House of Commons - International Development - Appendices to the Minutes of Evidence

Select Committee on International Development Appendices to the Minutes of Evidence

APPENDIX 4

Memorandum submitted by The Corner House

UNDERWRITING CORRUPTION

Britain's Role in Promoting Corruption, Cronyism and Graft

SUMMARY AND RECOMENDATIONS

1. Corruption—broadly defined as the abuse of public or private office for personal gain"[2]—has become a major international concern. Its impacts on development, democratic accountability and Third World debt are profound, with the burden falling most heavily on poorer sections of society (paras 9-19).

2. Surveys reveal widespread acceptance of bribery among European companies operating in the developing world. Anti-corruption drives by popular movements and governments in the South have exposed many instances of alleged corruption involving UK companies, some of which are now before the courts.

3. In many cases, these corruption allegations relate to companies or projects which have received tax-payer support through UK-backed agencies such as the World Bank (paras 20-56), the UK Export Credits Guarantee Department (ECGD) (paras 57-84) and the Department for International Development (DFID). While making no judgement on individual cases, The Corner House believes that the overall evidence of public monies being mismanaged or abused is sufficiently solid to merit investigation by the UK National Audit Office.

4. The Corner House also believes that there is an urgent need to shift the focus of anti-corruption measures. In seeking to "explain" corruption, most commentators tend to dwell on developing countries, not industrialised ones—on the bribe takers, not the bribe givers. The intimate connection between corruption in the South and the institutional culture, bureaucratic practices and priorities of public and private institutions in the North is thus effectively obscured.

5. Indeed, if corruption is growing throughout the world, it is in large part fuelled by policies and programmes that are being pushed by Western governments and which are further underwritten by poor governance and misdirected funds in the North.

6. The Corner House urges the Committee to direct its investigation towards examining these structural causes of corruption. Adopting this approach, it believes, may encourage policy makers:

immense

— To look not only at how regulations could be improved but also at the daily institutional practices that actively encourage the flouting of existing development guidelines and anti-corruption regulations; and

— To look not only at ways of opening up decision-making to public participation and scrutiny but also at the institutionalized racism that assumes the Third World to be inherently corrupt and corruptible and which thereby underwrites bribery even where nominally accountable procedures are in place.

7. More specifically, The Corner House would urge the Committee to examine the links between the growth of corruption and UK public and private sector practices. In particular, it would draw the Committee's attention to:

paras

ECONOMIC IMPACTS OF CORRUPTION

8. Corruption is now a routine feature of many development projects and programmes. 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. [3]Those paying the bribes include multinational and national companies, consultancy firms and even government agencies - national export credit agencies coming in for particular criticism. [4]

9. Corruption carries heavy economic and social costs; it undermines development and distorting democratic processes and rational decision-making.

10. The amount of money lost to corruption that could, and should, be directed towards public services and to the development of democratic institutions is significant. Although the Committee's inquiry is focused on corruption in the field of international development, it is important to scotch the racist assumption that corruption is a problem that is primarily restricted to the South. Fraud, embezzlement and bribery are equally pervasive in the North—and their economic impacts are no less detrimental. In the United States alone, fraud and corruption claim $400 billion per year. [5]A recent report published by the Association of Certified Fraud Examiners found that organisations—public and private—were losing 6 per cent of annual revenue to fraud and corruption. [6]

11. The direct economic impacts of corruption are substantial. [7]According to the Asian Development Bank (ADB), "corruption can add between 20 per cent and 100 per cent to the procurement of government goods and services", with overall corruption-related losses totaling, in some cases, "more than a country's foreign debt".[8] Transparency International estimates that, on average, 5 per cent of national budgets go astray. [9]A leaked 1998 World Bank report estimates that 20 per cent of World Bank loans to Indonesia were embezzled by corrupt officials under the Suharto regime (see Appendix 2). Some analysts have alleged the Bank was not only aware of the corruption but did little to prevent it. [10]

13. Corruption also negatively affects the selection of development projects, as well as their quality, financial viability and distributional outcome. As the ADB notes, corruption:

IT'S THE POOR THAT PAY THE PRICE

14. The ADB warns that the "costs of corruption are often borne disproportionately by the poor, while the provision of public goods and services is skewed towards the rich, the powerful and the politically well connected." [15]UK Parliamentarian Hugh Bayley is more blunt: "Bribery is a direct transfer of money from the poor to the rich." [16]Corruption makes the poor poorer—not only do they end up paying more for services but they also lose out when money that could have been spent on projects that would directly benefit their communities is diverted to big expensive projects with lucrative commissions. Hard-won public health and environmental legislation may also be undermined through "illicit payments to prevent the application of rules and regulations in a fair and consistent manner, particularly in areas concerning public safety, law enforcement or revenue collection." [17]

15. In many cases, corrupt contracts lead to uneconomic projects and increased public debt. Again, it is the poor who pay the price—through cuts in public expenditure, poorer services and higher prices for basic needs. The case for reviewing Britain's debt portfolio and writing off debts incurred through corruption is overwhelming.

16. Ironically, but predictably, efforts to curb corruption through procedures that are designed to meet the bureaucratic requirements of funders, rather than local realities, frequently result in procedures that can also work to the detriment of poverty alleviation and sustainable development. As a World Bank Consultant notes of the World Bank's Third Fisheries Project in Bangladesh, which was intended to increase the production and availability of affordable fish for poorer people:

"The [project] was excellently designed but nearly ruined by the World Bank's rules . . . Fish fingerlings cost Taka 60 per kilo and were expected to fall to Taka 45 as a result of the project's work. Instead the price rose to nearly Taka 120. What had happened was that the World Bank had imposed some standard rules of its own. Fingerlings had to be bought under International Competitive Bidding, so documents had to be in English.

The numbers of bidders had to be limited to nine. Bidders had to prequalify each year, having to buy the 45 page prequalification documents in English. Having prequalified, they had to answer an advertisement to buy the bidding documents, and then had to prepare the actual bids. The whole process took about five months. However, the sort of people who dealt in fish and fish fingerlings were invariably in a small way of business, and were only literate in Bengali. They had neither the language to deal with the World Bank's documents, nor the cash flow to handle the hundreds of tonnes of fingerlings that such contracts demanded. This process was followed each year. To deal with such contracts, `musclemen' or `mastans' entered the scene. They went about armed and fixed the price. They brought the project to the brink of disaster. The consultants employed to manage the contract pointed out the faults in this system many times to the Bank's staff, but the Bank was insistent: The rules must be followed."

DEVELOPMENT FAILURE—FOR WHOM?

17. What constitutes a development failure from the point of view of the poor and civil society, however, may well constitute a development success from the point of view of funding agencies, consultants and companies involved in a project. Even ill-conceived anti-corruption programmes, for example, are evidence of some sort of action" for which institutions can—and do—claim credit. Likewise, by lubricating deals, corruption may enhance the career prospects of aid bureaucrats or company employees whose promotion often depends on the rapid disbursement of loans, the sealing of deals or the implementation of projects.

18. Addressing these institutional "benefits" of corruption is as critical as documenting and analysing its financial and social costs. It is, after all, the "benefits" of corruption that fuel its growth and sustain its practice. Unless action is taking within institutions—from multilateral development banks to bilateral agencies and the private sector—to ensure that the institutional costs of indulging in corruption—or turning a blind to it—outweigh the benefits, there is little prospect for change.

19. Unfortunately, as the next sections show, the UK's record in this regard is poor.

CORPORATE GOVERNANCE FAILURES, CORRUPTION AND UK-BACKED INTERNATIONAL FINANCE INSTITUTIONS: THE WORLD BANK

20. A significant percentage of the UK's current aid budget is directed through Multilateral Development Banks (MDBs), including the World Bank group. [19]Britain sits on the Board of the World Bank and, as such, has direct oversight of its use (and misuse) of UK tax-payers' money. [20]As a Board member, however, Britain has conspicuously failed to insist on the high standards of financial management that UK taxpayers have a right to expect.

21. Although the World Bank has recently initiated anti-corruption measures—creating new oversight structures and increasing staff with expertise in financial management—major shortcomings are evident in their implementation. In addition, the Bank's Executive Board has conspicuously failed to address well-documented (and acknowledged) institutional practices within the Bank that encourage corruption. Disturbingly, the UK has supported many projects despite evidence of corruption, or their failure to comply with the Bank's own anti-corruption measures.

Ignoring Corruption: Russia and Indonesia

22. Internal World Bank documents and external reports by the US Government and others now provide plentiful evidence that the World Bank's Board, which is responsible for ensuring that loans are spent as intended, has approved loans to countries with a known record of corruption, despite such countries failing to comply with the Bank's own anti-corruption regulations and despite warnings that the loans were likely to be misspent. The cost to the UK taxpayer of such mismanagement runs into millions of pounds.

23. In the Summer of 1997, for example, Business Week alleged that at least $100 million from a $500 million Russian coal sector loan was either misspent or could not even be accounted for. [21]A little over a year later, the Financial Times estimated the amount stolen in the coal sector loan to be much higher, as much as $250 million. [22]

24. In Indonesia, according to a 1997 internal World Bank study known as the Dice memorandum, [23]some 20 to 30 per cent of all development funds, totalling several billion dollars, have been systematically diverted through corruption (see Appendix 2). These figures accord closely with estimates by other experts, such as former Indonesian Finance Minister Sumitro Djodjohadikusomo and Jeffrey Winters of Northwestern University. Winters alleged in July 1997 that shoddy accounting practices by the World Bank had allowed the misappropriation of as much as $8 billion dollars of World Bank lending to Indonesia over the past 30 years. [24]In effect, successive UK World Bank Executive Directors, who are duty bound to ensure that UK money disbursed through the Bank is properly spent, appear to have permitted the misuse of some $405 million of UK taxpayers' money. [25]And this in Indonesia alone. The case for a National Audit Office investigation into the Bank's lending programme in Indonesia would thus seem to be overwhelming.

25. As with the Russia loans, however, the Bank continued to pour money into Indonesia, despite the findings of the Dice report. In the 15 months after the report was written, the Bank committed and disbursed over $1.3 billion more to Indonesia without any effective measures to address the problems identified by Dice. In October 1998, with plans to commit and disburse two billion dollars more over the next nine months, a second Bank mission, headed by Jane Loos, recorded the following:

"Our mission confirms earlier reports on corruption in Indonesia: that it is pervasive, institutionalised and a significant deterrent to overall growth of the economy and effectiveness of the Bank's assistance . . . Despite apparent compliance with World Bank guidelines and documentation requirements for procurement, disbursement, supervision and audits, there is significant leakage from Bank funds . . . Bank procedures/standards are not being applied uniformly . . . The [World Bank] auditing requirements have been allowed to deteriorate into a superficial exercise; even an agency with overdue audits was not excluded from receiving new loans"

Corruption and Dams

26. Nor are the Russian and Indonesian examples one off aberrations. Research undertaken by The Corner House on dam projects funded by the World Bank has revealed widespread corruption within the sector. Recent examples of World Bank-funded dam involving corruption—documented in Appendix One—include the Lesotho Water Highlands Project, and the Itaipu and Yacyreta projects on the Parana River in Brazil, Paraguay and Argentina. Yacyreta, funded to the tune of $860 million by the World Bank, has been described by Argentinean President Carlos Menem as "a monument to corruption". The dam's costs soared from an original estimate of $2.7 billion to 11.5 billion, and the still unfinished dam is currently 10 years behind schedule. [27]Itaipu was originally projected to cost some $3.4 billion, but skimoffs by the then military rulers of Paraguay and Brazil and their cronies contributed to the cost skyrocketing to around $20 billion. [28]

27. Other studies indicate similar levels of corruption in other sectors. [29]Bank staff themselves admit that the Bank has for years been reluctant to address corruption risks openly and directly with borrowers but argue that the Bank is now taking the issue seriously. [30]Nonetheless, a full five years after the Bank first adopted "internationally accepted standards of effective management control",[31] and four years after the Bank's President committed the Bank "to fight the cancer of corruption",[32] its own rules continue to be flouted—with the apparent complicity of the Bank's own Executive Directors.

Flouting the Rules: The GAO's View

28. As the US General Accounting Office (GAO) reported in a major study of the Bank's fiscal management control, published in April 2000, the Board continues to approve many projects which fail to meet the Bank's minimal financial management requirements. [33]Of 12 projects in "corruption-prone" countries randomly selected by the GAO, six . . . did not meet the Bank's minimal financial management requirements at the time that the Board approved the projects".[34] The report continues:

"Our review of 12 randomly selected projects approved by the Bank since November 1998 identified five projects in which the borrowers' implementing agencies had little or no experience managing development projects, according to Bank records and staff . . . Furthermore, for three of the 12 projects, the Bank determined that the borrowers' implementing agencies had particularly weak capacity for carrying out procurement in accordance with Bank rules . . . For four projects, the implementing agencies were not yet functioning and did not have key staff or operating procedures in place."

As a result of these and other deficiencies:

"The Board may not have had sufficient information to assess the borrower's capacity when approving these loans."

Disturbingly, in six of eight projects where Bank staff had "flagged weak management capacity, corruption, or political interference as a critical risk", the project appraisal documents "did not describe what specific supervisory actions the Bank planned to take to mitigate the risks." [37]It is not known whether or not the Board requested such measures when it approved the projects.

29. The GAO also notes that the Bank's new anti-corruption procedures only apply to "about 208, or 14 per cent, of the Bank's 1,500 projects" and that "Bank studies indicate that management weaknesses persist in ongoing projects." [38]Recent procurement audits, for example, "show a lack of, understanding of, and noncompliance with, Bank procurement rules among many (17 of 25) borrowers subject to these audits." [39]

30. Although the GAO review notes that the Bank has made "significant progress" in introducing anti-corruption measures, it concludes, "further action will be required before the Bank can provide reasonable assurances that project funds are spent according to the Bank's guidelines." [40]Given the huge sums that have been disbursed since the Bank began operating over 50 years ago—some $170 billion[41]—this criticism, which is echoed by a succession of internal Bank reports dating back to the early 1990s, is profoundly disturbing. [42]

31. Among the many problems identified by the GAO, the following are particularly pertinent to the Committee's inquiry:

32. Other studies reveal that auditing of World Bank projects often amount to looking at the books, without checking whether the records match reality. [52]Between 1997 and 1999, only 50 projects out of a total of 250 were audited. Yet 100 contracts (out of a total of around 45,000) were declared "misprocured". Their total value was over $45 million. Audits are "generally innocuous, untimely and therefore useless" and provide only "cosmetic accountability." [53]

33. Conflicts of interest are also pervasive in World Bank auditing. The "independent firms of international repute" which the Bank hires to carry audits are the same ones it employs to set up the accounts, information systems and financial management of its projects.

34. The probity of some of the auditing firms used by the Bank also leaves much to be desired. Societe Generale de Surveillance (SGS) of Switzerland, the company appointed by the Bank to investigate corruption in Bank projects, has itself admitted to paying "a substantial commission" in 1992 to obtain a government contract for inspection services in Pakistan. [54]Furthermore, according to the US Security and Exchange Committee, PricewaterhouseCoopers, the auditor hired in 1998 to help the internal Fraud and Corruption Unit of the Bank, was found guilty of "not only a lack of sufficient global safeguards, but also a systematic failure by professionals . . . to adhere to even their own firm's existing controls." [55]

35. The GAO study concludes that the Bank's recently introduced anti-corruption measures, although improving, "are not yet strong enough to provide reasonable assurances that project funds are spent according to the Bank's guidelines."

36. The Bank has criticised the GAO report for its narrow focus on internal financial management of loans. As a result, the Bank argues, the GAO has missed "the broad dimensions of [the Bank's] overall governance and anti-corruption work", in particular through its lending for adjustment and public sector reform. Such lending, the Bank states, arguably constitutes the most important dimensions of the Bank's anti-corruption work." In reality, however, the Bank's structural adjustment and public sector reform programmes have exacerbated corruption for reasons that are explained in paras 103 to 106 below.

37. Given the millions of pounds of UK taxpayers' money spent every year by the Bank, The Corner House urges the Committee to press the UK Government to follow the US lead and institute a National Audit Office investigation of the Bank's fiscal management regime, including the circumstances surrounding the disbursement of loans that have been identified as problematic.

38. Such an inquiry should look not only at the flouting of procurement and auditing rules by World Bank staff but also at the rules themselves. As Tim Tucker, a consultant who has worked for the World Bank, has pointed out, existing rules can easily be exploited by those who know the ropes for corrupt ends. [56]Moreover, the ritualistic application of rules, regardless of context, can, as in the Bangladesh fisheries project example cited above, result in outcomes which are the opposite of those they are intended to achieve. Likewise efforts to increase transparency that rely on form filling, though useful in providing a paper trail that can help investigation, may ultimately serve only to bury wrongdoing under reams of paper. Tucker's experiences would suggest that new procedures alone will not address the problems revealed by the GAO and other bodies. Corruption and the financial mismanagement that facilitates it is most likely to be curbed through increasing the likelihood of detection, not least through more proactive investigation of those involved in making bids, in addition to staff incentives that reward greater oversight.

39. The Corner House further recommends that any investigation should not be restricted to considering the Bank's internal controls over investment lending: it should also examine the Bank's apparent inability to address well-identified institutional practices and procedures that allow corruption to flourish. These are discussed in more detail below.

EVADING RESPONSIBILITIES—KAZAKHSTAN, LESOTHO AND PAKISTAN

40. Although the Bank has debarred a number of companies from bidding for contracts after they were found guilty of corruption, such companies have tended to be smaller consultancies or sub-contractors (the majority of them British—36 out of 54 listed in June 2000).

41. The Bank, however, has shied away from taking action against larger firms—even to the point of allegedly suppressing information. Tim Tucker recalls the Bank's reaction to his discovery of evidence suggesting that one of the world's largest accountancy companies had submitted false information as part of its bid to win a World Bank contract in Kazakhstan. As he recalls:

"When I showed [the evidence] to World Bank's Task Manager, I was told that I had not shown him [the] document to him, because if I did so show it to him, the World Bank would have to stop [the company] bidding for a three year minimum

42. Leaked correspondence between the Bank and the Government of Lesotho over the Lesotho Highlands Water Project also provide an insight into the Bank's priorities when faced with evidence of financial mismanagement and corruption. Nine companies and three international consortia involved in the project are currently on trial in Lesotho, charged with bribing Masupha Sole, the project's former director, in order to win construction contracts. The correspondence suggests that the Bank knew as early as 1994 that an audit of the project's accounts had revealed serious mismanagement. [58]The Bank's reaction, however, was to berate the Lesotho authorities for having suspended Masupha Sole from his post pending an investigation. Their reason: it would interfere with project construction timetables and could lead to costly overruns. [59]

43. It also emerges that the Lesotho government was already investigating the corruption allegations against Sole at the time that the Bank approved new loans in June 1998 for the second phase of the project—constructing the Mohale Dam. [60]The Bank pushed for Mohale to be built immediately, rather than in a decade's time when its water would be needed in South Africa, because the contractors were in place and it would therefore be cheaper to build immediately than waiting. [61]Many of these contractors are now alleged to have paid bribes to obtain their contracts.

44. Although the Bank has now instigated an internal investigation into the corruption charges, the investigators—Arnold and Porter, a prestigious Washington-based law firm—have reportedly been subject to restrictions. For example, on the basis of meetings with Bank officials, non-governmental organisations have alleged that the firm has been denied complete access to World Bank files and is also only allowed to copy files which it could have obtained via third parties. [62]This is denied by the Bank. [63]Once completed, the investigation will not be made public.

45. Meanwhile, NGO demands that any conviction in the Lesotho courts should result in the convicted companies being debarred from World Bank contracts have been rejected by the Bank. Convictions in the court, the Bank has stated, will have no bearing on the Bank's future dealings with any of the companies. Instead, the Bank is insistent that it will only debar companies if its own internal investigations show that a company has been involved in corruption involving a project component specifically financed by the Bank. Since the Bank only made a small contribution to the multimillion dollar scheme, this would mean that few—if any—companies are affected. Although the World Bank's President, James Wolfensohn, recently committed to wait for the findings of the national trial in Lesotho, it is still unclear whether the World Bank will refer to its internal investigation or the national trial in Lesotho as concerns the possibility of applying sanctions on companies found guilty of corruption. [64]

46. In any case, the Bank's position is based on the narrowest legal interpretation of the Bank's guidelines and a singularly selective view of the Bank's involvement in the project. Not only did the Bank finance the design of the project; it was also responsible for setting up and coordinating the financing programme. [65]

47. In Lesotho, the World Bank, having initially discouraged investigation into the corruption charges, is now helping to fund the prosecution of suspected companies. By contrast, in Pakistan, the World Bank's partner organisation, the International Monetary Fund, has actively intervened to crush corruption prosecutions. In 1998, some 21 Western companies were investigated by the national corruption agency for alleged kickbacks to the government of Benazir Bhutto and for over-pricing. [66]Although all the companies filed sworn statements denying corruption, six of them subsequently confessed to offering bribes.[67] So serious were the allegations that the World Bank sent in a special team of investigators. [68] Yet far from receiving support from Western Governments for its anti-corruption efforts, Pakistan was warned by the British, US, Japanese and Canadian governments that its clash with the companies would put off other investors. [69] The IMF went so far as to make a package of loans at the end of 1998 conditional on the Government dropping the charges against the companies. [70]

Unscrutinised Consultancies

48. Although tenders for major constructing projects are subject to competitive bidding, consultancy contracts—which absorb 10 per cent of the Bank's annual lending—are not. Such contracts are particularly prone to corruption, since companies derive obvious advantages from the Bank hiring consultants whose recommendations are likely to lead to contracts. As Transparency International notes: "Consultants have a particularly powerful function in the early stages of a project . . . If the consultants are associated in some way with a contractor who has successfully built thin arch dams, it should not surprise anybody if the consultant comes up with the proposal to build a thin arch dam, even though the topographic and rock conditions might favour a rock fill dam." [71] TI recommends that consultants should be required to disclose any factors that would reduce the consultant's independence. [72]

Corporate Lobbying and Cronyism

49. Forty-five per cent of the $25 billion that the World Bank lends each year is disbursed directly to foreign companies through International Competitive Bidding. The majority of these contracts go to companies from the G7 countries. A host of specialised lobbying firms have grown up to help companies win these deals, many started by former World Bank staff and representatives. These lobbyists keep an ear out for forthcoming projects, arrange meetings between their clients and Bank staff, and help their clients structure bids. Sometimes they or their clients lobby the Bank to take on particular projects. Such practices are not conducive to transparency: instead they encourage patronage networks and cronyism.

The Pressure to Lend

50. Several factors make it difficult for the Bank to ensure that its funds are properly used. Of these, the most consistently well-documented in internal Bank reports are the deep-seated institutional pressures on the staff to "deliver" projects. As a 1992 report by the Bank's Portfolio Management Task Force, led by Willi Wapenhans, makes clear, the Bank's "pervasive preoccupation with new lending" takes precedence over other considerations. [73] According to the Task Force, a number of current practices—with respect to career development, feedback to staff and signals from managers—militate against increased attention to project performance management." In the subculture which prevails at the Bank, Wapenhans said, staff appraisals of projects tend to be perceived "as marketing devices for securing loan approval (and achieving personal recognition)"; no one bothers to take government's implementation capacity into account when calculating economic rates of return; "poor policy environments", "institutional constraints", lack of "sustained local commitment"—all of these are often simply ignored in the rush to push projects through and keep them going.

51. The Bank's institutional priorities and management structures have thus encouraged staff to flout internal policy directives and borrower governments to ignore loan conditions. Unsurprisingly, the "credibility of [loan agreements] as binding documents has suffered" and "evidence of gross non-compliance [with Bank legal covenants] is overwhelming." When borrowers disregard loan conditions, the typical response of Bank management has been to look the other way or waive the relevant requirements, unless public pressure forces them to do otherwise.

52. Since 1992, the Bank has introduced a number of initiatives intended to address the problems identified by Wapenhans. However, far from remedying the problems, they have in many respects made them worse, not least by streamlining business procedures in order to speed up loan approvals and by introducing new rewards for staff, who move projects through the approval process at a faster place, rather than for those who comply with policy. [74] Indeed, a succession of internal reports has continued to criticise the culture of loan approval—where staff are rewarded above all for pushing money—as a major cause of project failure and "leakage" (the Bank's euphemism for graft). [75] [76] In at least one instance, the full findings of one critical report—a 1997 review of the Bank's project portfolio by the Quality Assurance Group—were never officially shared with Board members. Significantly, the report concluded:

"The lessons from past experience are well known, yet they are generally ignored in the design of new operations. This synthesis concludes that institutional amnesia is the corollary of institutional optimism

Clientitis

53. Like the "pressure to lend", the Bank's desire to keep lending to its client governments—"clientitis", in the words of Bruce Rich, International Program Director at Environmental Defense, a US non-governmental organisation—has long been identified as a major cause of poor loans being approved by the Bank. Yet, again, however, it is a problem that the Bank's management and Board has singularly failed to address, exacerbating the problem of corruption and poor project quality. Even when Bank staff have been well aware of corruption in loans, they have frequently ignored it in order to maintain the flow of lending.

54. In a February 1999 study of lending to Indonesia, the Bank's own Operations Evaluations Department (OED) notes: "Warning signals were either ignored or played down by senior managers in their effort to maintain the country relationship. Some staff feared the potential negative impact on their opportunities that might result from challenging mainstream regional thinking." [78] Significantly, the "Bank's reluctance to fall out with a major borrower led it to downplay major problems which internal reports had revealed in the Indonesian banking system, with the result that the "Bank's readiness to address the subsequent financial crisis in Indonesia was seriously impaired." [79]

Penalising Integrity

55. World Bank staff are frequently reluctant to raise questions that might slow down a loan because they fear that doing so will adversely affect their career. Internal Bank memoranda and reports have identified this as a major problem in addressing the Bank's "culture of loan approval" and, indeed, corruption. In its 1999 report on Indonesia, for example, the OED notes that staff who had drawn attention to major problems in the Indonesian banking sector were perceived to have suffered "unjustified penalties to their career prospects." [80]

Some Questions

56. The UK Government has a direct responsibility for the failure of the Bank to carry out the necessary reforms that would reduce corruption in the Bank's own projects. The Committee may wish to inquire of government ministers:

— How much UK taxpayers' money has been lost as a result of corruption in World Bank and IMF loans?

— How the UK Executive Director and the Treasury justify the continuing approval of loans that do not meet the World Bank's own fiscal management standards?

— What measures the UK Government intends to take to address the well-identified institutional failures within the Bank that encourage the mismanagement and misuse of loans?

— When was the UK Executive Director of the World Bank first made aware of corruption allegations in the Lesotho Highlands Water Project? What action was taken?

— What instructions were given by the UK Government to the UK Executive Director at the IMF in the matter of company corruption in Pakistan?

— What was the outcome of the World Bank's investigation into corruption in Pakistan? Will any of the companies which have admitted corruption be debarred from bidding for future World Bank contracts? If not, why not?

CORRUPTION, CORPORATE GOVERNANCE AND THE UK EXPORT CREDITS GUARANTEES DEPARTMENT

57. Within multilateral institutions such as the World Bank, the UK's scope for pressing for action to address the corporate governance failures that nurture and encourage corruption is limited by the need to agree changes with other governments. In the case of UK public institutions, this constraint does not apply to the same degree.

58. The UK's record on addressing pertinent institutional failures within UK government agencies that support development projects in the South is thus a test of its commitment to combating corruption and promoting better governance.

59. The Corner House has not examined in depth the measures taken in this regard by the Commonwealth Development Corporation or the Department for International Development (previously the Overseas Development Administration), although it notes that corruption allegations have surrounded a number of DFID/ODA programmes. Most recently, the Comptroller and Auditor General of India has reported major mismanagement of funds by the Karnataka Forests Department in the DFID-backed Western Ghats Forestry Project in India—described by the previous Conservative administration as "Britain's flagship aid project".[81] The Comptroller General's report is appended (see Appendix 1).

60. The Corner House has, however, examined evidence of alleged corruption in a number of projects backed by the UK Export Credits Guarantee Department (ECGD).

61. 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.

Inadequate Due Diligence Procedures

62. A focus of recent concern over the ECGD's procedures for combating corruption has been the Lesotho Highland Water Project, where three ECGD-backed UK firms are currently being prosecuted for allegedly bribing a top official in order to gain project contracts. [82] The three companies charged are: Balfour Beatty, Keir International and Sterling International. The ECGD's support for the project amounted to £66 million and went in loan guarantees to five UK companies. [83] Another UK company, Sir Alexander Gibb and Partners (now known as Gibb Limited), which received EU grants, is also charged. [84]

63. The charges laid before the Lesotho courts are detailed and rest on bank records provided by the Swiss authorities. In the case of Balfour Beatty, it is alleged that, in March 1991, the consortium of which it is a part[85] allegedly paid £585,000 via an intermediary into a Swiss bank account controlled by a Lesothan official. Only one month earlier a building contract was signed, worth £135 million. In March 1994, the consortium allegedly paid another £200,000 to the official's account. Two weeks later, they signed the contract to build another dam, worth £41 million. Altogether the consortium—the Lesotho Highland Project Contractors—allegedly handed over one million pounds. [86]

64. Good governance and due diligence might suggest that the ECGD should have vetted the corruption records of the companies prior to offering them support. The Corner House has seen no evidence that either the ECGD or any of the other agencies involved in financing the project ever did so.[87] Even today, there is no binding requirement for the ECGD to undertake such a vetting process of the companies to which they award contacts nor of their associates in any consortium of which they are part.

65. Such lax procedures indicate a major governance failure. In the Lesotho case, for example, most of the companies now in the dock—charged with passing some £2 million in bribes to a key official in order to win the contracts for the project—are no strangers to allegations of corruption: for the ECGD not to have taken account of this in deciding to become involved in the project suggests, at best, a cavalier attitude to corruption, at worst, gross irresponsibility in its handling of public funds.

66. For example, Balfour Beatty had earlier been involved in the Pergau dam scandal, where allegations of corruption were rife (see Appendix 1). Its partners in the Lesotho Highland Project Contractors include France's Spie Batignoles, which, according to Balfour Beatty, was the lead finance company for the Lesotho contract. [88] Spie Batignoles was involved in Kenya's Turkwell Gorge Dam which, because of bribes reportedly paid to Kenya's president and energy minister, cost more than twice what the European Commission said it should have cost.

Both Keir International and Stirling International, meanwhile, are partnered with the Italian construction giant Impregilo in the Highland Water Venture. Impregilo was one of the three principle firms involved in the Yacyreta Dam in Argentina and Paraguay, which Argentina's President Carlos Menem called "a monument to corruption". Impregilio also had contracts on Guatemala's Chixoy Dam, a project in which between $350 and $500 million was lost to corruption. [89]

67. Regardless of the outcome of the Lesotho trial, the ECGD should show how it justifies having lent its name—and public money—to members of consortia whose partners' past behaviour and practices were so suspect.

68. The Committee may also wish to inquire why the ECGD continued to support the project—including new credits to the consortium of which Balfour Beatty is a part[90] —after the Lesotho authorities first uncovered evidence of financial mismanagement.[91] Indeed, by the time the second tranche of credits went through, Masupha Sole, the head of the project who is alleged to have taken bribes, had already been suspended for a period whilst the project's accounts were investigated.

69. There is also concern that the ECGD is not as rigorous in its scrutiny of the contracts it underwrites as the public has a right to expect. In 1990, for example, the ECGD backed 85 per cent of a £38.1 contract awarded to consultants Knight Piesold for undertaking the feasibility and environmental impact assessments for the Ewaso Ngiro dam in Kenya. The project was already tainted with allegations of corruption against Energy Minister Nicholas Biwott. The ECGD's due diligence procedures would appear to have revealed no suspicious elements to the contract.

70. By contrast, the World Bank, which investigated the project, criticised Knight Piesold's fee as being "five times what such services would normally cost".[92] Moreover, according to the Bank, at least £15.3 million had been paid up front to Knight Piesold, even though the project was not due to come on stream for another 10 years. "The exorbitant cost of this contract together with the high level of upfront payments . . . even before the feasibility study had been completed, raises fundamental questions about procurement practices and financial management", stated the Bank's report. Knight Piesold said at the time that the "fee was entirely in line with the norm for work of this nature." The firm later went on to win contracts for full tender design and documentation" and is still working on Ewaso Ngiro, with ECGD backing. [93]

71. The Corner House believes that the ECGD lending on both the Lesotho Highland Water Project and Ewaso Ngiro suggest sufficiently lax governance procedures to merit a National Audit Office investigation as to whether the public's money was put at undue risk or was misspent.

Oversight of Commissions

72. The Corner House is also concerned that the procedures for vetting "commissions" included in the contracts underwritten by the ECGD are inadequate. Commissions are frequently a euphemism for bribes channelled through agents by companies. A survey by Control Risk Group of business development managers showed that 56 per cent of European companies surveyed said they "occasionally" used middlemen to avoid direct involvement with corruption and 44 per cent agreed it was a regular occurrence. [94] [95] If the agent is caught having bribed an official, the firm simply says it paid a traditional commercial "finder's fee" to the agent and had no way of knowing what the agent did with the money. [96]

73. Given this widespread corruption in the use of agents, Transparency International has described the practice of underwriting commissions as "an indirect encouragement to bribe" and "close to complicity with a criminal offence." [97] UK taxpayers, who are ultimately responsible for any losses incurred by the ECGD,[98] may also question whether the underwriting of bribes—even unwittingly—is a use to which public money should be put.

74. The size of a commission fee is often a good guide to determine whether the agent's role was legitimate or not. A fee in the amount of 3-5 per cent of the contract value may well be legitimate: a fee in the amount of 20 per cent of the contract value suggests strongly that one is dealing with bribe money. [99] Currently, the ECGD scrutinizes the size of commissions and action is taken when a commission is higher than generally accepted for the service provided. Where projects are underwritten by a number of agencies, ECGD does not, as a matter of course, see the application forms completed by their exporters. However, the ECGD confirms that "if we had concerns over excessive commissions on the UK element, it would be open to us to make enquiries of others." [100]

75. These procedures are too limited in scope to prevent corruption. Although the ECGD's primary concern should be to ensure that excessive commissions are not underwitten in the UK element of a project, it also has a wider responsibility to ensure that the project as a whole does not involve corruption. Simply ensuring that the UK has clean hands is not enough, since the UK's involvement in the project may be critical to the project going ahead—and therefore to bribes involving the "non-UK element" being paid.

76. In addition, the ECGD procedures do not require the ECGD to investigate the agents being used by companies. In the Lesotho case, the prosecution has alleged that the middleman who paid Sole was a Frenchman called Max Cohen. Cohen's company is registered in Panama, a country notorious for laundering money. [101] This alone might have alerted the ECGD to the possibility of corruption—had the agency investigated Cohen's company background. Significantly, World Bank staff, discussing corruption in Indonesia, have stated that, in their view, the rigorous scrutiny out of agents through stringent "prequalificant" requirements constitutes "the single most important reform" which the World Bank could undertake to deter corruption (see World Bank Memorandum reproduced in Appendix 2). [102]

Failure to Alert the Investigating Authorities

77. The Corner House is also concerned that, even in cases where evidence of corruption in ECGD-backed projects is alleged, the ECGD is singularly resistant to undertaking independent investigations or even to conducting internal investigations.

78. In the case of the Lesotho Highlands Water Project, for example, the ECGD initially appears to have taken no steps to scrutinize the detailed evidence presented to the Lesotho court in the charge sheets against the companies. Indeed, when the charges were first laid, the ECGD initially denied that Balfour Beatty was even being prosecuted (a position it justifies on the grounds that although the charges had been filed, the case has still to come to court). As of June 2000, a full five years after the Lesotho authorities first began their investigation into financial mismanagement in the Lesotho Highlands Water Project, the ECGD had apparently made no inquiries to the chief prosecutor in Lesotho; and its own inquiries when the allegations against the companies were first made public appear to have ended when assured by Balfour Beatty that no wrong doing took place.

79. Demands from non-governmental organisations that the company be suspended from applying for other credits pending further investigations (it is currently seeking one for the equally controversial Ilisu Dam) have been rebuffed. In a letter to The Corner House and other NGOs, Trade Minister Richard Caborn states:

"Your letter raises the issue of various allegations of corruption and fraud which have been made against companies associated with Balfour Beatty and consortia and joint venture companies in which Balfour Beatty companies are or were participants. As you acknowledge in your letter, the allegations against these consortia/joint ventures have yet to be proven. We consider that the principles of natural justice, to which you also refer, require that Balfour Beatty companies should have the benefit of the presumption of innocence and we therefore do not envisage suspending current applications pending a resolution of the investigations/court proceedings.

You have asked that a UK investigation of the allegations and of the company's corporate governance structure should be initiated. The allegations in Lesotho . . are being investigated by the competent authorities in those countries and we will of course co-operate with them should they request assistance from the UK. At present, however, we do not intend to initiate a separate investigation in the UK.

103

80. The Corner House rejects this reasoning. Under the UK Prevention of Corruption Act 1906, it is an offence to bribe a foreign official in order to obtain a contract. [104] It is not for the Minister of State but the police and the UK judicial authorities to decide whether or not the evidence presented to the Lesotho courts is sufficient to merit an investigation into possible infringements of UK law. [105] Nor should such an investigation be dependent on the outcome of the Lesotho case. If there are good grounds for suspecting that the law may have been broken, then the UK authorities have a duty to investigate. Whether or not criminal proceedings follow would depend on the decision of the Attorney General or the Solicitor General. The Corner House is unaware, however, of any action having been taken to report the allegations to the Director of Public Prosecutions under the 1906 Bribery Act.

81. The Corner House further notes that, in the view of the Organisation for Economic Cooperation and Development (OECD), a conviction of the company representatives alleged to have paid the bribes would not be a prerequisite for finding the companies criminally liable under UK law: the outcome of the Lesotho trial is, in this respect, irrelevant. [106] Moreover, the Government's own stated policy on corruption is at variance with Mr Caborn's view on the presumption of innocence (a view with which the Corner House has considerable sympathy). As the Home Office states in its June 1997 statement on "The Prevention of Corruption":

"Reversing the burden of proof in criminal cases is a serious step to take and requires full justification. In circumstances where a person is expected to exercise impartial judgment, it is arguable that that person should order his or her private affairs in such a way as to avoid any impression of corrupt activity. It may be reasonable therefore to expect a person in these circumstances to justify any questionable payments made to them. The Government therefore believes that it is right to consider carefully an extension of the presumption of corruption

107

New Anti-Corruption Rules

82. Recently, the ECGD introduced new rules aimed at ensuring that "corrupt activity goes unrewarded".[108] The new rules stipulate that companies must sign a declaration that neither the exporter nor anyone acting on its behalf has engaged in any corrupt activity and will not engage in any such activity. [109]

83. Whilst this is a welcome move, The Corner House notes that it will do little to address the procedural and institutional failures that have led to many allegations of corruption to date.

84. In addition to new rules—and accompanying staff incentives that reward their implementation—to encourage thorough investigation into backgrounds of companies and their associates, the 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.

CORPORATE GOVERNANCE, CORRUPTION AND THE UK PRIVATE SECTOR

85. 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.[110] The evidence suggests that bribery is more common than the relatively low number of court convictions would suggest. [111]

86. A number of major UK companies involved in infrastructure projects in the South have recently been linked to corruption allegations that have resulted in investigations. These include: PowerGen (Paiton II Power Project, Indonesia); Balfour Beatty (Pergau Dam, Malaysia; North East Corridor Rail Modernisation Scheme, USA; Lesotho Highland Water Project, Lesotho; Singapore); AES Ltd (Bujagli Hydroelectric Project, Uganda); Sir Alexander Gibb and Partners (Lesotho Highlands Water Project, Lesotho); Keir International (Lesotho Highlands Water Project, Lesotho); Sterling International (Lesotho Highlands Water project, Lesotho); Knight Piesold (Ewaso Ngiro, Kenya).

87. Details of these allegations are appended as Appendix 1. Details of the involvement of UK banks in corruption are provided in a Corner House briefing, submitted to the Committee as a background document. [112]

88. Many have resulted in official investigations by the relevant national authorities and, in some cases, to court proceedings being initiated against the companies involved. The Corner House accepts that the allegations have yet to be proven but submits that, regardless of the outcome of any pending investigations, the very fact that the allegations have been made raises important question marks over the current culture and corporate governance of the companies involved, in addition to highlighting gaps in UK company law, which are of relevance to the Committee's inquiry.

These concerns are outlined below.

Institionalised Racism and the Culture of Corruption

89. Underlying much bribery by Western companies of Southern officials is a view that bribery is the way one does business in the South. Illustrative of this view is a letter recently published in The Daily Telegraph:

"Having been involved in exporting to various countries in the Middle and Far East and in Africa, I have bribed government ministers and officials of all grades, in the form of cash payments, commissions, introductory fees, new cars, hotel accommodation, provision of hospital treatment and so on for more than 40 years. If I were not now retired I would continue to do so. That is the way one does business in those places, and in conforming to such customs I, like many others, have earned this country many millions of pounds in foreign exchange . . . while ensuring the gainful employment of several thousands of my fellow countrymen and women

113

90. Such "explanations" not only obscure the role that Southern governments and popular anti-corruption movements have played in exposing corruption in the South, [114] but also the role that Northern businesses and governments have played in creating a "bribe culture". As Dieter Frisch of Transparency International notes: "I do not know of a single place on earth where growing rich through taking bribes is considered lawful or morally acceptable." He goes on to quote Olusegun Obansanjo, former President of Nigeria: "In the African conception of appreciation and hospitality, a gift is a token. It is not demanded. The value is in the spirit of the giving, not the material worth. The gift is made in the open for all to see, never in secret. Where the gift is excessive, it becomes an embarrassment, and is returned. If anything, corruption has perverted the positive aspects of this age-old tradition." [115]

91. The Corner House believes that corruption will continue to flourish so long as the myth of "the Third World culture of corruption" remains unchallenged. In particular, measures—along the lines recommended by the Macpherson Committee—are urgently needed to address the institutionalised racism that underpins such views.

Failure to Inform Shareholders

92. Corruption tells investors a great deal about how a company is run and the competence (or otherwise) of its management. Under the Companies Act 1985, company directors are required to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the company. Many companies, however, appear to take a narrow interpretation of this duty when it comes to reporting corruption allegations, even where those allegations have resulted in prosecution or in action being taken by the local authorities.

93. In the case of Balfour Beatty, for example, no mention is made in its 1996 Annual Report of the Singapore Government's decision to ban the company from bidding for contracts for a period of five years. Similarly, the company's 1999 Annual Report[116] and 2000 Interim Report[117] both fail to mention that the company is being prosecuted for corruption in Lesotho, as part of the Lesotho Highlands Project Contractors consortium. Yet charges, which were laid against the company in December 1999, could have severe financial repercussions for the Balfour Beatty: for example, non-governmental organisations are calling on the World Bank to any convicted companies from bidding for World Bank contracts.

94. In other instances, the information that is supplied to shareholders on projects where corruption is an issue is often misleading. PowerGen, for example, has a 35 per cent stake in the Paiton II power plant in Indonesia. Following the SE Asia economic collapse and the fall of President Suharto, the Indonesian State Electricity—PNL—has alleged that many of the power purchasing agreements it had signed with independent power producers were corruptly negotiated and, in some cases, it has refused to honour them. A focus of PNL's investigations has been the Paiton contracts. [118] PowerGen's 1999 Annual report, however, gives no indication of such corruption allegations. Instead the report refers only to PNL's "short-term difficulties in meeting their contractual obligations as a result of the financial crisis in Indonesia." [119] It does not state what shareholders most need to know: namely, whether or not the Paiton II contract is one of those being challenged by PLN.

95. The failure to disclose corruption allegations to shareholders is of major concern and signals a major lacuna in current standards for company reporting. [120] Corruption is not only damaging to a company's reputation, but is also indicative of poor management control within a company. Shareholders are responsible for appointment of board members and, ultimately, for the management of the company. If they are to fulfill those responsibilities, they need to be in a position to judge the integrity of management personnel and corporate governance structures. Full disclosure of all information relevant to making such an assessment—including the outcome of any internal investigations into corruption allegations—is thus essential.

96. Such extended reporting would be in line with the recommendations of the Turnbull Report, undertaken by the Institute of Chartered Accountants for the Stock Exchange. The report recommends that companies should report annually on the steps they have taken to institute internal controls for managing all risks to their businesses, including non-financial risks. Anti-corruption would, in The Corner House's view, fall within the remit of any such report.

97. The review of company law currently being undertaken by the UK Government offers an opportunity to introduce measures that would require companies to disclose corruption allegations—and measures taken to counter corruption—to shareholders. The Corner House recommends that the UK Government should introduce legislation to correct this gap in current company law.

98. The Corner House also recommends that companies be encouraged to draw up ethical policies laying down anti-corruption standards against which shareholders and investors can judge their performance and thus the integrity of their corporate governance structures. A number of companies already have such policies in place.

Little Fear of Prosecution

99. The pervasive use of corruption by Western companies operating in the South also reflects the relaxed attitude of Western legal authorities towards corruption.

100. In the UK, there has not been a single prosecution of either an individual or a company for bribery of a foreign public official. [121] This is despite legislation prohibiting such bribery being on the statute book since 1906.

101. Investigations into corruption are similarly hampered by the authorities' reluctance to pursue corruption. Prem Sikka, Professor of Accountancy at Essex University, has stated that he experienced "a total block" in getting evidence looked at by government over the last ten years about a money laundering scandal involving British-based accountancy firms. "The reluctance of regulatory authorities to investigate evidence and allegations brought out in this case indicates an alarming degree of inertia and buck-passing within the UK regulatory process." [122]

102. Although the Government has recommended changes in the law that will make prosecution for bribing foreign officials easier, the new rules will mean little without strengthening the government's investigative arm. The Department of Trade and Industry, however, has turned down proposals to set up an anti-corruption office, arguing that it is not the role of the British Government to monitor behaviour of UK companies overseas. Effectively, this means that no-one will be responsible for ensuring that UK companies are held accountable to the new law.

CORRUPTION AND THE WIDER POLICY ENVIRONMENT

103. Although tightening procedures and instituting stricter internal controls and staff incentives and penalties aimed at reducing the opportunities of corruption are critically important, these measures are frequently undermined by the broader macro-economic policies which Britain, through the World Bank and the IMF, encourages: economic liberalisation, deregulation, privatisation and structural adjustment.

104. By undermining the political credibility and regulatory capacities of many states, liberalisation, for example has "contributed to a more generalized process of political decay. This reduces the incentives for probity on the part of officials and politicians, and creates a widespread social alienation from the political process".[123] Regulatory mechanisms have been weakened; there is no longer any need to provide economic justification for money transfers; and it has become far easier to exchange and transfer currencies and capital.

105. Likewise the rapid privatisation of public services—a condition of structural adjustment loans—has increased the opportunities for corruption. State enterprises have often been privatised before workable frameworks for regulation have been set up. As a result:

— Governments often cannot arrange transparent and open bidding processes or promulgate needed regulatory laws;

— Managers and employees, fearful for their future and confident of their ability to escape punishment, commonly strip the assets of the entities undergoing privatisation;

— Interested parties engage in insider dealing and political manipulation of the process for their own profit;

— Many state enterprises do not have the time to become economically viable before being sold off, leading to frequent sales of industries at below market value despite heavy government spending on recapitalisation.

106. Civil Service reform—in practice downsizing—has similarly eroded governance. At the same time, wages for civil servants who remain employed have declined because of SAPs, resulting in a lack of motivation, low morale, and increased risks of petty corruption.

107. NGOs in the South and North are thus calling for the World Bank and IMF to:

— Ensure that the privatisation programmes they impose include provisions for appropriate and robust regulatory frameworks to be put in place before privatisation is begun;

— Examine public sector reforms which do not involve privatisation, particularly in sectors such as water and health, in which services to vulnerable groups cannot be provided at a profit;

— Review whether loans made towards privatisation would be more effectively spent on administrative reform of the entities to be privatised;

— Draw up a plan of action to encourage accountability and transparency in privatisation programmes;

— Shift their emphasis away from downsizing towards more long-term solutions;

— Help governments make a concerted effort to ensure that Civil Service salaries are raised;

— Help governments increase accountability of the Civil Service through more training, freedom of information legislation, whistle-blower laws, and punishment for wrongdoers.

CONCLUSION

108. The Corner House believes that deep institutional changes are required in both the private sector and the public sector if Britain is not to continue underwriting, both socially and financially, corruption in development projects.

109. The Corner House therefore recommends that:

— The Government publish details of steps taken to address the long-identified institutional failures in UK-backed agencies such as the ECGD, the World Bank and and other international finance institutions, with specified time lines for action;

— The Government forward the details of corruption allegations in the Lesotho Highlands Water Project to the relevant UK law enforcement authorities with a view to investigating whether or not a breach of UK law has occurred. The ECGD should also be required to undertake a full investigation;

— The ECGD and other public bodies cooperate with the World Bank in drawing up its proposed consolidated list of companies found guilty of corruption with a view to debarring them for a specified period from access to UK public funds;

— The Government consider changes to UK company law with the aim of requiring companies to report to shareholders on all allegations of corruption, together with an assessment of the likely impacts on the company's bottom line and reputation;

— The ECGD review its debt portfolio with a view to canceling debts incurred through corruption.

110. Given the vast sums of UK taxpayers' money and jobs that would appear to have been lost to corruption through poor corporate governance of both international and national public sector agencies involved in financing development projects, The Corner House urges the Committee to recommend that the Government institute a National Audit Office review of programmes and projects where allegations of corruption are well-founded. The World Bank's loans to Indonesia and the ECGD's export credits to Kenya and Lesotho are cases in point.

111. The Corner House would like to thank the Committee for its consideration of these issues and hopes that this memorandum will aid the Committee in its deliberations.

The Corner House

October 2000

2 Asian Development Bank, Anti-Corruption Policy: Description and Answers to Frequently Asked Questions, Manilla, Philippines, 1999, p. 5. Back

3 http://www.oecd.org/daf/nocorruption/faq.htm Back

4 According to a French secret service report, the official export credit agency of France paid around $2 billion in bribes to foreign purchasers of "defence equipment' in 1994. See: Fiddler, S., "Defence contracts `pervaded by graft'", Financial Times, 7 July 1999. Back

5 World Bank, Helping Countries Combat Corruption: Progress at the World Bank since 1997, World Bank, Washington DC, 2000, p. 1. Back

6 World Bank, Helping Countries Combat Corruption: Progress at the World Bank since 1997, World Bank, Washington DC, 2000, p. 1. Back

7 Asian Development Bank, Anti-Corruption Policy: Description and Answers to Frequently Asked Questions, Manilla, Philippines, 1999, p. 5. See also: Mauro, P, "Corruption and Growth", Quarterly Journal of Economics, 109: 681-712, 1995; Mauro, P, "The Effects of Corruption on Growth, Investment and Government Expenditure: A Cross-Country Analysis" in Kimberly Elliott (ed)., Corruption in the World Economy, Washington DC, Institute for International Economics, 1997. See: Susan Rose-Akerman, "Corruption and Good Governance", Paper presented at "Democracy and Development: The Role of International Organisations", An International Conference co-sponsored by UNDP and Yale University, Yale University, New Haven, 1997. Back

8 Asian Development Bank, Anti-Corruption Policy: Description and Answers to Frequently Asked Questions, Manilla, Philippines, 1999, p. 1. Back

9 Atkinson, M and Atkinson, D, "The Bung Bang", The Guardian, 13 December 1997, p. 26. Back

10 "20 per cent" of World Bank loans to Indonesia stolen' ", The Guardian, 21 August 1998. Back

11 Asian Development Bank, Anti-Corruption Policy: Description and Answers to Frequently Asked Questions, Manilla, Philippines, 1999, p. 5. Back