Select Committee on Trade and Industry Written Evidence


APPENDIX 18

Memorandum by Transparency International (UK)

TRANSPARENCY INTERNATIONAL (UK)

  1.1  Transparency International (TI) has been at the forefront of the anti-corruption movement since it was formed in 1993. TI is a not-for-profit, independent, non-governmental organisation, dedicated to increasing accountability of government and private sector and to curbing both international and national corruption. It seeks to work in a non-confrontational way with governments, companies, development agencies, NGOs and international organisations to build coalitions to combat corruption. TI has made a number of written and oral submissions to the OECD Working Party on Export Credits and Credit Guarantees (the OECD Group) with a view to strengthening best practice in deterring and combating bribery on officially supported export credits.

  1.2  TI's international secretariat is based in Berlin and there are more than 90 national chapters around the world (www.transparency.org). TI(UK) is the national chapter for the UK and was among the first to be formed, also in 1993. TI(UK) has on a number of occasions met with staff of the ECGD to clarify its practice in deterring and combating bribery relative to the OECD Group's recommendations.

TI(UK)'S SUBMISSION AND INTERNATIONAL BUSINESS

  2.1  TI(UK) approaches this submission from the single issue standpoint of contributing to the reduction of international bribery. In so doing, it will respond primarily to the first issue listed in the Press Notice—the ECGD's objectives and business principles. To some extent the submission also relates to the promotion of sustainable development and the ECGD's corporate governance.

  2.2  TI(UK) focuses mainly on bribery in international business but is in no sense anti-business. It has always enjoyed support from major companies and professional firms operating internationally. A significant number of leading UK companies are corporate members of TI(UK). This linkage with UK companies enables TI(UK) to keep abreast of the problems that business encounters in the "front line" of foreign exports and investment. TI has been instrumental in producing and promoting "Business Principles for Countering Bribery" as a framework for companies to formulate codes and policies for responding to bribery and extortion.

  2.3  TI(UK) is currently giving priority to special projects addressing corruption in the construction and engineering industry and the official arms trade. These sectors were listed as those where the most flagrant corruption was seen according to the TI Bribe Payers Index published in 2002. Papers published by the construction and engineering industry project offer a wealth of suggested actions to assist in the elimination of corruption from affected transactions. Whilst the focus is on that industry, much of the advice reads across and can apply to business in other sectors.

PROGRESS SINCE THE 2000 REVIEW OF ECGD'S MISSION AND STATUS

  3.1  The ECGD should be commended for the considerable progress made in 2000 and subsequently. There is now a set of Business Principles the first one of which ensures the ECGD's taking into account the Government's international policies on various issues. As this first Business Principle already lists some key areas where this applies (sustainable development, environment, human rights, good governance and trade) there is a case for including an express mention of combating corruption. This would reflect the government's increasing international commitments in this area. Apart from the OECD 1997 Convention referred to in the ECGD's policies under Business Integrity, the UK in December 2003 formally ratified the Council of Europe Criminal Law Convention and signed the UN Convention against Corruption.

  3.2  The objectives and policies through which the Business Principles are applied have wording that commits the ECGD to combating corrupt practices and to operating according to standards of probity and propriety set out in the Civil Service Code. This cross-reference to the Civil Service Code could perhaps be made more effective in communicating the objective of combating corruption, if in the context of business integrity, it spelt out the key relevant points from paragraphs 5 and 8 of the Code.

  3.3  The ECGD has endeavoured to meet recommendations of the OECD Export Credits Group and it has devoted time and effort to consulting with NGOs on issues of sustainable development and business integrity. However, it is understood that new, presumably strengthened, guidance on anti-corruption measures has now been issued to ECGD's customers but TI(UK) has not been consulted as to the content (see para 6.1 below).

  3.4  There is an Export Guarantees Advisory Council, one of the functions of which is to monitor the ECGD's compliance with its Statement of Business Principles. The reports of the Council's activities in the last two Annual Reviews do not disclose whether interest has been taken in the objective of combating corruption. The concentration appears to be upon environmental and social issues.

CRITICAL CHANGES SINCE THE 2000 REVIEW OF ECGD'S MISSION AND STATUS

  4.1  One critical change in the business environment in which the ECGD operates is that with effect from 14 February 2002, the bribery of foreign officials or businesses by a UK company or national is a crime, even though no part of the transaction takes place in the UK. This is the effect of Part 12 of the Anti-terrorism, Crime and Security Act 2001. A crime is committed, whether the bribed party is in the public or private sector and regardless of the size of the bribe. This seriously increases the ECGD's risk exposure along with that of banks and other project finance houses. Project contracts may have a number of different governing laws, but the new law in the UK may result in contracts being more readily voided for illegality in circumstances that were formerly not seriously considered. Moreover, it was the government's expressed intention that the proceeds of corruption and the economic benefit that accrues to a company from foreign bribery could be seized and forfeited under the Proceeds of Crime Act 2002. The circumstances of each case will determine whether an export credit agency would be liable on an indemnity where underlying contracts are voided. This business risk needs to be managed.

  4.2  In the context of TI(UK)'s project on corruption in the construction and engineering industry, it has produced a report entitled "Corrupt Practices on Construction Projects—The Business Risk to Banks, Export Credit Agencies (ECAs), Auditors and Shareholders" (copy attached—this and all other published papers in connection with this project are available on www.transparency.org.uk). The Report proposes actions to minimise risk to ECAs.

  4.3  Quite apart from the criminalisation of foreign bribery, the business climate is changing. Numerous international conventions against bribery have been signed and are currently being ratified and implemented. Spurred by massive corporate scandals in the USA and Europe, corporate governance requirements are being constantly tightened. This is in parallel with increasing interest in ethical investment. Corporate reputation is seen as the single most valuable asset that a company has in terms of securing long term shareholder value. The Combined Code requires listed companies in the UK to comply with the Turnbull guidance. Internal controls have to be adequate to support a company's effective and efficient operation and to enable it to respond to significant business, operational, financial, compliance and other risks. These risks include reputation and business probity issues. Reputation can be damaged by allegations of bribery in another country, by the conduct of a subsidiary, associated or joint venture company.

  4.4 The official publications of government departments, for the first time, are now directed at letting business know of the extra-territorial effect of Part 12 of the 2001 Act. Trade Partners UK, who had for long been rather silent on the issue, has, in association with the Home Office and the DTI, issued leaflets and web-based information drawing attention to the criminal offences for overseas bribery, with their severe penalties. It unequivocally states that "Bribery is bad for business. A culture of corruption is a disincentive to trade and investment and payment of bribes is unacceptable behaviour for UK companies or nationals. By upholding the law and promoting transparency in business activities, British companies enhance their own reputations and staff morale". It is vitally important for the future of ECGD that it continues to take this issue seriously and minimises its own exposure by proportionate measures. There also needs to be a coherent policy across departments for tackling corruption.

ECGD PIVOTAL IN PREVENTING THE EXPORT OF BRIBERY

  5.1  By virtue of its function and the business sectors that its operations support, the ECGD finds itself in a pivotal position in affecting the incidence of corruption in international business. ECGD approval of an application will, rightly or wrongly, sometimes be perceived as assuring a measure of propriety and "public" approval. ECGD is uniquely well placed to detect and prevent corruption and positively to influence corporate behaviour to reject bribery in the conduct of foreign business. It is hoped that the new measures that the ECGD has introduced to tackle corruption will advance considerably on existing practice and will make a positive contribution to ECGD's business.

  5.2 The ECGD, through the OECD Group, seeks parity of practice with other ECAs, hoping thereby not to be at a competitive disadvantage with them. In the rapidly changing legal and business environments, it is not at all clear that a softer regime is a competitive advantage, save in the very short term. Business lost by virtue of maintaining lower anti-corruption hurdles is business that the ECGD would be better off without.

  5.3 The next two sections suggest ways in which ECGD anti-corruption practice can be further strengthened.

IMPROVED PRACTICE OF ECGD IN COUNTERING BRIBERY

  6.1 Bribes are most frequently concealed within and represented as commissions payable to or through agents. Applications for ECGD support already contain requests for information that could lead to a conscientious applicant's undertaking a measure of due diligence to ensure that no bribe is payable in connection with a supported transaction. There is also a non-bribery declaration. However, the form of the no-bribery declaration should be significantly strengthened, so as to improve its impact on applicants' behaviour by alerting them to ECGD's concerns and to counter unreasonable defences to recourse claims. The applicant should bear the responsibility for failure of due diligence rather than ECGD. TI(UK) had hoped to propose changes in consultation with the ECGD and last offered to assist in this way in December 2003. In the event, it is understood that the ECGD's revised anti-corruption practice has recently been sent to ECGD's customers and that it will be sent to TI(UK) next month as a definitive document. Given TI(UK)'s positive approach and understanding of business concerns (see para 2.2 above), this is a disappointingly closed response.

  6.2  The practice of paying inflated agency commissions is such a common way in which bribes can be passed that it merits considerably enhanced due diligence. This would minimise the risk of false declarations discussed in para 6.1 above. In the context of TI(UK)'s construction and engineering sector project (see para 2.2 above), it has published a report entitled "The Prevention of Bribery through Agency Commissions" (copy attached). TI(UK) has sent this to the ECGD with an offer to discuss its contents and to consider its applicability in combating corruption from the perspective of the ECGD's services. Obviously the same level of due diligence cannot be adopted on all applications. The appropriate level should take account of the amount of cover being sought and the amount of agency commission(s) being paid. Due diligence by ECGD would therefore be applied on a tiered basis. A limit of a given percentage of project cost or cover is an inappropriate measure to determine a level of due diligence. What matters in most cases is the actual amount payable relative to actual services provided or to be provided by the agent.

DEBARMENT AND SUSPENSION

  7.1  There is wide recognition of the importance of a public financing institution's being able to deny future finance or support for further applications from a company found to have bribed. Such debarment for a fixed and proportionate period, to include parent and subsidiary companies, is a potentially powerful sanction in the anti-corruption armoury. This is the practice of the World Bank group of institutions and is recommended best practice of the OECD Group. The ECGD claims that it is unable to apply this practice on legal grounds. This is understood to be based upon the general principle of administrative law that the Secretary of State may not fetter his or her future discretion. It is said that this precludes automatic debarment of a company that has been convicted of corruption or has been debarred from the services of another institution for these reasons and that such a practice could be challenged by way of judicial review.

  7.2  Although the principle of administrative law is well understood, its consequence in this context is surprising. It suggests that an export insurance function is required to operate in a manner that is less prudent than would apply to a commercial credit institution that would be free to decline future business to limit its exposure to the consequences of an applicant's criminal activities. It is suggested that the powers of the Secretary of State in the Export and Investment Guarantees Act 1991 are so widely expressed that "arrangements" could include a procedure for debarment or suspension. If that is really not the case, then the Committee could recommend that the legislation be amended to enable ECGD to come into line with OECD best practice in this respect.

CONCLUDING COMMENT

  8.1  TI(UK) is grateful for the extension of time in which to make this submission. It would be willing to offer whatever further information or assistance might be found helpful.

Graham Rodmell

Director of Corporate & Regulatory Affairs

Transparency International (UK)

19 March 2004



 
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