Select Committee on International Development Minutes of Evidence


Examination of Witnesses (Questions 587 - 599)

TUESDAY 23 JANUARY 2001

MR JEREMY CARVER, CBE, MR GEORGE STAPLE, CB QC AND MR MONTY RAPHAEL

Chairman

  587. Can I first of all welcome you to the Committee and to these new Committee Rooms, which perhaps some of you are using for the first time, and we are using only for the second or third time, and I hope you will be much more comfortable than in the old Victorian rooms; certainly the air is fresher and the acoustics better, and the chairs, we think, more comfortable. So I hope you will feel comfortable. I know Mr Jeremy Carver, of course, is very familiar to us and has helped a great deal on our Sanctions inquiry, and so on, so I think, Mr Carver, you will feel quite comfortable, I hope. Therefore, I particularly want to welcome Mr Staple and also Mr Raphael. Can I start off, by asking, on this difficult question of corruption, a general question, which I imagine will give you the opportunity to make specific points which worry you, in particular. Might I just preface the questions. You might ask why the International Development Committee is interested in corruption. Evidence given to us shows that it impacts, corruption, very seriously on the poor, that is to say, basically, what are called sometimes facilitation payments are actually very onerous on the poor. And, secondly, that corruption prevents foreign direct investment, and indeed deters the investments from savings from the country itself, so you get capital flight, people do not invest their savings or their profits in their own country and they invest them outside it. And since the private sector is said to be the engine for development, the only way we can begin to cure poverty is by encouraging investment (a) internally generated but also from foreign direct investment, which does not reach the poorest countries. So this is the reason why this Committee has decided that it is terribly important that we find a way to understand it, and indeed deter it, or even prevent it. So that is the focus of our inquiry, which we believe to be very important, and your evidence to us, in understanding this and seeking for a solution, will be very important to us this morning. So can I ask you a question arising from the evidence given to us by Transparency International, and I would also try to encourage you to give us some written material after you have given your oral evidence, because we would welcome it very much, but Transparency International has told us that those bribing overseas seem to have a rather comfortable regime in the United Kingdom. Would you say this is true, Mr Carver?

  (Mr Carver) Yes, I would. And, Chairman, could I start simply by thanking you for your rashness in inviting me back again, on a different subject. I am very pleased to be here and delighted to help your inquiries, because I do believe, as I think all of us do, that it is very important, the inquiry that you are making. You suggested in your opening remarks that we might be surprised, or I might be surprised, that it is the International Development Committee that is addressing this topic. I am not in the least surprised. The fact is that in Whitehall there is only one department that has taken this issue seriously, and that is the Department for International Development; and, therefore, it is not in the least surprising that the only Select Committee that should take this issue seriously is your Committee, and it is a very, very important subject indeed. I regret not having provided written material already, but I am aware, because I have had a chance to read it, of the enormous mass of material you have accumulated over the course of recent months, and the weight of it is such that I would hope that maybe you could give us some guidance as to what particular points we could help you on. So far as I am concerned, I am a practitioner, I thought there were perhaps three topics that I might help on. One is to understand more about what actually does happen in terms of the process of corruption, and this maybe is more in the grand corruption, as opposed to the facilitation payment area. The second is what perhaps is changing to gradually eliminate this, but, in particular, as you said in your question to me, in this area where the United Kingdom is lagging woefully, woefully, behind the rest of the world 20, 30 years ago we could, perhaps with some confidence, expect to be believed when we said that corruption was a minimal element of commercial life in the United Kingdom. I am afraid that is not true any more, in this area where international business focuses and needs the services of the United Kingdom to such an extent. There is a very serious need for legislation, in order to give effect to our convention obligations which Parliament assumed from the Statement that was presented with the OECD Convention to Parliament in September 1998, assumed that legislation was not necessary; but the Statement that was made to Parliament simply was not correct. It has now, belatedly, been accepted by the Home Office that that is right, and there is a very serious need to address that.

  588. Yes; well how should we address it?
  (Mr Carver) The need is for legislation. If I can just pursue that. In September 1998, the Government laid before Parliament the OECD Convention, and said its objects were quite plain, the Explanatory Memorandum said that it was an instrument to permit OECD countries to move in a co-ordinated manner to adopt national legislation, to make it a crime to bribe foreign public officials. And it goes on to say: "The scope of these provisions is fully compatible with existing UK law." Maybe I am just a cynical lawyer, but I see "the scope of these provisions" as mealy-mouthed, indeed. The fact is, they did not say that the provisions were consistent, and, indeed, I suggest that maybe they knew, because of the submissions that had already been made to the Home Office and others, that they were not. But the fact is that Parliament was led to believe that they were. "The purpose of the Convention, to set a high standard for national laws applying to the bribing of foreign public officials, includes a broad and clear definition of bribery, it requires dissuasive penalties, sets a strong standard for enforcement, provides some mutual legal assistance". All of those unquestionably correct. What has the United Kingdom done; virtually nothing. Of course, what we have now discovered is that, unsurprisingly to those of us who have been following this, in Transparency International and elsewhere, in the Society for Advanced Legal Studies we did a major study of this exercise, in the peer group review carried out by the Working Group, under the OECD machinery, the United Kingdom has come bottom of the poll. The judgement of our performance has been, lamentable, humiliating, and this provoked the Home Secretary's announcement, policy review, in June. And what has happened since then? The Working Group has said, very specifically, that this must be corrected. Is it in the Queen's Speech? No it is not, nothing has happened at all. It is too difficult, apparently. And I do not believe this is an acceptable way of the United Kingdom performing its role in the world.

  589. Have you other things to add to that, Mr Raphael or Mr Staple?
  (Mr Raphael) Just in case it should be thought, from something which Jeremy Carver has just said, that he was indicating that there was a high level of business corruption in the UK, I do not think he was saying that; certainly, that is not the case. I think though that we are, all of us, concerned that, with the prominent place that UK companies have in international business, I would endorse everything that Jeremy Carver said, and say that it is regrettable that we appear to have ratified the OECD Convention on the basis that we could conform to its requirements; quite clearly, we have not been able to. Also I find it rather surprising and rather sad that we are not going to be told when a Bill will be introduced. Though I must just say, on this point, that there is a short Bill that could be introduced, there is a Bill published by, you have probably seen it, Mr Chairman, Her Majesty's Stationery Office, which does make certain amendments, it is only a two-page Bill; so that would make a great improvement. We could outlaw specifically the corruption of foreign public officials, make it explicit rather than implicit, as we have been told up to now it is, in our legislation; and, of course, we could extend our extraterritoriality laws, again in much the same way, specifically perhaps, or by reference to existing legislation. Of course, there was a time when we were very territorially bound, as I am sure you have been told by other witnesses, say, for offences such as murder; we have now become extraterritorial for offences like sex tourism, we have altered our laws on conspiracy to deal with the threat of terrorism and, by implementing Part 1 of the Criminal Justice Act 1993, we have brought many other offences, which are committed partly abroad and partly here, within the UK remit. I want to say just one more thing on this, if I may, and that is that one understands that it is fearfully difficult to investigate and prosecute offences which are committed partly or, in many cases, wholly overseas, it is jolly difficult, it is difficult from a logistical point of view to gather up the evidence, we may not necessarily have multilateral or bilateral treaties with countries whose assistance we need to collect the evidence, difficult, if not impossible, to get witnesses to travel across their own national frontiers; all that is rather difficult. But I do not think that your Committee will be sympathetic with a point of view that says just because the task is difficult it should not be pursued; it is doubtless difficult. And there are also resource implications; and, as far as we know, anecdotally, resource implications were behind the very slow implementation of Part 1 of the Criminal Justice Act 1993, which extended the jurisdiction of our courts, because it was feared, I assume by the Treasury, that it would be a bit of an `open sesame' to expenditure, with no clear guarantee of results. So it is difficult to know. But I think that I agree with everything that Transparency International, of which I am also a member, and Jeremy and others have said, and that is that, however difficult it may be to implement these laws in the future, it is absolutely necessary that we send a very clear signal to the rest of the world, as a major trading nation, we are part of every large trading organisation in the world, we must send a clear signal, it seems to me, that we do regard this as a very urgent matter, and it is being treated as urgently as is described in the Foreword to the Home Office paper by the Home Secretary.

  590. Thank you very much. Mr Staple, of course, you have looked at this from two angles, have you not, from your current position and your former position in the Serious Fraud Office?
  (Mr Staple) Yes, I have, Chairman. I would like also to say, first of all, that I agree with all that Jeremy Carver has said on this subject. You have received, of course, a huge amount of evidence, from a wide range of experts, throughout your hearings, and, reading through it, I find it difficult to find anything really that had not been touched upon in the course of the hearings. But there was one point which arose during your session with Mr Abbott of NCIS and Mr Thorpe of the FSA, which I thought was just worth returning to, if I may, for a moment, because I think you have rightly focused on what can we do about this scourge. There is no doubt that it is a major world problem, this. It is a problem for this country and everyone else, and so I think one has got to try to look in the evidence and elsewhere, if possible, to see what can be done. You asked a question of Mr Thorpe and Mr Abbott, which was, "We are very concerned about the incoherent look that all your efforts have, because of the very large number of Departments of State involved, the Home Office, the Treasury, the Department for International Development, the Department of Trade, and the large number of institutions involved. We worry whether or not the result is that we are not actually focused properly on the whole area you are trying to deal with?" That struck me, that question, I will not comment on the answer, they were not actually very full answers. But I think they were broadly agreeing with your concern. What I wanted to say was that it echoed a recommendation in the Roskill Commission, which is now 15 years ago, I think, Lord Roskill reported on his Fraud Trials Committee. He made 112 recommendations, it was a very well received report, and there are two, perhaps, important ones that are the only two, I think, that have not been acted upon since the publication of the report. One was about juries in fraud trials, which I am not going to harangue you about today, but the other was that there should be set up a National Fraud Commission. And if I could just read a short passage, Chairman: "In view of the fragmentation of the present system, it is essential in our opinion that there should come into being an independent monitoring body which has the responsibility for studying and advising, from year to year, on the efficiency, which includes issues of cost-effectiveness, with which fraud cases are conducted. Its main objectives would be to watch the system in operation for the detection and pursuit of fraud cases until the final verdict, including the time which elapses at the various stages, including the time between the discovery of fraud and its reporting to the prosecuting authority, to inquire into major variations or breakdowns in the system, above all, to assess the possibility of improvements by changes of policy and procedure, or the introduction of more efficient techniques. Apart from other advantages, we believe that this would provide a degree of co-ordination of the numerous interests involved, which is at present lacking. An additional function, which the independent body should, we think, perform, would be to observe the introduction of such of the recommendations in this report as prove acceptable to the Government and to assess their efficacy. We think that an Annual Report should be published." And it goes on in that vein. They were focusing on fraud, more than corruption, but I have discussed these recommendations with Transparency International, and they do very much see the opportunity for a co-ordinating body which would bring together the efforts of so many different departments of state. There are eight different departments, I think, which have responsibility for prosecution, there are a number of other departments which are concerned with policy, and in some cases as well as prosecution, one can think of the DTI, which would have both responsibilities. It is a very large number of different people, focusing on broadly the same subject. Of course, it has different aspects. Fraud in the Benefits Agency is rather different from an international corruption with which the International Development Department might be concerned, but they are broadly in the same area of economic crime, and one looks, therefore, for much greater co-ordination. And it may be, although one hesitates to suggest yet another quango, that some co-ordinating body ought to exist, to try to bring all these issues together and focus on the anomalies in the law and the difficulties of prosecution.

  591. I think that is very important, I agree. What we have had in evidence in front of this Committee is, after all the departments and the prosecuting organisations, such as NCIS, have finished their work, and again resources comes into doing that work, there are not enough resources available to them to do as much as we believe, I think, they should, eventually we end up again with a resource problem, with the NCIS referring this matter to the county constabulary. And the Chief Constable in that county, or jurisdiction, then has to make available the money necessary, which will be considerable, because these are not easy cases, to a policeman within his organisation to follow this up and bring the prosecutions, again another body, to the Crown Prosecution Service; and, of course, it simply does not happen. And it seems to me that not only do you have to have a co-ordination of those involved in investigating and bringing about the possibility of prosecution, but you have got to have somebody who is actually going to implement it. And at the moment it is just laughable, it seems to me, and adds to what Mr Carver has said, which is, of course, that we have totally inadequate organisations and resources actually to bring any of this to book, so that we are a very easy touch. And it is not surprising, it seems to me, and many of the overseas countries point to us and say, "Why don't you put your own house in order, OECD countries, before you begin to harass us?"; yes, very important. What do you think we can do to reform laws, to implement the OECD Convention and provide an effective deterrent and really discourage companies from bribing? Do you know what the experience of the United States is, because they do have a law in place which, in fact, makes it illegal, as Mr Raphael said, to bribe foreign overseas officials, I do not know why it is only foreign overseas officials, why it should not be others overseas, but it is overseas officials; what is their experience in bringing those committing these crimes to trial and to conviction? And who do you think would be likely to report such offences, and how can reporting be encouraged?
  (Mr Raphael) I cannot speak authoritatively on the US experience; but, as you know, they have had legislation in place since 1977.

  592. Yes; 1977, is it, yes?
  (Mr Raphael) The legislation was triggered by concerns expressed by the SEC into irregular, initially irregular, political payments being made by large American corporations, and then the inquiry widened. Originally they were thinking of introducing Codes of Practice, Mr Chairman will be interested to hear, but they soon abandoned that idea as not being sufficiently robust. Then they introduced legislation which became the Foreign Corrupt Practices Act 1977, which has been amended on a number of occasions, most lately to bring it into conformity with the OECD Convention. The FCPA is largely implemented either by the Securities and Exchange Commission or by the United States Department of Justice, and until recently, of course, it impacted only on United States companies. It has been criticised by a number of independent observers, because there have been fairly few prosecutions, bearing in mind it has been going for 23, 24 years, I think there have been fewer than 50 prosecutions in all that time. And I think that those who defend the legislation would say that, apart from prosecutions, there have been a number of administrative penalties and that its very existence has served as useful to deter American companies from bribing their way to foreign contracts. Certainly, as you already have received in evidence, the OECD Convention, the hard law, and indeed some of it soft law, recommendations were largely informed by the American experience, and they played a leading role in the OECD Councils, which eventually bore fruit in 1997. But the one thing I know your Committee has been concerned about, from reading the very large and impressive evidence that has been presented to you, and which very kindly has been sent to us, is that the American legislation makes an exception for, what are called colloquially, grease payments, or, rather more difficult to pronounce, facilitation payments. This is where petty corruption meets acceptable business practice, if it is acceptable. And, my friends will correct me if I am wrong, I think it is because we have that legislation in place, that has produced the precedent for facilitation payments being, as it were, permitted by the OECD scheme; although I think I am right in saying that when one turns to the rather more umbrella Conventions, which have been promulgated by the Council of Europe, one does not see that exception, there is a general ban on bribery of all kinds, by whatever name it may go.

  593. As a lawyer, Mr Raphael, how would you distinguish between a facilitation payment and bribery?
  (Mr Raphael) As a lawyer and otherwise, I would not.

  594. You would not; right. Mr Carver, would you like to add to that?
  (Mr Carver) If I may make two short additional points on the FCPA. I think it is interesting that the FCPA was not brought about through international concern, prompted by the Lockheed scandal in Saudi Arabia. It was actually brought about through domestic market forces, by the Securities and Exchange Commission being concerned about the extent to which these enormous bribes would cause distortion, and therefore instability, in the domestic shareholding market. That was the reason for it, and that was the primary purpose. It grew, in the conception of those administering it, into a regime that was intended to make sure that it eliminated anti-competitive elements; in other words, a competition, it was a commerce/trade issue, designed to ensure that people would play on the same playing-field. And the great complaint from the United States, over the last ten to 15 years, has been that the rest of the world was playing on a quite different playing-field from the United States. The fact that there were few prosecutions does not, in any way, diminish the impact that the Act has had on US business practice. All the most successful US businesses have operated very strictly in accordance with the requirements of the Act. One, for instance, that did not was General Electric. It cost them billions, literally billions, not that there were huge fines imposed as a result of it, but it caused such a dramatic impact upon reputation, upon the convulsions within the company, that literally billions of dollars were lost as a result of it. And General Electric re-emerged with their complete business structure re-engineered to eliminate any form of corruption whatsoever in their business. And that had a very salutary effect on many other businesses. Therefore, it is not so much that evidence of effectiveness comes from enforcement proceedings, or prosecutions; it comes from having a clear, simple law that the successful business knows what to do with. The uncertain law and the mess that we have here in this country is the worst creator of confusion, of bad business practice, and therefore of anti-competitive practice, which essentially is very bad for British business.

  Chairman: That is a very important statement; that is very important, yes.

Mr Colman

  595. May I apologise that I was unable to get here for the start of the meeting because I was taking part in an Adjournment Debate in Westminster Hall. Part of the evidence that we have been given by Transparency International was a league table of countries with their propensity to bribe, and, from memory, China and Korea were at the top, I seem to remember the United States was number six and Britain was number eight. This, apparently, we were told, caused consternation in the TI United States chapter, who, largely, in fact, funded the survey, clearly showing that the propensity to bribe was greater in the United States, by companies, United States company, actually than by UK companies. Mr Carver may want to respond to this. How would you explain this, bearing in mind what you have just said about the strength of the Foreign Corrupt Practices Act? And could it possibly be explained, and therefore we need to take account of it in any new legislation here, in terms of whether the Act applies to subsidiaries of United States companies, whether it applies to joint ventures; are there, in fact, loopholes which enable United States companies actually to dodge the legislation, and should we learn from that, in terms of any legislation we pass here?
  (Mr Carver) I am not sure that I have an adequate explanation for that. The TI indices are created with enormous difficulty, and TI do not publish them without realising that everybody is going to throw bricks at them. Therefore, they do try, I know, very hard, to ensure that some objective standards are applied in order to arrive at them. But I think one explanation might be that the expectations within the United States, and essentially TI creates these indices from reporting of expectations by bodies within the country, probably are higher than they are in Europe. Therefore, where there is criticism it is against a much higher standard of performance and a much more effective legal system. For instance, one of the mechanisms, (going back to one of the Chairman's questions about how does it work), is whistle-blowers who are much more a feature within the United States, because the discontented senior manager that was expecting promotion on the back of some deal that he engineered does not get it, and is much more inclined to report that to the authorities, or to threaten to report it to the authorities, and, therefore, one, as it were, generates that degree of tension. It produces a consciousness that is largely lacking here, where we can turn our back on it and say, "It doesn't happen." How many times have you heard, in this country, "Well, business in this country is impeccably conducted"? The question I am putting is that I am not sure that we are right to be complacent, and I suspect a considerable measure of hypocrisy in our asserting that. But that may be one of the reasons why the index is distorted in this way.

  596. But you did not answer my second point, that there are discussions apparently going on to improve the Foreign Corrupt Practices Act, in terms of dealing with issues of joint ventures and offshore companies; is this an area where you feel that some US companies are, in fact, attempting to go round the Act?
  (Mr Carver) I have not come across any widespread anecdotal evidence, or otherwise, that suggests widespread attempts to circumvent the FCPA. I do not believe it happens.

Chairman

  597. Can we return, just briefly, before we leave this question, to the question of whistle-blowing. I wonder, Mr Staple, whether you have any experience of this? Because the best policemen in this country, of course, are those to whom the public inform the police on what is going on in their locality, and it seems to me that this is parallel to this. If we have got a good policeman in touch with the scene then you are going to get good whistle-blowing, and therefore the ability to learn and therefore to prosecute thereafter. Do you think there is something in that?
  (Mr Staple) Yes, I do, very much so. As you know, we have changed the law recently on whistle-blowing, so that whistle-blowers, if they are victimised, they lose their jobs, and there have been one or two sensational cases where that has happened, with huge personal disaster being suffered as a result. But if they are victimised at least now they are able to claim compensation for that. But it is absolutely right, the people who are going to know that this sort of conduct is taking place are the people who are within the companies where it is happening. They are going to have the best chance of seeing it. And I think it goes to another, broader question, which you have touched on in earlier hearings, and that is the whole question of corporate governance. I feel, and I think others share this view, that the whole question of fraud and corruption and money laundering prevention is not taken at a sufficiently high level in companies. It is too often the responsibility of middle management, who do their best, but often do not have all the information, and indeed resources, available to them. It should be the responsibility of the Chief Executive. It should be high, fraud prevention, corruption prevention, money laundering prevention, high on his list of responsibilities, and he should have to report each year to the shareholders that he has in place adequate fraud and corruption prevention measures; he has got whistle-blower systems in place, so that employees can feel that they can report mischief of one sort or another. And I think my own feeling is, and I think you are shortly going to see some auditors, but I think auditors should be given a responsibility for certifying each year as to whether or not there is an adequate system of fraud prevention in companies. I have made these points to the Company Law Review, which is taking place within the DTI at the moment, and I think they were quite well received. It will be interesting to see whether they are pushed forward in that context, Mr Colman, I think.

  Chairman: That is very important.

Mr Colman

  598. On whistle-blowing, could you explain perhaps why it is that so few lawyers, in fact, whistle-blow on what is going on? Again, we have received evidence, and it is a tiny, tiny proportion of the total number of lawyers practising have actually provided any information in this area at all. Why do lawyers fail to whistle-blow?
  (Mr Staple) Of course, lawyers are, in some respects, in a different position from others, in that if they are acting and advising a client in a professional capacity. Then the client has a privilege in respect of information he has given them, and it is his privilege, it is not the lawyers' privilege, to do what he wishes with it. Now that does not mean to say that if a lawyer comes into possession of information, indicating that money laundering is going on, or fraud, or something of that sort, other than in circumstances where he is giving legal advice or receiving instructions for the purpose of giving legal advice, he should not report it to the authorities, indeed self-evidently he should report it, and I think the word should go out that that is the responsibility. I know The Law Society has published detailed money laundering guidelines to the profession, and in those money laundering guidelines the solicitor's duty is quite clearly set out.

  599. But it is not happening?
  (Mr Staple) The NCIS figures suggest that there are far fewer reports from solicitors and other institutions, far, far fewer, one cannot quarrel with that at all, that plainly is the case. I think one has to ask why. I do not think it is because the vast majority of honest, straightforward solicitors are not anxious to report when they have an obligation to do so. They are, of course, operating under a slightly different legal regime from financial institutions; unless they are conducting discreet investment business, they will not be subject to the money laundering regulations, which a bank or other financial institution, of course, is, and that might, to some extent, at any rate, account for the greater number of reports from banks rather than lawyers.

  Chairman: Yes; we are going to return to this in a little bit more detail. But now can I ask Tess Kingham to continue the questioning.



 
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