Select Committee on International Development Minutes of Evidence

Memorandum submitted by Transparency International (UK) continued


1.B.1  The public sector

1.b.1.1  Some history of public sector corruption in the developed world
  (i)  Corruption in any society is clearly a dynamic phenomenon—either increasing or decreasing over time. Historical assessments would concur that corruption was a major phenomenon in eighteenth century England, but was on the decrease by the mid nineteenth century. The fact that the first legislation to criminalise the bribery of a public official was passed in 1889 confirms that by the end of the nineteenth century an anti-corruption ethos was in place which was strong enough to lead to specific legislation. In the US a comparable process was at work taking American society from the open municipal corruption of the mid to late nineteenth century to the tough legislation of the early to mid twentieth century. Italy provides a further example of the fact that corruption is never a stable phenomeon. The political situation in Italy after World War II was one in which the Christian Democratic Party was able to dominate party politics and developed an increasingly effective but complex system of political and financial pay-offs which was eventually characterised as Tangentopoli (Bribesville). Not surprisingly there was eventually a reaction to this embodied in the Manu Polite (Clean Hands) campaign led by De Pietro which by 1996 had brought charges against 4,500 senior figures in Italian political life, including two former Prime Ministers (Andreotti and Berlusconi). Certain forms of corruption in Italian political life will certainly now be constrained as a result of these processes.

  (ii)  Formal analyses of the history of corruption over distant and more recent centuries do not really explain why these changes occur but recognise that they are linked to value changes in society which themselves may be linked to public outcry against a series of specific events. The introduction of the Foreign Corrupt Practices Act (FCPA) in the USA fits into this category since it had been preceded in the period from 1975-77 by a series of scandals linked to international bribery of which the Lockheed payments to Prime Minister Tanaka of Japan and Prince Bernhard of the Netherlands were the most conspicuous. However in the course of the Senate hearings which led up to the FCPA more than 30 US multinational companies tabled detailed information on the quantum of specific bribes which they had paid overseas in the preceding five years. Public opinion clearly felt, or was persuaded to feel, that it was time to establish new parameters of corporate behaviour in this regard. The hearings in 2000 in the Bundestag in relation to ex Chancellor Kohl and the manipulation of payments to the CDU may form a comparable phenomenon.

1.b.1.2  The developing world
  (i)  In the developing world the debate about corruption has likewise never been static. A good part of the justification for the communist revolution in China emanated from a reaction against the corruption of the regime of Chiang Kai Shek and its failure to eradicate corrupt practices at regional and local level which emanated from the previous imperial regime. The communist regime has maintained a nominal anti-corruption stance: in the early 90s the Ministry of Supervision received more than more than half a million complaints per year about corruption, of which 20,000 led to convictions.

  (ii)  In India corruption has never ceased to be an issue, both before and since independence. The series of events surrounding the Bofors case confirmed that armaments transactions were being used both by the Congress Party, and almost certainly by members of the Ghandi family, to attract bribes for both public and private purposes. At state level the rise and fall of political leaders is certainly partly linked to the public perception of their position on corruption.

  (iii)  In Latin America key political events in Argentina, Brazil, Venezuela and Mexico have been linked to corruption over the last ten years. In Brazil, Color di Mello was forced out of office for corruption-related reasons in 1996; in the same year Carlos Peres was indicted by the Venezuelan Congress and obliged to resign; in Mexico the money laundering scandals surrounding President Salinas and his brother in the late 1980s have led to the demise of the PRI.

  (iv)  The pattern of corruption in both central and eastern Europe, the countries of central Asia and nearly all of Africa is even more serious than in these cases. Whilst it does not follow that the poorest countries are the most corrupt it is true that many of the worlds poorest people live in very corrupt countries.

1.b.1.3  Categories and Causes
  (i)  Whilst it is very difficult to quantify the extent of corruption, there is a degree of consensus about the mechanisms which underlie the contemporary phenomenon. A useful approach to the phenomenon divides it into petty and grand corruption, with an increasing recognition of the links between the two. Grand corruption is used to describe large scale deals involving senior public officials and companies trading or investing on an international basis. Some of the key mechanisms surrounding this have been very fully described in George Moody-Stuart's book Grand Corruption. Petty corruption describes facilitation or grease payments sought and obtained by junior officials who are actually or ostensibly rendering a service to the public. In some cases these payments are made for the provision of a service which should be a free public good; in others they are for a largely fictitious service or relate to imaginary offences (as at many an army or police roadblock).

  (ii)  There is little doubt that grand corruption is occasioned largely by the greed of those who are already well off by local, and often by international, standards. The objective of the corrupt act is to make the key individuals even more wealthy and thus more powerful. This is true whether the corrupt act finances a political party or the individuals concerned (or both, as may often be the case). In the case of petty corruption the motivation is more frequently that of survival in societies where individual civil servants and others receive extremely low pay. Obviously there is a grey area between these two contrasting cases—notably of middle level officials who may have expectations about, say, the education of their children which prove increasingly unrealistic as real incomes fall or fail to rise.

  (iii)  A more complex point, however, is that there are often links between the two forms of corruption which may feed on each other. For example, in a police force, roadblocks and other forms of relatively minor harassment may be conducted at street level by a group of police constables. The participating constables pass a good part of their takings to their senior officer, who in turn passes a slice to his own senior, and so on up to the Chief of Police. The latter may have some arrangement with the Minister of Home Affairs who turns a blind eye to this in view of other deals in which the Chief of Police participates. In this case only a minority of the police force are participating; the links between the participants may be based mainly on ethnic lines and a common need to reinforce each others position. Such a minority-based system does not have to exclude a separate system being operated by an alternative network with a different ethnic base. In this case the link between petty and grand corruption is fairly close since middle and junior ranks of the police force may be allowed to indulge in petty corruption whilst the most senior ranks take a slice of these proceeds and are party to a major deal orchestrated by a Minister.

1.b.1.4  Significance of the cabal
  (i)  This schema also provides a guide to the mechanism underlying various types of grand corruption. In most such cases there is a small cabal of individuals who are strategically placed in key government departments or agencies to ensure that a deal can be completed. In, say, the purchase of an armaments system where a big bribe is to be paid to the Minister of Defence the latter will have ensured that some combination of the central bank, customs and excise, his own Ministry and perhaps a well placed individual in the Ministry of Foreign Affairs are cut in on the deal. Whilst the Goldenberg case in Kenya did not involve the receipt of a bribe from overseas, evidence now in the public domain suggests that such a cabal existed, and was led by the then Minister of Finance (now Vice President) George Saitoti. The significance of this for an analysis of corruption is that in a cabal the individual who may be regarded as the potential bribee is actually part of a network with a vested interest in the project.

  (ii)  In Tanzania in 1994 elements within the Government of the then President Mwinyi were actively pursuing the possibility of the purchase of a £100 million civil and military radar system from Siemens Plessey of the UK to protect Tanzania air space. This was to be funded by Bankers Trust from London whose security would rest in a contract for the forward sale for ten years of gold purchased by the Central Bank of Tanzania at an agreed price. The deal was strongly resisted by the Governor of the Bank of Tanzania, eventually subjected to intense media scrutiny and to intense negative pressure from the Paris Club of donors at its 1995 meeting. Although it was eventually killed, or radically scaled down, members of TI-Tanzania observing the deal noted that the cabal promoting it remained active in its pursuance well after the new Government of President Mkapa came to power in late 1995. Amongst other factors it was the failure of that cabal to co-opt the Governor of the Central Bank which negated the deal.

1.b.1.5  Privatisation
  (i)  The process of privatisation which has occurred in the majority of developing and transition economies in the past ten years has provided important opportunities for corrupt deals based on insider cabals of this kind. There are many examples of individuals close to para-statals under privatisation being an integral party to the privatisation deal. The role of the oligarchs, such as Berezovsky in Russian privatisation has been widely recorded, with personal gain a more important consideration than the potential gain to state revenues.

  (ii)  On a much smaller scale the Parliamentary Accounts Committee in Uganda published a report in 1999 indicating that the total net proceeds to the State from privatisation were close to zero. Underlying this failure of the privatisation process is the effective rigging of the sale by collusion between members of the tender board reviewing bids and either one of the bidding companies or the former management team of the para-statal in question. Sometimes the bidders may have links with the Head of State which are strong enough to negate the Board altogether. Thus in Zimbabwe, in 1996, the national power supply agency (ZESCO) was relieved by President Mugabe of the responsibility for awarding the privatisation contract for Hwange Power Station when a consortium including the Malaysian company YTL (which was in a joint venture with Siemens) was not selected.

1.b.1.6  Grand corruption is not always linked to aid (at least not directly!)

  As the above examples show, grand corruption, even in very poor countries, is not necessarily directly linked to aid flows. In many cases, however, there is corruption associated with conditionalities of aid. An insistence on privatisation is one such. In other cases the process may be entirely domestic (as with Goldenberg); in yet others it may be facilitated by export credits or commercial banks (as has been alleged in the case of the Bank of New York personnel facing criminal charges for money laundering in London from Russia in 1999). It is likely that such cases are at least as common as those in which corruption can be directly attributed to aid flows.

1.b.2  The private sector

  The domestic private sector in the majority of developing and transition economies has existed in symbiotic relationship with the role which governments have adopted, as partly described above. In the minority of cases where governments have taken a strong anti-corruption stance (such as Hong Kong, Singapore, Botswana) the private sector has responded by adapting itself to this stance. However, in the majority of cases it has responded to the perceived need to interact with the culture generated by key players in the Government. The ways in which multinational companies (MNCs) have interacted with this position are discussed in section 1.d below.

1.b.2.1  Import permits and tariffs
  (i)  Perhaps the most important single source of corruption in the domestic private sector, where this is taken to be medium sized manufacturing and distribution businesses, has been its interface with import licensing and the tariff structure. The most extreme example of this problem is certainly Nigeria where since independence the allocation of import licences has been an almost entirely corrupt auction based on who could pay most to the Ministers of Trade, Finance, Energy and Agriculture to provide authorisation for imports. Since the manufacturing and agri-business sectors (e.g. Fertiliser and feed mill inputs) in Nigeria have been highly import-dependant the country has provided a particularly dramatic example of the consequences of this auction approach.

  (ii)  This pattern of corruption being closely linked to import permits and tariff concessions has been particularly characteristic of West Africa and consistent across linguistic and cultural norms from Liberia to Ghana to Cameroun. The pattern has made nonsense of strategic decisions taken to afford a degree of protection to new infant industries, which might find overnight that their protected niche was henceforth to be undermined by the direct import of the their product.

  (iii)  However, west Africa is far from alone in this respect. The sugar industry in Kenya had been relatively successful since the first major estate at Mumias was developed in the mid 1960s. However in the course of the 1990s the viability of the five major estates, including the very successful Mumias, has been almost entirely undermined by sugar imports made by special Presidential authority and allocated to local distributors who are known to be major contributors to political funds controlled by the President. In 1996 the first casualty of the anti-corruption stance of President Mkapas new Government in Tanzania was Prof. Samuel Mbilyini, the newly appointed (and highly rated) Minister of Finance, who was found to have awarded a major import license for vegetable oil to two importers on the basis of a zero tariff. He was obliged to resign as a result of this case.

1.b.2.2  Other licenses and arbitrary payments

  The allocation of other types of licences tends to follow this pattern and to extend to much smaller businesses. A recent study in Tanzania found that SMEs had to acquire 17 licences before they could operate, and that an integral part of this process was the prepayment of a year's income tax on their putative and projected turnover. Whilst in principle the Ministries of Trade and Finance could rationalise such licences in the course of one budget there is in fact a strong vested interest in their maintenance, particularly at local Government level. In many countries both larger private businesses and successful SMEs are obliged to make arbitrary payments to both income tax personnel and in some cases to the funds of the ruling political party. The strategy of imposing arbitrary assessments for income tax is based on the perception that many businesses will find it easier to pay up than to pursue an appeal; only part of the funds collected in this way will reach the Revenue Authority.

1.b.2.3  Politically-based holding companies
  (i)  Another aspect of corruption in the domestic private sector lies in the ownership of share capital in larger local companies. There is a history, extending over several decades, of companies being owned by the political party dominant in a one party state in order to generate funds for that party. Thus the Press Holding Company in Malawi, which developed in the era of President Banda and eventually controlled a significant part of the modern corporate sector, was essentially a mechanism for generating funds for the Malawi Congress Party.

  (ii)  In other cases such private companies are in practice owned indirectly by those very close to the Head of State. We have shown above that the process of privatisation has frequently enabled a cabal of "insiders" to purchase formerly state owned businesses. An analysis published in Kenya in 1998 of companies controlled by President Moi and his closest associates indicated that these totalled four hundred firms. This figure has not been seriously disputed by those close to State House. Sometimes the complications arising from such arrangements are even more dramatic. In 1998, at a time when the world was being asked by the OAU to impose economic sanctions on Burundi as part of ex-President's Nyerere's peace building initiatives three senior politicians in office in three different East African countries established a sanctions-busting private transport company in which they are the main equity holders. In Angola, since the breakdown of the UN-brokered peace agreement in 1997, the purchase of arms for the government has been largely handled by SIMPORTEX, a company reported to be controlled by very close associates of President Dos Santos.

1.b.2.4  A common theme—in all sectors

  The themes traced here (import licensing and tariff exemptions, business taxation and licensing, and the "real" ownership of larger ostensibly private companies) may appear to be highly disparate. In fact, there is a common thread which fits well with TI's preferred definition of corruption: "the misuse of public power for private gain." The underlying question is the perception of the responsibilities of public office, especially in small and vulnerable economies where the misallocation of resources controlled directly or indirectly by the State has a very high cost to the public.


  This topic has been largely covered under "Public sector" in 1(b) above, but there are several additional points worthy of including here:

1.c.1  Budget processes and misdirected revenues
  (i)  In the case of a number of countries the existence of special accounts into which revenue is paid and never publicly declared has seriously undermined the budgetary process. This is a particularly acute problem in oil exporting countries where a small number of producers generate most of the revenue, a proportion of which is transferred to the state or its agents through revenue sharing agreements. Cameroun, Nigeria and Angola all provide examples of this. President Ahidjo of Cameroun established the special oil account when Cameroun's oil was first developed in the late 1960s. It remained completely off the budget and figures for its income and expenditure were inaccessible to both the Camerounian and international public. Inter alia it assisted in financing a complete Presidential village in the home area of the Beti, President Biya's ethnic group, in which there is a separate mansion for each of the (20) Cabinet members. As a result of intense pressure from the IMF, and as part of conditionalities associated with a resumption of IMF lending in 1998, the special account was finally abolished in that year.

  (ii)  In Nigeria oil revenue flows accruing to Government have been handled by the Nigerian National Petroleum Company (NNPC). Its accounts have likewise not been published and it has certainly contributed to the massive fortunes attributable to former Presidents Bushari, Babangida and Abacha. The government of President Obasanjo is currently seeking the repatriation of $5 bn from the Abacha family, a significant part of which has been gleaned from this account.

  (iii)  In Angola payments made to companies such as SIMPORTEX are the principal source of finance for the arms purchased to pursue the war against armed UNITA rebels who refuse to accept the results of a democratic election—in itself a legitimate process. However, the fact that these purchases are not made through the state budget but via SIMPORTEX, effectively controlled by close associates of President Dos Santos, is a glaring illustration of the scope for corruption offered by such special accounts [see para 1.b.2.3(ii)].

1.c.2  Customs and Excise

  The administration of customs and excise is particularly prone to corruption in many countries. In smaller economies where the yield of corporation and income tax, even when collected, is projected to be less than that of import duty this is a particularly serious problem. The first individual to contact TI from Tanzania was in fact a retired Director of Customs who wrote that, "I no longer recognised the country in which I live." He had found the problem of corruption in his service to be very difficult to handle. Certainly the process of corruption within customs has been triggered by corrupt arrangements instigated by senior political leaders, including the individual tariff concessions which have been mentioned above. It is, however, a characteristic of many customs services, and another area where petty and grand corruption converge and "facilitation payments" are commonplace. The experience of Crown Agents in reforming the customs administration in Mozambique provides very useful guidelines as to what may be done in this context.

1.c.3  Defence
  (i)  In nearly all countries defence procurement remains a relatively obscure process. A former Vice Chairman of the U.S. Joint Chiefs of Staff, Admiral Bill Owens, has recently published a book displaying the irrationality of procurement decisions made by the latter which states that the Joint Chiefs lacked the power to impose rational standards on the procurement decisions made by the services. In other national contexts, where corruption is widespread, it is not surprising that the dysfunctional nature of the procurement process is dramatically increased by the prevalence of bribery. The arms sector has been notoriously prone to corruption since its development as a large scale industry in the later nineteenth century. Sir Basil Zaharoff was Vickers most effective export salesman at the turn of the century and firm evidence indicates that he was used to posting commissions to purchasers of at least ten per cent of the value of the sale. The Bofors case in India in the later 1980s is a model example of the ways in which large scale deals in the sector are often completed. TI's "Active Bribery Index", published in 1999 found that the armaments industry was second only to construction in its propensity to pay bribes.

  (ii)  The implications of this process for small economies are huge, since individual items of equipment may cost as much as the budget of the Ministry of Health (or more) in any one year. In the current wars which are characteristic of some of the conflicts in Africa, or in Afghanistan, the cost of individual items may be less, but the total cost is high and procurement processes are equally prone to corruption, not least where sanctions are in place (as in Angola). The financial arrangements surrounding these purchases are complex and may well be funded off the budget through devices such as the special accounts discussed above, or through back-to-back equipment purchases made through the exporter of a high value product.

  (iii)  The pattern of sales of this kind is becoming more complex as new national suppliers enter the market, or as existing non OECD arms exporters expand. Thus both Belorussia and Ukraine have emerged as important arms exporters on their own account, and both China and South Africa have expanded their existing positions. Uganda bought four large-scale troop-carrying helicopters from Belorussia in a highly controversial deal arranged in 1998 by President Museveni's brother Salim Saleh, then Defence chief. South Africa has expanded sales by its arms industry both within Africa and to Iran, at the same time completing a large scale arms purchase from EU sources with a total value of £3 billion. The latter has proved highly controversial in the South African press and may attract a judicial inquiry.

  (iv)  However, while such exporters are increasingly important, by far the largest proportion of the $20-30 billion per annum international arms trade is carried out by the traditional major exporters of the US, UK, France and Russia. Some of the practices associated with such exports have been briefly described above. The nature of such deals is clear from a review of the cases brought against US companies by the Department of Justice since the introduction of the Foreign Corrupt Practices Act in 1977. Many of the most important cases occurred within the defence industry, and have involved complex arrangements with middle men.

  (v)  It is rare to find details in the public domain in the United Kingdom regarding the terms of agency deals in the armaments industry. Although the action is understood to be strenuously defended, a writ issued at the end of 1997 in the High Court in London (1997 A No. 1828) may possibly, however, give something of a glimpse into this world. Aerospace Engineering Design Corporation, a company incorporated in Panama, but reported to have links with Saudi interests, sued Rolls Royce plc for alleged failure to pay commissions at contract rates on the sale of aero-engines to the Royal Saudi Air Force. The writ refers to commissions at a rate of 15 per cent up to certain base prices and of 100 per cent on prices above base. It states that the defendant had paid at a rate of only 8 per cent on the whole price.

  (vi)  The removal of very high commissions as a factor driving the international arms market would be an invaluable contribution to developing greater integrity in world trade.

1.c.4  Drug dealing
  (i)  The international trade in illicit drugs is a more valuable global business, in financial terms, than any other except tobacco. The trade is controlled by several international networks focused on particular markets, although there are strong links between these. The role which drugs play in determining the civil war(s) in Colombia is widely recognised and has triggered a number of major US initiatives largely designed to reduce the value of drugs imported into the US itself. Likewise the role which the "golden triangle" plays in supplying cocaine to international markets is also well established. Both the UN agency, UNICE, and Interpol devote a great deal of energy to attempting to curb this trade.

  (ii)  However, the trade is a key source of revenue to some groups within various countries in the south, extending beyond those named above. The distribution system is also frequently controlled by groups operating from the south; Nigeria is regarded by both Interpol and H.M. Customs as the key original domicile of many of the most effective distribution gangs. These gangs now operate systems which are as far afield geographically as the US and the Czech Republic. Speaking in little known dialects of the Niger delta the gangs are able to avoid police detection on a wide front.

  (iii)  The drugs trade is an increasingly potent force particularly in southern Africa where the South African market has attracted considerable flows of cocaine and xxx from south east Asia. The South African market is partly an entrepot for forward distribution to Europe. A significant part of this material is channelled through East Africa, with Zanzibar playing a role in this process. Thus, when official donors withdrew their aid to Zanzibar following the rigged elections in 1995 the volume of the trade increased, with individuals close to Government taking a significant cut. This is a small but interesting case for the debate about the case for cutting off aid where corruption is rife. The net effect of the suspension of aid has been to increase the extent to which political leaders have resorted to abetting a criminal activity in order to strengthen their financial position. This in turn, has fuelled the growing tension in South Africa surrounding the drugs trade which has led to the emergence of the PRAHAD vigilante groups in Cape Town.

  (i)  There can be little doubt that some multinational corporations (MNCs) have contributed to corruption in some developing countries over the past 50 years, and not least in the 1990s. The context in which this has taken place and the pressures which companies have faced have often been very similar to those described as relevant to domestic companies in 1(b). The extent to which US companies were bribing before the FCPA was introduced has also been noted. MNCs from other parts of the developed world have never been induced to declare the bribes they have paid on a comparable basis. It has been a common assertion of UK-based companies that companies originating from other OECD states are far worse culprits and that they are only responding to commercial necessity. This argument has been redoubled in the light of the growing role of companies from Asia (especially Malaysia, China, Indonesia and India) who are described as having an even higher propensity to bribe than the UK's traditional EU-based competitors.

  (ii)  In 1999, for the first time, TI was able to test the assertion of the proclivity of companies from different parts of the world to bribe in its "Bribe Payers' Index". This was carried out by Gallup in 13 larger "emerging market" economies and surveyed the behaviour of companies from 19 larger exporting countries, including relevant exporters from Asia. The survey was based on interviews with 750 senior personnel in both government and the private sector in the 13 economies. It found the following ranking of the propensity to pay bribes (scores out of 10 with a zero propensity of 10):



2South Korea3.4


















  (iii)  The methodology and the findings of this survey have not been seriously questioned or disputed, and it may be taken as a fair assessment of the current situation. It clearly identifies the UK as a country with a lower propensity to pay bribes than some key competitors, but still as one whose behaviour is more or less in line with a group of larger OECD member states, in most of which, excluding the USA but including the UK, at the time of the survey it was not illegal to bribe a foreign public official provided that the bribe mechanism was "properly organised."

  (iv)  Two other sources appear to confirm the role of some UK companies in this regard. The case being brought by the Government of Lesotho in the High Court in Maseru a long list of international contractors and consultants for bribing the Project Manager, Masupha Ephraim Sole, over the period 1992-96 to a total of $3 million in relation to the Lesotho Highlands Water Project (LHWP) (see 1.a.1.4 above). The LHWP has been financed by a consortium of financiers including the World Bank. Of those indicted at least one is specifically British (Alexander Gibb and Partners) and one of the two French companies has a UK connection through a substantial shareholding. All have pleaded not guilty, but the indictment cites evidence provided by the Swiss Banks of payments made by all the defendant companies into the Swiss Bank account of Sole. The World Bank has stated that it will consider the debarment of the companies in question from bidding for future World Bank contracts if they are found guilty.

  (v)  A second source relates to debarment procedures already executed by both the Government of Singapore and the World Bank. In the mid-1990s the Government of Singapore debarred five MNCs, including major UK, German and Japanese companies, from bidding for five years on power contracts in Singapore since a separate case had found that an agent close to the power authority had supplied information in return for a bribe to each of the companies.

  (vi)  In the case of World Bank debarment procedures it is very disquieting to note that of 52 companies to be debarred for fraud and corruption, the addresses listed for 38 were in the United Kingdom. The predominance of UK companies on the World Bank list, the inclusion of a British MNC in the Singaporean case, and the identity of the defendants in the Lesotho case, although still subject to trial outcome, tends to suggest that some UK businesses continue to indulge in the practice of securing international contracts by bribery. This is also confirmed by recent World Bank research, although the UK does not show up as by any means the worst offender amongst developed nations.

  (vii)  Some UK based MNCs have expressed very active concern on the issue and have taken steps to terminate or avoid the practice. This is in line with the position adopted by the International Chamber of Commerce (ICC) as reflected in its Rules of Conduct on Extortion and Bribery in International Business Transactions. In the UK, Shell and BP-Amoco are amongst the leaders in this regard, the former having in 1999 produced a staff manual entitled "Fighting Bribery". BP also has had a strict policy of complying with the FCPA. However, the question of compliance becomes more difficult in the context of subsidiary companies and particularly of joint ventures.

  (i)  There has long been a school of thought which has argued that corruption is compatible with development since it is one of several means of capital accumulation, and such capital will be invested in ways which increase GDP and ultimately "trickle down" to the lower income strata of the community. This argument has fewer supporters than twenty years ago for several reasons. These include the fact that:

    —  few very corrupt countries as, say, measured in TI's Corruption Perception Index (CPI), are achieving significant rates of growth (3 to 4 per cent or more) over sustained periods;

    —  the exceptions to this, largely concentrated in south east Asia, suffered a major setback in 1997-98 which was at least partly attributable to various forms of corruption;

    —  whilst in Asia much of the capital accumulated in this way is invested in the domestic economy, in Africa a high proportion is exported; and

    —  the trickle down effect is conspicuously absent from most countries where corruption is endemic. (A few oil exporting states might be regarded as the exception to this).

  (ii)  Nonetheless it is true that corruption of a certain type is compatible with development at least for a number of years. Two Harvard economists, Schleifer and Vishny, have argued that corruption is "sustainable" where the going rate for commissions is known and is modest in relation to the capital cost of projects, where commissions do not greatly distort project costs, and where they are paid to a recognised and discrete entity—whether Presidential family or political party. They have suggested that Russia under Brezhnev and Indonesia in the earlier years of Suharto fall into this category. However, in both these cases there proved to be political and economic costs which were not sustainable.

2.a  The impact of corruption on provision of services to poor people
  (i)  Regardless of the fact that some forms of corruption may be compatible with growth for limited periods, the question of the incompatibility of corruption with the provision of adequate services to the poor is hardly contestable. We have discussed above the effects which corruption has on the collection and allocation of government revenue, on the development of public policy and on the interface between service providers and the public. The distortion in government policy shaped by corruption minimises the extent to which senior civil servants are really motivated to ensure that services to low income groups are operational. At the level of service delivery the picture becomes very bleak. A surprising amount is known about just how bleak the picture is as a result of some work undertaken in Bangalore which has systematically surveyed low and very low income groups over the past ten years with a view to establishing how much an individual member of the public has to pay in the form of a bribe to secure a public service. The national chapters of TI in several countries, notably in Bangladesh and Tanzania, have followed this example and produced valuable material on the topic.

  (ii)  The Bangladesh survey, based on a sample of 2,500 households (both rural and urban) found that:

    —  96 per cent of those surveyed agreed that it was impossible to get help from the police with out money or influence;

    —  63 per cent of households involved in court cases had to bribe court officials for the case to be heard (28 per cent of these bribes were paid through lawyers);

    —  nearly 90 per cent thought that it was impossible to get quick and fair judgement from a court without money or influence;

    —  over 40 per cent found it necessary to make a special payment to school staff to obtain admission for their children; an additional 34 per cent used an "extra- regular" method to obtain admission;

    —  70 per cent agreed that unethical practices, involving some form of payment, were necessary to obtain admission to hospital and over 80 per cent found this true when the patient was seeking treatment whilst in the hospital;

    —  about 33 per cent of households paid money for electricity connections and accessories;

    —  30 per cent of households paid a bribe to the meter reader to reduce consumption assessments;

    —  about 65 per cent of urban households found that it was almost impossible to get a trade license without money or influence.

  (iii)  These points relate to the provision of "basic services" some of which may be regarded as primarily urban (although survey responses are divided between urban and rural). However, the allocation of land titles and bank credit, both of prime relevance to rural households, is similarly skewed. Seventy one per cent of rural households considered that it is "impossible to register land without money or influence". In the case of credit only 75 per cent of those receiving loans received the amount which had been sanctioned, the remainder having been intercepted by bank officials before reaching them, though failure to repay the full amount led to confiscation of assets in 55 per cent of cases.

  (iv)  The authors of the survey concluded that "Bangladesh is suffering from endemic and chronic corruption and it has infested every nook and cranny of society". The survey results from Tanzania were remarkably similar, and concur with the very extensive verbal evidence given to the Warioba Commission in each of Tanzania's 50 Districts. In contexts where this culture of corruption is endemic many, if not most, of the poor are excluded from the basic services of health, education and energy which may be regarded as the key building blocks of human development.

2.b  Domestic sector private development (eg commercial banking and power development)
  (i)  In 1(a) above we discussed some of the distortions in private sector development, especially of locally owned large and smaller scale businesses, which arise from widespread corruption. Here we will provide an additional comment on the banking sector and on power development.

  (ii)  In both south east Asia and many parts of Africa the 1990s have seen the collapse of a number of key commercial banks which have had actual or effective ties to the state. Thus in Indonesia it became clear in the course of 1997-8 that the large scale commercial banks were heavily overstretched in the finance which they provided to members of President Suharto's extended family and other close associates. These banks had in turn been heavily dependent on short term inflows from international banks; when these were withdrawn, the vulnerability of the local banks to their dubious portfolio became very clear, creating a major liquidity crisis.

  (iii)  In Cameroun, the "liberalisation" programme of the late 1980s created a strong interest among international commercial banks in establishing a presence in Cameroun, and at least four banks did so. In fact the culture of non-repayment of loans, established over the previous twenty years, proved to be so deep that all of these have closed. Credit to the agricultural sector had been particularly prone to corruption during previous years and in order to re-establish effective agricultural credit systems a new Credit Agricole was established in the early 90s managed by an international team funded by GTZ, the main German technical assistance agency. Within five years, this too had closed. The combination of internal fraud, severe problems in project execution, and the culture of non-repayment proved decisive.

2.c  The ability of developing countries to attract foreign direct investment (FDI)
  (i)  What aspects of corruption are relevant to FDI? A key aspect of transnational corruption is its role in relation to large scale investments in new projects or in privatisations. Whilst these investments may in principle occur in any sector they are particularly associated with, for example, power generation, telecommunications and defence. In the case of large scale projects the mechanism at work has been very well described by George Moody-Stuart, former chairman of TI-UK, whose book "Grand Corruption" is perhaps the clearest description in print of this process, at least in relation to countries of the "south". The costs involved in the process of Grand Corruption are those derived from its nature. The need to provide large commissions, which may involve up to 25 per cent or more of the cost of a project, to senior figures (either directly or through agents) tends to cause a serious and unjustified increase in project costs, a consequent increase in external debt (if there is an element of external finance—eg through export credits or multilateral or foreign banks), and may lead to capital flight or diversion of the commission to offshore financial centres. Overall the rate of return to shareholders is lower than it would otherwise be, and the cost of the product to customers higher.

  (ii)  Furthermore, the manner in which the corrupt payments are arranged will frequently lead to surplus purchases, skewed specifications, substandard performance, and even unnecessary facilities constructed solely as a means acquiring commissions.

  (iii)  There is growing evidence that international investors build in an aversion to corruption in their calculations of where to place investment. If an investor knows that he can only develop a project—with or without a joint venture partner—on the basis that he will have to make a significant payoff, this is increasingly likely to dissuade him or her. If the investor is aware that not one but a series of payments—perhaps stretching over several years—will be necessary the level of dissuasion will be even greater. If these payments may have to be made to a series of currently unidentified people with influence over the outcome of the investment the negative signals may be decisive. Of course these factors may be offset if the national market in question is very large or medium scale but growing very fast.

  (iv)  A specific but related issue for investors is the question of dealing with bureaucracy which can cost both time and money. Daniel Kaufman at the World Bank has produced a set of data which shows a consistent relationship between an economy in which there are a large number of bureaucratic regulations and a high level of corruption (as measured by the TI Index); and also a close relationship between a high level of corruption and the amount of time which corporate management is obliged to spend with bureaucrats. Both of these analyses show how significant levels of corruption may act as a disincentive to FDI, when there is a choice of national location.

  (v)  Valuable related work on the broad impact of corruption on FDI has been published recently by Prof Shang Jin-Wei of Harvard University who has analysed the correlation between levels of FDI and a country's position on the TI Corruption Perception Index. He has found that as a country moves up the corruption perception index (ie becomes less corrupt) so it is likely to attract increasing quantities of FDI. Looking at the question from the investors' point of view he has equated a reduction in the level of corruption with a reduction in the rate of corporation tax. Thus he finds that if Mexico were to move up from its low position in the index (i.e. heavily prone to corruption) to the level of Singapore (in the 10 "least corrupt") its ability to attract foreign investment would increase as if it had reduced corporation tax by 20 per cent. One might question these findings on the grounds that China alone attracted $40 billion in FDI in 1995, and is widely acknowledged to have a fairly high level of corruption (a score of less than three in the index). However, if the flows of FDI are shown on a per capita basis China attracted ten times less investment per head in 1995 than did Malaysia; and between 1994 and 1999 the Czech Republic received more than 10 times as much FDI per capita as did Ukraine.

  (vi)  On a more empirical basis a survey was conducted by the UK NGO "Worldaware" for the Commonwealth Secretariat and the Commonwealth Business Council in 1998. It was based on interviews with 38 UK based companies, each with significant trade or investment interests in Commonwealth Developing Countries. Respondents were asked to rank 22 factors in order of importance as obstacles to FDI. Corruption was ranked as the decisive constraint, ahead of political instability, inadequate infrastructure and problems of accessing foreign exchange. Whilst there are fifty developing (low or middle income) countries in the Commonwealth many receive virtually no new flows of FDI, including some, such as Kenya and Papua New Guinea, which in the past have received very significant flows. In fact flows have always been concentrated—in the early 1990s Malaysia and Nigeria together accounted for 75 per cent of total flows to developing Commonwealth Countries. It is clear that corruption has been a major constraint on FDI in the recent past for which many countries are paying a high price given that formal aid flows now account for only about 15 per cent of all flows to developing countries.

  (vii)  There is no doubt that a really valuable natural resource base, or a country with very high tourist potential, can overcome investors reluctance to commit funds. However in these cases the expected rate of return has to be exceptionally high: investment in the Tanzanian mining industry over the last three years has fulfilled these conditions because the costs of exploitation and the extent of the resource (particularly of gold) are expected to justify it. Investment in China fits into a special category of investment in a massive market, which is again large enough to offset the undoubted costs of corruption in that economy. However, as the World Bank Development Report for 1997 noted: "No matter how high the degree of predictability of corruption in a country, its rate of investment would be significantly higher were there less corruption".

2.d  The distortion of decision making by developing country governments as a result of corruption

  This has been largely covered under in 1(b) and (c) above. There is, however, another aspect of corruption which has begun recently to attract serious research attention—labelled "State Capture"—in which companies (either indigenous or foreign) go beyond the corruption of purchasing decisions and procurement processes to the "capture" of the legislative and regulatory process itself, bending the creation of laws and regulations to their own interest. World Bank researchers, in particular, are now looking at this closely.


3.a  The provision of support for the development of appropriate legislation and judicial capacity to deal with cases of corruption and effective anti-corruption commissions in developing countries.
  (i)  Assistance through aid mechanisms can only be effective when it is actively sought by the Government in question and is not simply a response to donor pressure for governance programmes. Additional conditions for the development of appropriate legislation are a willingness to confront difficult questions such as the reverse onus of proof which places the burden of proof on the defendant. The effectiveness of Anti Corruption Bureaux (ACBs) very much depends on:

    —  committed political backing at the highest levels of government;

    —  political and operational independence to investigate even the highest levels of government;

    —  adequate powers of access to documentation and to question witnesses;

    —  leadership which is perceived to be of very high integrity.

  (ii)  It is fairly self evident that without backing from the highest levels of government an ACB cannot be expected to make much progress. In Kenya at the present time the new ACB, brought into being by the anti-corruption legislation of 1999 is considered by many Kenyans to be basically flawed in that it shows no sign of tackling the largest of all Kenyan scandals—the Goldenburg case discussed above. The question of adequate powers to access documentation and the questioning of witnesses may seem an obvious provision, but in Zimbabwe the Anti Corruption Act specifically excludes investigation of the President's Office or of the army. Operational independence may seem an obvious condition for success, but in South Africa the Special Investigating Unit established under Judge Willem Heath must seek the State President's permission before proceeding to investigate any case.

  (iii)  Where an alternative strategy of involving the public more directly has been adopted there has been conspicuous success, as in Hong Kong. In this case, an oversight committee (with participants from civil society and the private sector) must agree to closing an investigation file before this action can be taken. Perhaps even more importantly it is generally agreed that it is crucial to sensitise the public to the issue of corruption and to be aware that office holders found guilty of corruption can be prosecuted. In Hong Kong the intensive preparation of public opinion has been the key to the success of the agency. In Malawi where a relatively successful ACB has been launched in the last two years a similar programme of sensitisation was conducted leading to the receipt of more than 5,000 complaints. Successful ACBs generally also have the powers to freeze the assets of those under investigation (or those holding funds on their behalf); to seize and impound travel documents, to prevent a person from fleeing abroad, and to protect whistleblowers.

  (iv)  Where these and related conditions are met there is a good case for donor assistance being used to support ACBs, which in many cases are chronically underfunded. Even in South Africa the Special Investigating Unit is suffering serious budgetary cutbacks, even though it recovered a total of £130 million (equivalent) for the state in 1998/9. Three relatively successful examples of donor support to ACBs are those in Uganda, Botswana and Malawi, each of which has made valuable contributions to addressing corruption in the recent past. In the case of Uganda much of the material placed in the public domain by the Inspector General of Government (Director of the Equivalent of an ACB) has been used intensively by Parliament to criticise Ministers, at least three of whom have been obliged to leave office partly on corruption charges.

  (v)  In many countries there is inadequate judicial capacity to deal with cases of corruption, which are frequently complex and involve commercial law. This is especially true where countries are emerging from a legacy of one party state government in which much of the corporate sector has been in state ownership. In cases such as this, it may be very useful for a donor to fund one or two senior judges who are specialised in commercial law, so that cases can be heard. A positive consequence of this is that the need to refer cases to international dispute procedures (e.g. ICC, ICSID) outside the country in question would be reduced, and companies which may consider that they are the victims of extortion could have recourse to the courts.

  (vi)  Thus support from the UK and other donors to ACBs and the judicial system is more than justified where the conditions discussed above apply. However, this has to be offered in the context of a programme for strengthening judicial integrity and accountability. Where judges are appointed by the President, and can also be dismissed by the President, findings against senior members of government may still prove to be rare.

3.b  Regional Initiatives to Combat Corruption which Takes Place at Borders Between Countries
  (i)  In most regional free trade areas or customs unions (such as COMESA in southern Africa or the East African Community or Mercosur in the southern cone countries) the formal focus is on the abolition of tariffs on intra-regional trade and the harmonisation of external tariffs. However, in such blocs is it frequently the case that the effect of the formal tax regime is greatly distorted by the prevalence of consistent demands for bribes by customs officers. This may be in addition to, or instead of, the tax regime.

  (ii)  A recent study listed the following advantages to harmonising the tax system within the newly re-formed East African Community:

    —  a common taxation system will hold the common market together;

    —  operators will enjoy the complete absence of fiscal frontiers among countries;

    —  reduced border control will reduce the manpower required to manage movement of goods and people;

    —  there will be a reduction of smuggling problems among the three countries.

  (iii)  In practice each of these points will tend to reduce the levels of corruption prevalent border posts. As the Community becomes a zone in which trade is completely free the levels of this particular form of corruption are very likely to fall away. If this is matched by other forms of successful economic integration (such as a common external tariff and a common currency) corruption in the context of regional trade may be largely eliminated. However, it is equally likely that the rents which are generated by the status quo are sufficiently attractive to ensure that progress in this respect may be slower than Treaty obligations would suggest.

3.c  The Provision of Support to Civil Society Groups in Developing Countries to Raise Awareness about Corruption and to Build Domestic Demand for its Eradication

  In reviewing the role which civil society can play in addressing the corruption issue it is essential to recognise that there are many different components of civil society, and each has its own needs. For the purpose of this analysis the three principal types of group can be categorised as follows:

3.c.1  Different types of civil society group
  (i)   Existing advocacy groups, not corruption-specific: Existing groups active in areas such as human rights and the environment which have chosen to recognise corruption as a factor which reinforces the negative effects of their main concern; in some cases, such as Lok Sevak Sangh in India and Poder Ciudadano in Argentina, they may have an existing large mass membership;

  (ii)   Specifically anti-corruption groups: All seventy national chapters of TI fall into this category but some other, single-country, anti-corruption groups predate TI—such as Integrity in Nigeria and The Anti-Corruption Network in South Korea;

  (iii)   Professional associations: These consist primarily of skilled professionals such as accountants and lawyers who may choose to focus on issues such as corruption and fraud either for broad social, economic and political reasons, or to achieve specific improvements across the profession in its general practice. The first objective is more typical of professional bodies in the south: the Kenya Law Society and the Cameroun Bar Association are both examples of professional organisations which have campaigned courageously on the corruption issue. On the other hand, in the UK, a Fraud Advisory Panel designed to improve governmental and corporate response to fraud, was formed through an initiative of the Institute of Chartered Accountants in England and Wales.

3.c.2  Ways in which such civil society can be active:
  (i)   Awareness Raising: moving the corruption issue up the national agenda through small scale meetings, demonstrations, conferences and placing material in the press;

  (ii)   Political Lobbying: direct lobbying of Government, and maybe of international organisations, to ensure that a particular route to redressing corruption is adopted;

  (iii)   Prosecution or legal representation on corruption related issues: mounting a prosecution against an individual or set of individuals as the Law Society of Kenya did with eight individuals allegedly associated with the Goldenburg case in 1998. Alternatively, direct legal assistance to individuals who may wish to bring a case against the authorities as the Cameroun Bar Association did in a series of Town Hall meetings in 1999.

  (iv)   Civic Education: can be regarded as part of moral education at school level and delivered through teacher training. TI Chapters in countries as different as Italy and Papua New Guinea have had active civic education programmes designed for school level and delivered through the orientation and training of teachers;

  (v)   Monitoring the anti-corruption aspect of the Growth and Poverty Alleviation Programmes: the linkage of debt relief to anti Corruption measures, as envisaged in the conditionality built into relief under the HIPC initiative, provides a key opportunity for civil society groups to measure progress in this regard.

  (vi)  The following matrix relates each of these activities to the three types of civil society group discussed above:
Awareness Raising Political LobbyingLegal Initiatives Civic EducationMedia Placement Monitor WB/IMF Programme
Existing Advocacy Groupsx x
Specifically Anti-corruption Groupsx xx xx
Professional Associations xxxx x

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