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					21st Century Trust
Corruption and its Victims Introductory Paper George Moody-Stuart Chairman of Transparency International (UK) Definitions Any discussion of corruption must start with at least one definition, because in many people’s minds “corruption” is almost equated with “evil”. Perhaps the tidiest and most succinct is that coined by J J Senturia in 1931 - “Corruption is the misuse of public power for private profit”. This clearly includes bribery of national or local officials or politicians in any form, but excludes bribery which is solely within the private sector. It includes, in the word “profit”, money, entertainment or any less tangible benefit. Similarly it is useful to distinguish between “grand corruption”, which involves senior officials, ministers and heads of state, and “petty corruption” involving, for example, immigration officials, customs clerks and policemen. This is not just a difference of scale. Petty corruption is usually about getting routine procedures followed more quickly - or not followed at all. Grand corruption is about influencing decision-makers. To focus on grand corruption is not to condone petty corruption. The latter can seriously damage the quality of life of the ordinary citizen, particularly that of the most vulnerable mem-bers of society, but the former can destroy nations. One also frequently hears the description “international (or off-shore) corruption”. This takes place when the payer and the receiver are subject to the laws of different countries. Grand corruption, at least in the developing world, is usually international because a purely domestic transaction seldom meets the criteria which enable grand corruption to flourish. Conditions favouring Grand Corruption There appear to be three such criteria. The first is size; unless the project or transaction is big, it is not worth bothering about. The second is immediacy of rewards. The prospect of receiving payment in a few years’ time is not very enticing, especially in countries where tenure of office is likely to be short. The third can best be described as “mystification”, meaning that the more complicated and technological a transaction is, the less likely that awkward questions will be asked about it. Anybody can find out what should be the price of a cargo of cement on a given day. Similar information about the price of a fighter aircraft is virtually unobtainable: recent studies have shown that, in practice, it may vary as much as 300% for what appears to be the same piece of equipment. Applying these criteria, an order of attractiveness emerges on the following lines : a) Military supplies, aircraft, ships and telecom-munications equipment b) The capital goods element of major industrial and agro-industrial projects c) Major civil engineering projects, e.g. dams, harbours, bridges, highways

d) e) f)

Licences for extractive industries On-going purchases of bulk supplies, such as oil, fertilisers, cement, school text books and pharmaceuticals Consultancy fees

Obviously there are wide variations in the attractiveness of individual contracts to corrupt buyers but, by any calculation, those for military supplies emerge as the worst group by a substantial margin. They tend to be very large, they justify an early payment “up-front” and they are highly secretive. A recent American estimate claims that about 45% of all international corruption is accounted for by arms sales.

The Mechanics of Corruption An essential cog in the machinery of grand corruption is the local agent or representative. Sales directors of major corporations do not, generally speaking, travel the world with suitcases full of $100 bills. Instead they appoint an agent, usually a man of high standing in his local community, to whom they offer a large commission (typically 10 to 20%) if a contract is won. In this way the corporation has no improper relationship with the decision-maker. Its executives do not need to know how much of his inflated commission the agent passes on to others - or indeed whether he passes on anything. In spite of this distancing between the payer and the receiver of the bribe, it appears incredible to many people that large, well-known and apparently reputable organisations can become involved in bribery. An important part of the explanation is that although in every country it is a crime to bribe officials within that country, it is not currently a crime, except in the USA, to bribe a foreign official outside the briber’s own country. This is discussed in greater detail later in this paper. It is the combination of head-in-the-sand ignorance, facilitated by the use of an agent, and the non-criminality of such bribes, which enables “respectable” corporations to provide the fuel for the grand corruption engine. It is sometimes assumed that if a contract is subject to international competitive bidding (ICB), the risk of corruption has been eliminated because the lowest conforming tender will win. Nothing could be further from the truth. Opportunities arise at all stages, from the preparation of specifications, the drawing-up of the tender documents and the award of the contract through to its final implementation, for a corrupt buyer and seller to organise arrangements to their mutual advantage. Only professional and truly independent supervision can prevent this from happening.

Economic Damage So how much damage does grand corruption do? The most obvious effect is the direct increase in the cost of the transaction. If a bribe of, say, 10% is paid, not much of it generally comes out of the seller’s pocket in the end. He will merely build it into his price. Indeed the fact that a bribe is being paid may well make it possible for the seller to increase his price by more than the amount of the bribe. Incidentally, if the sale involves imported goods or services, any increase in cost will add to the foreign exchange required by the buyer to complete the transaction, which

in many cases further depletes an already scarce resource. However, this cost increase is by no means as serious as another aspect. Once the possibility of personal gain becomes a factor, it rapidly becomes the only factor that matters, pushing aside cost, quality, delivery and other legitimate considerations. The result is that the wrong suppliers or contractors are selected and the wrong goods are purchased. Worst of all is the situation in which, as a result of distorted decision-making, supplies or projects which are not needed at all are given priority over much more important requirements, for no better reason than that they carry high bribes for the decision-makers. Bearing in mind the corruption potential of military supplies, it is not surprising that they are so often bought unnecessarily. So while the cost of a bribe may lead to a direct increase of, say, 10 or 20% in the transaction cost, a bribe which results in a useless purchase can lead to the writing-off of 100% of the value of the contract.

Moral Damage But if the economic damage from grand corruption is serious, so is the moral damage. It is quite common in industrialised countries to hear the argument that “we have to go along with their way of doing business. It is part of their culture. What would be wrong here is all right there” - “there” being, of course, any developing country. This excuse is indignantly rejected by honest Africans, Asians and Latin Americans. Corruption is certainly more widespread in developing countries than in the North; but it is not part of anyone’s culture. The easy test of the “cultural” argument is that if the donor and the recipient do not mind seeing details of the “gift” on the front page of a newspaper, then it is probably alright. At the same time, companies which succumb to the temptation to pay bribes overseas create a major moral problem for themselves in their home market. How do you explain logically to a sales director that while it is permissible to pay a commission (frequently the polite name for a bribe) to secure a sale abroad, he may not, in any circumstance do so in his home market, even when his competitor at home is a foreign company which he strongly suspects of paying a bribe? There is clear evidence that at least some of those companies which pay bribes overseas, sooner or later pay them in their home market too. In his Letter to the Sheriffs of Bristol in 1777, Ed-mund Burke, the Anglo-Irish Statesman, wrote “Among a people generally corrupt, liberty cannot long exist.” He might almost have had fore-knowledge of the situation in many African, Asian and Latin American countries two centuries later, with the serious danger of several former Soviet Union countries following the same path. It is obvious that corrupt ministers and officials cannot allow free speech and a free press to expose their activities; nor can they allow a parliamentary opposition to do so. At the same time the wealth proceeding from grand corruption can play a significant part in enabling corrupt politicians to remain in power - by corrupt means. Transparency International has recently developed a Corruption Perception Index (CPI), which

last year covered fifty-two countries. This was based on ten surveys made by other organisations and no country was included unless at least four separate surveys covering it were available. A score of ten would indicate an entirely “clean” country, while zero would show a country where business transactions are entirely dominated by extortion and bribery. No country scored ten or zero, the extremes being Denmark (9.94) and Nigeria (1.76). With very few exceptions the countries in the top half of the list were those with well-established and strong democratic institutions, with the reverse applying in the bottom half. The CPI is flawed in some respects but it gives a useful comparative indication of the prevalence of corruption within the countries on the list.

The Weapons If, then, grand corruption is a disaster both in material and in moral terms, what can be done about it? It would be unrealistic to imagine that it can ever be eliminated, but groups of people in many countries, often working with Transparency International, believe that it can be greatly reduced. In the words of Jeremy Pope, the New Zealander who is now TI’s planning director, it must be turned from a low risk, high profit business into a high risk, low profit one. The first weapon must be criminal law. The US Foreign Corrupt Practices Act (1977) leaves the directors of US corporations in no doubt that if they bribe a foreign official or politician, directly or indirectly (i.e. through an agent), they are just as guilty as if they had bribed a fellow American in their home country. No other country has similar legislation; but this will change before long because the governments of the OECD countries have agreed, by a convention signed in December 1997, that cross-border corruption should be criminalised and that they will introduce the necessary legislation before the end of 1998. This timetable appears to be very tight and the end of 1999 is probably a more realistic target but there can be no doubt that the change is coming. Some English lawyers have objected to the OECD Convention on the grounds that extra-territorial legislation is repugnant to English law, but as Britain already has extra-territorial legislation against terrorism and drug-trafficking, the argument is now weak. An obvious question is whether the US FCPA has been effective. Its opponents argue that it has not, because some American corporations still give bribes; but the test of good legislation should not be whether it is infallible but whether it has brought about significant changes for the better. The FCPA undoubtedly passes that test. Its effectiveness also deserves to be judged against the failure of other major trading nations to enact similar legislation, which must at times have tempt-ed American exporters to take illegal action to match their competitors. Criminalisation will clearly have a marked effect on taxation. Until very recently the unintentional and unacceptable situation has existed in all European countries that off-shore bribes, however described, were tax-deductible as “business expenses” and were therefore in effect subsidised. Once again, all OECD countries are committed to changing this; and some have already done so. The results will be interesting. For example, under the Anglo-Saxon common legal system the accused is innocent until proven guilty; but the same presumption does not apply in an argument between a company and the tax authorities. There may be some sharp

disagreements when companies try to convince the tax man that, for example, a payment of 20% of contract value to an overseas agent was really required to meet his legitimate expenses and appropriate profit margin.. Criminalisation also changes the position of auditors. Given that an external auditor has a clear duty to draw attention to the illegality of any payment appearing in a company’s accounts, his failure to do so will put him at risk of being sued for negligence by any dissatisfied shareholder. Civil law can also be a weapon against corruption, on its own or in conjunction with criminal law. In the US there have been cases in which unsuccessful tenderers have recovered damages from a competitor who has been shown to have won a contract by corrupt means; and shareholders have successfully sued directors for abuse of trust when their money has been used to pay bribes, even though the result may have been beneficial to the company. There has already been one case in England, not widely reported, in which shareholders recovered money from the managing director of their company which he had used to pay a bribe within the UK. The court ruled that although the payment of the bribe might have secured business for the company, authority could never have been validly given to perform an illegal act and that the managing director was therefore essentially acting ultra vires. An interesting new concept called “Islands of Integrity” has recently been developed by Transparency International. This involves the use of an Anti-Bribery Pact (ABP) in major public contracts. The ABP commits all relevant officials and politicians, who sign it individually, not to solicit or accept any form of inducement in connection with a specific contract; and it similarly commits all corporations bidding on the contract not to offer any inducements to officials or politicians. On the corporation’s side, the ABP should be signed by the chief executive. There are heavy penalties (e.g. long-term blacklisting and rescinding of any contract awarded) for any corporation which is found to have broken the ABP. The “Islands of Integrity” concept is obviously open to the objection that those involved on both sides are doing no more than to promise to do what they should already be committed to doing ie not offering or receiving bribes. However there is evidence that a specific anti-bribery commitment on a specific project contract, which spells out special non-compliance sanctions, is taken more seriously by all parties than a general, all-embracing promise of good behaviour. The people most likely to know when a corrupt payment has been made are the employees of the paying company. The Americans legislated as long ago as 1863, during their Civil War, to reward “whistleblowers” - those who report their employers when they are making excessive or fraudulent profits on a government contract. A British organisation, Public Concern at Work, has recently played an important part in encouraging the setting up of facilities and protection for those who feel that they should blow the whistle, although current thinking does not favour the paying of rewards. It must be right to emphasise that duty to society at large always outweighs loyalty to an employer. Current thinking is moving strongly in this direction, with the whistleblower seen as a very useful anti-corruption ally. There is also a most important role to be played by financial institutions. Many major contracts in the developing world are financed, at least in part, by multilateral agencies such as the World

Bank, the regional development banks and the European Union, or by bilateral agencies such as USAID or Britain’s Department for International Development. Until quite recently it appeared to be the practice for many of these agencies to pay very little attention to the way in which their funds were used once they had been allocated. “Conditionality” was a dirty word and any attempt to supervise the spending of aid or soft loan money was stigmatised as “neo-colonialism”. This, of course, played right into the hands of corrupt politicians and officials, readily abetted by some contractors from the north. However, since James Wolfensohn became President of the World Bank, he has moved anti-corruption procurement procedures right up the Bank’s agenda. Others agencies are following suit and it is increasingly seen as being part of the financiers’ responsibility to ensure that their money is spent in the way which was intended. Baroness Chalker, who was Britain’s Minister for Overseas Development until the election of May, 1997, said in Nairobi shortly before leaving office that she had never regarded it as part of her job to transfer money from the British taxpayer to the Swiss bank accounts of Third World leaders! There is growing recognition that development aid, which is extremely important to many impoverished countries, will get decreasing support in donor countries if it is seen to be being wasted by corruption. Finally, when considering the weapons available to be used against corruption, the value of public debate must not be discounted. Of course it is action that is needed, not merely words, but it is a very healthy development that there is now so much more discussion and understanding of what is going on - and it is greatly disliked by those involved on either side of the corruption business.

Petty Corruption This paper focuses heavily on international grand corruption for two reasons. One is that it is a problem which, with many different aspects, affects almost all countries, industrialised and developing, whether as payers or receivers - there can be very few people who can truly say “This is irrelevant to my country and to me”. Petty corruption, on the other hand, varies greatly both in type and intensity from country to country. While combatting it is tremendously important, it is far harder to make useful generalisations about it. Remedies which have worked well in some countries would doubtless be ineffective or unnecessary in others, although the sharing of experience is always likely to be valuable. The second reason is that there is little prospect of achieving much reduction in petty corruption when grand corruption is rampant. What hope is there of persuading a “small man” to behave honestly when he know that the “big men” are enriching themselves? The Turks are right when they say “A fish rots from the head downwards”. So does a State. © 21st Century Trust

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