Select Committee on International Development Fourth Report

SECTION 6: TACKLING CORRUPTION - ACTION IN THE UK

112. In the UK, a large number of different bodies are responsible for addressing corruption including various government departments, several regulatory bodies and a host of organisations responsible for the investigation and prosecution of offences. The Home Office leads on development of criminal law relating to bribery, money laundering, asset recovery and mutual assistance. The Department of Trade and Industry is responsible for UK commitments under the OECD Convention on Combatting Bribery of Foreign Public Officials in International Business Transactions[254] and improving corporate governance including the adoption of codes of conduct. The Treasury is responsible for oversight of action against financial crime and money laundering. DFID promotes action on corruption in developing countries as 'an essential measure for poverty reduction'.[255] The main elements of the UK Government's anti-corruption strategy are:

• the support of anti­corruption strategies in developing and transitional countries committed to tackling corruption;
• the protection of development assistance from corruption;
• the elimination of bribery from international trade and business;
• the prevention of the laundering of funds corruptly acquired in developing countries.[256]

113. We have already looked at anti-corruption strategies in developing countries in Section 4, and at the protection of development assistance in Section 5 of this Report. In this Section we will consider the UK's implementation of the OECD Convention as a means of tackling international bribery. We will then examine the role of money laundering and the Government's efforts to control it before considering the role of the private sector.

Implementing the OECD Convention in the UK

114. The OECD Convention on Combatting Bribery of Foreign Public Officials in International Business Transactions is an international convention that requires signatories to adopt national legislation to make bribery of foreign public officials illegal. Jeremy Carver, Clifford Chance, explained that the purpose of the OECD Convention was to set a high standard for national laws with regard to the bribing of foreign public officials. He explained it included a broad and clear definition of bribery and it required dissuasive penalties. It established a strong standard for enforcement and made provision for mutual legal assistance.[257] Transparency International said that the OECD Convention was the most important initiative in the fight against international corruption. They noted that signatories to the Convention represented 80 per cent of world trade.[258] The Convention was signed by the UK in 1997. DFID said anti­bribery conventions such the OECD Convention and the Council of Europe Convention illustrated a new commitment to action by developed countries.[259] In November 1998, the Convention was ratified on the basis of existing statute (Public Bodies Corrupt Practices Act 1889, Prevention of Corruption Act 1906 and Prevention of Corruption Act 1916) and common law. The Government was obviously convinced that existing law was sufficient to implement the OECD Convention. Elaine Drage, Department of Trade and Industry, told us "Our legal advice at the time was that the law and case law did support the United Kingdom's view and we were already compliant with the Convention".[260] She said that this was supported by one piece of case law. Transparency International noted that a number of important issues had been left unresolved when the Convention was originally negotiated including the funding of foreign political parties and their officials, recipients of bribes, bribery through foreign subsidiaries, links to money laundering and the role of offshore havens, and the extension of money laundering provisions to recognise corruption as a predicate offence.[261] Transparency International were particularly concerned about the issue of funding to foreign political parties.[262]

CRITICISM OF THE CURRENT IMPLEMENTATION OF THE OECD CONVENTION IN THE UK

115. The Corner House said that "The pervasive use of corruption by Western companies operating in the South also reflects the relaxed attitude of Western legal authorities towards corruption".[263] In a similar vein, Transparency International claimed that "Those bribing overseas seem to have a rather comfortable regime in this country".[264] They went on to say "Until there is fresh legislation in the UK, the OECD Convention has no direct and immediate impact on UK law, which remains as ineffective as it has been for the past century".[265]

The OECD Peer Review Process

116. The OECD has a peer­review process that looks, in Phase 1, at conformity of the implementing legislation with the articles of the Convention and in Phase 2 at the application of the laws in practice. DFID has provided funding to the OECD Secretariat to support the work of the peer review process.[266] The Phase 1 OECD peer review of the UK was critical of the UK Government for failing to address all aspects of the Convention. The peer review group was unable to determine whether the UK laws were in compliance with the standards of the Convention and urged the UK to enact appropriate legislation. The review was concerned that:

• there was no explicit provision criminalising bribery of foreign public officials;
• there was a lack of legislation specifically prohibiting bribery of foreign officials;
• the UK relied on common law which does not expressly mention bribery of foreign officials;
• there was insufficient case law to support the UK's interpretation of the 1906 Prevention of Corruption Act and that there was potential for this Act to clash with the European Convention on Human Rights.[267]

117. The Phase 1 review of the UK will be repeated until the OECD is satisfied that appropriate legislation is in place. Transparency International were critical of the Government's attitude saying that having failed the first Phase 1 review, it actively proposed to fail the second Phase 1 review as no new legislation would be introduced in time for the second Phase 1 review.

118. Monty Raphael, Peters and Peters, said "...it is regrettable that we appear to have ratified the OECD Convention on the basis that we could conform to its requirements; quite clearly, we have not been able to. Also I find it rather surprising and rather sad that we are not going to be told when a Bill will be introduced".[268] Laurence Cockcroft, Transparency International (UK), was more forthright saying "the UK is currently gravely at fault, to an extent which can be described as a national disgrace".[269] Elaine Drage, Department of Trade and Industry, conceded that "It is clear that the United Kingdom law is not sufficiently clear...".[270]

Damage to the Reputation of the UK

119. Transparency International said "There is real concern within the OECD at the UK's apparent lack of commitment to the implementation of the Convention. Bribery of foreign public officials (FPOs), is a serious international economic crime. To delay enacting this offence could severely damage the future success of the Convention, which rests on the basic assumption that the same rules will apply to all major exporters".[271] Jeremy Carver, Clifford Chance, was similarly unimpressed saying that the OECD peer review's judgement of the performance of the UK had been lamentable and humiliating.[272] Mark Pieth, Chairman of the OECD Working Group on Bribery in International Business Transactions, told Transparency International (UK) that the OECD bracketed the UK with Turkey, Brazil, Argentina and Chile on the basis that it had been found not to have implemented the Convention.[273] Elaine Drage, Department of Trade and Industry said of the peer review process "I am informed that all countries were criticised, but to varying degrees. We were criticised the most severely".[274] Mark Pieth said that the UK might be not be permitted to be an evaluator in the Phase 2 peer reviews.[275]

Timing

120. The Institute for Chartered Accountants expressed disappointment that the law did not feature in the Queen's Speech on 6 December 2000 and said "it should be reintroduced into the Parliamentary timetable without delay".[276] In June 2000, the Home Office published a paper, 'Raising Standards and Upholding Integrity: The Prevention of Corruption'.[277] This indicated that a Bill would be introduced when parliamentary time allowed. In the foreword to 'Raising Standards and Upholding Integrity: The Prevention of Corruption', the Home Secretary recognised corruption as "a deadly virus". Transparency International said that if it was a deadly virus it would not wait for parliamentary time to be available.[278] We were surprised there was no provision for new legislation to implement the OECD Convention in the Queen's Speech of 6 December 2000.

GOVERNMENT PROPOSALS FOR NEW LEGISLATION

121. There has been some response by the Government to the continual criticism of its failure to implement the OECD Convention. 'Raising Standards and Upholding Integrity: The Prevention of Corruption'[279] was based on the work of an interdepartmental review group and set out the Government's proposals for the reform of the law of corruption. In the Globalisation White Paper, DFID stated that the Government was committed to

• revising the laws implementing the OECD Convention;
• introducing legislation to strengthen money laundering;
• working to help developing and transition countries recover illegally and corruptly acquired funds deposited in the UK.[280]

122. DFID said that, when enacted, the law to implement the OECD convention would include a clear definition of the concept of corruption to enable its application to both the public and private sectors. It explained that the law would have wider applicability and would make clear that bribery of a foreign public official to further a business transaction was an offence. It noted that the law would be subject to extra­territorial jurisdiction so that UK nationals engaging in corruption would be subject to prosecution in the UK courts even if the bribe was paid abroad.[281] Elaine Drage, Department of Trade and Industry, explained that Transparency International had helped to prepare a short Bill designed to implement the OECD Convention. But she noted that there were other Conventions on similar topics, such as Council of Europe Convention on Corruption, and said that one of the aims of the Home Office was to introduce legislation that covered all relevant conventions.[282]

123. Despite these proposals, it is likely that the poor performance of the UK in implementing the OECD Convention is damaging our reputation among developing and developed countries. Clare Short was convinced that it was. She said that despite the good record we had in addressing corruption "... the view we are taking on the OECD Convention is damaging our reputation and I really regret it because our commitment to have new legislation means that we are going to do the right thing, so why do we not do it more elegantly and say we know our existing law is too weak?"[283] The current legislation on corruption, which is over ninety years old, is inadequate to meet our responsibilities under the OECD Convention on the Bribery of Foreign Public Officials in International Business Transactions. New legislation is urgently needed to meet our international obligations but, incredibly, has yet to be introduced. We cannot understand why the Government has not yet introduced legislation to deal with this shameful situation, especially as the issue is unlikely to be controversial. The Government should introduce such legislation without delay. The Government should ensure that any legislation introduced is consistent with other anti-corruption Conventions to which the UK is a signatory.

124. Transparency International have criticised the tax deductibility of bribes in the UK. The Treasury clarified the position for the Committee stating that any bribe made illegal under existing UK legislation was denied tax relief as were business entertainment, hospitality and gifts, irrespective of whether they were corrupt payments.[284] They conceded that if a bribe was paid wholly outside the UK, it could not be an offence in the UK and therefore would not be denied relief (however, if the decision to bribe was taken in the UK it might be).[285] The issue is not really one of tax deductibility but of extra-territoriality. It is entirely unsatisfactory that confusion remains over the issue of the tax deductibility of bribes. The Inland Revenue and the Treasury should take steps to clarify the situation and should make explicit that no form of bribery or corrupt payment, anywhere, can receive tax relief.

SIMPLICITY AND CLARITY

125. Transparency International argued that any new legislation on corruption should criminalise the bribery of foreign public officials and should allow UK nationals to be prosecuted in the UK even if the offence takes place wholly outside the UK.[286] They called for clear effective legislation with equivalent laws in Scotland, Northern Ireland and Crown Dependencies. Similarly, Monty Raphael, Peters and Peters, suggested that "We could outlaw specifically the corruption of foreign public officials, make it explicit rather than implicit, as we have been told up to now it is, in our legislation; and, of course, we could extend our extraterritoriality laws, again in much the same way, specifically perhaps, or by reference to existing legislation".[287] Campaign Against the Arms Trade believed new legislation criminalising bribery of foreign officials should be brought forward to establish clear and well monitored anti-corruption rules for UK business.[288] Monty Raphael explained that despite the difficulties in investigating and prosecuting offences committed partly or wholly overseas and the difficulties gathering evidence or finding witnesses willing to travel,[289] the UK should send a clear message to the rest of the world, by implementing new legislation, showing that we regard this as a very urgent matter.[290]

126. Jeremy Carver, Clifford Chance, said "...it is not so much that evidence of effectiveness comes from enforcement proceedings, or prosecutions, it comes from having a clear, simple law that the successful business knows what to do with. The uncertain law and the mess that we have here in this country is the worst creator of confusion, of bad business practice, and therefore anti­competitive practice, which essentially is very bad for British business".[291] There has been a great deal of reflection on the low number of prosecutions for corruption under the current legislation. We believe that the number of prosecutions may not be the best measure of effectiveness provided that legislation is sufficiently simple and clear as to make plain the boundary between right and wrong. We believe that any new legislation should be as clear and as simple as possible.

THE BRITISH AND AMERICAN EXPERIENCE COMPARED

127. The lack of appropriate legislation in the UK is often contrasted with the situation in the United States where the Foreign Corrupt Practices Act has made the bribery of foreign public officials illegal since 1977. It is worth noting, however, that in Transparency International's Bribe Payers Index, the United States is ranked as having a higher propensity to pay bribes than the UK.[292] The American legislation provides an exemption for bribes paid through joint ventures and for facilitation payments. American companies may be able to use off-shore arrangements to circumvent the law thus giving rise to the perception that US companies are more willing to pay bribes than UK companies. As with the UK, there have not been many prosecutions under the anti-bribery legislation possibly because of the expense and difficulty of conducting an international investigation, especially where the host government might not be willing to cooperate. Laurence Cockcroft noted that one of the successful impacts of the law in the United States was to force companies to have clear compliance procedures.[293] A lack of prosecutions for corruption might not be a problem provided that the legislation making corruption illegal is simple, effective and results in meaningful changes in companies such as the introduction of appropriate compliance procedures.

128. Anglo American were concerned to ensure that any moves to tighten up legislation in the UK (which they accepted were necessary) should be accompanied by steps to ensure that other OECD countries did not evade the provisions of the Convention. They were keen to see the OECD Convention extended to non-OECD countries and to see aid supporting anti-corruption measures in developing countries.[294] UK businesses should not be put at a competitive disadvantage. John Bray, Control Risks Group, pointed out there could, in fact, be a competitive advantage to being backed by legislation that prohibits corruption. He explained it provided companies with a justification for resistance. He said "If as a company you are approached by somebody demanding a bribe, it is a very strong advantage to be able to say 'Look, I cannot pay, because if I do I will be prosecuted and I personally may go to prison'".[295] We must equip companies with the necessary legislative backing to resist extortion and bribery. The law should provide companies with a shield that protects them from those who solicit bribes by giving them the argument that a company and the individuals concerned would face the stiffest penalties in the UK if they were to engage in corruption of any sort. We believe that the DTI should work with companies to help them address issues of corporate governance and ethics and through Trade Partners should provide help and support on the ground to companies working in countries where corruption is endemic.

Money Laundering

129. DFID told the Committee that "Corruption is aided and abetted by money laundering".[296] They said that grand corruption and money laundering "form a cycle of interdependent and illegal activity". Corruption can originate in any country and weaknesses in banking and financial systems anywhere can be used to access the global financial system to launder funds.[297] Co-ordinated global action is needed if the cycle of grand corruption and money laundering is to be broken.

130. There are few estimates of the scale of money laundering. The IMF, using 1996 statistics, suggested that the total global laundering problem was between US$590 billion and US$1.5 trillion a year. Mark Malloch Brown quoted IMF statistics suggesting that money laundering accounted for between 2 and 5 per cent of global GDP.[298] Ceri Smith from HM Treasury did not think that such figures would be reliable given the problems with measuring the scale of money laundering. There is certainly no estimate of the scale of money laundering in the UK and consequently no idea of how significant laundering the proceeds of corruption might be.[299]

131. Money laundering is the process by which illegitimate funds are given the appearance of having been legitimately acquired. It involves three stages: placement (where the financial system is first accessed), layering (moving of funds between companies or jurisdictions - "effectively the wash­cycle in the laundering process"[300]) and integration (allowing the beneficial owner to enjoy the funds as apparently legitimate). Ceri Smith, HM Treasury, indicated that the UK is principally used for layering or integration of funds rather than the initial placement. John Abbott, Director General, National Criminal Intelligence Service (NCIS), said the United Kingdom was vulnerable because it was a major international financial centre. London has a reputation of being relatively well regulated,[301] and Ceri Smith said that to some extent "the United Kingdom could be said to be a victim of its own success"[302] in that passing money through London added a certain amount of legitimacy to the money. He said there were effective anti-money laundering controls in place and this had been recognised by the Financial Action Task Force (FATF), which is the principal international anti­money laundering organisation, when it had assessed the UK. FATF described the UK anti-money laundering systems as impressive and comprehensive.[303]

CURRENT LEGISLATION

132. Historically, legislation to control money laundering has developed in a piecemeal fashion. The EC Money Laundering Directive (91/308/EC) is enacted in UK legislation by the Criminal Justice Act 1993 (CJA) and the Money Laundering Regulations 1993 (MLR). The CJA made laundering the proceeds of serious crime, and failure to report suspicions of money laundering, a criminal offence, adding to the provisions already contained in the Drug Trafficking Act 1994 and the Prevention of Terrorism Act 1989. The MLR requires banks and other financial institutions to have measures in place to prevent money laundering. The Queen's Speech for the current Session contained provision for a Bill to increase powers against money laundering and to make it easier to recover the proceeds of crime. This draws largely on the work done by the Performance and Innovation Unit of the Cabinet Office for 'Recovering the Proceeds of Crime' of June 2000.

133. The European Directive on Money Laundering required financial firms to know the identity of their customers when opening an account or when transactions exceeded _15,000, to keep appropriate records and establish anti­money laundering programmes. It also required banking secrecy to be suspended whenever necessary and any suspicions of money laundering to be reported to the authorities. In September 2000, EU finance ministers agreed to extend the directive to widen the definition of money laundering to include 'all serious crimes', to extent the provisions to include a number of professions beyond bankers, such as lawyers and accountants and to improve cooperation between Member States.

134. DFID said the Government was keen to ensure that financial institutions had appropriate procedures in place to detect and deter money laundering, and to report suspicious transactions. Through the Financial Services and Markets Act 2000, the Government has given the Financial Services Authority (FSA) a statutory objective to combat financial crime.[304] The FSA has consulted on its proposed rules on money laundering, which will come into force when the new Act is implemented (sometime in 2001). The Joint Money Laundering Steering Group are revising their Guidance Notes in light of changes in legislation.

135. One of the main tools for tackling money laundering is the system for reporting suspicious transactions to the National Criminal Intelligence Service (NCIS). DFID told us "The Government is ... concerned to ensure that a wider range of professionals, such as lawyers and accountants, take seriously their responsibilities to report suspicious transactions".[305] However, current reporting levels are perhaps best described as patchy. In 1999, 10 out of 554 banking institutions contributed 78 per cent of reports from the banking sector (39 per cent of all disclosures). Only 4 per cent of insurance companies and 6 per cent of London Stock Exchange member firms made reports compared to 76.8 per cent of building societies. Reporting from Bureaux de Change has improved from 7 per cent of all disclosures in 1995 to 21 per cent in 1999 but 90 per cent of these came from only seven organisations.[306] Solicitors and accountants are often key in the initial placement of funds and are often prime targets for money launderers.[307] NCIS have said that accountants are an obvious target for money launderers. However, accountants made about 0.7 per cent of the 14,129 suspicious transaction reports to NCIS in 1998 having accounted for only 0.3 per cent of the 14,148 reports made the previous year. Similarly, only 57 out of 12,500 solicitors made reports. Howard Davies, Chairman of the Financial Services Authority, is quoted in the Performance and Innovation Unit Report, 'Recovering the Proceeds of Crime', as saying in 1998 "We believe there is evidence that non­bank financial institutions are increasingly targeted by money launderers, which argues for an upgrading of our efforts outside the banking sector".[308] We are concerned at the under-reporting of suspicious transactions by certain professional groups, in particular lawyers and accountants.

ENFORCEMENT OF MONEY LAUNDERING LEGISLATION

136. Because of the risk of money laundering, a number of banks now refuse to accept funds where the identity of the underlying beneficial owner is not known. The FSA Rules and the revised Joint Money Laundering Steering Group Guidance Notes will both re­emphasise the need for the underlying beneficial owner to be identified. Jeremy Carver, Clifford Chance, stressed the importance of the 'know your customer' principles saying that they should not simply be a matter of know your customer but also know your customer's business.[309] The British Bankers Association said that the Joint Money Laundering Steering Group Guidance Notes recognised that know your customer went beyond identification at the outset of a relationship.[310] We believe the 'know you customer' principle is key to the detection and control money laundering. We also believe that it should extend beyond simply determining beneficial ownership to understanding a customer's business and how their wealth is derived. The FSA and Joint Money Laundering Steering Group should take account of this in further developing their money laundering rules and guidance notes.

137. As part of the money laundering process, funds will often be moved through nominee and shell companies to ensure that beneficial ownership remains hidden. A bank or financial institution should always know the identity of the underlying beneficial owner but this can be difficult to determine where there are highly complex financial structures protecting the anonymity of the beneficial owner. We noted with interest that the Financial Services Authority has just completed its investigation of money laundering controls at 23 banks in the UK linked to Abacha family members and found that 15 banks had significant control weaknesses.[311] Banks often rely on a chain of responsibility that can be applied between regulated parties. If a transaction is received from a bank known to be operating under regulations that require beneficial ownership to be established, the receiving bank can be assured that underlying beneficiaries have been identified. Members of FATF are peer reviewed to ensure that their regulation encompasses the 'know your customer' principle. FATF have published a list of non-compliant states, and banks are warned to make extra checks on transactions originating from such states.

138. The British Bankers Association explained that the regulations required only 'reasonable measures' to identify an underlying third party (to avoid unnecessary duplication and inconvenience to ordinary customers), there were weaknesses in the chain of responsibility and due diligence system. Tim Sweeney, British Bankers Association, said it would not be unusual for money launderers in positions of power to use a Central Bank to transfer money and where a commercial bank in the UK received a telegraphic transfer from a Central Bank, then it was highly likely to be regarded as a legitimate transaction.[312] Tim Sweeney also pointed out that a lot of the money moving through London was passed through correspondent banking relationships, where one bank opened an account with another bank and used that account to move a customer's funds. Money can thus acquire the "London stamp of respectability" and avoid the controls and 'know your customer' safeguards that provide the defence against money laundering.[313] In this context FATF becomes very important because, as Tim Sweeney pointed out, the relationships between regulatory authorities in different jurisdictions and financial institutions in different jurisdictions become fundamentally important in tackling money laundering. There are further weaknesses in the current system that allow professional intermediaries such as lawyers to hold client accounts. The British Bankers Association pointed out that there was legislation that precluded banks from making any enquiries or incurring any liability in respect of the underlying client. Lawyers were thus able to use client confidentiality to mask the beneficial ownership of the funds.[314] This situation is likely to be addressed under the proposed second European Money Laundering Directive, which will extend the scope of the Money Laundering regulations to cover all lawyers and accountants. In revising legislative loopholes, the Government must ensure that weakness and inconsistencies in the current system for tackling money laundering are addressed.

139. The British Bankers Association felt that corruption by a head of state or a public sector official fell within the definition of fraud and would therefore be covered by requirements to make suspicious transaction reports to NCIS.[315] However, this seems to have made little difference and Anglo American recognised that "At present too many heads of state and their families feel that they can siphon huge sums from the public exchequer without any great likelihood of being called to account or of having to return their ill gotten gains".[316] Many of the organisations involved in tackling money laundering are unable to take proactive action in relation to states with endemic corruption and must wait for a request before intervening. There is no way that organisations like NCIS or the SFO can determine which states are likely to have senior figures engaging in corruption and money laundering. Philip Thorpe, FSA, said "...there is not a black list of jurisdictions that we can rely on".[317] They need reasonable grounds before commencing an investigation and they must wait until they are asked to act either as a result of some kind of mutual legal assistance request, a formal complaint or a suspicious transaction.

140. We are aware that some information of this nature is available from DFID as they assess the level of corruption in each country where they are working. The Foreign and Commonwealth Office is also likely to make some analysis of corruption in assessing the economic stability of countries. The DTI probably makes some assessment of investment risks and the Export Credits Guarantee Department (ECGD) would almost certainly have some knowledge of corruption as a risk factor in its lending decisions. At the very least some of this information should be shared with investigative authorities so that the worst excesses of kleptocratic states, like Zaïre under Mobutu or Nigeria under Abacha, can be identified and prevented. There is already a model for such action in FATF which maintains a list of non-cooperative countries (financial centres whose anti-money laundering controls are deemed to be inadequate). To tackle money laundering effectively the Government can no longer rely on a process of reaction. The activities of Mobutu and Abacha, for example, were well known at the time. What interest or monitoring was there from the UK authorities as to whether money was being laundered through the UK? A more proactive investigatory system should be established to combat money laundering. We do not believe that this need undermine the duties of self-regulation.

141. The current regulations often put banks and other financial institutions in a difficult position. The British Bankers Association pointed out that an institution cannot freeze customer funds without the risk of being sued by the customer but would be guilty of committing the criminal offence of laundering if they moved the funds (and also risk a civil suit from the rightful owner). The British Bankers Association noted that the courts have recently sought to provide guidance to banks that were caught up in this dilemma but said there were no easy or quick answers. Banks were also in a difficult position with respect to suspicious transaction reports as, having made a report, closure of an account could constitute the offence of 'tipping off' the customer that a law enforcement investigation was underway.[318]

142. There is clearly a need for greater awareness among financial institutions and others as to what constitutes money laundering and what kinds of transactions should be reported as suspicious. Monty Raphael stressed the need for training of lawyers and other professionals if money laundering were to be tackled seriously. He said that training should be mandatory but recognised that there was a need to ameliorate the cost to small firms of solicitors and accountants.[319] John Abbott said "There is a whole host of activities that are undertaken by solicitors and accountants that bring them into contact with the movement of money and I believe that there is still a lot of work to be done in terms of raising their awareness and understanding and education so that they are better equipped to identify what we would regard as likely suspicious financial transactions".[320] We believe that there is a case for training on the prevention of money laundering to be made a mandatory part of the initial training for lawyers and accountants. It should be a component of any continuing education for these professions and any ongoing training by compliance officers.

CRITICISM OF CURRENT REGULATION AND ENFORCEMENT MECHANISMS

143. John Abbott, NCIS, was concerned about the current system for combatting money laundering saying "I think the laws are too complex. I think that there are loopholes, there are examples of gaps in enforcement capability. Broadly speaking the police service and the law enforcement agencies have the powers but not the incentive, the regulators may have the information but do not have the powers yet".[321] Ceri Smith, from HM Treasury, saw this as a result of the piecemeal way the legislation had developed and the small differences in definition and in the nature of the crimes within the three main pieces of legalisation.[322]

144. Money laundering as a stand-alone offence has rarely been prosecuted.[323] There have been relatively few prosecutions for money laundering and even fewer convictions. This has been attributed to the fact that many of those guilty of money laundering are actually prosecuted and convicted on other offences related to drugs trafficking or terrorism. Although money laundering is a criminal offence in the UK it is typically the underlying crime (predicate offence) that has been prosecuted. The reason given for this was that the money launderer is often the same person who commits the underlying crime. However, Graham Rodmell from Transparency International did not agree, saying that in the case of corruption "...almost certainly those responsible for the predicate offence are offshore, so they are not likely to be prosecuted in this country".[324] Lorna Harris, Home Office, conceded that there was genuine concern that individual prosecutions for money laundering do not take place often enough.[325]

145. Concern was expressed that there are still insufficient resources dedicated to this area. John Abbott, NCIS, felt insufficient resources were devoted by law enforcement agencies to tackling money laundering. He recognised that there were a huge number of competing demands on law enforcement agencies in priority areas of work. He had reservations about the ability of all law enforcement agencies to conduct the often complex enquiries associated with money laundering. He agreed that specialist enquiries of this sort required certain skills that not all police forces would have available.[326]

146. NCIS receive about 15,000 reports per year, handled by 30 staff and funded by a budget of £0.9 million. Australia has some 965 financial organisations compared to 7,000 in the UK but AUSTRAC, the Australian body for handling disclosures, has 82 staff and a budget of £3.8 million pounds.[327] This comparison, given in the PIU report, is staggering even given the differences in the roles of the bodies and the nature of the markets they monitor. It is clear from the evidence that enforcement bodies in the UK are underfunded and under resourced. The Performance and Innovation Unit report - 'Recovering the Proceeds of Crime' - also noted that financial institutions felt that there was little feedback on suspicious transaction reports and when there was it was too late to influence decisions around continuing a relationship with a client. We are concerned that there are insufficient resources being dedicated to the detection and investigation of money laundering, particularly the handling of suspicious transaction reports. We anticipate that the situation could get much worse unless the new legislation, which extends the scope of current legislation to cover previously unregulated bodies, is accompanied by the resources necessary to enforce it properly. The investigation of money laundering is often time consuming and requires specialist skills that need to be developed. If the Government is serious about the fight against money launderers, the regulatory and investigatory bodies must be adequately resourced.

147. It appears that money laundering has the potential to be a major problem for the UK. Mark Malloch Brown said "I think different countries have different Achilles' heels on [corruption]. The United Kingdom issue has been this banking issue, of funds coming through the UK banking system".[328] There are a number of reasons why money laundering remains a major issue in the battle against corruption. First, London is a major financial centre and so will be attractive to money launderers. Secondly, the UK response to money laundering is currently uncoordinated and piecemeal. Thirdly, the current approach does not do enough to recognise the importance of tackling the laundering of the proceeds of corruption. We are deeply concerned about the vulnerability of one of this country's most valuable financial assets - the City of London. The Government should take coordinated, coherent and properly resourced action to fight money laundering if the UK, through the City of London, is to maintain its reputation as one of the most important international financial centres.

148. Investigations into money laundering are complex and often require specialist skills. There is a need to refocus efforts to control money laundering and look at ways of better coordinating the response of the various agencies to make the specialist skills needed for tackling money laundering available when and where they are needed. The Government must ensure that effective action to enforce the law is taken.

PROPOSALS FOR NEW LEGISLATION AND NEW BILL

149. Monty Raphael welcomed the fact that new legislation promised to clarify the system by placing in one statute all the legislation on money laundering that has been developed in a piecemeal fashion, to tackle the laundering of the proceeds from drugs, terrorism and serious crime. He hoped that inconsistencies between the different pieces of legislation would be removed.[329] We welcome the fact that the Government is to bring forward legislation that will update existing legislation on money laundering and address inconsistencies. We believe that the UK Government should take the opportunity to make clear that the bribery of foreign public officials and other forms of corruption are predicate offences for money laundering.

INTERNATIONAL ACTIONS TO TACKLE MONEY LAUNDERING - THE ROLE OF THE UK

150. The UK has taken a leading role on the international stage within bodies dedicated to tackling money laundering, such as FATF and the Egmont Group.[330] John Abbott, NCIS, said, "We need to bear in mind that the United Kingdom, in comparison with many other countries, remains near the top of the list of those endeavouring to tackle these issues".[331] The Government is committed to supporting actively the efforts of the international community to tackle money laundering, particularly through the work of the Financial Action Task Force.[332]

151. Tackling money laundering risks being like squeezing a water filled balloon. The problem will just move elsewhere when one part of the system is squeezed. International cooperation is vital if money laundering is to be tackled successfully; as Philip Thorpe said "If we alone are looking to see a sea change in the business of money laundering we will not succeed on a global basis. We have to look to other institutions and other governments to put in place similar requirements".[333] FATF is the principal international anti­money laundering standard setting body and plays a pivotal role in the international fight against money laundering. International collaboration in the area of money laundering is crucial to the success of efforts to control the problem and FATF is encouraging the harmonisation of laws, cooperation between jurisdictions and exchange of information between governments. The UK is a member of FATF and DFID said that it supported the extension of FATF-type arrangements to other parts of the world, particularly in Asia, Africa the Caribbean and Central and Eastern Europe.[334] Beyond the work of FATF there are other development activities that could be undertaken. For example, there are a number of countries that could benefit from access to the specialist skills of the FSA and NCIS. Transparency International has suggested that more information could be shared with victim countries and that better provision could be made for mutual legal assistance.[335] The UK must also continue to press for action on money laundering in a number of international fora including the European Union, the Council of Europe, the Commonwealth and the United Nations.

152. We welcome the Government's commitment to work through Financial Action Task Force and believe that the UK should play a leading role in international efforts to tackle money laundering. DFID should examine the possibility of supporting developing countries seeking membership of FATF. It should also consider what more can be done to help countries access the specialist skills of organisations such as the Financial Services Authority, Serious Fraud Office and National Criminal Intelligence Service in the UK in order first to tackle corruption and money laundering but second to build their own capacity and institutions.

MUTUAL LEGAL ASSISTANCE

153. DFID said that the Government regarded asset recovery as a key part of the anti­corruption effort.[336] In the UK, foreign governments gain access to the UK legal system through the UK Central Authority (UKCA) in the Home Office.[337] There has been much criticism of the UKCA. Jeremy Carver, Clifford Chance, said "As a firm, we have worked for many years for Governments all over the world, and occasionally I have had to assist Governments in mutual legal assistance matters, simply because they find it so difficult to deal with the UK authorities".[338] Transparency International criticised delays in processing reports saying that the Mutual Legal Assistance Unit was under-resourced. They were concerned that suspects were able to slow down the system with "unmeritorious judicial review applications".[339] Jeremy Carver, Clifford Chance, said that the last democratic Government of Pakistan tried to obtain evidence through the UKCA relating to corruption prosecutions in Pakistan. He explained that courts in the UK prepared 26 boxes of evidence which were delivered to the Home Office. He said that these sat in the Home Office for nearly two and a half years. He noted that investigations could be carried out quickly but was concerned that the Home Office was a "swamp" where things got lost.[340] Clare Short was also critical of the current Mutual Legal Assistance procedures saying that they were slow and unresponsive. She did hold out some hope as there is now an agreement between the Home Office and DFID where DFID is informed of requests from developing countries so that they can help those countries prepare their applications.[341] The Globalisation White Paper said that DFID was "committed to greater co­operation with developing and transition countries to help them recover funds that were illegally acquired through criminal activity or corruption and subsequently deposited in the UK".[342] It went on to talk about strengthening the arrangements which give overseas governments access to the courts and investigative authorities in the UK and providing advice to governments on preparing their requests for legal assistance.[343]

154. Transparency International felt there was a case for extending the role of the SFO so it could provide direct assistance to developing countries. They also proposed a hotline routed through DFID for mutual legal assistance requests.[344] There is scope for DFID to assist countries outside groups like FATF and the Egmont Group to improve their institutions and provide training so that such countries could join FATF and Egmont and enjoy the benefits that membership confers. In line with our earlier recommendation, DFID should examine the scope and practicality for UK institutions engaged in tackling money laundering and corruption, to provide technical assistance and direct support to similar organisations in developing countries.

155. Transparency International said that the confiscation of assets could only happen where there was a formal agreement with the requesting country but noted that few developing countries have agreements to cover all criminal offences.[345] They further noted that funds are retained by Her Majesty's Government and no formal mechanism exists to return funds. The Government should consider what steps are necessary to ensure that any funds that are confiscated, including those confiscated by the new National Confiscation Agency, which are the proceeds of corruption from a developing country can be returned to the country of origin.

FREEZING OF ASSETS

156. Assets can be frozen very quickly through civil processes using freezing injunctions (formerly known as Mareva Orders). These can be used to freeze assets that are the subject of a dispute until the dispute is settled and ownership of the assets determined. They are often, although by no means exclusively, used in commercial disputes. Civil proceedings require a lower standard of proof and a foreign power would only need to demonstrate that they had a good claim on the funds to obtain a freezing injunction.

157. Assets can be frozen in the UK by means of a restraint or charging order under the Criminal Justice Act 1988 or the Drug Trafficking Act 1994. A foreign government can seek an order to freeze assets, believed to be in the UK, subject to two conditions: firstly, that the foreign government has issued a confiscation order or has started proceedings that will lead to such an order and secondly, the country in question is designated in the UK under subordinate legislation (as in, for example, Statutory Instrument 1991 No. 2873 - The Criminal Justice Act 1988 (Designated Countries and Territories) Order 1991 or other similar Orders). An order to freeze assets by the UK Government is a temporary measure to freeze the assets pending a confiscation order arising from criminal proceedings abroad. For this reason the UK Government and Crown Prosecution Service need to be sure that proceedings in the foreign country are likely to lead to a confiscation order before the CPS would feel able to seek an order to freeze assets. Currently, a foreign government seeking to freeze assets that was not contemplating a confiscation order would need to pursue the civil remedies referred to above.

158. The situation is different in the Roman civil law system used in many continental countries where an investigating magistrate is put in charge of investigations. They have the power to issue orders freezing assets very quickly. They have an ability to freeze assets as part of an investigation, not necessarily in the context of an actual or imminent confiscation order as is required in the UK. This may put the UK at odds with countries which take action to freeze assets and ask the UK to take similar action but find that the UK is unable to do so because a confiscation order has not or will not be issued abroad. In 'Proceeds of Crime Bill - Publication of Draft Clauses'[346] the Government has proposed changes to the present law that would enable assistance to be granted to any country without the need for designation. The proposals still require an order for the recovery of property to have been made in criminal, civil or other court proceedings in the foreign country. The Government indicates the proposals will allow property to be frozen at a much earlier stage in an investigation provided there are reasonable grounds to believe that the property to be frozen may be needed to satisfy an external order.

159. We believe legislation should be introduced to ensure that assets can be frozen on evidence of an investigation rather than on evidence of charges, giving the UK the same powers that Roman civil law countries currently use to freeze assets. Any body charged with detecting and investigating money laundering should also have the ability to request that assets be frozen at the start of an investigation. As a wider long term goal, and once we have appropriate legislation, the Government should encourage other common law countries to make similar changes to their law so that a harmonised international position on freezing orders can be developed.

Coordinating the Fight Against Corruption and Money Laundering Across Government

160. DFID has done much to mainstream development thinking across Whitehall. But there are still some barriers that need to be broken down as Clare Short indicated when she talked about how the Foreign Office still saw development assistance as being associated with doing projects while High Commissioners and Ambassadors did any hectoring that was required.[347] This was certainly the view expressed during our visit to Vietnam. Clare Short felt that what was needed was a shared United Kingdom effort. Both DFID and the Foreign Office have a remit to engage with the governments of developing countries on governance issues. They must work together to ensure a coordinated and complementary approach on governance and corruption issues.

161. DFID has a role in ensuring that the interests of developing countries are recognised and included in the systems that the UK has in place for tackling corruption and money laundering. DFID's job must be made much harder by the huge number of different organisations that have an interest in these areas. George Staple, Clifford Chance, said "There is a worry that the involvement of so many different departments results in a failure to properly focus on the whole area with which the Government is trying to deal".[348] He listed the following as having a policy or investigatory interest:

The Home Office
HM Treasury
The Department of Trade and Industry
The Department for International Development
The Financial Services Authority
The Foreign Office
The Lord Chancellor's Department
The Cabinet Office
The Attorney General
The police
The National Audit Office
The National Criminal Intelligence Service
The Serious Fraud Office
HM Customs and Excise
The Inland Revenue
The Department for Social Security
The Crown Prosecution Service.

162. As George Staple pointed out, there are good reasons for different departments to maintain specialist interest in their area of responsibility but it appears that no single body has a lead responsibility for ensuring the:

• current laws are consistent with the international treaties the UK has ratified;
• laws are up to date and effective;
• resources are adequate and allocated in the most productive way.[349]

163. The SFO said it had no remit in dealing with corruption per se but noted a great deal of corruption involved fraud of some description which would allow it to consider investigation.[350] George Staple thought it was illogical for the SFO not to have an extended remit that included corruption and money laundering. He thought that the currently limited remit of the Serious Fraud Office could be expanded to deal with cases of money laundering and corruption.[351] Transparency International also felt that in addition to a review of current investigations and prosecution procedures, the jurisdiction of the Serious Fraud Office could be extended to include corruption.[352] The Government must give serious consideration to extending the role of the SFO to tackle corruption and money laundering as well as fraud. Any change in its remit would need to be properly resourced but could provide a much needed focus for these issues.

164. The evidence presented to this inquiry suggested that there was a lack of focus and coordination in the way the Government was tackling corruption and money laundering. Jeremy Carver, Clifford Chance, said "The fact is that in Whitehall there is only one Department that has taken this issue seriously, and that is the Department for International Development".[353] Another example of the lack of coordination was provided by NCIS who attributed a lack of convictions for breaches of the Money Laundering regulations to the fact that no particular organisation was designated to deal with such breaches.[354] Laurence Cockcroft, Transparency International (UK), noted that the UK response to corruption could be much more effective if it not only had adequate legislation to deter overseas bribery but also a much better coordinated response. He said that apart from DFID the only other department to take the issue seriously were the Export Credits Guarantee Department - "Only if anti-corruption policy is prioritised and mainstreamed through the UK government machine can we lift the cloud of inadequacy - inviting and frequently attracting the contempt of other OECD countries - which now envelopes our position".[355]

165. George Staple noted that the Report of the Roskill Commission on Fraud Trials (1986) had recommended a national fraud commission in response to fragmentation in the system of detection, investigation and prosecution of fraud. He said the Report saw an opportunity for a body to co­ordinate and bring together the efforts of all the different Departments of State engaged in tackling fraud.[356] He suggested that there was still scope for a coordinating body that could bring together all the issues, address anomalies in the law and tackle the difficulties of prosecution.[357] Monty Raphael said that it would be wrong to separate corruption, fraud and money laundering, as they are all inter-related and that what was needed was a holistic response.[358] New developments need to be factored into how information, investigation and prosecution are all coordinated. The FSA is soon to acquire new powers but there was little evidence presented to the Committee's Inquiry that the Government had examined the impact that this would have on other regulatory and investigatory bodies. John Abbott, NCIS, pointed out that the Metropolitan Police Service had developed a money laundering investigation team in the last year. Early indications are that this has proved successful with some extremely positive results.[359] We believe that there is greater scope for sharing information between government departments at both a policy and operational level to ensure that anti­corruption policies are built in to wider objectives. The roles of the respective investigative and regulatory bodies should be re-examined to ensure that corruption is taken seriously and to avoid the situation where each organisation believes it to be the responsibility of another to address a particular issue. The Government should examine the case for a single body or office performing a coordinating function across Whitehall and the investigatory and regulatory bodies active in this area. Corruption can only be successfully tackled where there is a greater degree of co­operation and coordination among all the interested parties.

Working with the Private Sector

166. The Corner House told us "Every year, Western businesses pay huge amounts of money in bribes to win friends, influence and contracts. These bribes are conservatively estimated to run to US$80 billion a year - roughly the amount that the UN believes is needed to eradicate global poverty".[360] DFID recognised that corruption distorted competitiveness and was an unfair barrier to trade. It felt tackling bribery would help prevent damage to the interests of legitimate businesses in terms of reduced sales and market share.[361]

CORRUPTION IN THE PRIVATE SECTOR

167. The Corner House reported that "UK private sector involvement in corruption comes in many forms - from bribery of officials to win contracts to the handling of corrupt payments by UK banks".[362] They also said bribery was more common than the low number of prosecutions would suggest and noted that many of the anti-corruption drives led by governments and by popular movements were revealing "many instances of alleged corruption involving UK companies".[363] In their memorandum, Transparency International noted that the arms industry was second only to the construction industry in its propensity to pay bribes.[364] Campaign Against the Arms Trade said that the high financial value and the levels of secrecy associated with arms deals made them more susceptible to corruption.[365] They called for prior scrutiny of export licences and disclosure of the details of arms exports in the Annual Reports on Strategic Export Controls.[366] DFID pointed out that firms in the extractive industries were particularly affected by the distortions of competitive practice that result from bribery.[367] Anglo American said that they typically had less exposure than oil companies to auctions for rights to explore or exploit areas of land.[368] Such auctions were often the subject of malpractice.

168. Transparency International said that their Bribe Payers Index "clearly identifies the UK as a country with a lower propensity to pay bribes than some key competitors, but still as one whose behaviour is more or less in line with a group of larger OECD member states, in most of which, excluding the United States but including the UK, at the time of the survey it was not illegal to bribe a foreign public official provided that the bribe mechanism was 'properly organised'".[369] They recognised that some multi-national companies had identified corruption as an issue and taken appropriate steps but stated that addressing corruption effectively becomes much more difficult in the context of subsidiary companies and joint ventures.[370]

INDUSTRY INITIATIVES, CORPORATE GOVERNANCE AND PROPOSED CHANGES TO UK COMPANY LAW

169. DFID recognised the importance of corporate governance initiatives, transparency and disclosure requirements, and the regulations that govern the relationship between managers and shareholders.[371] The maintenance of adequate records, the adoption of internal controls and the use of external audits are all key parts of corporate governance. It is likely that over the next few years corporate responsibility and corporate citizenship will play an increasingly important part in the way that companies organise and present themselves. The current debate on corporate governance (how companies are directed and controlled) is likely to merge with the debate on the wider accountability of companies to their employees, customers, suppliers, creditors, governments and the community they operate in.[372] We are encouraged that DFID is planning a forum with the DTI this year to promote the OECD Convention and other anti-corruption measures.[373]

Leadership

170. George Staple, Clifford Chance, said "I feel, and I think others share this view, that the whole question of fraud and corruption and money laundering prevention is not taken at a sufficiently high level in companies, it is too often the responsibility of middle management, who do their best but often do not have all the information, and indeed resources, available to them. It should be the responsibility of the Chief Executive, it should be high, fraud prevention, corruption prevention, money laundering prevention, high on his list of responsibilities, and he should have to report each year to the shareholders that he has in place adequate fraud and corruption prevention measures, he has got whistle­blower systems in place, so that employees can feel that they can report mischief of one sort or another".[374] Roger Davis, PricewaterhouseCoopers, indicated that the accountancy profession was 'edging up on [George Staple's suggestion]' but recognised that progress could be faster.[375]

Corporate Transparency and International Accounting Standards

171. A number of witnesses, including Transparency International, The Corner House and Global Witness, suggested in their evidence that there was a need for greater corporate transparency, particularly where there were special accounts into which revenue was paid as was common in the extractive industries. The use of such accounts seriously compromised the budgetary process.[376] Transparency International said that in countries where there was little openness about financial matters companies should state publicly any payments they make to the state. Such statements would make it difficult for governments to maintain special accounts and reduce the scope for the diversion of government revenue to private ends. They said that this was simply a case of applying the same reporting requirements that apply in the UK to their dealings with governments in developing countries.[377] Reg Hinckley, BP, told the Committee that they tried to ensure that their dealing with governments were open and above board.[378] The Committee welcomes the moves by BP to report openly the payments associated with oil in Angola.[379] In making legitimate payments to a government, companies have a responsibility to ensure these are open and transparent to prevent some or all of the payment being diverted for personal gain. Companies cannot claim that, having made a payment, it is not within their power to prevent corrupt use of the monies. All companies should seek to conduct their business in an open and transparent way and make information on their dealings with the governments of developing countries publicly available.

172. Companies have certain responsibilities by virtue of their size and position. They must balance transparency with commercial confidentiality in being accountable to shareholders. The Corner House suggested that many companies failed to report allegations of corruption even when this had resulted in action being taken against the company. They felt this was a narrow interpretation of a company's duty to return a true and fair view of the company in its annual accounts - "The failure to disclose corruption allegations to shareholders is of major concern and signals a major lacuna in current standards for company reporting. Corruption is not only damaging to a company's reputation, but is also indicative of poor management control within a company".[380] Such reporting would be in line with the Turnbull Report (1999) which recommended annual reporting on internal controls including those in place to address non-financial risks. If a company has been accused or convicted of any corrupt practices, shareholders and other stakeholders, such as employees or customers, should be informed by the audit committee of the company concerned in a report to the annual general meeting. Companies should also report on the controls and systems they have in place to prevent corrupt practice.

173. An increasing amount of effort is going into the development of international accounting standards with a growing emphasis on transparency.[381] Work on audit standards is also being taken forward including work on how any exceptional and unusual business transactions identified by auditors could be disclosed publicly.[382] Roger Davis, PricewaterhouseCoopers, saw a leading role for the UK in terms of widening corporate reporting to provide a better audit of not only the financial position but also a company's policies including their social policies.[383] DFID accepted that corporate governance initiatives dealing with transparency and disclosure of financial information were important for the control of corruption and noted the OECD had published Principles on Corporate Governance in May 1999. These aim to improve the legal, institutional and regulatory framework for corporate governance by requiring firms to maintain adequate accounting records, adopt internal company controls and undergo regular external audits.[384] A review of company law is currently underway and DFID have said that this is expected to recommend "improved levels of reporting and higher standards of transparency in company accounts".[385]

174. Roger Davis, PricewaterhouseCoopers, said "We do not think it is our role, as auditors, to pass what I might call moral judgements on what is acceptable or not".[386] But auditors do have a key role to play in spreading best practice and raising standards and we do not see how they will be able to do this without making some kind of judgements about what works and does not and about which companies need to do more and which do not. The accountancy and auditing professional bodies should look closely at the role that their professions must play in the fight against corruption and money laundering. We would encourage them to play an active and vocal part in the current debate on the best way forward.

CODES OF CONDUCT

175. In addition to the legal sanctions that arise from the implementation of Conventions such as the OECD Convention on the Bribery of Foreign Public Officials, there are a number of other steps that companies can take to reduce corruption. Foremost among these are the voluntary codes of conduct.[387] The OECD Guidelines for Multinational Enterprises, agreed on 27 June 2000, provide an internationally agreed code of conduct. They consist of non­binding recommendations to help companies operate in harmony with government policies and with societal expectations. The guidelines contain a number of recommendations specifically on bribery. Many companies have chosen to develop their own codes of conduct and ethics.

176. Codes of conduct are only useful if they are followed up with training to support implementation and monitoring to ensure compliance. Control Risks Group found that although take-up of codes was high there was often little follow-up. John Bray, Control Risks Group, said "We did a survey last year of some 50 US companies and 70­odd Northern European companies and we found that the overwhelming majority now did have formal Codes of Conduct saying that they would not pay bribes to secure business, but follow­up mechanisms were not so consistent".[388] He too stressed that training was a key issue.

177. Roger Davis, PricewaterhouseCoopers, noted that there was increasing interest in codes of ethics among companies.[389] Anglo American have a Code of Corporate Governance and said it was an essential tool in communicating company values to their staff worldwide. They explained it also provided staff with protection if they were put under pressure by foreign officials to behave corruptly.[390] In their memorandum, Transparency International encouraged the use of corporate codes of conduct but stressed that to be effective they must be widely disseminated, accompanied by training and understood within the company.[391] The Corner House recommended that companies be encouraged to "draw up ethical policies laying down anti­corruption standards against which shareholders and investors can judge performance".[392] Transparency International felt codes should be extended to joint ventures. The DTI should encourage companies to put in place codes of conduct that take account of corruption. This issue should be considered during the preparation of the forthcoming Company Law Bill.

OPPORTUNITIES FOR THE PRIVATE SECTOR TO TACKLE CORRUPTION - WORKING WITH LOCAL PARTNERS TO SET A GOOD EXAMPLE

178. Worldaware recognised that multinational companies have greater opportunities to overcome corruption than small companies given their negotiating strength.[393] Transparency International criticised the fact that the private sector was not taking a lead in fighting corruption in developing countries, even when an incoming government had made a commitment to fight corruption. They said that there had been little response from either international or local business to the attempts by the Nigerian government to tackle corruption.[394] Corruption needs to be tackled across the board and not in isolated pockets and it is vital that all parties, including the private sector, are engaged in efforts to eliminate it. The lack of response from the private sector to the anti-corruption efforts of developing countries is particularly worrying.

179. Multinational enterprises (MNEs) can provide an important role model for smaller and domestic companies to follow. John Bray, Control Risks Group, said, "The point, therefore, being that being a model of best practice and applying that model in all your dealings, for example with your own subcontractors, is in itself a very important role which companies can play".[395] Bribery by MNEs undermines attempts to tackle corruption. It is important that companies resist bribery and extortion. Ian White, Crown Agents, said that "What we want to encourage is companies who are forced or feel coerced to pay bribes to report that to the relevant authorities wherever possible".[396] It is important to remember that multinational companies have an important impact on the local businesses they work with and there is tremendous potential for this to be a positive interaction that builds and develops local capacity. Reg Hinkley, BP, said, "We do have, through the behaviours of our staff and the code of ethics within which they operate, the opportunity to demonstrate good practice continuously and as a company that is what we do strive to do".[397] Equally, if companies were engaging in corrupt practice or had poor systems it was possible to set a very bad example.

180. A number of companies told us that it was difficult for them to raise issues relating to corruption openly. John Bray, Control Risks Group said "...companies are reluctant to be seen to be telling governments what to do, they do not want to get on soap boxes".[398] Similarly, BP said they had got further by not lecturing in public.[399] John Bray explained that while it was badly received for companies to lecture on corruption, it was not so badly received for them to share best practice.[400] Companies can achieve a great deal by working in partnership with local organisations like chambers of commerce and professional associations. There was some evidence to suggest that the international companies doing best were those with strong local partners who share a common sense of honesty, transparency and business ethics.[401] In exchange for sharing information on best practice, a local partner may offer an international company other advantages such as a greater awareness of political and social contexts and may offer an international partner some protection against corrupt practice. In its memorandum, DFID noted that "Several UK firms have expressed an interest in working with chambers of commerce and firms in the same sector in developing countries to spread good practice in combatting corruption and to encourage the adoption of higher standards of corporate governance".[402] We welcome the interest companies have shown in working with local partners through chambers of commerce. We see such activities as being in the interest of both parties. We believe that DFID should encourage this type of activity and should seek to broaden the focus to include professional bodies, associations and service organisations such as the Round Table, Rotary International and Lions International. DFID should examine what scope and need there is for building and strengthening the capacity and institutions needed to create professional bodies and associations in developing countries, especially for lawyers, accountants, business and engineering, as such bodies could have an important part to play in tackling corruption locally.

FACILITATION PAYMENTS

181. We have already examined the impact petty corruption has on the poor. The same petty corruption affects businesses. Manzoor Hassan, Transparency International (Bangladesh), said companies were often placed in a difficult position of needing a service that could be delayed significantly if a bribe was not paid with the risk of lost business in the interim.[403] BP said it could be difficult to draw a distinction between corruption and legitimate business incentives for a manager working in different cultures.[404] We are not convinced that this is the case. We do not see why the actions of a manager should differ from one country to another, especially between developed and developing countries. We have already examined whether there is a cultural basis for corruption. Perhaps it is not so much the difference of culture that makes the distinction between corrupt and legitimate business difficult to determine for a manager but the fact that there is less likelihood of being caught in countries with weak oversight structures and where a ruling elite is engaged in corruption. The fear that a company might lose out to a competitor who is willing to pay a bribe might also tend to blur the boundaries of acceptable behaviour. In these circumstances, the level playing field created by the OECD Convention and the Integrity Pacts promoted by Transparency International become important catalysts for change and should be supported. Some of what happens in developing countries is probably closer to extortion than to bribery but unless companies resist the temptation to pay they are as guilty as those extorting the bribe.

182. All the companies that gave evidence to the Committee said that they did not tolerate bribery. All had some form of code of conduct or ethics to ensure that the company's policy on bribery was clear to all employees. However, all the companies that gave oral evidence, with the exception of Crown Agents and Control Risks Group, admitted that they would make facilitation payments. We are sure they are not alone. The companies said that such payments were not encouraged and they would rather not make them, but all agreed that, if unavoidable, such payments would be tolerated under controlled, transparent circumstances and only where they were deemed to be part of local custom and practice. The companies drew a distinction between acts that were unlawful or designed to achieve unfair advantage or non-commercial advantage and practices which are essentially about speeding up processes.[405]

183. However, the policy of tolerating such payments was not universally shared. Ian White, Crown Agents, said "Making a facilitation payment or speedy money, as it is quite often called in Africa, is just the same as paying a bribe in any other society".[406] He did not see how anyone could differentiate between facilitation and bribery. He said that by making these payments companies were perpetuating petty corruption and what was required was a firm stance and a refusal to make such payments.[407] John Bray, Control Risks Group, said his company would advise its clients to resist making such payments even in places where illicit payments were customary, though he did recognise that people were often put under a great deal of pressure.[408] There are other options for companies when faced with demands for such payments other than payment. One area where companies could set a good example is in the reporting of requests for bribes to the local authorities. Companies can raise the issue of corruption at a junior level with more senior officials. Large companies have much more leverage than small companies in this regard.[409] Taking a stand against such payments is an important part of the anti-corruption effort and Laurence Cockcroft, Transparency International (UK), said "there is some evidence that people who take a stand are recognised as such and can get results".[410]

184. Monty Raphael made it clear that he would not distinguish between a bribe and a facilitation payment. However, he was able to explain why some of the uncertainty and some of the acceptance of these payments had come about. The US Foreign and Corrupt Practices Act prohibits bribery to secure business or a business advantage but allows facilitation payments where these are legal locally.[411] Such payments are often illegal locally and company's codes of ethics often fail to address this issue adequately.[412] Under the Act, it is mandatory to record facilitation payments.[413] Monty Raphael said "the American legislation makes an exception for, what are called colloquially, grease payments, or, rather more difficult to pronounce, facilitation payments. This is where petty corruption meets acceptable business practice, if it is acceptable".[414] This exemption in the American legislation produced the precedent for facilitation payments being permitted by the OECD Convention. He went on to say that the Council of Europe Convention makes no exception and provides a general ban on bribery of all kinds.[415]

185. Rick Helsby, PricewaterhouseCoopers, noted that facilitation payments were extremely difficult to find in company accounts because "by their very nature they are meant to be hidden". In evidence to the Committee, David Philips of Crown Agents said that "...I do not suspect that anybody has a line saying 'facilitation payments or bribes' in their accounts. What they will have under customs clearance entries is a line which is long accepted and which will always appear... you will see a line which is called 'petty disbursements' and that will cover a multitude of items and I think you will find that most of these facilitation payments, the tea money, the speedy money, the small payments, will appear under that category".[416]

186. Some companies may resist efforts to address corruption and tackle facilitation payments because they believe it will not be in their interest. But we believe by working together, resisting these payments and lobbying for improvements in service delivery, their massive collective leverage could be used to bring about real improvements in the quality of services. We see no difference between bribery and facilitation payments. Our legislation should make clear facilitation payments are not acceptable and that anyone making them would be breaking the law. Demands for such payments should be resisted by companies and reported to the local authorities. The OECD Convention should be amended so that it also forbids facilitation payments.

IMPROVING THE TENDERING PROCESS

187. We heard that the public opening of tender bids was an important way to tackle corruption.[417] We were told this was common practice in America where the public and other tenderers could examine the selected bids and monitor that a fair and proper selection process had been followed. Mike Welton, Balfour Beatty, said "The audit trail from the original public opening of the bid process through to the final award is an absolute fundamental".[418] The Nigerian Government also recognised the importance of publicly opening tenders.[419]

188. Integrity pacts were also seen as a helpful development in the tendering process. Laurence Cockcroft, Transparency International (UK), said they had been championing the concept of an Anti­Bribery Pact for some time. Basically in order to pre­qualify in the tendering process for a contract, companies sign a document that states they will not pay a bribe in relation to that particular project. The process is monitored by civil society groups and provides a mechanism for redress. It has been successfully applied in a number of projects and interest in such agreements is growing. Laurence Cockcroft, Transparency International (UK), said that the World Bank did not support this mechanism as it was seen as infringing the rights of companies to bid freely on contracts as pre-qualifying is a condition of being allowed to tender.[420] We believe that the public opening of tenders, the creation of audit trails to ensure a fair process is followed and the use of integrity pacts will all help to eliminate corruption in the allocation of contracts. We do not see why the concept of integrity pacts should not be extended to become industry-wide agreements not to engage in bribery, especially where there are relatively few companies in a particular sector.

THE ROLE OF AGENTS, SUBSIDIARIES AND JOINT VENTURES

189. We were told that commissions paid through agents are "frequently a euphemism for bribes".[421] John Bray, Control Risks Group, said there was a complacency about the use of agents. He urged that UK legislation make clear that the use of foreign agents or subsidiaries to pay bribes was not permitted. He pointed out there were financial risks and risks to a company's reputation in having agents acting on their behalf.[422] The Defence Manufacturer's Association was concerned to ensure it was recognised that "reasonable hospitality is not bribery" and that while agents should not be paid excessive commissions in the expectation that they will be paying bribes, some agents have higher costs in some parts of the world.[423] The OECD Convention did not address bribery through foreign subsidiaries and agents when it was originally negotiated, although it is likely that the OECD will re-examine this issue. The UK Government should address this deficiency in any new legislation on bribery that it seeks to introduce.

THE EXPORT CREDITS GUARANTEE DEPARTMENT AND CORRUPTION

190. In our Report "The Export Credits Guarantee Department - Development Issues", the Committee referred to evidence that suggested the Export Credits Guarantee Department (ECGD) should do more to scrutinise the record of companies applying for credits and refuse support for companies involved in bribery or corruption.[424]

191. The Corner House was critical of the role played by the ECGD. They examined the evidence of corruption in a number of ECGD backed projects including the Lesotho Highlands Water Project, the Turkwell Hydroelectric Dam in Kenya and the Ewaso Ngiro Dam in Kenya. They concluded that "This evidence strongly suggests that the agency, which underwrites the export contracts and investments of UK companies working abroad, has inadequate procedures to pursue or guard against corruption with the vigour and application that the UK public has a right to expect. New measures introduced to combat corruption, though welcome, also fall far short of credible responses to the institutional failures that are evident in the agency's management and operations".[425] They went on to say that ECGD should:

• "Introduce a mandatory requirement to withdraw credits awarded to companies convicted of corruption, regardless of whether or not the conviction is directly related to an ECGD credits or guarantee;
• Suspend credits (or the consideration of credits) where a company receiving or seeking ECGD support is being investigated for corruption, pending the outcome of the inquiry;
• Refer all allegations of corruption that involve UK companies bribing foreign officials to the police and instigate their own independent inquiries;
• Ban any company found guilty of corruption from receiving ECGD support for a period of ten years.
• Liaise with other export credit agencies and multilateral development banks to draw up a consolidated list of companies banned by any international finance institution".[426]

192. Gordon Welsh, ECGD, told the Committee that ECGD would not act until it had evidence that a company had been found guilty of corruption. He said until then there would be a presumption of innocence and well-being.[427] He also said that companies were required to sign a warranty saying that they had not engaged in corruption. He went on to say that either a failure to sign the warranty or inclusion on the World Banks list of debarred companies were prima facie grounds for not providing ECGD cover.[428] In December 2000, ECGD introduced a set of Business Principles that included statements on business integrity and corrupt practice. Through these ECGD commits itself to combat corrupt practice and promote the OECD Convention on the Bribery of Foreign Public Officials.[429] However, ECGD does not check whether contracts being considered for support have been won as a result of a competitive tendering process.[430] We welcome the introduction of a set of business principles by ECGD and the use of a warranty that seeks to prevent export credits being given to companies who have engaged in corrupt practice. However, we remain concerned that internal procedures and controls may be insufficient to prevent credits being given to companies with a poor track record and which therefore present a high risk. Applications for support should be subject to rigorous scrutiny and there should be in place a system to check that the scrutiny has been carried out. We would welcome further evidence on the actions being taken by ECGD to strengthen procedural and institutional oversight.

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254  Henceforth referred to as 'the OECD Convention' Back

255  Evidence, p.2 Back

256  Evidence, p.2 Back

257  Q.588 Back

258  Evidence, p.66 Back

259  Evidence, p.2 Back

260  Q.31 Back

261  No Longer Business as Usual, Fighting Corruption and Bribery, OECD, 2000, p.61 Back

262  Evidence, p.66 Back

263  Evidence, p.314 Back

264  Evidence, p.67 Back

265  Evidence, p.69 Back

266  Q.761 Back

267  Review of Implementation of the Convention and 1997 Recommendation - United Kingdom, OECD. See http://www.oecd.org/daf/nocorruption/report.htm Back

268  Q.589 Back

269  Evidence, p.105 Back

270  Q.32 Back

271  Evidence, p.68 Back

272  Q.588 Back

273  Q.153 Footnote Back

274  Q.38 Back

275  Q.153 Footnote Back

276  COR17 Back

277  Raising standards and Upholding Integrity: The Prevention of Corruption, Cm 4759, June 2000 Back

278  Q.158 Back

279  Raising standards and Upholding Integrity: The Prevention of Corruption, Cm 4759, June 2000 Back

280  Eliminating of World Poverty: Making Globalisation Work for the Poor, White Paper on International Development, DFID, Cm 5006 Back

281  Evidence, p.8 Back

282  Q.36 Back

283  Q.815 Back

284  Evidence, p.32 Back

285  Evidence, p.32 Back

286  Evidence, p.68 Back

287  Q.589 Back

288  Evidence, p.298 Back

289  Q.589 Back

290  Q.589 Back

291  Q.594 Back

292  Evidence, p.56 Back

293  Q.150 Back

294  Evidence, p.331 Back

295  Q.358 Back

296  Evidence, p.8 Back

297  Evidence, p.1 Back

298  Q.179 Back

299  Q.62 Back

300  Q.82 Back

301  Q.180 Back

302  Q.82 Back

303  Q.82 Back

304  Evidence, p.9 Back

305  Evidence, p.9 Back

306  'Recovering the Proceeds of Crime', Performance and Innovation Unit, June 2000 Back

307  http://www.ncis.gov.uk/PRESS/09_99.html Back

308  'Recovering the Proceeds of Crime', Performance and Innovation Unit, June 2000 Back

309  Q.604 Back

310  Evidence, p.131 Back

311  Http://www.fsa.gov.uk/pubs/press/2001/029.html Back

312  Q.183 Back

313  Q.177 Back

314  Evidence, p.132 Back

315  Evidence, p.132 Back

316  Evidence, p.331 Back

317  Q.219 Back

318  Evidence, p.132 Back

319  Q.605 Back

320  Q.202 Back

321  Q.187 Back

322  Q.66 Back

323  Q.68 Back

324  Q.160 Back

325  Q.81 Back

326  Q.195 Back

327  'Recovering the Proceeds of Crime', Performance and Innovation Unit, June 2000 Back

328  Q.321 Back

329  Q.605 Back

330  The Egmont Group is an international group of financial intelligence units that provides a forum for them to improve support to their respective national anti-money laundering programmes. See Http://www.oecd.org/fatf/ctry-orgpages/org-egmont_en.htm Back

331  Q.233 Back

332  Evidence, p.8 Back

333  Q.216 Back

334  Evidence, p.3 Back

335  Evidence, p.63 Back

336  Evidence, p.10 Back

337  Evidence, p.10 Back

338  Q.600 Back

339  Evidence, p.63 Back

340  Q.608 - 609 Back

341  Q.776 Back

342  Eliminating World Poverty: Making Globalisation Work for the Poor, White Paper on International Development, DFID, Cm. 5006, p.26 Back

343  Eliminating World Poverty: Making Globalisation Work for the Poor, White Paper on International Development, DFID, Cm. 5006, p.26 Back

344  Evidence, p.63 Back

345  Evidence, p.64 Back

346  Proceeds of Crime Bill - Publication of Draft Clauses, Cm 5066, March 2001 Back

347  Q.791 Back

348  Evidence, p.241 Back

349  Evidence, p.241 Back

350  Evidence, p.359 Back

351  Q.606 Back

352  Evidence, p.68 Back

353  Q.587 Back

354  Evidence, p.128 Back

355  Evidence, p.105 Back

356  Q.590 Back

357  Q.590 Back

358  Q.601 Back

359  Q.210 Back

360  Evidence, p.299 Back

361  Evidence, p.1 Back

362  Evidence, p.312 Back

363  Evidence, p.298 Back

364  Evidence, p.55 Back

365  Evidence, p.294 Back

366  Evidence, pp.297-298 Back

367  Evidence, p.10 Back

368  Evidence, p.328 Back

369  Evidence, p.57 Back

370  Evidence, p.57 Back

371  Evidence, p.11 Back

372  http://www.pwblf.org/csr/csrwebassist.nsf/content/a1a2c3a4.html Back

373  Evidence, p.11 Back

374  Q.597 Back

375  Q.623 Back

376  Evidence, p.54 Back

377  Evidence, p.71 Back

378  Q.408 Back

379  Evidence, p.199 Back

380  Evidence, p.313 Back

381  Q.633 Back

382  Q.633 Back

383  Q.634 Back

384  Evidence, p.11 Back

385  Evidence, p.11 Back

386  Q.630 Back

387  Evidence, p.10 Back

388  Q.166 Back

389  Q.629 Back

390  Evidence, p.330 Back

391  Evidence, p.71 Back

392  Evidence, p.314 Back

393  Evidence, p.294 Back

394  Evidence, p.71 Back

395  Q.331 Back

396  Q.349 Back

397  Q.332 Back

398  Q.450 Back

399  Evidence, p.172 Back

400  Q.167 Back

401  Q.285 Back

402  Evidence, p.11 Back

403  Q.105 Back

404  Evidence, p.171 Back

405  Q.342 Back

406  Q.350 Back

407  Q.343 - 344 Back

408  Q.344 Back

409  Q.344 Back

410  Q.106 Back

411  Q.592 Back

412  Q.344 Back

413  Q.381 Back

414  Q.592 Back

415  Q.592 Back

416  Q.381 Back

417  Q.324 Back

418  Q.325 Back

419  Q.671 Back

420  Q.139 Back

421  Evidence, p.310 Back

422  Q.168 Back

423  Evidence, p.328 Back

424  First Report from the International Development Committee, Session 1999-2000, The Export Credits Guarantee Department - Development Issues, HC73, para 13 Back

425  Evidence, p.308 Back

426  Evidence, p.312 Back

427  Q.44 Back

428  Q.53 Back

429  http://www.ecgd.gov.uk/graphic/debtdev/busprinstatement.asp Back

430  HC Deb 24 January 2001 Vol 361 c 626W Back

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Prepared 4 April 2001