• I. Reasons Why Corporate Anti-Bribery Commitments are Needed
• II. Objectons and Concerns Regarding Anti-Bribery Commitments
• III. Implementation Issues

A memorandum prepared for the World Bank by TI-USA on behalf of Transparency International (TI)

In July the World Bank adopted important changes in its procurement procedures as part of a broader program to combat corruption. The proposal that anti-bribery commitments be obtained from bidders on Bank-financed projects was not included in these changes. Objections had been raise procurement and legal specialists and the proposal was deferred for later consideration.

This memo represents an effort to analyze the issues which should be considered in deciding whether to require anti-bribery commitments. Section I gives the reasons why such commitments are needed. Section II considers the objections, including those raised by Bank specialists. Section III discusses implementation issues.

The changes in procurement rules adopted by the Bank in July reflect the recognition that combating corruption requires increased efforts by the Bank and by procurement agencies of Borrower countries. The success of these efforts requires complementary efforts by the private sector. Corporations bidding on Bank-financed projects should commit not to pay bribes on such projects and to adopt procedures to ensure compliance.

I. REASONS WHY CORPORATE ANTI-BRIBERY COMMITMENTS ARE NEEDED

A. Nature of Problem
B. Reasons Why Active Corporate Participation is Needed
C. Assurances That Others Won't Bribe Are Crucial
D. Prevention More Effective Than Sanctions
E. Balanced Anti-Corruption Strategy

A. Nature of Problem

The need for corporate anti-bribery commitments follows from the nature of the underlying problem. Our starting premises are that corruption in public procurement is a major problem in all parts of the world, that it is extremely difficult to control, and that comprehensive, long-term efforts are required to deal with it.

Corruption has persisted, notwithstanding repeated reform efforts, because it is extremely rewarding to the participants. Corrupt officials can make vastly more money by taking bribes than by being honest. For corrupt companies, paying bribes is an effective way to win orders. The damage done by corruption hurts others, not the corrupt parties. The risk of getting caught has traditionally been low.

Controlling corruption is difficult because bribes are always paid in secret. They are usually channeled through middlemen, using a large variety of techniques. Corruption in international transactions are even more difficult to control than in domestic transactions. Governments whose leaders take bribes are disinclined to prosecute bribe-payers. The home countries of most bribe-paying companies disregard what their companies do abroad. Bribes are usually deposited in states with bank-secrecy laws. Prevailing legal systems are ill-equipped to deal with a situation where a company from Country A bribes an official from Country B, using an agent from Country C, and the funds are deposited in a bank in Country D.

Finally, it must be recognized that corruption is frequently an endemic problem. The persistence of corruption usually reflects the existence of long-standing patterns of relationships between corrupt officials, corrupt corporate salesmen, and a network of corrupt middlemen. All the participants have a strong interest in preserving their relationships and will do everything they can to do so. This means that whole systems of relationships must be changed. Ending corruption is not a matter of throwing out a few rotten apples.

Based on the foregoing considerations, we believe that only a comprehensive program, seeking to control corruption from both the bribe-taking and the bribe-giving side, has much chance of success. Enlisting active corporate involvement through anti-bribery commitments is a key part of such a program.

B. Reasons Why Active Corporate Participation is Needed

The practical dimensions of controlling corruption on Bank-financed projects are formidable. We understand that the Bank is involved with approximately 40,000 contracts per year. Moreover, corruption concerns are not limited to the bidding stage, but can arise at numerous stages during the execution of the work, such as choice of subcontractors and vendors, environmental and other permitting, inspections, etc., etc. In view of these factors, assuring active support from the private sector is critically important. Such support would multiply the effectiveness of the monitoring capabilities of the Bank and of Borrower procurement bodies.

A second practical consideration is the importance of assuring committed support from corporate management. In any large company there will always be differences in values and incentives. For local salesmen and regional managers winning new orders and maintaining good relations with customers and local authorities is a high priority. Top management can take a broader view, reflecting the political, legal and public relations risks to the corporation of corrupt business practices. Unless top management becomes involved and unequivocally supports anti-bribery policies, pressures to compromise will be hard to resist. That is why anti-bribery commitments signed by senior officers, and corporate compliance programs, are important.

C. Assurances That Others Won't Bribe Are Crucial

The year-long deliberations of the Committee on Extortion and Bribery of the International Chamber of Commerce, as well as TI's extensive contacts, have made clear that non-U.S. companies, which do not face criminal penalties for foreign bribery, would prefer not to pay bribes, but are concerned about losing business if their competitors continue to do so. The same point has been made clear in the OECD's Anti-Bribery Working Group, where the principle of criminalizing foreign bribery has been accepted, provided that it can be done in a coordinated and effective way.

In competitions for orders on World Bank-financed projects, a requirement that all bidders provide anti-bribery commitments and implement corporate compliance programs will provide assurance to all bidders that bribery is not necessary. The greater the assurance that others won't bribe, the more likely is it that no one will pay bribes.

D. Prevention More Effective Than Sanctions

Encouraging corporate compliance efforts to prevent bribery will be more effective than relying on the threat of blacklisting or other sanctions, after a bribe has been paid. The difficulty of relying on sanctions is that there must be credible proof that a bribe has been paid. Anyone familiar with corruption investigations knows that bribery is very difficult to prove, particularly in an international transaction. In many cases the end result is likely to be inconclusive: bribery allegations will not be proven, but suspicions will not be alleviated.

Both from the Bank's standpoint and from that of the contractors there are advantages to focusing on compliance efforts. It is much easier for the Bank to determine whether a contractor has made reasonable compliance efforts, than to determine whether a bribe has been paid. From the contractor's standpoint, it would be helpful if the existence of conscientious compliance efforts will be taken into account in making blacklisting decisions. Such an approach is taken by the U.S. sentencing guidelines, which consider compliance programs as a mitigating factor. It reflects the reality that even the best compliance programs cannot guarantee that no agent and no employee will ever pay a bribe.

E. Balanced Anti-Corruption Strategy

Requiring anti-bribery commitments from bidders on Bank-financed projects represents a key part of a balanced anti-corruption strategy. Where systematic corruption exists, it is impossible to allocate responsibility between extortion by government officials and bribery by companies; invariably both are present. The burden of the Bank's anti-corruption measures should not fall primarily on the procurement agencies of the Borrower. It is only fair for the Bank to require that corporations take responsibility for cleaning up their act.

Experience with corruption reform programs demonstrates that only comprehensive efforts, influencing the practices of all key participants, can succeed. Actions by the Bank will influence the procurement agencies of Borrower countries. It will also serve as a model for other multi-lateral and bilateral financing agencies. Assuring active cooperation from the corporate sector is an essential building block for success.

II. OBJECTIONS AND CONCERNS REGARDING ANTI-BRIBERY COMMITMENTS

A. Usefulness of Anti-Bribery Commitment Questioned
B. Anti-Bribery Pledge Harmful to Borrowers
C. Undesirable Precedent
D. Reactions of Business Community
E. Delays and Burdens for Procurement Process

This section will first consider the three objections raised by Bank specialists in the Appendix III distributed before the July 23 Board meeting. It will also deal with the reactions of the business community, and with the concern that a no-bribery commitment would unduly burden procurement procedures.

A. Usefulness of Anti-Bribery Commitment Questioned

Bank specialists argue that anti-bribery commitments are useless because bidders who are willing to break local laws prohibiting bribery will also break their anti-bribery pledges. It is also argued that the threat of blacklisting is "the essential weapon against corruption."

It is also simplistic to argue that companies that break local bribery laws would also ignore contractual commitments to the World Bank. The practical reality is that there are many countries where bribery is endemic and bribery laws are not enforced. Many respected companies from countries where foreign bribery is not a crime, and where foreign bribes are officially recognized as tax-deductible business expenses, have ignored foreign bribery laws. Such conduct can be deplored, but it has been a widespread international practice. Important reform initiatives are underway through organizations such as the International Chamber of Commerce in Paris, the World Economic Forum in Davos, the Federation of German Industry, as well as TI. The World Bank should encourage such efforts.

For the reasons already explained above, anti-bribery commitments signed by senior corporate officers, coupled with assurances regarding corporate compliance programs, can play a significant role in influencing corporate conduct. The existence of compliance programs provides a realistic basis for assuring the credibility of anti-bribery pledges.

The threat of blacklisting is useful. However, it cannot realistically be regarded as a sufficiently dependable barrier. As already discussed, the proof needed to provide a proper legal basis for blacklisting will be extremely difficult to obtain. Experience with anti-corruption programs has shown that there is no single "Essential weapon" that will prevent bribery, and that a comprehensive, multifaceted approach is required.

B. Anti-Bribery Pledge Harmful to Borrowers

It is argued that requiring anti-bribery pledges could result in the elimination of otherwise qualified bidders. This argument is based on experience with requirements for bid security. The bid-security analogy is readily distinguishable in several ways. For example, it involves action by third parties, i.e., bank guarantees. Anti-bribery commitments are made by the bidder, without any need for action by third parties. Moreover, the availability and cost of obtaining bid security will depend on the size and experience of the bidder. Such considerations do not apply to anti-bribery commitments.

There is no credible reason to believe that requiring a no-bribery commitment would deter ethical companies from bidding. In fact, the opposite is more likely: the absence of assurances that bribes will not be paid will deter ethical companies from bidding in highly problematic countries.

The argument that low bids would have to be rejected "merely because a no-bribery pledge happens to be missing, late or incorrectly worded," is also far fetched. Competent bidders can get their paperwork done. As will be discussed below, the implementation of no-bribery commitments need not be complicated.

C. Undesirable Precedent

Appendix III suggests that requiring a no-bribery commitment might lead to pledges relating to compliance with labor laws and environmental laws. The need for any bidding requirement must obviously be determined on its own merits. What distinguishes an anti-bribery commitment from the examples mentioned in Appendix III is that it deals with the basic integrity of the procurement process.

If there is any real indication of concern that a no-bribery requirement would raise anxieties that the Bank or Borrowers may impose other conditions, that concern could be dispelled by explaining the unique reasons for the no-bribery requirement: protecting the integrity of the procurement process.

D. Reactions of Business Community

The March 1996 Report of the International Chamber of Commerce states that "The ICC supports the growing practice of making government contracts dependent on undertakings to refrain from bribery, and recommends that such contracts should include appropriate provisions to ensure compliance with international, national or enterprise codes against extortion and bribery." Representatives from companies in a dozen countries were members of the ICC Committee which drafted the 1996 Report; none objected to the recommendation supporting no-bribery commitments.

As discussed above, leaders of the business community in Europe and elsewhere are searching for ways to eliminate bribery, provided this can be done in a coordinated and effective manner. They would welcome World Bank action resulting in wider use of anti-bribery commitments and corporate compliance programs.

There may be some concern, perhaps on the part of smaller companies, that compliance with a no-bribery requirement could be unduly burdensome. As discussed below, we believe that the no-bribery requirement can be implemented in a flexible way and would not require detailed reviews.

E. Delays and Burdens for Procurement Process

Concerns have been expressed that the administration of a no-bribery requirement could complicate and delay procurement procedures and create a major workload for the Bank and for the Borrower's procurement agencies. As discussed below, we believe that the no-bribery requirement can be implemented without causing delays or other serious burdens on the procurement process.

III. IMPLEMENTATION ISSUES

We recommend that corporate anti-bribery commitments be implemented in a simple, non-bureaucratic manner. Bidders should make two representations: first, not to pay bribes, directly or indirectly, on the Bank-financed project; and second, to adopt procedures to ensure compliance. These representations would become part of the bidding documentation.

The wording of the first representation can be expressed in a single sentence. If a slightly more detailed version is preferred, Section 2 of the new ICC Rules can serve as a guide. The representation relating to compliance procedures should be specified in general terms, enabling companies to utilize compliance programs tailored to their organization and management style. For example, a small company, operating out of a single location, would not need a communication process of the kind required by a large, decentralized company. What steps the company proposes to take to satisfy its compliance undertaking would be left to its discretion.

There should be no requirement for reviews of compliance programs by the Bank or by the Borrower's procurement agency, either at the bidding stage or at the contracting stage. Thus there would be no delay or other burden on the procurement process.

The issue of how a company implements its compliance representation would only be reviewed in the event credible allegations of bribery arise. At that time the company would have the burden of showing that reasonable steps were taken. The company's response should be considered as part of the process for handling corruption allegations (Appendix II) recently approved by the Board.

This approach has several major benefits. First, it provides flexibility to the company to tailor a program most appropriate to its needs. Second, it avoids burdening the procurement process with paperwork and delays. Third, it restricts the consideration of the adequacy of corporate compliance efforts to a limited number of cases where corruption allegations had arisen.

A representation regarding compliance programs would be no problem for companies which already have corporate policies against foreign bribery. Bidders that do not want to adopt such policies can adopt compliance procedures applicable to specific Bank-financed projects.

It is recognized that consideration by the Bank of the issues relating to anti-bribery commitments may take time. In the meantime, Borrowers should be able to require anti-bribery commitments from bidders when they wish to do so on their own initiative. There is no sound policy reason and no good arguments under the Procurement Guidelines why the Bank should prohibit the use of anti-bribery commitments when a Borrower considers such action desirable.

Fritz F. Heimann
Chairman, TI-USA
August 8, 1996

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