Financial Crimes and Development

Written Evidence Submitted by Global Witness

Global Witness

1. Global Witness welcomes the opportunity to make a submission to the International Development Committee Inquiry into Financial Crime and Development.

2. Global Witness is a London-based non-governmental organisation that investigates the links between natural resources, conflict and corruption. We aim to promote improved governance, transparency and accountability in the management of the natural resource sector to ensure that revenues from resources are used for peaceful and sustainable development rather than to finance or fuel conflicts, corruption and associated human rights violations.

3. While the vast flows of capital associated with the extraction of natural resources present a huge opportunity to promote peaceful, stable and democratic states in some of the poorest regions of the world the reality is that these revenues have tended to initiate and sustain conflict across the globe as well as entrenching the rule of corrupt and repressive regimes. The development implications of these sustained conflicts and repressive regimes are widespread and all too evident

4. If the UK’s efforts to promote development abroad are to be taken seriously the UK government must ensure that British companies and banks are not complicit in this process by fuelling and facilitating conflict, corruption and human rights violations abroad through their business dealings.

Financial Crime and Development

5. Corruption has devastating impacts on development. Money that should have been destined for investment in public services is diverted into poor quality or pointless procurement projects or indeed into private bank accounts. Corruption also entrenches poor governance and undermines the rule of law. It damages investor confidence and is a disincentive to entrepreneurship and diversification in the economy. The poor, who tend to be more reliant on public services, are the worst affected by corruption.

6. Corruption also fundamentally undermines UK development assistance, in countries where illicit financial flows out of the country dwarf incoming development assistance. In these cases, tackling corruption is not just about ensuring the aid money is not diverted. It means ensuring that the aid is not itself subsidising the looting of the state, by providing basic state services, while corrupt officials get on with the much more lucrative business of corruption. Tackling corruption is an essential pre-requisite to development. As this case will illustrate, it requires a coordinated approach across government departments.

7. The terms ‘corruption’ and ‘bribery’ are often used interchangeably but corruption is far more than just bribery. It can also involve embezzlement of state funds, extortion, influence peddling. Money laundering is usually involved, since it is hard to engage in large scale corruption without a bank to put the money in and move it to a place where it will be spent.

8. Corruption is not just a developing world problem. Bribes cannot be received or solicited without companies willing to pay them, and money cannot be looted or bribes paid without banks willing to accept corrupt money. There are numerous ways that the UK government can help tackle this fuelling and facilitation of corruption, especially when it is done by British companies and banks. These are set out in detail in the Bond Corruption Paper – Annex 1. [1]

The BAE Tanzania case

9. The BAE Tanzania case illustrates the need for a coordinated UK policy towards transnational financial crime, and specifically corruption.

10. The facts relating to the prosecution and fine of BAE are well known. According to the judgment of Mr Justice Bean at Southwark Crown Court on 21 December 2010, BAE pleaded guilty to accounting failures under Section 221 of the Companies Act 1985 to conceal payments of $12.4 million to a Tanzanian agent called Shailesh Vithlani, employed by BAE as a marketing advisor. BAE agreed to make a £30 million ex gratia payment for the benefit of the people of Tanzania less a £500,000 fine imposed by the court. As the judge noted, BAE’s basis of plea was that: ‘there was a high probability that part of the $12.4 million would be used in the negotiation process to favour British Aerospace Defence Systems Ltd.’ [1]

11. The International Development Select Committee is right to look at the issues surrounding this case, and the questions asked in the invitation to submit written evidence are pertinent ones. We will answer those questions on which we have expertise. We wish to draw the Committee’s attention, however, to some additional questions about the facilitation of this deal which may lead to lessons learnt for the UK’s approach to transnational crime.

12. The evidence suggests this damaging deal could not have gone ahead without:

· payments made by BAE

· export licenses and export credit guarantees granted by HMG

· commercial financing from Barclays

13. The first was tackled in the court case, and the implications for the UK’s new Bribery Act are examined below. The export licences and export credit guarantees will be tackled, we believe, in a submission from Campaign Against the Arms Trade. The last, the role of Barclays, is examined in our final answer.

14. Our key recommendation is that the UK needs to develop a joined-up approach to corruption which encompasses not only bribery legislation, but export credit guarantees and export licenses and, crucially, anti-money laundering regulation of banks. Recent events in Egypt, Libya and Tunisia have shown how banks have been willing to facilitate corruption by dictators and their corrupt regimes by accepting their money. The unrest in the region has in part been fuelled by such corruption.

How BAE will ensure that its payment to Tanzania is used effectively for development purposes / What advice DFID has given to BAE about how this money might be used.

15. It should not be left to a private company to ensure that its payment is used transparently and effectively. This process should be conducted in coordination with the UK and Tanzanian authorities who should ensure that money moves into, and through, accounts in a transparent manner and that money is accounted for and independently audited at each stage of the process. Effective civil society oversight in Tanzania will be essential.

16. BAE should ensure that it publicly discloses all payments made, including to whom they are made and which accounts they are made into.

17. An appropriate use of the money might be to promote transparency and accountability in the management of state revenues and budget management, and to promote civil society oversight so as to restore trust in the government and ensure that future incoming revenue is used for development priorities. Tanzanian civil society should be involved in setting priorities for the use of the money.

Whether the law needs to be changed to ensure that British companies and individuals found guilty of financial crimes in developing countries are always required by the court to make reparations to the developing country concerned.

18. It would seem fair that where a public procurement project has been affected companies should make restitution payments. These should be greater than the amount that was influenced by the bribe on the basis that it is extremely unlikely that prosecutors are able to detect and prosecute every crime, and also the fines levied should be large enough to deter future potential bribe payers who may conduct cost benefit analysis.

Whether further changes to the Bribery Act 2010 or other legislation are required. 

19. The Bribery Act is a good act which is fit for purpose. It has gone through extensive consultation with relevant stakeholders including business groups and it passed with cross party support. As such it should not be revisited despite the protests of companies, which have nothing to fear from it unless they pay bribes. The Act should be implemented as soon as possible and without further delay.

20. However, an act is only as good as its implementation – this will now largely fall to the Serious Fraud Office, or its successor body, and the Crown Prosecution Service. The guidance for business published by the Ministry of Justice on the 30th of April 2011 is extremely disappointing and raises a number of areas of serious concern as set out in the following paragraphs. It also raises serious doubt about the government’s commitment to effective implementation of the Act. The particular sections that give rise to these concerns were only added following the delay in the publication of the guidance and intense pressure from business groups. In our view the guidance goes beyond the remit of providing guidance to business and risk undermining the act through its interpretation.

21. Our view is that the interpretation of the Act, which was passed by parliament, should be left to prosecutors and the courts, and should be free from intervention by the government and business groups.

22. Firstly, the guidance is intended to provide guidance to companies on complying with the act and putting in place ‘adequate procedures’ to prevent bribery, as such it potentially defines the defence as set out in Section 7 of the act. Section 7 makes companies libel for failing to prevent bribes paid on their behalf by a third party, a company can defend itself in court by showing that it had adequate procedures in place to prevent bribery on its behalf. The guidance, as it is written, risks presenting a tick list for companies to observe in order to avoid prosecution rather than simply providing guidance on compliance. In our view it should be left to the courts to interpret whether a company has adequate procedures in place to prevent bribery, on a case by case basis.

23. Secondly, the guidance suggests that companies will not fall within the jurisdiction of the Act just by virtue of their listing on the London Stock Exchange. If this interpretation of the act were to hold true large international companies which are listed in London would potentially be able to avoid prosecution for overseas bribery. The guidance also suggests that foreign companies who operate subsidiaries in the UK would not fall under the jurisdiction of the Act. This may well incentivise companies to operate subsidiaries in the UK to ensure that they do not fall foul of the act hence restricting the scope of the Act. This interpretation will unfairly disadvantage UK companies, whilst failing to prevent the damaging practice of bribing foreign public officials.

24. The Act should be used to investigate and prosecute not only UK but also foreign companies who are either listed on the London Stock Exchange, or who operate a subsidiary in the UK. This will broaden its indisputably positive impacts and create a level playing field for UK businesses.

25. Thirdly under Section 7 of the act, companies should be held liable for bribes paid by joint venture partners and subsidiaries where they benefit by virtue of their relationship to those entities. The MoJ guidance appears to contradict this. This matters because it will encourage UK companies to operate subsidiaries in high risk environments which they distance themselves from in order to avoid prosecution.

26. Successful implementation of the Act will be a matter for prosecutors and courts. This potentially misleading guidance from the MoJ should not get in the way of their ability to prosecute; nor should it lull companies into a false sense of security

Further recommendations:

· Effectively enforce the Bribery Act, ensuring that the UK is fully compliant with the 1997 OECD Anti-Bribery Convention; fines and penalties should be large enough to both punish and deter. The UK’s financial penalties for companies that commit financial crimes including bribery and money laundering offences are currently woefully inadequate. This is particularly true when compared to the US which has levied substantial financial penalties against companies and banks that have either been prosecuted for financial crimes or that have settled voluntarily. If the UK is to successfully deter companies and banks from paying or processing bribes or from accepting stolen assets then the UK must levy fines large enough to act as a successful deterrent. In the BAE case the size of the fine was restricted because any increase would have decreased the size of the ex gratia payment to the people of Tanzania. Such a structure should be avoided in future.

· Ensure that sufficient dedicated resources are available for the Act’s effective implementation. UK diplomatic posts must have the awareness, capacity, political backing and will to assist UK companies to deal with demands for bribes. UKTI and other UK representatives should also be trained to identify risks and warn companies.

· Introduce greater transparency and consistency in relation to the terms of negotiated settlements in bribery cases.

· Actively and effectively enforce Article 45 of the EU Procurement Directive within the UK and work with the EU to ensure its successful enforcement across the Union, to ensure that companies found guilty of bribery are automatically precluded from government contracts.

· Encourage self reporting and whistle-blowing as this is the most efficient way of bringing bribery to light.

· The UK should use its anti-money laundering laws to tackle bribery by treating profits from a deal struck following a bribe as the proceeds of crime.

27. None of the above would require amendments to the Bribery Act or further legislation. However we do have recommendations for further legislation and regulation that would help curb financial crime. The Bribery Act is welcome, but alone will never curb corruption, or even bribery. Tackling bribery is not just about prosecution; it is also about uncovering the bribes in the first place and making it more difficult to pay them.

28. At present it is extremely difficult to detect bribes as they are often paid through shell companies and other corporate vehicles, often in secrecy jurisdictions or tax havens (half of which are British). The fact that companies and individuals are able to set up companies and trusts without providing their identity means that they can make and receive payments anonymously. This makes it enormously difficult to detect where bribes have been paid, slows down investigations, and severely limits the effectiveness of any anti-bribery legislation.

Recommendation:

29. Each country should maintain a verified national registry of beneficial ownership and control of all companies incorporated and trusts established there (ie, not just the immediate shareholder). No one should be allowed to become a director or company secretary or shareholder owning 10% or more of the shares of a UK company without having first proved their identity to the Registrar of Companies to the standards required by money laundering regulations for the opening of a bank account. The use of nominees to record the ownership of shares can be permitted, but only if the name of the beneficial owner is also on public record.

30. This would have to be an international standard to work. Two possibilities exist for the UK to push it internationally:

· through its membership of the Financial Action Task Force, the OECD body that sets the global anti-money laundering standard and is currently reviewing its standards, including this one

· in Brussels, where a recent EC Internal Security review called on the EU to amend its anti-money laundering standard to provide greater disclosure of beneficial ownership and control of companies and trusts.

How the government coordinates its policy against transnational financial crime

31. The following aspect of the BAE Tanzania story is indicative of the need for a more joined-up UK strategy towards transnational financial crime.

Barclays’ loan to Tanzania

32. It was extensively reported at the time that Barclays was providing the loan for the deal: a loan without which the sale could not have gone ahead. When the deal first came up in 1995 it could not go ahead because the Tanzanian Central Bank would not pledge the country’s gold reserves as collateral. [1]

33. According to the Guardian, Barclays made the loan at a rate of 4.9% even though the World Bank and IMF refused to lend for such a white elephant project. [2] This was reportedly just below market rates, even though Tanzania was not supposed to borrow on commercial terms due to its existing debts, $3 billion of which had just been written off by its donors. [3] A World Bank report said that a civilian radar system could be bought for a fraction of the price. [4]

34. Barclays’ involvement was criticised in Parliament by Clare Short, then Secretary of State for Development, and Norman Lamb MP.

35. Clare Short said: ‘under the HIPC [Highly Indebted Poor Country] initiative, countries cannot borrow unless the loan is concessional. Somehow a loan from Barclays Bank, which is funding the project-there is no way that Barclays can provide concessional funding-has been reported to the IMF as being concessional, so the project squeaked through, which is very odd.’ [5]

36. Norman Lamb MP said that the IMF had written to him explaining the financing Barclays had provided, saying ‘the terms of the financing package obtained by Tanzania in 1999 for its air traffic control system yielded a weighted average grant element of 35.9 per cent, which is consistent with the definition of concessionality under the terms of the IMF's concessional loan facility, the Poverty Reduction and Growth Facility.’

37. As Mr Lamb pointed out, this seemed like an extraordinary thing for Barclays to do:

‘Barclays might simply have had a fit of generosity, but that seems unlikely. Perhaps it had something to do with the fact that, on 11 October 2000, Barclays secured a banking licence to operate in Tanzania. Was that the payback for subsidising the deal? The other more sinister explanation is that the contract price was fiddled and artificially inflated so that it looked to the outside world as if Barclays was providing a concessional loan, which was necessary to get the deal past the IMF.’

38. He continued: ‘When a Secretary of State alludes to corruption, surely it is time thoroughly to investigate the financing of the deal. I have also been told that bungs were paid to oil the wheels of the deal.’ [6]

39. These questions about the role of Barclays in allowing this deal to go ahead were not satisfactorily answered at the time. Now that that the payments by BAE have come to light and BAE has pleaded guilty to accounting errors which hid them, it is once again pressing to ask what due diligence Barclays did on this loan to reassure itself that its funding would not facilitate a corrupt deal.

40. A leaked request for mutual legal assistance from the SFO to the Tanzanian authorities [7] says: ‘the SFO has reasonable grounds to believe that the financing package was structured to circumvent, and in reality may have breached’ the requirements agreed with the IMF and World Bank.

41. In the same leaked document the SFO alleges that it had reasonable grounds to believe that a recipient of payments from Vithlani was the Tanzanian Attorney-General, Andrew Chenge. Without his agreement, the SFO says, the financing package involving Barclays could not be agreed.

42. According to the document the SFO had evidence to believe that:

· Chenge was personally in charge of negotiations by 1995

· Between 19 June 1997 and 17 April 1998 Chenge received $1.5 million into an account at Barclays in Jersey in the name of a company he controlled called Franton Investments Ltd. The money had previously come from another Barclays account in Frankfurt, and may ultimately have been sent from LGT Bank in Liechtenstein.

· Barclays later became concerned over the governance of the Franton accounts and ended the client relationship (a date is not given).

· Vithlani, the recipient of BAE’s payments, was involved in setting up the financing package with Barclays. For example, the SFO says that on 28 September 1999 Vithlani wrote to Barclays enclosing the final draft of the financing package. He enclosed a legal opinion dated 15 September 1999 from Chenge concerning the financial arrangements, including that they would not be subject to suit in Tanzania, that English law would be used in the event of any dispute, and that these arrangements would not cause Tanzania to become ineligible for IMF funding. Such conditions, the SFO said, were important to Barclays’ willingness to proceed.

· In September 2009 £600,000 was transferred by Chenge from the Franton account at Barclays in Jersey to an RBS account in Jersey. Later he moved the funds to the investment manager J O Hambro, this time in his own name, and also had an account at Standard Chartered in Dar es Salaam.

43. Chenge resigned in April 2008 following claims about more than £500,000 in an account in Jersey. He denied wrongdoing and claims, through the law firm DLA Piper, that the completion of the SFO’s investigations vindicates him. [1] The SFO’s plea bargain preventing further investigation of matters prior to 5 February 2010 means that these allegations will not now be tested in court.

44. The SFO’s information about the Franton account at Barclays in Jersey raises the extraordinary possibility – untested by the case that concluded in December – that a bribe may have been paid into a Barclays account to facilitate the agreement of conditions which allowed a Barclays loan to go ahead to finance an unaffordable deal for Tanzania.

45. We recommend that the Committee call Barclays to account for its role in this deal. The questions which we believe need to be asked include:

i. Can Barclays confirm the IMF’s statement to Norman Lamb MP that 35.9% of the loan was a grant, and explain what this meant, and why this was done?

ii. Can Barclays respond in detail to allegations that the size of the deal was inflated to make it look as though the loan was on concessionary terms?

iii. What due diligence did Barclays do on Shailesh Vithlani and his role as an intermediary in arranging the financing?

iv. How does Barclays justify its comment, reported in the Guardian in December 2001, [2] that it was ‘not involved’ in the debate surrounding the sale, when

· its provision of a loan was so central to allowing the deal to proceed

· it had received documents from Vithlani and Chenge discussing Tanzania’s eligibility for IMF funding if the Barclays loan went ahead, this being one of the questions at the centre of the debate about the appropriateness of the deal?

v. Has Tanzania repaid the loan to Barclays? If so how long did it take? What is the total amount repaid including interest? Does this exceed the ex-gratia payment to be made by BAE?

vi. When exactly did Barclays close Chenge’s Franton account in Jersey? It is to Barclays’ credit that it did so, but had it identified its customer as a politically exposed person (ie a senior official and therefore a greater corruption risk)? When it closed the account, did it make the connection between suspicious money received by its customer Andrew Chenge, and the fact that the same man was responsible for giving the go-ahead for Tanzania to borrow heavily from Barclays? [3]

46. In addition, Royal Bank of Scotland, J O Hambro and Standard Chartered – the banks that handled Andrew Chenge’s funds after they left the Barclays’ account in Jersey – should be asked what due diligence they did on Chenge and his source of funds. Did they identify him as a PEP and do enhance due diligence? How did they reassure themselves that these funds were not the proceeds of corruption? Did they file any suspicious activity reports?

Recommendations:

47. Commercial banks should be required by law to disclose loans made to sovereign governments or state owned companies, including details of rates as well as all fees and charges. Proposed loans should be published well in advance, allowing parliamentary scrutiny in the recipient country and, if necessary, in the home country of the company whose deal is being paid for by the loan. This would need to be a global standard in order to be effective, but the UK, as a major financial centre, is in a position to push this.

48. The UK should ensure that its anti-money laundering laws, with their requirement to do customer due diligence, are rigorously implemented both in the UK and in the Crown Dependencies and Overseas Territories. The current furore over frozen funds belonging to Ben Ali, Mubarak and Gaddafi shows that the lessons are still not being learnt by banks when it comes to accepting corrupt funds. The current light touch approach to AML regulation means that banks can tick the box to say they’ve done their customer due diligence yet still do business that fuels corruption.

49. The UK also needs to set up a whole of government approach to tackling corruption which spans all the relevant government departments. The current PEP group and Bribery groups are untransparent and they do not cover all of the relevant issues. The UK government’s efforts to tackle corruption have so far been largely limited to bribery and asset freezing/recovery. We would urge the UK anti-corruption champion to introduce an anti-corruption strategy that tackles all of the aspects of corruption which UK companies and banks – and the government itself – contribute to as set out in the Bond corruption paper, see Annex 1.


Annex 1

Bond Anti-Corruption Paper

Bond Governance Group

The Bond [1] Governance Group is made up of likeminded British NGOs who, through their work, witness the devastating effects of corruption on developing countries every day. Our experience has taught us that corruption continues to be one of the biggest obstacles to development, poverty alleviation and good governance. Our aim is to draw attention to the impact of corruption on developing countries and provide a platform for the voices of our partners and southern civil society organizations to be heard in the UK. We intend to use our joint influence to campaign for changes in policy which will help bring an end to corruption around the world. This paper was prepared by the Anti-Corruption Sub Group. [2]

Anti-Corruption Sub Group

CAFOD, Christian Aid, The Cornerhouse, Corruption Watch, Global Witness, Tearfund, Transparency International UK.

Bond Governance Group – Steering Committee

Care International – UK, Christian Aid, Global Witness, One World Action, Oxfam GB, Plan International – UK, Practical Action, Progressio, Save the Children, Tearfund, Water Aid, World Vision - UK

Introduction: About corruption

Corruption has devastating effects on developing economies and their citizens’ quality of life. Its cost in Africa alone has been estimated at US$148 billion a year, representing 25% of the continent’s GDP. [1] Corruption undermines economic growth rates and cripples public services, as money which should be destined for re-investment and public expenditure finds its way into private bank accounts, often abroad.

The size of financial flows from developing countries into the rich world that deprive poor countries of revenue has been estimated at up to $1 trillion each year. [2] These flows, which include state looting, tax evasion and abusive tax avoidance, rob developing countries of much needed revenue and therefore seriously undermine the impact of development assistance from the developed world. [3] Tackling these flows will require measures which provide greater transparency.

Corruption seriously damages attainment of the Millennium Development Goals. [4] It undermines good governance and tends to permeate all levels of society precluding the poorest from access to basic services and creating barriers to business. Corruption remains one of the major impediments to poverty alleviation, development, good governance and stability, and is a proven source of conflict and insecurity.

Corruption is often thought of as just a developing world problem. But it is driven and facilitated by external actors, many of them in the developed world:

· Companies (including British companies) can actively fuel corruption by paying bribes, or passively fuel it by failing to disclose the legitimate payments they make to governments.

· Banks (including British banks) can sustain corruption by doing business with corrupt officials and accepting looted funds or bribes.

· Financial secrecy jurisdictions (including the UK’s Overseas Territories) and the financial and legal service providers who operate in them can help the corrupt to hide their ill-gotten assets, and facilitate large-scale tax avoidance that denies revenues to developing countries.

· Donors (including the Department for International Development - DFID) have made steps forward in tackling corruption. Donor aid provides vital assistance but does not always adequately tackle corruption, promote state accountability to citizens and transparency in highly corrupt aid-recipient countries.

In this context, the activities of British financial institutions and companies, along with failures in the regulatory frameworks, can seriously undermine development and the effectiveness of aid provided by the UK and other donors.

There is also a compelling business case for tackling corruption, which includes:

· Creating a level playing field for business, in which sales and contracts are won through an open market rather than through bribery.

· Creating greater security for contracts.

· Reducing the cost of doing business through eliminating the ‘bribery premium’ in contracts.

· Downgrading corporate risk in key markets, reducing the cost of capital, insurance premiums and other operational costs.

· Increasing value for money in aid and development spending.

· Creating a more politically stable and secure environment in which British companies and investors can operate.

This paper sets out to raise awareness of the numerous different ways in which corruption is fuelled and facilitated by external actors, and points towards actions the UK government needs to take to curb it. So far the UK government has largely focused on the new Bribery Act, which is certainly necessary and which Bond welcomes. But corruption goes way beyond bribery and the remit of the Ministry of Justice and DFID. To make any real inroads into overseas corruption the government must develop a cross-Whitehall anti-corruption framework. This document sets out the main external drivers of corruption over which the UK has control and outlines the policy responses needed to effectively address the problem.

A cross-Whitehall anti-corruption framework

There is pressing need for a cross-Whitehall framework on corruption, including increased parliamentary scrutiny and civil society participation. The policy processes and institutional mechanisms required in the UK for tackling corruption are highly complex. Complexity in itself is not necessarily the problem; in fact the multi-faceted nature of corruption demands a plurality of responses. However, a lack of coordination and clear channels of accountability threatens the effectiveness of the UK’s anti-corruption efforts.

Action must be taken to ensure that there is a comprehensive cross-Whitehall anti-corruption framework. Dealing with corruption is inherently difficult. There are no quick fixes or one size fits all solutions. It requires cross-party political commitment that extends across successive governmental cycles and coordinated policy interventions across government departments.

General recommendations for a cross-Whitehall anti-corruption framework and the role of the Anti-Corruption Champion

1. Formally commit the government to a ‘zero tolerance’ policy on corruption in all aspects of its work around the world.

2. Set specific targets, based on the recommendations in this paper, against which progress should be reported on a biannual basis to Parliament.

3. Create mechanisms for a structured and regular dialogue, and coordination, between UK government departments and Ministers.

4. Involve civil society and other stakeholders in a regular, open and transparent dialogue that allows on-going input to, and comments on, the framework’s implementation.

5. Work with G8 and G20 partner countries to keep anti-corruption high on the global agenda and report annually on the UK’s implementation of G8 and G20 anti-corruption commitments.

6. Implement all commitments in the United Nations Convention Against Corruption (UNCAC), to which the UK is a signatory, including cooperation between Member States to prevent and detect corruption and to return the proceeds of corruption to the country from which it came.

The external drivers of corruption

Policy responses for a cross-Whitehall anti-corruption framework

1. Illegitimate payments: Bribery of foreign public officials

Bribery is the most obvious and best recognised form of corruption. Bribery is not a victimless crime nor a regrettable but unavoidable cost of doing business abroad. Bribery undermines the rule of law and the principle of fair competition and entrenches bad governance. Bribery of public officials results in government revenue, which could be used for development, being wasted on unnecessary and poor quality procurement projects, posing a risk to health and even life where essential services are affected.

While many British firms are not involved in corrupt practices, we know that some UK companies have used bribery to win business overseas. [1] The 2008 OECD phase 2 bis Report on the UK’s bribery record showed that the government needs to do more to tackle bribery. [2] As such, we welcome the UK Bribery Act, which greatly improves UK law. We very much hope that the cross party support for strong legislation will continue during the implementation process.

Recommendations

1.1. Effectively enforce the Bribery Act, ensuring that the UK is fully compliant with the 1997 OECD Anti-Bribery Convention; fines and penalties should be large enough to both punish and deter, as is the case in the US.

1.2. Ensure that sufficient dedicated resources are available for the Act’s effective implementation. This should include ensuring that UK diplomatic posts have the awareness, capacity, political backing and will to assist UK companies to deal with demands for bribes.

1.3. Introduce greater transparency and consistency in relation to the terms of negotiated settlements in bribery cases.

1.4. Ensure that guidance for business on the Bribery Act presents clear obligations and advice without providing a safe haven under the ‘adequate procedures’ defence under clause 7; ‘Failure of Commercial organisations to prevent bribery.’

1.5. Ensure that the UK actively and effectively enforces article 45 of the EU Procurement Directive and works with the EU to ensure its successful enforcement across the Union.

Bribery is an important element of corruption but bribery should not be confused with, or treated as synonymous with, corruption. Corruption extends far beyond illicit payments and takes multiple forms.

2. Lack of transparency in legitimate revenue payments by companies

A lack of transparency in payments by companies to foreign states, often for natural resources, allows corrupt leaders and officials to personally enrich themselves by siphoning off legitimate payments made for those resources by international companies. Without transparency over how much companies are paying to foreign governments, the people and parliaments of resource-rich countries are unable to hold their governments to account. The lack of payment disclosure by companies facilitates an opaque environment in which high level corruption can take place on a grand scale, robbing countries and citizens of much needed revenue. This opacity and associated corruption also exposes foreign companies to greater investment and operational risk that ultimately disadvantages shareholders.

The Extractive Industries Transparency Initiative (EITI), spearheaded by the UK in 2002, is an important tool in improving revenue transparency as well as providing space for civil society to monitor revenues in producer countries. But as a voluntary initiative it only reaches a limited number of countries and progress has been very slow. On its own, the EITI is not and never will be a panacea for corruption. It covers a crucial stage in the flow of resource revenues, i.e. the making and receipt of payments, but it does not cover the allocation of rights to companies to exploit oil, gas and minerals, nor the marketing of oil by state agencies (which can be a major source of revenue for the state in many oil-producing countries).

The US recently passed legislation as part of the Frank-Dodd Financial Reform Bill which will require every US SEC (Securities and Exchange Commission) registered company to disclose all payments made to foreign governments on a country by country basis as a condition of its stock exchange listing. This will include UK based companies listed on the US SEC. Such transparency will not only reduce opportunities for embezzlement but also help shelter companies from the costs of bribery and corruption creating a more level and transparent playing field in which to operate.

The Bond Anti-Corruption Sub Group believes that the UK should adopt similar legislation, covering all companies operating in the extractive industries in all their countries of operation. Failure to do this could result in a situation where some foreign oil and mining companies registered in the UK will be free from a requirement that British companies registered in the US will not.

The remit of the EITI will also need to be strengthened, improved and extended, over time to cover procurement contracts, allocation of concession rights and additional payments. This process should take place in consultation with its stakeholders in governments, the private sector and civil society. It is important that any extension learns from the lessons of the EITI process to date. This combination of regulatory reform and voluntary initiative, overlapping and reinforcing each other, is the best chance for addressing the problem of corruption in resource revenue payments.

Recommendations

2.1. Create a legal requirement for UK companies, their subsidiaries and joint venture partners, to disclose all legitimate payments made to foreign governments for access to natural resources, and for the resources themselves.

2.2. Promote and support a strengthened model of EITI building on lessons learnt to date.

3. Illicit and harmful financial flows out of developing countries:

a) Money laundering laws are failing to prevent banks sustaining corruption by accepting dirty money

Just as a bribe cannot be taken without a company willing to pay it, large scale corruption cannot take place without a financial institution willing to accept or process the money. The scale of theft involved in state looting requires the involvement of the financial system.

For example payments are made from the bank account of a state oil company to that of a company owned by a government minister; from the account of a company’s ‘fixer’ to that of a state official; from one of the accounts of a public official to another of his accounts in a different jurisdiction. It requires a bank to accept corrupt persons and their associates as their customers and then process the payments to divert bribes or stolen public money into the accounts of individuals, or the companies that they own. Otherwise these illicit transactions could not take place. Combating the role of financial institutions in the flow of illicit money is therefore absolutely intrinsic to tackling corruption. So too is combating the role of those who set up and audit the corporate vehicles behind which individuals and legal persons hide, and which are still not properly regulated.

Banks and other institutions are required by anti-money laundering laws to identify their customer and the source of funds, and to file a suspicious activity report if they suspect the money is illegally earned. However, weaknesses in the anti-money laundering regulations, particularly in relation to due diligence on Politically Exposed Persons (PEPs), [1] combined with the deficiencies in regulation in many secrecy jurisdictions (including the UK’s Overseas Territories), increases the risk of UK institutions continuing to do business with the corrupt.

b) A lack of transparency in the ownership and operation of companies is facilitating corruption, tax evasion and avoidance

Increased transparency in company ownership and transactions is key to tackling corruption, since corrupt officials will often hide their looted money behind a shell company. However, it also has the knock-on effect of tackling the twin problems of tax evasion and avoidance which are estimated to cost the developing world US$160 billion a year, more than one and a half times the total global aid budget to developing countries. [1]

Approximately 60% of global trade is conducted within multinational corporations (MNCs), between subsidiaries of a parent company. [1] This allows companies to use intra-group transactions to disguise profits in order to avoid tax liabilities. This is possible due to the current level of opacity afforded by the current regulatory structures and secrecy laws.

The International Accounting Standards Board is currently developing a new standard for the extractives sector. It is considering whether this should include a requirement for oil, gas and mining companies to publicly disclose tax and other payments to governments on a country by country basis. Such a policy would reinforce the aim of the EITI by ensuring that companies routinely disclose their tax and other revenue payments to countries where they operate. It would also help tackle tax evasion and abusive tax avoidance.

Recommendations

3.1. Strengthen regulations to explicitly require institutions, including banks, to identify that the source of funds being deposited by Politically Exposed Persons (PEPs, e.g. senior foreign public officials) is legitimate. The Financial Services Authority (FSA, or any successor body) should proactively supervise these institutions to ensure that this happens.

3.2. The UK should use its influence within the Financial Action Task Force (FATF), the inter-governmental body that sets the global anti-money laundering standards to;

i. ensure that tackling the proceeds of corruption is a priority;

ii. that loopholes in the global standard are closed;

iii. and that the FATF’s members are pressured sufficiently to ensure not only that they have regulations in place meeting FATF’s standards, but that these regulations are implemented and enforced.

3.3. Corrupt politicians can hide behind a web of tax havens, corporate vehicles and trusts. The only way to ensure that these are not abused is transparency over ownership and control of corporate and legal entities. The UK should push for the FATF standard (recs 33 and 34) [2] to require that every jurisdiction should publish an online registry of the beneficial ownership and control of companies and trusts.

3.4. The UK should spearhead a multilateral agreement for information exchange between tax authorities including developing countries. This should be done with the ultimate aim of enshrining automatic exchange of beneficial ownership information as the international standard for information exchange.

3.5. The UK should push for international accounting standards to require all multinational corporations to publicly report sales, profits and taxes paid at country level in all the jurisdictions where they operate. This information should appear in their audited annual reports and tax returns. This UK should engage with the current debate on a new standard for the extractives sector.

4. Loans that fuel or subsidise corruption

There is a risk that in countries where corruption is prevalent, loans to governments or state agencies (including state owned companies) may be misappropriated or used to fill holes in the public finances that have been created by corruption. This can leave current and future generations of citizens to repay a debt from which they have derived no public benefit. There are examples where debt obligations currently crippling developing countries originate from loans that were corruptly used; greater transparency would help to curtail this source of corruption. [3]

Recommendations

4.1. The UK should lead in the establishment of an international standard requiring commercial banks to publish key details of their loans to sovereign governments and state owned companies, including the amount, pricing and duration of the loan. This information should be provided with plenty of time to allow democratic scrutiny of the deal.

4.2. The UK should require lenders to governments and state owned companies to verify, and publicly confirm to their shareholders, that these funds are not being misappropriated or used to replace misappropriated public funds.

5. Export credit guarantees can legitimise corruption

The Bond Anti-Corruption Group is concerned that most of the British companies that have faced law enforcement investigations and penalties for overseas corruption have received backing from the Export Credits Guarantee Department (ECGD). This raises serious concerns about the adequacy of ECGD anti-bribery procedures for vetting projects. Furthermore, it is not clear what action the ECGD has taken to penalise those companies which have been subject to enforcement action, particularly where there have been allegations that companies have made false statements to the ECGD about use of agents and commission payments.

The UK government should initiate an independent review into the current ECGD anti-corruption regime to ensure that UK tax payer money does not support companies associated with corrupt deals abroad. Furthermore, UK companies that are convicted of corruption should be automatically precluded from working with the UK government and state procurement under the terms of Article 45 of the EU Procurement Directive as well as ECGD support for a set period of time.

Recommendations

5.1. Apply strong anti-bribery rules to all transactions supported by the Export Credits Guarantee Department (ECGD).

5.2. Apply ECGD’s anti-bribery rules to all business conducted through third parties, such as banks providing short-term credits and reinsurance.

5.3. Ensure that ECGD’s anti-bribery rules are consistent with best practice in other export credit agencies in OECD countries.

5.4. Ban companies convicted of corruption from all ECGD support for a period of up to 5 years.

6. a) Donor aid provides vital assistance but does not always adequately tackle corruption and promote accountability and transparency in highly corrupt aid-recipient countries

Aid provides vital services to millions in the developing world. Unfortunately, in many aid-recipient countries, high level corruption and poor governance is undermining economic growth and preventing countries from harnessing their own resources for development. This can undermine the long-term impact of development aid. [1]

As part of a whole-of-government approach, DFID can play a vital frontline role in tackling corruption. It can do this by improving its own internal due diligence and anti-corruption procedures and by promoting good governance, natural resource and public financial management, transparency and respect for human rights, particularly in countries where corruption is endemic.

The Bond Anti-Corruption Sub Group welcomes DFID’s efforts to place governance reforms at the heart of its programmes, its increasing focus on the causes and not just the symptoms of corruption, and its use of political economy analysis.

In Mozambique, bilateral donors funded a tribunal which audited 35% of the government budget – both aid and general public funds. The findings of these audits were acted on by both members of parliament and the national media. [2] Examples like this have shown that in the right circumstances donor assistance can lead to more accountable government. [3] Likewise, we welcome the coalition government’s new Aid Transparency Guarantee which could be an important way to curtail mismanagement of donor funds.

However, weak state structures, poor public financial management and inexperienced or ill-intentioned governments have meant that corruption remains endemic in many countries. This is often compounded by a lack of civil society participation and democratic oversight of government functions. In an age of tightening government budgets, we encourage DFID, and the Foreign and Commonwealth Office (FCO), to go further in leveraging their diplomatic and financial influence in-country to support calls for transparency and combating corruption. We believe that the following measures in aid programming will strengthen the existing approach.

Recommendations

The UK should ensure that its in-country programmes improve governance and incentivise greater accountability. Specifically, it should:

6.1. Include specific, targeted and measurable anti-corruption benchmarks when negotiating jointly agreed performance assessment indicators. Such benchmarks should not include economic or fiscal conditionalities, as practiced in the past. Rather they should include basic transparency and anti-corruption requirements demanded by civil society in country, such as publishing incoming revenue and other measures to curtail high level corruption.

6.2. Continue and expand political economy analysis to ensure a full and nuanced understanding of country context which takes account of domestic incentives, drivers (both internal and external) and concerns.

6.3. Shift efforts to improve governance away from purely technical focus on laws and procedures, towards a broader agenda of promoting democratic oversight and impartiality. This approach should include encouraging the provision of space for civil society to enable it to monitor government revenue and expenditure, and securing protection for anti-corruption whistleblowers and investigators. The UK should avoid the promotion of the private sector at the expense of a strong, functioning state.

6.4. Work with change agents such as parliamentarians, civil society and non-formal structures of authority to strengthen democratic oversight of governments, and to provide support geared towards strengthening the ability of these agents to provide public interest information and advocacy and to ensure accountability.

6.5. DFID should continue to support the implementation of the UNCAC abroad and to resource and support the UNCAC review mechanism process.

6. b) Ensuring proper oversight and due diligence of Official Development Assistance (ODA) funding

Whilst DFID has made some strides forward in tackling corruption, the Bond Anti-Corruption Sub Group does have some specific concerns about the oversight mechanisms and due diligence for UK ODA funding, particularly where channelled through intermediaries.

Of particular concern is the Commonwealth Development Corporation, a UK government owned company, which has come under particular scrutiny in relation to its investments in Nigeria. [4]

Recommendation

6.6. DFID should strengthen its oversight of the funds operated by intermediaries such as the CDC to ensure that they do not contribute to corruption.

7. Providing safe haven to corrupt officials

The developed world does not just provide a source of illegitimate money and a safe haven for looted assets to corrupt leaders, it is also the shopping destination and provider of educational and medical facilities of choice. The UK should take a firm stand against corrupt leaders who siphon off their national wealth. Action should be taken to stop corrupt leaders spending their stolen money with impunity in the UK and elsewhere. Such cases have a huge deterrent effect on the perception of the UK as a safe haven for corruptly acquired funds. For example, the Proceeds of Corruption Unit at the Metropolitan Police, has successfully brought to trial accomplices of a Nigerian state governor accused of corruption, and provided key support to successful asset recovery actions against two other state governors by the state of Nigeria.

While the UK has a procedure to deny visas to individuals if their presence is not deemed to be in UK interests, it is not made explicit that it will be used as an anti-corruption tool. The US has specific legislation requiring the State Department to maintain a list of corrupt foreign officials, and to deny visas to those on it; the UK (and EU) should do the same.

Recommendations

7.1. Continue to support the Proceeds of Corruption Unit at the Metropolitan Police.

7.2. Strengthen and improve procedures to help developing countries to recover looted assets and the proceeds of corruption in line with UNCAC (The UN Convention Against Corruption) commitments and ensure that repatriated assets are not in turn lost through corruption.

7.3. Work with other states to freeze the assets of foreign officials against whom there is credible evidence to suggest they are involved in corruption and state looting.

7.4. Deny visas to foreign leaders, and their families, against whom there is credible evidence to suggest they are involved in corruption and state looting.

27/04/2011


[1] Global Witness is a member of BOND’s Anti-Corruption Group

[1] Judgement of Mr Justice Bean, 21 December 2010, 2. 2) and 5) ; 3. 4.5

[1] David Leigh, ‘ The arms deal, the agent and the Swiss bank account ’, Guardian , 15 January 2007

[2] Charlotte Denny, ‘ World Bank, IMF see air system as white elephant ’ Guardian, 29 January 2002

[3] Patrick Wintour and Charlotte Denny, ‘ Overruled: Short loses in aid row ’, Guardian , 20 December 2001

[4] Norman Lamb MP, Hansard , Export Controls ( Tanzania ) debate, 25 Jun 2002 : Column 228WH

[5] Clare Short, Hansard , Official Record 15 May 2002: Column 763

[6] Norman Lamb MP, Hansard , Export Controls ( Tanzania ) debate, 25 Jun 2002 : Column 228WH

[7] Serious Fraud Office letter to Attorney General of Tanzania, 21 March 2008, leaked and available on internet

[1] Barney Jopson & Michael Peel, ‘Tanzanian minister quits amid inquiry into BAE radar deal’, Financial Times, 22 April 2008; DLA Piper (represented by Andrew Baillie QC of 9 Gough Square ) attended the BAE sentencing hearing and produced the following document: http://www.9goughsquare.co.uk/newsArticle.asp?ID=250

[2] Overruled: Short loses in aid row , Guardian, 20 December 2001

[3] Verification of the identity of bank customers was not a legal requirement in Jersey until 1999, and enhanced due diligence on politically-exposed customers (ie senior public officials) was not a legal requirement until 2008.

[1] Bond is the UK membership body for non-governmental organisations (NGOs) working in international development. Established in 1993, Bond now has 370 members. These range from large bodies with a world-wide presence to smaller, specialist organisations working in certain regions or with specific groups of people.

[2] The Anti-Corruption Sub-Group is a sub group of the Bond Governance Group, which is made up of 67 different UK development NGOs. For further information please contact Bond via their website http://www.bond.org.uk/

[1] According to an often quoted African Union study on corruption in Africa that was prepared in 2002 and which fed into the development of the African Union’s anti-corruption declaration approved in 2003 – see: Smith, Pieth and Jorge (February 2007). “The Recovery of Stolen Assets: A Fundamental Principle of the UN Convention Against Corruption”, Briefing Paper. Prepared for the Basel Institute on Governance, International Centre for Asset Recovery. Published by the U4 Anti-Corruption Resource Centre, Norway , http://www.u4.no/themes/uncac/asset-recovery.cfm#scope

[2] Dev Kar and Devon Cartwright-Smith , Illicit Financial Flows out of Developing Countries, 2002-2006 , Global Financial Integrity, December 2008, http://www.gfip.org/storage/gfip/executive%20-%20final%20version%201-5-09.pdf

[3] Tax Justice Network has collected a wealth of information on the impacts of tax evasion and avoidance see: http://www.taxjustice.net/cms/front_content.php?idcat=2

[4] UNDP, Governance for the Millennium Development Goals: core issues and good practices, Jan 2007, http://unpan1.un.org/intradoc/groups/public/documents/un/unpan025110.pdf

[1] See Corruption Watch website http://corruptionwatch-uk.org/about/

[2] The Phase 2 bis Report on the United Kingdom evaluates certain aspects of the UK‘s track record of implementation of the OECD Anti-Bribery Convention that are of particular concern to the member states of the OECD Working Group on Bribery. See report here http://www.oecd.org/dataoecd/23/20/41515077.pdf

[1] PEPs can be defined as persons who perform important public functions for a state.

[1] Death and Taxes: the True Toll of Tax Dodging, Christian Aid, May 2008. http://www.christianaid.org.uk/images/deatha n dtaxes.pdf

[1] Ibid; J Neighbour, ‘Transfer pricing: keeping it at arm’s length’, OECD Observer, January 2002, www.oecdobserver.org/news/fullst o ry.php/aid/670/Transfer_p

[2] The current recommendations do not go far enough in ensuring transparency over beneficial ownership of companies and trusts, see: http://www.fatf-gafi.org/pages/0,3417,en_32250379_32 2 36920_1_1_1_1_1,00.html

[3] Global Witness, A time for Transparency, March 2004, P.40, 41, http://www.globalwitness.org/media_library_detail.php/115/en/time_for_transparency

[1] Carlos Santiso, John Hopkins University, Good Governance and Aid-effectiveness: The World Bank and Conditionality, The Georgetown Public Policy Review, Volume 7, Number 1, Fall 2001, pp.1-22 http://www.sti.ch/fileadmin/user_upload/Pdfs/swap/ s wap108.pdf ; See Paul Collier’s work

[2] Oxfam International (2010) ‘21 st Century Aid: Recognising success and tackling failure’. Oxfam Briefing Paper. 28 th April 2010. pp30. http://publications.oxfam.org.uk/display.asp?k=e2010052010265508

[3] ibid

[4] The Cornerhouse, Memorandum to the Secretary of State for Development, Concerns over alleged corruption in CDC-backed companies in Nigeria , June 2010. http://www.thecornerhouse.org.uk/sites/thecornerho u se.org.uk/files/CDC%20Memorandum_0.pdf