• Introduction
• What is meant by "corruption"
• What is corruption costing?
• A culture of corruption
• Is corruption necessarily alien to development?
• How much damage is caused to developing countries by corruption?
• Are corrupt payments damaging to those who make them?
• The international response
• Towards a solution
• The example of Ecuador
• Action by relevant companies
• Conclusions
• Annex: Elements of an Effective National Integrity System Strategy
• Background to national integrity system reform
• The preconditions for successful implementation
• Strategies to reduce corruption fall into four broad categories
  • 1. IMPROVING PUBLIC SECTOR INTEGRITY BY ENFORCING EXISITING LAWS AND THROUGH EXISTING STRUCTURES
  • 2. REFORMING THE PROCEDURAL BASIS OF GOVERNMENT TO INCREASE TRANSPARENCY AND DISCOURAGE CORRUPTION
  • 3. ADDRESSING GOVERNMENT ACTIVITIES WHICH ARE PARTICULARLY SUSCEPTIBLE TO CORRUPTION
  • 4. ADDRESSING PUBLIC ATTITUDES AND THE ROLE OF THE PRIVATE SECTOR
• PROSPECTS FOR SUCCESS
• Five final thoughts

Introduction

1 The problem of corruption is age-old. Indeed, the Judeo-Christian tradition begins with the temptation of an innocent by a serpent, with disastrous and enduring consequences for all of humankind. It is at least arguable that the present levels of corruption and its impact on national economic and social development in many developing countries is no less dramatic.

2 While a degree of corruption may be endemic in the human condition, its consequences can be such that in certain areas at least, sustained efforts are called for to contain it. This is particularly so where the private and the public sectors interface, with opportunities - temptations - on both sides for personal enrichment at public expense. It is this. diversion of public resources, and the resulting distortion of decision-making in the public sector, that is so damaging and which distinguishes this particular category of corruption from all others.

What is meant by "corruption"

3 It is important to distinguish between the relatively modest amounts which low-level civil servants exact from their citizenry in order to obtain access to public services. This is, of course, not to be condoned but may derive more from a need for grossly underpaid civil servants to feed their families than from any desire to become wealthy. Those involved are often not corrupt but simply caught in a poverty-trap and acting in the perceived best interests of those for whose welfare they are responsible. It is also distinguishable by at least three other salient factors: first, relatively small amounts of money are involved (much though they may mean to the poor who have to find them); secondly, the payments do not impact directly upon and so distort the quality of major decision-making in the public sector; third, they are not the result of the deliberate enticement of officials induced by representatives of what are often large and wealthy international companies.

4 It is altogether right that strenuous efforts be made to strengthen the public services of developing countries and to see that public servants are adequately remunerated in order to eliminate these practices. This is being addressed in a number of countries and is doubtless the subject of discussion in other papers before the Commission. The particular focus of this paper is not on these "grease" or facilitating payments, but on the grand corruption that can and does take place where the private and the public sectors interface.

What is corruption costing?

5 Placing figures on the amounts of money taken out of national economies by corrupt politicians and officials cannot be done with any reliability. After all, great lengths are gone to in order to conceal them. It is a realm in which rumours abound but where hard, tangible evidence is often lacking. Lifestyles may arouse suspicions, even certainty, but the evidence required to prove corruption in individual cases is lacking.

6 Just occasionally, however, a tip of this gigantic iceberg surfaces, at times in the most unexpected of ways. A recent example concerned Pertamina, an Indonesian state enterprise responsible for constructing a steel works at Cilegon, West Java in the 1970's. At no stage did the salary paid to the assistant who authorised payments under the various contracts exceed US$9,000. When he died in 1976 it was discovered that he held some 19 bank accounts in Singapore, with credits totalling nearly US$36 million. Three parties claimed the proceeds: the widow, sons by an earlier marriage, and Pertamina. For reasons not yet apparent, the proceedings - although commenced in 1972 - did not begin in earnest until 1992.

7 In the High Court of Singapore, the widow (who had actively participated in the corrupt activities) accepted that the accounts mostly represented bribes paid by German contractors³ and the only issue before the court was to whom the proceeds belonged. Not altogether surprisingly, the court held that they should go to Pertamina.⁴

8 The Pertamina case needs to be placed in perspective. The fortune was amassed in less than four years. It represented only one official's "cut": and of a relatively junior one at that. Moreover it was in respect of just one project. More than this, the overwhelming consensus of opinion in business circles is that the scale of corruption today is very much higher than it was in the mid- 1970's. It must be salutary for many companies, especially those with large public relations budgets, to think that activities in corrupting officials can come to light in such a way, and such a long time after the event.

9 Another recent case involves efforts by the government of Hong Kong to recover part of the proceeds of millions of dollars acquired by the head of its Independent Commission Against Corruption, which had been removed to New Zealand and transferred into the names of his wife and lawyer. ⁵

10 There are, too, examples similar corruption within developed countries, but these suggest that the amounts involved tend to be very much smaller. Yet there, too, there are instances which demonstrate the readiness of the private sector to subvert public servants in developed countries no less than in developing ones.⁶

11 In November 1993, in Britain a former procurement official at the Ministry of Defence - what was described as "Britain's biggest corruption case" - was convicted of receiving £1.5 million over four years from three European firms. The bribes were paid into "buffer" companies in Basle and Geneva.⁷

12 However corruption at the highest level is seldom documented. While many developing governments are headed by deeply-respected individuals of manifest integrity, some are clearly not. Three of those commonly regarded as being the more corrupt leaders in recent times have been Nicolae Ceaucescu (President of Rumania), Bokassa (head of the Central African Empire) and, most of all, Ferdinand Marcos (President of the Philippines). It was recently observed that, "during his rule, Marcos became one of the 10 wealthiest people in the world while the Philippines became one 10 poorest countries".⁸

13 In 1963 two writers observed that:

"How much is true and how much is false about corruption in high places nobody outside a small circle can ever know for certain. What is certain, and can be said without circumlocution, is that to wander through the corridors of power in these countries is to wander through a whispering-gallery of gossip, in which the fact of corruption at the highest levels in taken utterly for granted, and the only interest lies in capping the latest story with one that is even more startling."⁹

14 In the 30 years since the following passage was published, little seems to have changed at the top in some of the countries the writers had in mind, but in an age in which people generally are becoming more confident in speaking out, the "whispering-galleries" are increasingly to be found in marketplaces and beer-halls throughout most of the countries involved.

A culture of corruption

15 It is today commonplace among businessmen of the North to discuss amongst themselves corruption in their dealings with developing countries. Corruption has become a part of the commercial landscape and, as such, simply a fact of life. But it is true, too, that the scale of corruption has soared in recent years to the point where it is seriously distorting competition.

16 To justify their participation in such a process, it is often argued by businessmen from the North that gifts are simply part and parcel of the culture of developing countries.

17 Of course, in many cultures the offering of a gift is part and parcel of etiquette - be it an object of handicraft or an invitation to lunch. But the assumption such businessmen make so self-reassuringly flies in the face of the facts.

18 That the people of the South and the East are far from content to see their leaders plunder the country's wealth has been demonstrated time and again by popular revolutions in their own countries, fuelled in large part by the corrupt activities of their leaders. It is at odds, too, with the degree of secrecy and money-laundering that is involved -with payments being channelled through intermediaries, through bogus charities and huge "political" donations, and not infrequently involving vast sums of cash and the use of numbered Swiss bank accounts. Where handsome gifts are expected by a particular culture, then the people of the country concerned are accustomed to seeing these made in the full light of day.

19 What the naive may take for "culture" may turn out, on closer analysis, to be a fatalistic helplessness that the powerful are going to feather their own nests. It would also be a curious state of affairs if the laws of a country outlawed - and virtually all countries do outlaw the bribing of public officials - a practice that was supported publicly and reflected national cultural norms.

20 The real answer would seem to be that corruption is not a part of anyone's national culture - rather it is part of a culture that has developed in international business transactions as between businessmen and groups of politicians and senior officials, and it is a culture that is bitterly resented by the ordinary men and women who are the continuing victims of the process and who have little power to address it.

21 Periodically, too, various leaderships have responded to public alienation by announcing drives against corruption - and action, too, which is hardly compatible with being a widely-accepted way of life. But when mechanisms have been established to detect and punish corruption, to often to the extent that they have had any impact at all, this has been on the small and the weak: on junior functionaries and not their superiors, let alone on their political masters. The large fish are seldom landed, unless there has been a political fall from grace.¹⁰

22 Nepotism, too, is frequently cited as evidencing traditions on the part of developing societies that may be at odds with the concept of corruption in the North. From this the conclusion is drawn the somewhat broader conclusion that people in the South (in particular) do things "differently".

23 Certainly, in many societies the expectation that a person in a position of wealth or power has obligations to his or her extended family is a real one. But the thesis overlooks the fact that, in an era of growing accountability, the person exercising such patronage will come to be judged by the good sense with which this is done, if at all. It also ignores the absolute transparency of such patronage.

Is corruption necessarily alien to development?

24 It is also argued in some quarters that corruption is not necessarily alien to development: that corruption can serve, at least in part, a beneficial function in developing societies.

25 In what is widely regarded as the classic exposition of this thesis¹¹, the cases "for" and "against" corruption are advanced. "Beneficial" effects of corrupt acts are given, including:

(a) an "ability to offer massive bribes ... could be correlated with entrepreneurial efficiency" and so correct situations where government economists have not selected the proper indicators of efficiency;

(b) kickbacks "may result in increased allocations of resources away from consumption and into investment";

(c) "a transitional people may have more faith in a system they can influence in some degree through personal action than one they do not know how to manipulate by means of the institutional mechanisms provided";

(d) corruption "provides non-violent entry into government affairs and administration" when political channels are clogged, a form of access that "may be essential to the stability of the system";

(e) "corruption should dampen doctrinairism... It is the disheartened politician, cut off from power or perquisites who is more likely to repair to the standards of factional rigidity or ideological extremism"; and

(f) the opportunity for corruption "may actually serve to increase the quality of public servants" by providing the means for talented individuals to supplement meagre salaries.¹²

26 While conceding that it is impossible to determine firmly and precisely how the positive and negative effects of corruption combine, the author proffers the conclusion that "removal of all vestiges of corruption may not be a good thing".¹³

27 In the light of the evidence now available, and the perception that corruption has both broadened and escalated, it would be difficult to sustain any of these arguments today.

How much damage is caused to developing countries by corruption?

28 As the Pertamina case illustrates, the pickings for senior officials and, of course, for politicians can be immense. And if this type of evidence is hard to come by, nevertheless four observations can be made with confidence.

29 First as to the destination of the funds. It is sometimes argued that little real damage is done by corrupt payments as the additional costs find their way into the national economy and, sooner or later, trickle down to the people at large. This is demonstrably bogus. If the suggestion were correct, there would be no emphasis on numbered Swiss numbered bank accounts and no determination on the part of some Swiss banks to maintain this system.¹⁴ Moreover, as the Pertamina case shows, the money tends to be taken out of a country and left quietly to earn interest in a bank account.

30 Second, as to the amounts involved in illegal and corrupt commissions. The percentages required to secure corrupt contracts in various regions is well-known in commercial circles (though seldom if ever written about and certainly afforded scant publicity).¹⁵ For the newcomer to international business transactions, and to keep old hands fully up-to-date, this information - and precisely who might be susceptible to being bribed and the modalities for doing so - is carefully monitored by diplomatic missions from the North so as to ensure that their own companies are well briefed, both on how to land the business and how not to be found out.¹⁶ Because of this, rough estimates are possible.

31 As to grand totals, a recent report emanating from Switzerland claimed that in Swiss banks alone, amounts in excess of $20 billion are held for leaders from the African region alone.¹⁷ The Vice-President of Ecuador has estimated that as much as one-third of Third World debt may be due to corruption in one form or another. He has observed that even if only 10 to 15 per cent of his own country's official debt was incurred by wasteful investment or development plans and corrupt payments, the sum would coincide precisely with that part of its official debt which Ecuador is presently unable to service.¹⁸ A few years ago, commissions (a euphemism for bribes) were of the order of 2.5%: they are now estimated to be of the order of 10 to 15 %.¹⁹

32 Third, a far greater cost to developing countries lies not so much in the additional expenses caused by the bribery factor, but by the gross distortion of official decision-making. This defies estimate as, quite apart from the commissions, it is impossible to quantify the opportunity costs forgone and the losses incurred by wrong choices of project, by inferior and/or inappropriate plant being acquired and by vitally-needed projects being delayed simply because less necessary projects offer larger back-handers to politicians and senior officials.

33 Fourth, and wholly defying any efforts at quantification, are the costs - economic, social and political -of corrupt leaders holding grimly onto power, frequently abusing human rights and rigging election processes as they do so, because they simply could not afford the possibility of their personal finances being examined should they fall from office and be held to account. To some extent, at least, these have become captive of their own malfeasance.

34 As to the overall effect on decision-making, it has been observed that:

The scale of demand is generally .... linked inversely with genuine concern about the merits of the project or the quality of the purchase to be made. The man who is looking for thousands seems usually to be much more concerned that his decision (or recommendation) should be a sound one than the man who is looking for millions. This may be because the bigger the man the less vulnerable he feels to the consequences of a bad decision; or it may merely be that seven figure numbers distract the attention away from fundamentals in a way that four figure numbers do not. Whatever the reason, the major decisions tend to be less soundly based than the minor ones. ²⁰

Are corrupt payments damaging to those who make them?

35 It is widely accepted that those companies from the North who engage in the making of corrupt payments are not all criminally-minded: most, perhaps the great majority, believe that they can do a good job and they enter into relationships in the short term expectation of providing value for money and the longer term expectation of repeat business. Some are simply in it to take an individual country for as large a ride as possible, but in general these would seem to be the exception rather than the rule. Many of the companies involved genuinely feel that they are playing a socially useful role in helping to uplift the social and economic conditions of the people for whom the projects are designed.

36 Nor do the directors of these companies see themselves as engaging in criminal activity. Most would be shocked at the suggestion that, were the evidence of their payments available and the prosecuting authorities in the developing country empowered to act, they might be extradited to stand trial in a developing country for being party to the bribing of its public officials. They are encouraged, too, by the fact that for the most part in their own countries they are enabled to claim "commissions" as a legitimate business expense and so gain tax relief.²¹

37 These companies are used to operating in a competitive market-place, playing a commercial game according to sets of rule, written and unwritten. It is easy for them simply to regard the countries of the South and the East as having their own local variants. Indeed, however reluctant a particular company may be to indulge in corruption, in many developing countries it has become a question of pay up or get out. To their credit, a number of companies have taken the second option. Some do not have the luxury of choice.²²

38 It is an open question as to whether involvement in such activities has a corrosive effect on the internal business ethics of the companies involved. Certainly it must breed cynicism. Certainly it must inculcate and reward approaches to circumvent and frustrate legal systems. Assuredly, too, it must breed a culture of contempt for those who take the money and make the wrong decisions. It rewards poor performance (as the bribe is the key to landing the contract, not the quality of the package on offer). It also rewards those to find ways of circumventing internal company rules (which are to be found in most responsible multi-national companies and which invariably prohibit the offering of illegal inducements).

39 All of this points to at least a tendency towards a lowering of professional and ethical standards in ways that could well have damaging consequences in other fields of endeavour. What is startling in the extreme is that senior managers of multi-national companies which are highly active in regions where corruption is rife, are prepared to claim in both public and private, that their companies have never indulged in corruption and that it is simply a non-issue. It also flies in the face of repeated election campaigns in developing countries in which corruption, including corruption in international business transactions, has featured so prominently, and never more so than in the present decade.

40 In quite a different category are the companies - or, more precisely, their local commission agents - who quite blatantly set out to create and sustain a relationship of dependence between themselves and rising stars among the public administration.

41 An illustration is provided by the practice of many large companies (many of them for altruistic reasons) to provide scholarships for study abroad, with - of course - no strings attached. It is only once the children are settled into school or university that an unscrupulous local representative, with deep sorrow, may disclose that his head office has instructed him that unless a particular deal goes through it will be necessary for the company to curtail its scholarship programme - and the official's children will have to come home. Such an official is then placed in an impossible position. In this way, and in others, some companies are actively subverting key public servants. Through the application of unfair pressure, they are placing honest individuals in positions where they have little realistic alternative but to play along with their bidding. As such, their activities in developing countries are probably no more than an extension of sharp practice (if not downright illegality) in their activities elsewhere.

42 In an age of accountability, those who offer bribes no less than those who take them should be held to account for their actions. To many, and especially to those in countries who are left with inflated indebtedness exacerbated by corruption, it is beyond argument that the giver of a bribe is at least as corrupt as those who take them - indeed, arguably even more so. It is trite to observe that if there were no companies prepared to pay bribes on such scale in their eagerness to secure personal advantage, there would be no-one receiving them.

The international response

43 The international community has endeavoured to respond to the challenge. In recognition of both the extent and the consequences of corruption, efforts have been made within the United Nations and, in the private sector, by the International Chamber of Commerce, to produce instruments which would have the effect of reducing its levels.²³ These efforts have succeeded in defining the international norms of good business practice, but they have been frustrated at the level of implementation. The business communities in the North and various official aid agencies have harboured suspicions that in some way implementation of these norms in an effective fashion would work to their detriment. Recent efforts at the OECD to produce a directive has seen a successive watering down of the text and its legal status. It is now likely to emerge as little more than an expression of good intent.²⁴ If some of those who claim to be at the forefront of moves to extend the honesty, accountability and openness of government can be so obstructive to the making of progress at the international level, the outlook would seem to be grim.

44 This international approach is presently being carried forward by an Australian initiative. With strong support from the Group of 77, and despite opposition from major economic powers, a resolution was passed at the UN Commission on TNCs to keep the issue of Global Business Guidelines on the Commission's agenda for 1994. No firm commitment to further work was made, and unless considerable international support can be generated ahead of the Commission's next meeting (May, 1994), the initiative is likely to collapse.

45 Even if the global approach has its shortcomings in a practical sense (to be fully effective it would need to be bolstered by a broad raft of domestic and international measures), its importance as a vehicle for awareness-building and as a catalyst for raising international business ethics is manifest. Its loss would be deeply disappointing to those who are working for reform.

46 In an effort both to break the deadlock and to carry forward the fruits of work at the UN and the ICC, and after a process of wide consultation, Transparency International has effectively repackaged the international texts into Standards of Conduct.²⁵ Like those that have preceded it, even this document has provoked deep suspicion in the North, although it is beginning to attract the interest and support of some business leaders.²⁶

47 On a wholly practical front the concept of international competitive bidding has been evolved over the years. This is sometimes advanced as providing adequate protection against malpractice. However experience has shown that this is a process that is readily subverted by the laundering of short-fists, and by post-bidding variations in specifications and the like. In similar ways, pre-shipment inspection procedures can subverted or nullified. In particular, the latter does not strike at the areas where the most extreme forms of corruption take place.²⁷

48 Despite an increasing willingness to engage in platitudes, many countries, especially (though not exclusively) in the North, remain reluctant to provide basic international mutual assistance in the tracing and seizure of the proceeds of corruption. Although the position in Switzerland, for long a notorious depository for ill-gotten gains, has improved somewhat in recent years, in the recent case of the British Ministry of Defence official, investigating officers were reported as saying: "We believe he still has quite a bit of money stashed away in Switzerland but it has been very difficult to find out because of the Swiss refusal to help our enquiries".²⁸

Towards a solution

49 To be effective, any approach to the problem of corruption has to take account of realities as outlined above. These include:

(a) the fact that previous aspirations for the immediate introduction of a universal set of rules, applicable and enforceable globally is, at least for the foreseeable future, beyond reach therefore, pending any such agreement and even if one is reached, the approach must be an incremental one;

(b) even if achievable, an international convention would take years to draft, further years to come into force and longer still to become fully effective - and efforts to date at the OECD and elsewhere give little cause for optimism;

(c) at least in part because of an absence of will, the task of providing an international framework is presently beyond the reach of official international institutions - governments alone have the capacity to act;

(d) the problem can begin to be addressed on a national level by governments in both the North, the South and the East, but many developing governments will need assistance for this to be effective;

(e) because of the competitiveness of the business world, individual companies cannot be expected to boycott in sufficiently large numbers the countries where corruption is a serious problem - the rules must be changed for everyone, and at the same time; and

(f) the need for more companies involved in international business to recognise that the containment of corruption is in their own best interests.

50 Taking full account of these factors, it is clear that effective efforts can and should be made to combat corruption, starting at the national level. There is neither need nor any point for any government who wishes to address the issue to wait for others. Each has to do it for itself The key lies in the development of a national strategy which, in turn, can lead to enhanced regional and international cooperation.

The example of Ecuador

51 An example of what can be achieved in a practical and concrete fashion is the strategy presently being developed jointly by the Government of Ecuador and Transparency International. This involves both the formation within Ecuador of a national, people-based coalition against corruption (with appropriate participation by people in government, but not control) and the evolution, with the active participation of this coalition, of a system which will culminate in Ecuador emerging as an "island of integrity". This will undoubtedly be for the benefit of all the people of Ecuador, but there is another, longer term hope, too: namely that similar actions in other countries will see the evolution of a number of such "islands" and their coalescing into a global norm²⁹. There will be a continuing role for the national coalition in helping to monitor the functioning of Ecuador's new integrity system and ensuring that it is kept fine-tuned to meet changing circumstances and the inevitable challenges that will come from the most corrupt sections of the commercial community.

52 By the end of the process every aspect of the country's integrity system will have been examined, both from the point of view of individual effectiveness and where it fits in the system overall. Although each is approached from the point of view of monitoring international business transactions involving the public sector, each will have an overspill into other areas of potential corruption and so impact even more widely on its incidence. The areas include:

(a) competitive tendering procedures in public sector
(b) relevant audit procedures
(c) local accounting and legal practices
(d) conflict of interest provisions
(e) disclosures of assets by politicians and decision-makers
(f) protection for "whistle-blowers"
(g) political donations
(h) relevant complaints-handling procedures
(i) special criminal investigatory and prosecution processes
(j) use made of international inspection mechanisms
(k) procedures for making information publicly-available
(l) parliamentary procedures for taking information into public domain and other relevant practices to accountability
(m) adequacy of training programmes for public officials
(n) mechanisms for consultation between public and private sectors
(o) mechanisms for tapping international assistance in investigations, and
(p) procedures adopted in private sector to combat corruption

53 This is a demanding agenda, but the strategy is an essentially practical one. It began with a visit to Ecuador of two senior figures from within the TI movement, funded by the Inter-American Development Bank. Intensive meetings took place, in and out of government, and involving as well the private sector, the churches, parastatals and members of the international community. A number of problems were identified (including, curiously enough, the fact that the country had such a plethora of overly sophisticated safeguards that its integrity system was, quite simply, unable to function).

54 The first round of consultations led to the emergence of a national coalition, with strong expressions of support from all sections of the community. It also resulted in a formal government announcement of a range of measures that were being adopted to address the problems identified. A national coordinator was appointed, and meetings and workshops are to be held with those involved with transparency and accountability to begin to define a detailed national strategy, to build support for it and to design an action plan for its implementation. Special efforts are being made to ensure the transparency of the whole operation, and maximum participation in it by all the citizenry, to whom the whole process belongs.

55 Most significantly, at the conclusion of the first round of consultations the government announced that in future, all those biding for major public contracts would have to commit themselves in writing to avoid any form of corrupt payments and to notify the government of all commissions paid in connection with these contracts.

56 Ecuador has thus made a start, and present indications are that the necessary levels of public support and enthusiasm are there to sustain the carrying through of a successful programme. In so doing, the country has also become the hub of efforts to confront corruption in the Latin American region, a region which has been bedevilled by corruption in the past.

Action by governments in the North

57 There is at the same time a need for governments of countries in the North to reflect on a number of matters, including the coherence of their aid programmes: do they exist to advance the social and economic conditions under which most of the world's inhabitants live? Or do they exist solely to sustain employment in the donor country ?³⁰

58 In particular, the question of the tax deductibility of illicit inducements needs to be scrutinized. As a general rule, illegal payments made within a country are generally not allowed as a legitimate business expense. Why, then, should different criteria apply when the people being bribed are civil servants and politicians in other countries where such activities are illegal? This is especially pertinent in the case of governments who are traditional aid donors: there is a clear conflict between development projects designed to increase transparency, accountability and orderly development on the one hand, and a tax policy which has the effect of encouraging businesses to subvert the public services and political institutions of those same countries. In some cases this may require a regional approach (e.g. within the European Union), but it is a matter that should be placed high on relevant agenda.

59 The question of mutual assistance in tracing and seizing illicit funds also needs consideration. In part, this is already on the agenda by reason of the OECD's Financial Action Task Force recommendations aimed at money-laundering and drug trafficking, but the wider implications for developing countries, too, need to be taken into account. It is depressing, if not wholly unpredictable, for attempts by the Swiss government to combat money-laundering to have run into such stiff resistance from its banking community.³¹

Action by relevant companies

60 Leaders in the international business community must exercise their leadership role in mobilising companies to support the efforts of individual countries who wish to clean up their market-place. While it is arguably legitimate to invoke the concept of the "level playing-field" - and to claim that when trading in Rome one must do as the Romans do³² - it is clearly illegitimate for such businesses actively subvert, rather than actively support, these efforts. The process of squeezing corruption out of a system in which it has become endemic must inevitably be a gradual one, but it is a process worthy of support - particularly as international business is one of the gainers, with those offering value for money gaining the business rather than those who offer the greatest bribes.

61 Not only should encouragement and advice to these countries be forthcoming, but companies should re-examine their own internal rules of conduct to ensure that these are adequate, that they are properly understood by all senior staff and all sales staff, and that they are properly implemented. In particular, the question of the amounts paid to commission agents must be in line with the services they provide, not a euphemism for illicit inducements.

Conclusions

62 The present levels of corruption in international business transactions is crippling development in many of the world's most needy countries. While it is present in all countries, developed countries are, by and large, cushioned from its impact by their well-established institutions and their wealth. The consequences are most stark - and most damaging - in countries who are both poor and institutionally weak. There is thus a special duty, on developed countries no less than on developing, to confront this massive diversion of wealth away from the poor and into the hands of the elite and of bankers in the North.

63 International efforts to contain the mance have lacked conviction. Cancer-like, corruption continues to seep through public infrastructure, distorting decision-making, and taking hold to an ever-increasing extent. While there is a need to maximise transparency and mutual assistance as between countries both in the policing of international commerce and in the tracing and seizing of the fruits of corruption, and to develop ethical business standards, the primary area for attention lies within individual countries.

64 An individual country, adopting a holistic approach³³, backed by public opinion and given any necessary technical assistance, has it within its capacity to develop and implement a cost-effective national strategy, consistent with its cultural norms and values, which can markedly reduce the opportunities - and so the level of - corruption in dealings between the private and the public sector, and most significantly in the area of international business transactions.

ANNEX: ELEMENTS OF AN EFFECTIVE NATIONAL INTEGRITY SYSTEM STRATEGY

Background to national integrity system reform

5 In the reform of a national integrity system it is important to appreciate from the outset that if political will is lacking both for change and for rigorous implementation at all levels of government no legislative changes can ever be effective in containing corruption.

6 It is also important to bear in mind three further truisms --

• The mere passage of legislation is unlikely to be effective unless it is accompanied at the same time by a raft of measures designed to ensure implementation, which maximise accountability and transparency and which also minimise areas in which corruption is most Iikely to flourish.

• The overall objective of the exercise must be to convert corruption from being perceived as a "low risk, high profit" activity into one which is generally regarded as "high risk and low profit".^A3

• Reform of anti-corruption measures, as in all other areas, should be undertaken in ways that conform with international human rights standards, particularly as regards due process and fair trials.

7 It is a sobering reflection on the utility of the law that most countries in the world provide criminal sanctions against those involved in corruption, yet the laws are widely flouted and sanctions are infrequently imposed -- and when they are, they tend to be directed against "small fish" rather than "big fish". In these respects, Russia appears to be no exception. Effective reform will therefore depend on an ability and a political willingness to provide a legal framework which can be, and will be, implemented effectively and for a range of administrative measures to be taken in support of the overall process.

8 Given that corruption is a universal phenomenon, and that there will always be individuals and groups within a society who will attempt to enrich themselves unjustly, how should corruption be attacked?

9 Solutions are difficult to design because, unlike in many other types of crime, there are benefits flowing to those on both sides of the equation - giving both the payer of a bribe and its receiver an interest in secrecy, and the victims do not know what has happened. Nevertheless, experience shows that corruption can be curbed by reducing the opportunities in which it can occur and by reducing the benefits to both recipients and bribe payers (i.e. by rendering both more vulnerable to detection and sanction).

10 On the part of the government there needs to be a well-coordinated, well-understood overall strategy that -

(a) reduces the opportunities for corruption;

(b) increases the likelihood of corruption being detected; and

(c) reduces the likelihood of an individual being able to profit from his or her corrupt acts (on the part of both the bribe giver and the bribe receiver).

11 As noted above, the aim of an effective anti-corruption policy is simple: corruption should be seen by the community at large and understood by it to be a "high risk, low return" activity.

12 However, it is also important that the measures taken are both cost-effective and are not damaging to public service morale and efficiency.

13 In pursuit of this aim no one single line of attack is likely to be effective. Rather an holistic approach is required: one with a clearly-thought out internal logic. This involves -

• a clear commitment on the part of political leaders to the combating of corruption, no matter by whom;

• the adoption of comprehensive anti-corruption legislation implemented by a strong and an independent agency of manifest integrity;

• identification of the areas of government activity most prone to corruption and a review of relevant procedures;

• as soon as possible, ensuring that salaries of civil servants and political leaders adequately reflect the responsibilities of their posts and as are as comparable as conditions allow with corresponding levels in the private sector (this both to reduce the "need" for corruption and also to ensure that the best people are available to serve the state);

• ensuring that legal procedures and remedies are such as to provide an effective deterrence (e.g. by rendering contracts induced by corruption both void and unenforceable, export guarantee organisations would be compelled, for reasons of self-interest, to monitor much more closely the nature of the international transactions they are underwriting; by rendering void all licences and permits obtained through corruption, a powerful incentive is created for the general public to protect itself through reporting corrupt demands).^A4

14 Singapore was, on independence, riddled with corruption to the extent that its very prospects for survival as a nation were at risk. Yet the problem was tackled comprehensively and determinedly by a government whose ethics were established as being transparent and above reproach. The lessons of Singapore (in common with experience elsewhere, such as in Hong Kong) show very clearly what can be achieved, given the requisite political will, the provision of appropriate infrastructure. and the determined implementation of an anti-corruption policy. It also shows that this clean-up can be launched ahead of the adoption of remuneration policies that effectively remove key officials from the likelihood of temptation.^A5

15 There is also a clear and constructive role for the civil sector to play in developing and strengthening ethics and practices in the public sector, particularly in the context of business transactions between the public and the private sectors. The place for a free press (both to inform of measures taken to contain corruption as well as to expose it, and generally to educate the public of its evils) and for open political debate and accountability is also important.

The preconditions for successful implementation

16 To achieve an effective change in the ethical environment, certain preconditions have been identified -

• Do not promise what cannot be delivered (promises of good and honest government that are broken simply reinforce the public's world-wide cynical view about politics and the motivations of politicians);

• What is promised must apply to the lawmaker as well as to the lawbreaker (it must be seen as applying to the grand corruption of senior politicians and officials as well as to the routine petty corruption of local officials);

• Whatever is implemented must be "owned" by someone - someone has to implement it, to police it and to keep it up to date;

• Reforms must be a core political and administrative goal that is not only an integral management function but one which is realisable, with clear long-term objectives, regular reports, evaluation and milestones (progress confirms promise);

• Reforms must focus on strategic areas (such as the Police or Treasury) where wider gains are achievable in a visible way and in a relatively short time frame (the public's respect for the rule of law and confidence in the state's machinery may be enhanced if the police - directly responsible for enforcing the law on a daily basis and with whom the public most frequently come into contact - are seen as honest: and there is added benefit to the state for there to be honest and regular collection of taxes as well as effective scrutiny of public expenditure);

• Reforms should, at a low level, focus on activities where there is too much power or too much decision-making authority resting with one individual (decisions must be shared, be transparent and be reported to or available to an independent source of confirmation and verification);

• Reforms must be horizontally and vertically integrated (the one to share information and best practice, and the other to demonstrate commitment);

• Special emphasis must be paid to conflict of interests (where the potential for corruption exists); and

• Recruitment, training and reward for good behaviour are as important as the threat of investigations and possible sanctions.^A6

Strategies to reduce corruption fall into four broad categories

17 The first takes the underlying structure of government programmes as given. The focus is then on improving government integrity, enforcing the existing law, designing effective penalties for bribers and recipients, and developing international support mechanisms.

18 The second group reforms the procedural basis of government to increase transparency and discourage corruption. This involves reform of bureaucratic procedures and public procurement practices, reform of political campaign financing and electoral laws, and the creation of an independent judiciary.

19 The third category addresses government programmes which are susceptible to giving rise to corruption because they may be poorly designed, or even unnecessary. Thus regulatory statutes might be reviewed to determine their necessity and whether they can be streamlined. Public procurement specifications might be redesigned to emphasize standardized, off-the-shelf products where manipulation of tailor-made specifications is reduced. Government benefits allocated at the discretion of officials might instead, be allocated in accordance with clear and readily verifiable criteria as to need. The scope for restructuring will, of course, vary from programme to programme. Many types of permits and licences may be eliminated altogether; others may be allocated to the highest bidder; still others on the basis of clearly defined public interest criteria.

20 The fourth, and final, group concerns public attitudes and the role of the private sector in a self-regulatory capacity. Public attitudes (and attitudes within the corporate sector) can be changed so that corruption is not viewed with cynicism, resignation and acceptance. This can only be achieved if it goes hand-in-hand with credible efforts to reform the public sphere. If people have grounds for cynicism about their governments, attitudes will always be difficult to change.

1. IMPROVING PUBLIC SECTOR INTEGRITY BY ENFORCING EXISITING LAWS AND THROUGH EXISTING STRUCTURES

Redesign of programmes etc to reduce incidence of corrupt incentives

21 In Singapore, a comprehensive approach was adopted in July 1973, with the issuing by the Ministry of Finance of a circular instructing them to review and improve the measures taken to prevent corruption among their officers by minimizing the opportunities for corrupt practices.

22 Among other thing, the permanent secretaries (heads of ministries) were asked "to make their officers aware for the PAP government's serious efforts to eradicate corruption and to advise them to report any cases of corruption. They were also requested to take appropriate anti-corruption measures in those departments particularly exposed to corruption. Such measures included the following:

• improving work methods and procedures to reduce delay;

• increasing the effectiveness of supervision to enable superior officers to check and control the work of their staff;

• rotating officers to ensure that no officer or group of officers remain too long at a single operational unit;

• carrying out surprise checks on the work of their officers;

• making the necessary security arrangements to prevent unauthorized persons from having access to a department's premises; and

• reviewing the anti-corruption measures taken once in three to five years with the aim of introducing further improvements.^A7

Review of existing agencies

23 A review should be conducted of the adequacy of existing investigatory and prosecutorial agencies to ensure that their powers, procedures and resources are adequate for their task and to determine whether existing prescribed penalties for existing offences are such as to deter would-be corrupters and corruptees.

Review of mechanisms for appeals, judicial review of administrative action

24 A review should also be undertaken of the adequacy of existing mechanisms for the independent judicial review of administrative decisions, to ensure their lawfulness and that they are made in good faith and in accordance with established procedures.

Review of penalties, consequences of corruption etc

25 A series of reviews should be undertaken to ensure that legal procedures and remedies are such as to provide an effective deterrence. This might include:

(i) rendering all contracts (and sub-contracts etc) induced by corruption both void and unenforceable [In the case of foreign transactions, this would have the effect of compelling export guarantee organisations, for reasons of self-interest, to monitor much more closely the nature of the international transactions they are underwriting];

(ii) by rendering void all licences and permits obtained through corruption [placing at continuing risk anyone who obtains a licence etc in a corrupt manner and so increasing the deterrent factor];

(iii) providing for the automatic disqualification for the tendering for public contracts etc by any entity (or associated entity or company with substantially the same shareholding and/or directors) which has been convicted for corrupt practices in the pursuit of publicly-funded contracts.

Adequate remuneration for public officials

26 There is little doubt that inadequate remuneration for public officials is a contributing cause to corruption, at least at the petty level if not throughout a system. Of course, many developing countries are not in a position to pay high salaries to public officials simply because of their state of under-development. They are caught in a vicious, self-perpetuating spiral. Combating corruption is one way of addressing low pay, by creating the additional wealth required to pay higher salaries.

27 For this reason the adequacy of salaries in the public sector should be kept constantly under review. In Singapore, a country conspicuously successful in creating a successful economy with little more than its human resources and starting from a low base and with high, endemic corruption, the salaries now paid are among the highest in the world. This was not always so, but as the economy has become able to pay civil servants well, the civil servants have prospered. But the anticorruption strategy started before the country was in a position to pay well, and was reinforced through the salary structure as and when this was possible.^A8

Deterrence

28 The best form of deterrence in corruption, as in any other area of criminal activity, is a high expectation of detection and successful prosecution followed by the imposition of a punitive sanction. To achieve this it is essential to have efficient investigatory agencies whose laws and procedures - including prescribed penalties for breaches - are such as to deter not only officials but also companies, top executives and chairmen from corrupt practices.

2. REFORMING THE PROCEDURAL BASIS OF GOVERNMENT TO INCREASE TRANSPARENCY AND DISCOURAGE CORRUPTION

29 To be effective, the strands of a programme to reform the procedural basis of government to increase transparency and discourage corruption should include:

• an open, genuinely competitive and transparent system of public procurement;^A9

• a radical simplification of regulations, not solely in order to diminish the need to resort to bribery but to ease the transaction of business of all sorts and of people's access to public services generally;

• as noted above, an adequate salary structure which will eliminate the positive need for civil servants to supplement their incomes through bribery, though this objective can be met by the fruits of a successful war on corruption and so need not necessarily be a priority aspect of it;^A10

• strict limitation and regular supervision of the discretionary authority of minor officials in particular, but from which no level is exempted;

• frequent transfers of officials to prevent long-term relationships with suppliers/customers being developed;

• effective and well-understood laws and procedures preventing improper association between officials and suppliers;^A11

• guidelines for decision-making that are published and are publicly available;^A12

• appropriate review mechanisms to enable speedy and effective reviews of decisions which an aggrieved party believes have been taken contrary to published guidelines;

• efficient investigatory agencies whose laws and procedures - including prescribed penalties for breaches - are such as to deter not only officials but also companies, top executives and chairmen from corrupt practices;^A13 and

• providing appropriate channels for subordinate officials to use when reporting acts of alleged corruption by their superiors.

"Subsidiarity" as a route to combat corruption

30 Corruption generally arises from the monopoly of power enjoyed by public officials (including, of course, politicians). It is a universal phenomenon, found in all states, whether rich or poor, and whatever their stage of development. It is, however, particularly prevalent in two different types of states.

31 On the one hand, it can be a way round the rigidities of an overly centralized and planned society. Individuals at the bottlenecks enjoy positions of gatekeepers, and can demand payoffs to assure the provision of key services or access to scarce commodities. On the other hand, corruption can also be a way to overcome the uncertainties of a weak state and a poorly-developed open economy. In this second case, the incentives to make and receive payoffs can arise from too few rules, rather than too many,

32 If the state has not established clear, well-enforced guidelines for economic activity and the exercise of administrative discretion, private individuals may seek to obtain some form of security by paying officials to give them the needed permits or protection (as, e.g. in the case of law enforcers and judges). It is only one step further for these same officials to prevent the entry of competitors for government business, or to divert public funds for private purposes.

33 Efforts to reduce corruption by decentralizing decision-making can, however, backfire badly. Unless this is accompanied by a strong team overseeing and auditing public procurement, corruption can -- and most probably will -- flourish. An example is in France, where many of the scandals presently concerning that country have their genesis in contracts being let at the local level which, in prior years would have been let centrally. The practice then developed under which more-or-less standard percentages were demanded by local politicians and/or their parties in exchange for the award of contracts. Once entrenched, such a practice is difficult to root out, among other reasons because too many of those influential within the political process have a stake in maintaining the status quo.

34 Although "Subsidiarity" has its enthusiasts (Subsidiarity being decision-making at the lowest possible level), it is fair to say that there are others who maintain just as firmly that a properly overseen centralized system can function less corruptly than one which is widely dispersed. From the point of view of controlling corruption, the arguments for and against Subsidiarity cut both ways. The French experience has been that too much Subsidiarity with too little control has degenerated into a situation of endemic corruption, with political parties governing the various townhalls receiving virtually automatic percentage payoffs for public contracts: a situation that was not known to exist prior to this exercise in delegation being undertaken.^A14

35 Whatever the position taken on Subsidiarity, it is clear that Subsidiarity will not, of itself, provide an antidote to corruption. In tandem with decisions on Subsidiarity attention must be paid to strategies to police the exercise of such decision-making and to ensure that those to whom decision-making power is being extended understand fully both their new power and their accountability for its exercise.

3. ADDRESSING GOVERNMENT ACTIVITIES WHICH ARE PARTICULARLY SUSCEPTIBLE TO CORRUPTION

36 Corruption is most widely found in such areas of government as:

• public procurement

• customs

• taxation

• police (especially traffic police)

• immigration

• licences and permits (including drivers' licences)

• provision of services where there is a state-owned monopoly

• construction permits and land zoning, and

• government appointments.

Transparency in public procurement

37 The area of public procurement is one which is notorious for the levels of corruption that have been achieved by corrupt politicians and officials. Throughout the world, from France to Zaire, procedures have been allowed to develop that foster bribery and corruption in the decision-making processes. The World Bank and regional development banks, and a number of leading aid agencies, have developed procurement rules, but for a variety of reasons these do not always achieve what is required.^A15

38 Nonetheless there are approaches which hold the promise of reducing levels of corruption in a traditionally very difficult area. One is the "no-bribery pledge" presently being introduced in Ecuador for major public procurement exercises, in which tendering Chief Executive Officers are made personally to warrant that no bribery has taken place and personally to certify returns of all commissions and other payments made to or for the benefit of third parties in connection with a particular transaction.^A16 Another is the introduction of a specific mechanism for the monitoring of the award and execution of public contracts such as that now instituted in Jamaica and, more recently, Belize.

39 Some government programmes are particularly susceptible to -corruption because they may be poorly designed, or even unnecessary. Regulatory laws should be reviewed to determine their necessity, and to see whether they can be streamlined, if not actually dispensed with entirely.^A17

40 In addition, public procurement specifications might be redesigned to emphasize standardized, off-the-shelf products where manipulation of tailor-made specifications is reduced. Government benefits allocated at the discretion of officials might instead, be allocated in accordance with clear and readily verifiable criteria as to need.

41 The scope for restructuring will, of course, vary from programme to programme. Many types of permits and licences may be eliminated altogether; others may be allocated to the highest bidder; still others on the basis of clearly defined public interest criteria.

Civil service ethics

42 Corruption is often fed by a lack of a public service work ethic and an absence of concepts of public accountability and responsibility.^A18 The establishment and maintenance of integrity in public life and public service stems from a number of sources:

• legislation, regulations and codes of conduct;

• a society whose religious, political and social values expect honesty from politicians and officials;

• professionalism among officials;

• a sense of elitism among, senior civil servants;

• a political leadership which takes both public and private morality seriously.

43 Together, these establish and foster a tradition of ethical public life - an ethical environment, a climate or an atmosphere in which most politicians and officials are assumed to be honest, both by each other and by those with whom they have dealings. Within such an environment it is also assumed that the laws and means of detection and investigation are sufficient to catch those few who break the rules, accept bribes and become involved in fraud.^A19

44 It is, however, important to bear in mind several crucial points, which can be overlooked:

• The ethical environment must be owned, policed, adapted and updated across the public sector;

• Its purpose and intentions must be equal across the public sector and must be applied equally;

• The ethical environment is akin to an ecosystem in that it can be mutually self-sustaining and integrated, but it may have potential weaknesses (such as a decline in political participation) or parts over which it has no control (such as an effective investigative media) rendering it important that the environment be reviewed, with new means of accountability being introduced or existing means upgraded and reinforced to counter weaknesses or uncontrolled components;

• The ethical environment requires political commitment and leadership to inspire confidence and trust but it should not always be the politicians who have the responsibility to own and police it;

• The ethical environment is a macro-approach from which must be developed those micro-level changes - the details of reform - to deal with the consequences of the failure of the ethical environment within organisations and departments which will result in --

- weak guidance on standards of conduct or poor compliance with procedure,
- management indifference or ignorance,
- aggregated decision-making powers,
- inadequate financial and management information systems,
- lax working practices,
- poor staff relations,
- sub organizational autonomy,
- poor recruitment and training policies;
- and, crucially, little or no attempt to control, monitor or police the increasing contact with private sector values, practices, personnel and procedures.^A20

Post public service employment

45 An important area in which the state may need protection is that of the post public service employment of senior officials and decision-makers. Not only may these possess valuable confidential information when they leave the public service (such as knowledge of other tenders and of plans in the pipeline but not yet in the public domain) but they may also have a network of personal contacts within their areas of last activity. More important still, the prospect of well-paid employment in the private sector on retirement can, of itself, be used as a highly-corrupting influence on decisions being taken whilst still in office. There can be corruption without the payment of money. This aspect can be dealt with in legislation covering public sector ethics.

4. ADDRESSING PUBLIC ATTITUDES AND THE ROLE OF THE PRIVATE SECTOR

46 The following areas in the private sector may require examination:

• self-regulating structures need to be fostered under which compliance with best practice is internally monitored, assessed and enforced, so rendering it easier for individuals within corporate structures to resist temptations to indulge in corrupt payments

• more independent non-executive directors should be required by law for all publicly-owned companies who are truly independent and given explicit remits to monitor internal governance and compliance^A21

• a refusal to countenance "off the books" or secret accounts

• a determination to cooperate with host governments in the observance of the letter and spirit of their laws and procedures

• policies that adequately remunerate such middlemen as commission agents in line with the provision of legitimate services and not as a "no questions asked" provision of slush funds for bribery purposes^A22

• professional bodies (accountants, lawyers, auditors etc) need to foster an understanding amongst their members that active participation in the making of illicit payments or of concealing the fact that they have been made can constitute of itself criminal conduct and, in any event, should be declared to be professional misconduct

A free press as watchdog

47 The press has a particularly important role in countering corruption. Not only is there the traditional role of investigative journalism, but important, too, is the part the press can play in communicating to the public at large all aspects of the campaign against corruption and, most importantly, the rights of the citizen (which hitherto may have not been fully appreciated but kept obscure in order to create areas in which petty corruption can take place. Successful moves against corruption need widespread publicity to generate public confidence in the integrity of the process, as well as to deter those who might not appreciate its meaningful purpose.

48 The press must be free to discharge its role as public watchdog in a considered and responsible manner. To this end, laws regarding defamation and libel ought not to be unreasonably harsh, awards of damages ought not to be prohibitive, and the courts should be able to allow adequate space for newspapers to defend their reporting as being in the public interest. (The public interest in this context means the order publique, and not simply things in which the public may be interested!) Appropriate anonymity of the sources of information ought to be accorded, so that newspapers ought not to be forced to disclose the sources of their information (while, of course, still having to defend the accuracy of it where this is called in to question). Newspapers ought not to be subjected to registration requirements (other than perhaps particulars of their operations and addresses to enable them to be located by potential litigants etc), nor should their access to paper, other materials and printing presses be subject to regulation or control.

Public participation in the process

49 It goes without saying that it is essential for the public at large to understand fully the rationale behind any major public sector pay rises, and for them to appreciate that together with the "carrot" of higher pay comes the "stick" of accountability and the likelihood of corrupt officials being weeded out.

50 However, the role of the general public, through institutions within civil society, is a much broader one than this. A successful assault on corruption calls for positive public support: for public belief and confidence in what is going on, and public participation. Most importantly, it calls for public participation through the laying of complaints etc to be reinforced through mechanisms which give appropriate protection to so-called "whistle-blowers": those who "blow the whistle" on corrupt practices (usually by superiors) and thereby expose themselves and their careers to danger of retribution.^A23 It is significant, too, that the attempt in July, 1994 by the Italian Prime Minister to reform procedures for the investigation of corruption cases collapsed in the face of public hostility, despite a need for these to be reviewed in the light of international-recognised standards of procedural fairness, largely because of a lack of public consultation and a feeling on the part of the public that their if ownership" of the process was being threatened.^A24

51 At the same time the positive aspects of ethical behaviour can be stressed: people should be encouraged to be honest not for reasons of fear, but for reasons of personal integrity and for the enhanced self-image this engenders. Those who may have become rich through corruption can be rendered figures of contempt and of pity, and not seen as role models.

52 All organs of government can play a role, in concert with relevant sections of civil society - private sector business, professional organisations, teaching institutions, and spiritual leaders -- in building a more ethical society.

53 Whether in government or in business there can be no substitute for self-regulation. If the incidence of corruption is to be significantly lowered, individuals must be encouraged to have in markedly different ways. In this equation we are talking about changing the patterns of behaviour of certain people, and of reinforcing that of others. Whether for reasons of personal ethics or of deterrence induced by the consequences of detection, individuals must be encouraged to resist either offering or receiving illicit payments. As Jack Mahoney observes: "Yet ultimately there can be no substitute for personal self-regulation, or the individual manager's own integrity as he or she goes about their business."^A25 He quotes as a classic statement: "Human beings do not engage in such acts without affecting their characters, their view of themselves, their integrity."^A26

54 As in most other areas of life, corruption is one in which prevention is very much better than subsequent cure. For this reason, special attention is given to ways in which not only the public area can protect itself but also to ways in which the private sector, too, can be drawn in to this process.

PROSPECTS FOR SUCCESS

55 A review of experience to date in countries around the world suggests the following conclusions --

• on the negative side

- Corruption flourishes in closed economies, where the state exercises considerable control over the day-to-day lives and commercial practices of its citizenry; However, corruption is not confined to these economies by any means. Even in more open economies the role of the state as a provider of infrastructure (and especially in areas of construction and road-building) has been shown to be particularly vulnerable to massive corruption (e.g. France, Italy etc);

- Unchecked, corruption risks escalating out of control, undermining democratic institutions and market economies, (e.g. Italy, Japan, Brazil. Colombia, etc.) or impeding the evolution of democratic and responsible government (e.g. Kenya, Zaire, Nigeria, etc);

- Societies in transition especially vulnerable, where new procedures and practices have not caught up with new practices and requirements, and where the philosophy of the "market" may be interpreted as meaning that the civil servant, too, has something to trade with.

• on the positive side

- Corruption is a problem that can be addressed effectively if tackled in an holistic fashion.

- A quantum change in patterns of behaviour can be achieved that is of long standing. There can be instilled in the public mind (and the minds of public officials) a realization that corruption is a high-risk and a low-gain activity: that the chances of detection are considerable and that the consequences unacceptable.

Five final thoughts

56 Five final thoughts are offered --

1. Reform is a long-term process where attitudes and conduct must be taught and reinforced at all levels;

2. Reform should initially only tackle issues where it can be most effective or where there is the most added value;

3. Reform is a question of building blocks which must be put in place over a number of years;

4. The process of and commitment to reform must be owned visibly and supported from the top; and

5. Finally, tackling corruption is not just about tackling corruption: it is about the public's confidence in, and loyalty to, the State and the State's financial and policy abilities to reciprocate.^A27

¹ Transparency International is an international non-governmental organisation, incorporated as a not-for-profit organisation under German law, which is building an international coalition in countries of the North, the South and the East and is augmented by a growing number of national chapters in individual countries. TI is non-party political and does not represent any particular sector or system. It is, first and last, opposed to corruption in international business transactions and is ready to work with all who share its objectives. It claims no investigative or exposure role, seeing the lessons of the past as being relevant primarily in order to ensure that mistakes are not repeated and systems are strengthened to that end. TI's international secretariat is based in Berlin, Germany: tel. (+49)30-261-6015; fax (+49)30-262-8583. Annex is a subsequent addition.

² It draws from the somewhat narrower definition of "corruption" in Webster's Third New International Dictionary, namely "inducement [as of a public official] by means of improper considerations [as bribery] to commit a violation of duty".

³ Klöckner Industrie Anlagen GmbH and Siemens AG.

⁴ The judgment is reported as Sumitomo Bank Ltd v Kartika Ratna Thahir et ors and another matter [1993] ISLR 735. Because of the nature of the dispute and the admission made by the widow (that Siemens had contributed DM15 million and Klockner DM35 of the moneys), the contractors in question were not parties to the court case and so had no standing in the case to deny that they were the source of the bribes. The judgment is under appeal, but the fact the bribes were paid is not a matter of controversy, at least as between the parties.

⁵ Attorney-General for Hong Kong v Reid and Others (reported in The Times, 12 November 1993. The case points to the danger that the very mechanisms designed to counter corruption can, in fact, generate new points of vulnerability. As Director of Public Prosecutions, Charles Warwick Reid had accepted bribes as inducement to obstruct the prosecution of certain criminals. He was sentenced to eight years' imprisonment and his employers, the Government of Hong Kong, sought to recover assets purchased by Reid in the names of his wife and his solicitor. Finding in favour of the government, the Privy Council, in its decision, overturned an earlier decision of 1890 which, the Court said, was not consistent with the principle that a fiduciary (such as a civil servant who received a bribe and as such owed the money to the state which employed him) must not be allowed to benefit from his own breach of duty.

⁶ This is particularly so in the recent spate of cases involving massive political corruption that have surfaced in Italy and Spain.

⁷ The Times, 4 November 1993. The firms involved were reported as being a Fiat subsidiary, Fratelli Borletti (Milan, Italy), Gebruder Junghans (Schramberg, Germany) and A.S. Raufoss (Gjovik, Norway). The contracts in question involved the awarding of "multi-million-pound contracts for vital supplies of mortar bomb fuses, rockets, tracer rounds and other ammunition".

⁸ Guardian, 20 January 1994 in an article entitled "1,200 tons of Marcos gold 'lies stashed in Zurich warehouse'." The articles states that the gold, "more than double the 570 tons held by the Bank of England and about 15 per cent of the contents of Fort Knox, is in the custody of as reputable Swiss bank.. Much of it is thought to be the fruits of theft, bribery, misuse of foreign aid and misappropriation of gold hoarded by the Japanese army during the second world war." The allegations, which the bank has denied, were made in a Channel 4 programme, "Dispatches", using the results of an investigator's four-year search for assets thought to be the rightful property of the Philippines.

On 17 January 1994, the Guardian quoted the official Kuwait News Agency as reporting that the former Kuwaiti oil and finance minister, Sheikh Ali Khalifa al-Sabah, was among five people due to stand trial on charges of "embezzling public funds".

⁹ Ronald Wraith and Edgar Simpkins in Corruption in Developing Nations (Allen & Unwin, London, 1963).

¹⁰ A conspicuous exception in this respect has been Singapore.

¹¹ David H. Bayley (University of Denver), "The Effects of Corruption in a Developing Nation" in The Western Political Quarterly, [issue number not available] page 719

¹² lbid; pp 726-729. The list given here is not exhaustive.

¹³ lbid; at page 731.

¹⁴ Guardian, 17 January 1994.

¹⁵ A conspicuous exception has been George Moody-Stuart, a retired British businessman who now chairs TI-UK (the British national chapter of Transparency International), who has analysed the problem for TI in a paper entitled "Grand Corruption in Third World Development", presented as a background paper for the PUNDP Human Development Report, 1994.

¹⁶ Ibid.

¹⁷ Ibid.

¹⁸ Quoted by Peter Eigen in "TI Country Program in Ecuador: A Practical Approach for Building Islands of Integrity", background paper prepared for the UNDP Social Development Report, 1994.

¹⁹ George Moody-Stuart, (supra).

²⁰ Ibid.

²¹ A conspicuous exception is the United States where the Foreign Corrupt Practices Act criminalises such conduct. It is disappointing that more countries have not followed this lead. However legislation introduced into the British parliament will have a similar effect, although its prime target is believed to be the disallowing of protection money that is paid in Northern Ireland to both sides in the struggle there.

²² Transparency International is aware of some mining companies, in particular, who have a firm policy against the offering of substantial bribes. They see at as being in their own self-interest, as otherwise they are liable to a succession of endless and escalating demands, and the fact that they have plant and investment on the ground would magnify their exposure to ransom.

²³ See, e.g. the Code of Conduct adopted by the International Chamber of Commerce in 1975; the ICC report "Extortion and Bribery in International Business Transactions" (1977); the Draft International Agreement on Illicit Payments, 1978, prepared for, but not supported by, the UN General Assembly by the ad hoc InterGovernmental Working Group; and the more work of the OECD Working Group on Illicit Payments (originally invited to consider an international convention amongst OECD members, later modified to a "model law" and subsequently further modified into an even less binding "Executive Decision" by which a "recommendation" would be made by OECD Ministers to their governments. These and other developments are analysed in "The Policy Stance of Selected. Industrial Countries on Corruption in International Business Transactions and the Scope for Further Action", by Laurence Cockcroft, prepared as a background paper for the UNDP Human Development Report, 1994.

²⁴ Ibid.

²⁵ A copy appears as Annex 1.

²⁶ Transparency International is pursuing a strategy central to which is the formation of a broad international coalition of interests, including the private sector, supportive of raising business ethics and practices internationally in an incremental way.

²⁷ For a detailed description, see Moody-Stuart, supra.

²⁸ The Times, 4 November 1993.

²⁹ A number of other governments have expressed interest to TI in becoming involved in this way, among them Benin and Cambodia.

³⁰ Prime Minister John Major "fiercely defended his decision to overrule the civil servant in charge of [Britain's] overseas aid over Britain's commitment to spend £234 million on a dam and an uneconomic power station for Malaysia to gain defence and trade orders ... "To have withdrawn the contract would have put British jobs at risk...": quotation from the Guardian newspaper, 19 January 1994, under the headline "Dam aid to save jobs says PM".

³¹ " Switzerland's traditional role as a haven for discreet 'no questions asked' personal banking would be damaged beyond repair if the legislation was [passed], said a spokesman for the Swiss Bankers' Association. Under the new system banking authorities would have to alert the authorities to any suspicious movements of cash worth more than [US$20,000]. This would amount to an indirect incentive for foreign investors to switch their money into less inquisitive banking havens, leaving the Swiss economy as the ultimate loser, says the association." Extract from Guardian, 17 January 1994.

³² Or at least as the Romans used to do. The assault by the people of Italy upon corruption, and the personal bravery of investigating judges, have been among the most remarkable events of the past several decades.

³³ See Annex.

^A3 See the various papers by Dr Jon S. T. Quah

^A4 Model laws to this effect are available from TI.

^A5 For a discussion of the Singapore experience, see the papers by Dr Jon S.T. Quah. This is not to say that Singapore has not attracted criticism in other areas, such as its approach to a "free press" and excessive secrecy of information.

^A6 Alan Doig in "Honesty in Politics and Public Spending: The Ethical Environment", paper presented to the Second Seminar on the Status and Prevention of Corruption, Santiago, Chile, 4-6 July 1994, at pages 10-12.

^A7 Jon S. T. Quah, "Singapore's Experience in Curbing Corruption" in Political Corruption : A Handbook ed. Arnold J. Heidenheimer et ors (New Brunswick; Transaction Publishers; 1989) at page 845.

^A8 Prime Minister Lee Kuan Yew, the architect behind this remarkable achievement, was asked to justify a policy of paying cabinet ministers well when an increase was being discussed in 1985. His reply was that Singapore needed to preserve its most precious assets through an administration that was "absolutely corruption-free" and with "a political leadership that can be subject to the closest scrutiny because it sets the highest standards." He continued: "It is not easy, because if we lose this, then our reason for our existence, our raison d''etre... will disappear. Why does this island survive? Why does it attract banks, computer software, financial services, information services, ,manufacturing, in preference to so many countries better endowed with natural resources, manpower and markets? Any traveller knows that, because from the moment you hit the airport to the time you get into the taxi, you travel on the road, you know the difference, whether a place works on rules or it bends rules... How do you ensure that a fortuitous, purely accidental group of men who came in in 1959 and after 26 years of office ... have remained stainless? ... Every member knows that there is no easy money on the take. That's the way we are. Nobody believes that we spent money to get into this House ... I'm one of the best paid and probably one of the poorest of the Third World prime ministers ... There are ways and ways of doing things. And I'm suggesting our way, moving with the market, is an honest, open, defensible and workable and workable system. You abandon this for hypocrisy, you'll end up with duplicity and corruption. Take your choice." Straits Times, 23 March 1985, pages 14-16 quoted in Jon S. T. Quah, "Singapore's Experience in Curbing Corruption" in Political Corruption : A Handbook ed. Arnold J. Heidenheimer et ors (New Brunswick; Transaction Publishers; 1989) at page 848-9.

^A9 An important transparency strand is an obligation to disclose all payments made to third parties etc, together with details of services supplied.

^A10 See, e.g. Singapore.

^A11 These must include such matters as gifts and the receipt of acts (or repeated acts) of hospitality.

^A12 "Guidelines are operated which are almost not written. There is a tremendous level of power in the hands of bureaucrats." This they will not give up lightly... "The Japanese market is seen from foreign eyes as still fraught with many obstacles in the form of regulations and puzzling business practices". Financial Times, 19 July 1994: Japan Financial Survey, III.

^A13 In this context it is essential to equip the relevant authorities with whatever powers they may need for them to be able to attack the proceeds of corruption. The common law system of development by precedent may lend itself to creative processes. See, e.g. The UK Ministry of defence's action in issuing writs against not only the relatives of a corrupt official but also against the three international firms which bribed him (reported in Times newspaper, 11 July 1994: see TI Newsletter, September 1994). There should be clear laws stating that (a) all bribes belong to the employer; (b) that all bribes are recoverable from the employee who has received them; (c) that, where others have benefited from bribes by receiving them from a corrupt official, those recipients can be required by law to repay them to the employer where it is just that they should do so; and (d) that any person who makes a corrupt payment to an official should be liable to a penalty which includes the amount of money paid (or a multiple of it).

^A14 See TI Newsletter, September 1994.

^A15 In this context the annual reports of the Contractor-General of Jamaica (who oversees public procurement there) makes illuminating reading. His 1993 report noted that political pressure "is often exerted on functionaries to ensure that certain people are engaged... and to pressure the consultants to approve the variations, additions and applicable rates... Members of Parliament are known to name contractors and submit lists from which contractors are selected. Contracts which should be the subject of selective tendering are sometimes negotiated on untenable pretexts. Names will recur with monotonous regularity until there is a change in administration. Directions are never written but are unmistakably conveyed." See TI Newsletter, September 1994.

^A16 The procedures have been developed by the Government of Ecuador in association with Transparency International, and details are available from TI's Berlin office. If the corruption leakage is of the order of 10 to 15%, then on a contract worth US$600 million, even a fifty-percent success rate through the new system can result in a saving to the public purse of about US$40 million in a single transaction.

^A17 For example, see: Switzerland: a 'classic' scandal - but more to come: What the Financial Times describes as "Switzerland's biggest-ever corruption scandal" has seen formal charges laid against eight people, including a prominent magazine publisher. The affair centres on Raphael Huber, the canton of Zurich's former restaurant and bar inspector, alleged to have taken some US$1.84 million in bribes from permit applicants in the ten years to 1991. The story has shocked a country where the honesty of public officials has always been taken for granted. No one had suspected that cantonal regulations giving inspectors immense discretionary powers could be so abused. Among other things, applicants had to show that there was a "need" for the establishment. According to the prosecutor, Huber established a "reign of fear", taking payments in the form of loans or encouraging applicants to buy, at excessive prices, pictures painted by his deceased father. Though earning only a modest salary, Huber managed to maintain two flats in Zurich and to build up a 90-hectare estate in Chianti, Italy, complete with vineyard and artificial lake. The case is expected to come to trial early next year. Meanwhile the cantonal government has introduced new regulations under which applicants no longer have to prove a "need" for their establishments. Financial Times, 8 July 1994. Since then Zurich prosecutors are quoted in Sonntags Zeitung, promising further cases and last week five Swiss government internal auditors are placed under investigation on suspicion of taking money for favours to government suppliers, and Zurich motor vehicle bureau officers were arrested for taking bribes to issue incomplete registration papers to falsify documents for used car exports to Africa. In mid-July, the head of a corruption ring in Fribourg who had bribed the canton's finance director and police chief was sentenced to 27 months' jail. Financial Times, 1 August 1994 reported in TI Newsletter, September 1994.

^A18 This is particularly evident in societies where public servants owe their posts not to the public they serve but to the relatives who appointed them. Nepotism results in apathy towards the public as "customers" and a disinclination to accord them service.

^A19 Alan Doig in "Honesty in Politics and Public Spending: The Ethical Environment", paper presented to the Second Seminar on the Status and Prevention of Corruption, Santiago, Chile, 4-6 July 1994, at page 4.

^A20 ibid., pages 7,8

^A21 Beyond imposing the obligation by law the role of the government is limited to ensuring that it is complied with (through annual reports to the registrar of companies or other depository of returns by companies). The role of these directors is to intrude upon the "club-like" atmosphere which can otherwise develop on a board so as to ensure that decisions taken are made on an ethical and defensible basis. In this way they protect the public investors. Their role in non-executive and they are not responsible for charting the economic fortunes of the company. Their cost is a charge on the running costs of the companies in question.

^A22 In this context it is worth noting that 'commission agents" generally do not account for what they have done with the funds entrusted to them, and that a company only has the word of the commission agent that they have been disbursed at all.

^A24 BBC European Service, 16 August 1994

^A25 Mahoney; p. 10

^A26 Noonan, John T., Jr. Bribes, Macmillan, New York, 1984 at page 700

^A27 Alan Doig in "Honesty in Politics and Public Spending: The Ethical Environment", paper presented to the Second Seminar on the Status and Prevention of Corruption, Santiago, Chile, 4-6 July 1994, at page 12.