Short Essay For Corruption Of A Minor

2. Corruption and Economic Development

Corruption is a complex phenomenon. Its roots lie deep in bureaucratic and political institutions, and its effect on development varies with country conditions. But while costs may vary and systemic corruption may coexist with strong economic performance, experience suggests that corruption is bad for development. It leads governments to intervene where they need not, and it undermines their ability to enact and implement policies in areas in which government intervention is clearly needed—whether environmental regulation, health and safety regulation, social safety nets, macroeconomic stabilization, or contract enforcement. This chapter looks at the complex nature of corruption, its causes, and its effects on development.

How do we define corruption?

The term corruption covers a broad range of human actions. To understand its effect on an economy or a political system, it helps to unbundle the term by identifying specific types of activities or transactions that might fall within it. In considering its strategy the Bank sought a usable definition of corruption and then developed a taxonomy of the different forms corruption could take consistent with that definition. We settled on a straightforward definition—the abuse of public office for private gain.1 Public office is abused for private gain when an official accepts, solicits, or extorts a bribe. It is also abused when private agents actively offer bribes to circumvent public policies and processes for competitive advantage and profit. Public office can also be abused for personal benefit even if no bribery occurs, through patronage and nepotism, the theft of state assets, or the diversion of state revenues. This definition is both simple and sufficiently broad to cover most of the corruption that the Bank encounters, and it is widely used in the literature. Bribery occurs in the private sector, but bribery in the public sector, offered or extracted, should be the Bank's main concern, since the Bank lends primarily to governments and supports government policies, programs, and projects.

Bribery.   Bribes are one of the main tools of corruption. They can be used by private parties to "buy" many things provided by central or local governments, or officials may seek bribes in supplying those things.

  • Government contracts. Bribes can influence the government's choice of firms to supply goods, services, and works, as well as the terms of their contracts. Firms may bribe to win a contract or to ensure that contractual breaches are tolerated.
  • Government benefits. Bribes can influence the allocation of government benefits, whether monetary benefits (such as subsidies to enterprises or individuals or access to pensions or unemployment insurance) or in-kind benefits (such as access to certain schools, medical care, or stakes in enterprises being privatized).
  • Lower taxes. Bribes can be used to reduce the amount of taxes or other fees collected by the government from private parties. Such bribes may be proposed by the tax collector or the taxpayer. In many countries the tax bill is negotiable.
  • Licenses. Bribes may be demanded or offered for the issuance of a license that conveys an exclusive right, such as a land development concession or the exploitation of a natural resource. Sometimes politicians and bureaucrats deliberately put in place policies that create control rights which they profit from by selling.
  • Time. Bribes may be offered to speed up the government's granting of permission to carry out legal activities, such as company registration or construction permits. Bribes can also be extorted by the threat of inaction or delay.
  • Legal outcomes. Bribes can change the outcome of the legal process as it applies to private parties, by inducing the government either to ignore illegal activities (such as drug dealing or pollution) or to favor one party over another in court cases or other legal proceedings.

The government benefits purchased with bribes vary by type and size. Contracts and other benefits can be enormous (grand or wholesale corruption) or very small (petty or retail corruption), and the impact of misinterpretation of laws can be dramatic or minor. Grand corruption is often associated with international business transactions and usually involves politicians as well as bureaucrats. The bribery transaction may take place entirely outside the country. Petty corruption may be pervasive throughout the public sector if firms and individuals regularly experience it when they seek a license or a service from government. The bribes may be retained by individual recipients or pooled in an elaborate sharing arrangement. The sums involved in grand corruption may make newspaper headlines around the world, but the aggregate costs of petty corruption, in terms of both money and economic distortions, may be as great if not greater.

Theft.  Theft of state assets by officials charged with their stewardship is also corruption. An extreme form is the large-scale "spontaneous" privatization of state assets by enterprise managers and other officials in some transition economies. At the other end of the scale is petty theft of items such as office equipment and stationery, vehicles, and fuel. The perpetrators of petty theft are usually middle- and lower-level officials, compensating, in some cases, for inadequate salaries. Asset control systems are typically weak or nonexistent, as is the institutional capacity to identify and punish wrongdoers.

Theft of government financial resources is another form of corruption. Officials may pocket tax revenues or fees (often with the collusion of the payer, in effect combining theft with bribery), steal cash from treasuries, extend advances to themselves that are never repaid, or draw pay for fictitious "ghost" workers, a pattern well documented in the reports of audit authorities. In such cases financial control systems typically have broken down or are neglected by managers.

Political and bureaucratic corruption.   Corruption within government can take place at both the political and the bureaucratic levels. The first may be independent of the second, or there may be collusion. At one level, controlling political corruption involves election laws, campaign finance regulations, and conflict of interest rules for parliamentarians. These types of laws and regulations lie beyond the mandate and expertise of the Bank but nevertheless are part of what a country needs to control corruption.2 At another level corruption may be intrinsic to the way power is exercised and may be impossible to reduce through lawmaking alone. In the extreme case state institutions may be infiltrated by criminal elements and turned into instruments of individual enrichment.

Isolated and systemic corruption.   Corruption in a society can be rare or widespread. If it is rare, consisting of a few individual acts, it is straightforward (though seldom easy) to detect and punish. In such cases noncorrupt behavior is the norm, and institutions in both the public and private sectors support integrity in public life. Such institutions, both formal and informal, are sufficiently strong to return the system to a noncorrupt equilibrium. In contrast, corruption is systemic (pervasive or entrenched) where bribery, on a large or small scale, is routine in dealings between the public sector and firms or individuals. Where systemic corruption exists, formal and informal rules are at odds with one another; bribery may be illegal but is understood by everyone to be routine in transactions with the government. Another kind of equilibrium prevails, a systemic corruption "trap" in which the incentives are strong for firms, individuals, and officials to comply with and not fight the system. And there may be different degrees of coordination between those taking bribes, ranging from uncontrolled extortion by multiple officials to highly organized bribe collection and distribution systems. Antibribery laws notwithstanding, there are many countries in which bribery characterizes the rules of the game in private-public interactions. Systemic corruption may occur uniformly across the public sector, or it may be confined to certain agencies—such as customs or tax authorities, public works or other ministries, or particular levels of government.3

Corruption in the private sector.  Fraud and bribery can and do take place in the private sector, often with costly results. Unregulated financial systems permeated with fraud can undermine savings and deter foreign investment. They also make a country vulnerable to financial crises and macroeconomic instability. Entire banks or savings and loan institutions may be taken over by criminals for the purpose of wholesale fraud. Popular support for privatization or the deepening of financial markets can be eroded if poor regulation leads to small shareholders or savers withdrawing when confronted by insider dealings and the enrichment of managers. And a strong corporate focus on profitability may not prevent individual employees soliciting bribes from suppliers. Furthermore, when corruption is systemic in the public sector, firms that do business with government agencies can seldom escape participating in bribery.

While noting the existence of fraud and corruption in the private sector and the importance of controlling it, this report is concerned with corruption in the public sector. Public sector corruption is arguably a more serious problem in developing countries, and controlling it may be a prerequisite for controlling private sector corruption.4 Still, Bank activities can also promote the control of bribery and fraud in the private sector by helping countries strengthen the legal framework to support a market economy and by encouraging the growth of professional bodies that set standards in areas like accounting and auditing. In the long run, controlling corruption in the private sector may require improvements in business culture and ethics.

What are the causes of corruption?

The causes of corruption are always contextual, rooted in a country's policies, bureaucratic traditions, political development, and social history. Still, corruption tends to flourish when institutions are weak and government policies generate economic rents. Some characteristics of developing and transition settings make corruption particularly difficult to control. The normal motivation of public sector employees to work productively may be undermined by many factors, including low and declining civil service salaries and promotion unconnected to performance. Dysfunctional government budgets, inadequate supplies and equipment, delays in the release of budget funds (including pay), and a loss of organizational purpose also may demoralize staff. The motivation to remain honest may be further weakened if senior officials and political leaders use public office for private gain or if those who resist corruption lack protection. Or the public service may have long been dominated by patron-client relationships, in which the sharing of bribes and favors has become entrenched. In some countries pay levels may always have been low, with the informal understanding that staff will find their own ways to supplement inadequate pay. Sometimes these conditions are exacerbated by closed political systems dominated by narrow vested interests and by international sources of corruption associated with major projects or equipment purchases.

The dynamics of corruption in the public sector can be depicted in a simple model. The opportunity for corruption is a function of the size of the rents under a public official's control, the discretion that official has in allocating those rents, and the accountability that official faces for his or her decisions.5 Monopoly rents can be large in highly regulated economies and, as noted above, corruption breeds demand for more regulation. In transition economies economic rents can be enormous because of the amount of formerly state-owned property essentially "up for grabs." The discretion of many public officials may also be large in developing and transition economies, exacerbated by poorly defined, ever-changing, and inadequately disseminated rules and regulations. Finally, accountability is typically weak in these settings. The ethical values of a well-performing bureaucracy may have been eroded or never established. Rules on conduct and conflict of interest may be unenforced, financial management systems (which normally record and control the collection of revenues and the expenditure of budgeted resources) may have broken down, and there may be no formal mechanism to hold public officials accountable for results. The watchdog institutions that should scrutinize government performance, such as ombudsmen, external auditors, and the press, may be ineffectual. And special anticorruption bodies may have been turned into partisan instruments whose real purpose is not to detect fraud and corruption but to harass political opponents.

A defining characteristic of the environment in which corruption occurs is a divergence between the formal and the informal rules governing behavior in the public sector. The Bank is unaware of any country that does not have rules against corruption, although not all countries have all the rules that may be necessary. These range from laws making it a criminal offense to bribe a public official to public service regulations dealing with the expected behavior of public officials, conflicts of interest, the acceptance of gifts, and the duty to report fraud. Government agencies—police and army, tax and customs departments, local governments, and public enterprises—may have their own regulations and codes of behavior. Organic laws, often embedded in constitutions, cover budgeting, accounting, and auditing, supported by laws and regulations on public procurement and the safeguarding of public assets. In addition, there are laws on the conduct of elections and the appointment of judges, and codes governing the conduct of legislators. Some of these laws are a colonial inheritance, some have been adapted from countries with a similar legal tradition, and some are additions to existing laws (for example, providing for special anticorruption commissions and other watchdog bodies).

Where corruption is systemic, the formal rules remain in place, but they are superseded by informal rules.6 It may be a crime to bribe a public official, but in practice the law is not enforced or is applied in a partisan way, and informal rules prevail. Government tender boards may continue to operate even though the criteria by which contracts are awarded have changed. Seen in this light, strengthening institutions to control corruption is about shifting the emphasis back to the formal rules. This implies acknowledging that a strong legal framework to control corruption requires more than having the right legal rules in place. It means addressing the sources of informality, first by understanding why the informal rules are at odds with the formal rules and then by tackling the causes of divergence. In some countries the primary reason for divergence may be political, a manifestation of the way power is exercised and retained. This limits what the Bank can do to help outside the framework of its projects. In other countries the reason may be weak public management systems and inappropriate policies, which the Bank can help improve.

What do economics and political science tell us?

While it would be easy to say that all corruption is bad, the Bank must base its approach on evidence and analysis of corruption's effects on development. The political sensitivity surrounding issues of governance underscores the need for such a foundation. In preparing this report, the Bank examined the conclusions drawn by economic researchers working on the topic, the perspectives of disciplines other than economics, and the evidence from the Bank's operational work.

Economic research.   The body of research addressing the economic effects of corruption has grown significantly in recent years. The research is both macroeconomic and microeconomic, theoretical and empirical. Its conclusions depend in part on what the researcher views as the bottom line: short-term economic efficiency in private markets, long-term dynamic efficiency and economic growth, equity and fairness, or political legitimacy.

One strand of literature explores, primarily from a theoretical perspective, the likely economic effects of different forms of corruption.7 Some writings of this group argue that corruption can be efficiency enhancing. First, the argument is made, corruption may not distort the short-run efficiency of an economy if it merely entails a transfer of economic rents from a private party to a government official. Thus a bribe to an official who is allocating, say, foreign exchange or credit in short supply can be seen as a market payment for ensuring that resources go to the party most likely to use them efficiently (the one who can pay the highest bribe). The problem with this line of reasoning is that it fails to take into account any objective other than short-term efficiency. In the long run, expectations of bribery may distort the number and types of contracts put up for bid, the method used to award contracts, and the speed or efficiency with which public officials do their work in the absence of bribes. It may also delay macroeconomic policy reform. In addition, the gains from such bribery may be inequitably distributed (accessible only to certain firms and public officials).

Second, bribes can theoretically increase economic efficiency if they allow firms to avoid overly restrictive regulations or confiscatory tax rates. That is, bribes lower the costs of bad regulations to firms that bribe. There may be some validity to this argument, particularly in the short run. Yet such bribery defuses pressure for broader reform and invites firms to evade good regulations as well as bad. Furthermore, the costs of such a system may fall disproportionately on smaller firms.8 A policy framework based on many legal restrictions and widespread bribery to avoid them is like a highly regressive system of taxes on the private sector, and few would argue for such a system in developing countries. And in some transition economies such restrictions have proliferated in an uncontrolled way with the express purpose of extracting rents. This causes a shift of economic activity to the informal sector.

To summarize, models purporting to show that corruption can have positive economic effects are usually looking only at static effects in the short run. In the long run, opportunities for bribery are likely to lead public officials to change the underlying rules of the game or their own behavior in the absence of bribes, and the results are likely to be costly in terms of economic efficiency, political legitimacy, and basic fairness.

Another strand of literature examines the links between investment, economic growth and the quality of government institutions.9 It finds that weak public institutions, as evidenced by unreliable contract enforcement, unclear property rights, unpredictable policies, inefficient public administration, corruption, and other indicators, significantly reduce private investment and lead to slower growth. While useful in highlighting the broad economic effects of institutional deficiency, much of the literature has been unable to separate the effect of corruption from other dimensions of government quality.10

Finally, there is the uneven performance of countries to contend with. While few would disagree that corruption has undermined development in Africa and has slowed the emergence of well functioning market economies in the former Soviet Union, the coexistence of high growth and systemic corruption in some Asian countries challenges those who believe that corruption is always economically harmful. Several explanations have been suggested. First, perhaps predictability is what matters, and some governments reliably deliver what is "bought" with bribes while other governments do not.11 Second, others view highly concentrated corruption at the top of the political system (cited as more the model in some Asian settings) as less distortionary than uncontrolled corruption at lower levels (as in parts of the former Soviet Union).12 Third, if political systems are well established and the rules of the game are known to all, the transactions costs of rent seeking may be less costly than in less stable, less certain environments. Fourth, corruption may be imposing environmental and social costs that are not captured in national accounts data. We do not know these costs, and country experience differs widely even within Asia. Nobody, however, argues that corruption is good for development, and recent research suggests that corruption may be restraining growth even in Asia.13 What is clear is that the nature and dynamics of corruption vary greatly among countries, making it a diverse and complex phenomenon to address.

Political science.   Political scientists look beyond the visible signs of corruption to the broader setting in which it occurs. They see corruption in relation to the legitimacy of the state, the patterns of political power, and the engagement of civil society. Corruption may be a manifestation of the way political power is contested and exercised. To the leadership the creation and allocation of state rents serves political purposes: rewarding supporters, buying off opponents, ensuring the backing of key groups, managing ethnic diversity, or simply accumulating resources to fight elections. To obtain these resources, leaders may forge alliances with business groups or create and distribute rents through the bureaucratic apparatus. The resulting policies may favor or discourage capital accumulation and economic growth, depending on the nature of the alliances struck.14 Politicians in such countries may be aware of the distortionary consequences of such rents but view them as a necessary tool of political management. If this is the case, the pattern of corruption will change only if the power structure changes, which may result from a popular outcry against corruption.

Political scientists also take a historical perspective. Over time most industrial countries have developed merit-based bureaucratic values, institutionalized competitive politics, established transparent government processes, and fostered an active media and an informed civil society. These mechanisms constrain political and bureaucratic corruption, making it the exception rather than the norm. The transition may be spurred by an enlightened ruler or, more likely, by the growing power of new political groups with an interest in better-performing government. In developing countries, in contrast, government institutions are weaker, civil society is less engaged, and political and bureaucratic processes are less accountable and transparent. An effective state apparatus and capacity for law enforcement may be virtually nonexistent. In such settings, sustained progress in building an honest and effective state apparatus requires addressing the mix of factors in the state and in society that give rise to both corruption and weak social and economic performance. This is an exceedingly complex and long-term effort.15

Public management.   The public management view of corruption is clear-cut. Systemic corruption, in the form of graft and patronage and the inefficiencies that accompanied it, spurred the nineteenth-century reforms in Europe and North America that created the modern bureaucratic state. Corruption opposes the bureaucratic values of equity, efficiency, transparency, and honesty. Thus it weakens the ethical fabric of the civil service and prevents the emergence of well-performing government capable of developing and implementing public policies that promote social welfare.

The machinery of modern government, as it evolved in industrial countries and has been transferred to developing countries, includes systems that protect public organizations from corruption and promote accountability. These systems, including a meritocratic civil service and watchdogs such as supreme audit institutions, ombudsmen, and public service commissions, should not be neglected. Some OECD countries seeking to improve government performance through New Public Management reforms are developing "risk management" perspectives on corruption. But they do so within a framework of strong financial management control systems and a renewed emphasis on the ethical values of public service. While economies may still grow in countries in which corruption is entrenched in the public sector, the public management view is that successive stages of economic and social development will be harder if not impossible to achieve without well-performing government. Ultimately, countries need to create durable institutions to foster and protect integrity in public life if public policy is to achieve the objectives (such as poverty reduction and environmental protection) that are at the core of sustainable economic and social development.

What is the Bank's experience?

Most of the economic and sector work undertaken by the Bank does not directly address corruption. However, a small but growing number of public expenditure reviews have drawn attention to the problem, and survey data gathered in the course of private sector assessments are beginning to illuminate the costs of bribery to entrepreneurs. Based on the economic and sector work that does address the topic, informal country knowledge within the institution, and examples from the Bank's vast store of country reports in which the influence of corruption can be inferred (even if the term is seldom used), the following picture emerges of the many ways in which corruption imposes costs on our borrowers.

  • Macroeconomic stability may be undermined by loss of government revenue and excessive spending. This can happen through corruption in tax and customs departments, through debt incurred when the scrutiny of finance ministries and central banks is bypassed, through contracts that are awarded to high-cost bidders or without competitive tendering, and through the general erosion of expenditure control. Excessive debt may be incurred through "white elephant" investment projects that owe their origin, in part, to bribes. Macroeconomic stability may also be threatened by debt guarantees and other off-budget contingent liabilities agreed to in corrupt transactions without public scrutiny. It may also be threatened by fraud in financial institutions, leading to loss of confidence by savers, investors, and foreign exchange markets. In transition economies and in many developing countries corruption may reduce revenue collection by driving firms (or their most profitable activities) out of the formal sector and by providing a moral justification for widespread tax evasion.16 The costs of macroeconomic instability are borne by all elements in society but especially by the poor.
  • Foreign direct investment may still flow to countries in which corruption is systemic but only if bribery is affordable and the results are predictable. Even so, corruption can have a negative effect on foreign investment. Where corruption is large and systemic, investment may be concentrated in extractive industries in which operations can be enclaved, or in light manufacturing or trading operations that can be relocated if corruption costs become unbearable. Or foreign investors may shun the country altogether. For most foreign firms, corruption is a cost of doing business to be recouped from revenues.17 If the costs become too high or unpredictable, foreign firms will disengage unless global marketing or sourcing considerations require them to maintain a presence in that country. High levels of corruption add to the risk of a country being marginalized in the international economy.
  • Small entrepreneurs may be affected in many developing and transition economies. Evidence from private sector assessments suggests that corruption increases the costs of doing business, that small firms bear a disproportionately large share of these costs, and that bribes can prevent firms from growing.18
  • The environment may be endangered. Many countries have enacted laws to protect the environment and have created special agencies to enforce these laws, but there is often a disconnect between policy and its implementation. Complying with environmental regulations imposes on firms costs that can be avoided by bribery. There are huge rents to be earned from activities such as logging in tropical rain forests, where permits can be obtained corruptly or where inspectors can be bribed. The environmental costs of corruption may take the form of ground water and air pollution, soil erosion, or climate change, and can be global and intergenerational in their reach.
  • The poor suffer. While poverty assessments have focused more on measuring poverty than explaining it,19 anecdotal and survey evidence reveal the cost of petty corruption to the poor. When access to public goods and services requires a bribe, the poor may be excluded. Given their lack of political influence, the poor may even be asked to pay more than people with higher incomes.20 Furthermore, when corruption results in shoddy public services, the poor lack the resources to pursue "exit" options such as private schooling, health care, or power generation.

A survey of 3,600 firms in 69 countries carried out for the 1997 World Development Report provides further evidence of the widespread existence and negative effects of corruption. As noted in the report:

The survey confirmed that corruption was an important—and widespread —problem for investors. Overall, more than 40 percent of entrepreneurs reported having to pay bribes to get things done as a matter of course. . . . Further, more than half the respondents worldwide thought that paying a bribe was not a guarantee that the service would actually be delivered as agreed, and many lived in fear that they would simply be asked for more by another official. . . . The consequences of corruption often do not end with paying off officials and getting on with business. Government arbitrariness entangles firms in a web of time-consuming and economically unproductive relations. . .21

The survey also confirms the negative correlation between the level of corruption (as perceived by businesspeople) and the level of investment in an economy.


Notes

Britain's Prime Minister David Cameron arrives for the Anti-Corruption Summit in London on May 12. Credit: Frank Augstein/AP/Press Association ImagesEditor’s note: In September 2015, Clare Short received a letter from prime minister David Cameron asking her to contribute to his book on tackling global corruption, to be published ahead of his anti-corruption summit on May 12. With her “distinguished record,” Cameron wrote, the essay would spark “debate and action across the world.” Short submitted this piece and shortly after was told it would not be included – the book was taking “a more forward looking focus.” The wide-ranging essay, which finds many reasons for optimism in the battle against corruption worldwide, is published below.  

How can the international system do more to tackle corruption?

At least until the recent scandals in football and athletics, most people would I suspect judge that the worst corruption in the world is a problem of bad governments in developing countries. Indeed, Transparency International’s (TI) “Corruption Perception Index” finds countries of the south consistently at the bottom levels of the Index; though TI explicitly recognises that the north is partly responsible for the corruption of the south as a bribe payer.

There is no doubt that there are problems of corruption in some governments in developing countries. The question is what should be done about it? Some want to wag fingers and deny any aid to some of the poorest people in the world; wiser heads understand that lots of the corruption originates in OECD countries and that it is when systems are weak – anywhere in the world  – that some people will engage in corrupt behaviour. If we want to reduce corruption then we need to strengthen preventative systems in both OECD and developing countries.

It is important to remember that it was not until 1996, that the OECD – the club of rich countries based in Paris – recommended that bribes paid to public officials abroad should cease to be tax deductible. And it was not until 2002 that the UK implemented this recommendation. In fact the OECD treaty requiring countries to legislate to make corrupt payments to a public official abroad, a criminal offence, was not agreed until 1997 – less than 20 years ago. The history of how this came about is very interesting.

Watergate revelations and UK monitoring

At Watergate in 1972, burglars were caught breaking into the Democrat committee headquarters and it was then discovered that this was authorised by president Nixon in order to bug the headquarters of his electoral opponents. Congress therefore set up enquiries, and during the hearings, it became clear that large amounts of cash were provided by CEOs to fund the Committee for the Re-election of the President. One thoughtful congressman asked where in the company accounts such funds were provided for. It was then discovered that 400 publicly traded major corporations had slush funds which existed to pay bribes to public officials abroad, in order to obtain contracts.

France and Saudi Arabia sign contracts for jets, helicopters and cooperation over nuclear waste, June 2015. Remy de la Mauviniere / Press Association. All rights reserved.In the wake of the national shock revealed by the dirty dealings over Watergate, the US Congress passed the Foreign Corrupt Practices Act in 1977. This made the US the first country to outlaw bribing foreign public officials abroad. After a little time, US businesses started to complain that it was unfair that others could compete through bribery and they could not. This led to a massive US effort to achieve agreement through the OECD, that countries should pass legislation to make it a criminal offence to bribe public officials abroad. The Treaty was agreed in 1997 and took effect in 1999, just over 15 years ago.

Importantly, the OECD put in place monitoring machinery to expose countries that failed to implement the treaty requirements. The UK does not come well out of the monitoring. In 2008 the OECD Working Group said that it was “disappointed and seriously concerned” about the UK's continued failure to address deficiencies in its laws on bribery of foreign public officials and on corporate liability for foreign bribery, which it said had hindered investigations. This led to a new Bribery Act being passed into law as recently as 2010. The new Act was welcomed by the OECD Working Group, but the government was being intensively lobbied by business interests over the details of implementation. The OECD Working Group also asked for a roadmap to extend the Convention to UK Overseas Territories.

In February 2011 the chair of the OECD Working Group expressed his disappointment over the delay in the promised entry into force of the Act, originally promised for April 2011. At last in March 2012 the Working Group found that the UK had significantly boosted its foreign bribery enforcement efforts but needed to be more transparent when resolving cases. It also asked for a roadmap to extend the Convention to UK Overseas Territories.

By October 2014 Transparency International found that of the 41 countries, accounting for two thirds of world exports, that had signed the OECD Anti Bribery Convention, only four countries were "actively investigating and prosecuting companies that cheat taxpayers when they bribe foreign officials to get or inflate contracts or obtain licenses and concessions". Happily the UK had by then arrived at a state of grace and was found to be engaged in active enforcement alongside the US, Germany and Switzerland. The countries with little or no enforcement included Japan, The Netherlands, South Korea, Russia, Spain, Mexico, Brazil, Ireland, Israel and 12 others.

The 1998 EU Code of Conduct on arms exports

My own experience in government included an effort in 2000/01 to halt the sale by BAE Systems of an obsolete military air traffic control system to Tanzania. This was such a bad project that it was obvious that it could only have been agreed through corruption. Tanzania had recently been granted debt relief and one of the conditions was that it should obtain no loans unless they were concessional. The air traffic control deal was funded by a loan from Barclays which obviously broke this condition.

Amnesty international protest export of UK-manufactured arms to Saudi Arabia,March 2016. Yui Mok /Press Association. All rights reserved.

Eventually, as part of an investigation by the Serious Fraud Office, it was exposed that BAE Systems had paid £8.5 million ($12.4) -- one third of the contract’s value -- to a middleman in Tanzania called Shailesh Vithlani. In 2010, the company agreed to pay £30 million reparations to Tanzania and was given a further fine at the Crown Court in Southwark for concealing payments “from the auditors and ultimately the public”. BAE Systems and the Serious Fraud Office argued that Vithlani had been paid to lobby for the contract. The judge said he was “astonished” at claims BAE Systems had not acted corruptly, court records show.

“I accept...that it is not now possible to establish precisely what Mr Vithlani did with the money that was paid to him,” Mr Justice Bean said. “But on the basis of the documents shown to me it seems naïve in the extreme to think that Mr Vithlani was simply a well-paid lobbyist.” He added that BAE Systems made payments with the intention that Vithlani would have “free rein to make such payments to such people as he thought fit” adding that they “did not want to know the details”. 

The UK had been a major player in negotiating the 1998 EU Code of Conduct on arms exports which said, in addition to normal provisions limiting arms sales, that all EU countries would block arms exports that would seriously hamper the sustainable development of countries. Despite this I couldn't get support from Number 10, the Foreign Office, the Ministry of Defence or Departments of Trade and Industry to use the government licensing system to block the contract. I said at the time if BAE Systems and all those government departments would go to such lengths to support such an indefensible but relatively small defence export, it made one fearful of what they would do for bigger things.

UK and Saudi Arabia

Prime Minister David Cameron meets Saudi Arabia's Defence Minister Prince Salman bin Abdul-Aziz Al Saud, April 2012. Matt Dunham / Press Association.All rights reserved.Sadly, arms sales to Saudi Arabia are an example of bigger things. There is a long history of corrupt behaviour sanctioned by successive governments. As recently as 2006, the UK terminated a major foreign bribery investigation concerning the Al-Yamamah arms deal between the UK and Saudi Arabia, for which BAE Systems was the main contractor.

At the time, the Serious Fraud Office was investigating an alleged £20 million slush fund designed to bribe Saudi officials. In autumn 2006, the SFO planned to look at certain bank accounts in Switzerland -- with the cooperation of the Swiss authorities -- to find out whether payments had been made to a Saudi agent or public official, according to a 2008 House of Lords judgement. This provoked an “explicit threat” by the Saudi authorities, the judgement noted, that if the investigation continued “Saudi Arabia would withdraw from the existing bilateral counter-terrorism co-operation arrangements with the UK, withdraw cooperation from the UK in relation to its strategic objectives in the Middle East and end the negotiations then in train for the procurement of Typhoon aircraft.”

After consultations with then-Prime Minister Tony Blair and the Attorney General, the director of the Serious Fraud Office Robert Wardle halted the investigation. He said that continuing would risk “serious harm” to the UK’s national and international security. The SFO announced the end of the investigation in a press release, quoted in the judgement: “It has been necessary to balance the need to maintain the rule of law against the wider public interest. No weight has been given to commercial interests or to the national economic interest.” Tony Blair said he took “full responsibility” for the decision.

In 2010, to settle allegations of bribery made about the Al Yamamah deal, the arms giant pleaded guilty to charges of false accounting in a U.S. District Court in the District of Columbia. BAE Systems was sentenced to pay $400 million (£277 million) in what then-Attorney General Gary Grindler called “one of the largest criminal fines ever levied in the United States against a company for business related violations.”

The story of British arms salesto Saudi Arabia is so murky, it’s worth reminding ourselves of just how bad itwas, and that it continued from the late ‘60s until 2006, implicating every successive government.

According to a briefing by The Guardian newspaper on BAE in Saudi Arabia – part of a lengthy, groundbreaking investigation – the US warned at the outset, “Saudi requests for arms were not based on considerations of national security as much as private pressure by those most likely to profit from arms sales…”. But successive governments took no notice.

The first deal was made in 1967 under Harold Wilson’s Labour government. It was, according to the Guardian report, for 42 Lightning fighters plus a radar contract. The value was £104 million (today’s value, £1.7 billion). The commission paid by BAE was at least £7.8 million (£128 million in today’s values). These payments were authorised by government officials and were declared to three UK agencies. The Inland Revenue, in documents obtained by the Guardian, minuted privately that the “hard fact is that bribery is essential”.

The UK government became more involved with the next deal in 1973. Worth £253 million (modern equivalent £2.8 billion), according to Guardian research, it was for Strikemaster fighter jets, training and maintenance for the Saudi’s existing Lightnings.  Made under Edward Heath’s Conservative government, the commission payment was over £30 million (£327 million today). This was the first time the UK government became directly involved in payments after the Saudis demanded a ‘government to government’ deal.

“The Ministry of Defence signed a contract with Saudi Arabia, and took the money from Riyadh. It then employed BAE as lead supplier with an officially controlled profit margin. But in fact the official ‘profit margin’ was a fiction,” the Guardian briefing said. “The prices were inflated and millions of pounds in ’commission’ were channeled by BAE into anonymous Swiss bank accounts…The government auditor concluded that the government was up to its neck in bribery.” What is important is that we face up to the fact that a massive responsibility for very large-scale bribery and corruption originates in countries like our own.

In taking the trouble to remind my readers of this sad history, I am not suggesting that the UK behaved any worse than other OECD countries. There are similar scandals in many comparable countries. What is important is that we face up to the fact that a massive responsibility for very large-scale bribery and corruption originates in countries like our own. We must also recognise that action to challenge such behaviour has been taken only very recently and is not properly enforced in most countries.

The Anti Bribery Convention

In December 2014 the OECD published an analysis of the cost of foreign bribery and corruption. The report analysed more than 400 cases worldwide involving companies or individuals from the 41 signatory countries to the OECD Anti-Bribery Convention, which were involved in bribing foreign public officials. The cases took place between February 1999, when the Convention came into force, and June 2014. Almost two thirds of cases occurred in just four sectors: extraction (19%); construction (15%); transportation and storage and information and communications (10%). Bribes were promised, offered or given most frequently to employees of state-owned enterprises (27%) followed by customs officials (11%), health officials (7%) and defence officials (6%). Heads of state and ministers were bribed in 5% of cases but received 11% of total bribes. In most cases bribes were paid to obtain public procurement contracts (57%), followed by clearance of customs procedures (12%). 6% of bribes were given to gain preferential tax treatment. In 41% of cases management-level employees paid or authorised the bribe.

Clare Short newly appointed Minister for International Development.May,1997.Michael Crabtree / Press Association. All rights reserved. … If I may, I will digress for a moment. I would like to recall the advice I was given in 1977 when I left the Home Office and went to work as the director of a community organisation based in Handsworth in Birmingham. When I met with our auditor to discuss the financial systems and bookkeeping, I suggested we might keep a few pounds in a tin as petty cash to pay for milk and tea and other small items. He emphasised strongly something I have never forgotten, that I owed it to everyone who worked in the organisation to set up a system that could not be fiddled. It was impossible to know what pressures and temptations individuals might be subjected to. If systems were tight, no one could be tempted and it would be better for everyone. TI make this point clearly on its website: “people are as corrupt as the system allows them to be”.

When it comes to developing countries it is often the case that governments have over the years offered jobs in the public sector to more people than they can really afford. Over time, wages tend to decline to such a level that people cannot live on the income that they take home. We find that in such cases policemen start taking small payments from members of the public and minor officials make similar charges. The question each of us should ask ourselves is, if we were unable to feed our children with the salary we were paid, and such practices were widespread, would we be joining in? Such examples show that petty corruption is usually a result of bad systems rather than morally defective people. Such examples show that petty corruption is usually a result of bad systems rather than morally defective people. The challenge for development is to help countries out of such a trap. There have been various programmes for public-sector reform in order to offer redundancy to older workers, slim down the size of the public service and provide better wages for those that remain. They tend not to be favoured by the commentariat.

Thus we must be clear that working for development, anti-corruption and good governance is not a question of hectoring from the moral high ground or denunciation and threats of the withdrawal of aid, but of helping to build systems that prevent such corruption. This is an important purpose of budgetary aid, so disliked by so many, where development funds are put into government budgets on condition of joint work to build well-organised public financial management and procurement systems. The prize from such work is that people in poor countries with weak institutions see aid well spent, help provided to build up the capacity of government systems, and their own tax revenues better protected and better spent.

In recent years, we have also engaged in Security Sector Reform, helping countries to organise their military, police and intelligence agencies effectively to deal with the real challenges they face, and to try to clean up defence procurement, which, as we have seen, has been a murky area for very many years.

The poorest and most fragile countries are often engaged in conflict or newly emerged from conflict, and they pose a real challenge for development.

Billboard of Afghan President Hamid Karzai reads: "Corruption is a dangerous problem, we want to follow it seriously", Kabul, Afghanistan, January 2010. Musadeq Sadeq /Association Images. All rights reserved.The laudable aim of the government to work more in fragile states will impose greater risks that aid money may go astray. The task here is to help countries to build reliable government systems and this takes years of effort. Our experience in Afghanistan, and the terrible corruption that there is after more than 10 years of massive international aid, shows that we have many lessons to learn to get this right.

The Extractive Industries Transparency Initiative (EITI)

The 2014 OECD study of prosecutions for breaches of the Anti Bribery Convention found that Extractives was the biggest bribery sector. For the past five years (until February 2016) I have chaired the international Board of the Extractive Industries Transparency Initiative ( EITI ) which was established over 10 years ago to try to use transparency to improve accountability in this traditionally highly opaque and corrupt sector. A short description of this work helps to exemplify the challenge in working to reduce corruption in a major problematic sector.

Again, in this field, it is only in the last 10 years that concern has been expressed about resource wealth feeding corruption and conflict, and the failure of vast oil and mineral resources to lead to sustainable development and the reduction of poverty. In the Cold War years, western governments’ major concern was security of supply, and companies shared that concern together with an anxiety to secure their profits and avoid nationalisation. The World Bank, and other banks and investment institutions, cared only about the return on investment and not about the wider governance and social consequences of their investments in this sector.

Research evidence has been available since the founding of OPEC in the 1970s that, paradoxically, the discovery of oil and other natural resources, tended to undermine and not improve poverty reduction and economic development. For a long time explanation focused on currency appreciation and fluctuations in revenues. But as early as 1975 the Venezuelan oil minister, who was a co-founder of OPEC said, “I call petroleum the Devil’s excrement, it brings trouble... waste, corruption.... public services falling apart. And debt, debt we shall have for many years”. It was, again, only from the mid ‘90s onwards that the perverse outcome of oil extraction in developing countries came into the spotlight. This was because research identified bad governance as the driver behind very dismal development in resource rich countries. The research suggested that oil and mineral-rich states in the developing world were more likely to suffer from lack of provision of basic public goods, corruption, and civil war than comparable non-resource- rich countries. The research suggested that oil and mineral-rich states in the developing world were more likely to suffer from lack of provision of basic public goods, corruption, and civil war than comparable non-resource-rich countries, and also more likely to be poorer. These findings were generally referred to as “the resource curse” and this is a widespread reality. But countries like Norway and the UK in the case of oil, and Canada and Australia in mining, are not so cursed. It is clear that the problem is governance, not the nature of the resources themselves, although it is true that fluctuating prices, resource-depletion and the likelihood of currency appreciation do pose particular difficulties.

It is clear also that poor development outcomes were caused by the link between international and domestic factors, i.e. the interaction between multinational companies and their shareholders and investors, host governments and greedy elites. The work of TI and the OECD Convention on Combating Bribery were important influences on public debate as were Global Witness reports on egregious corruption in Angola. Global opinion turned against major companies, particularly oil companies, and denounced their behaviour. The old slogan that “the business of business is business” was no longer acceptable.

The Publish What You Pay coalition was formed initially from NGOs in the UK which has since spread to a worldwide movement. The idea behind the EITI is clear and simple: build a coalition of companies, governments and civil society at the international and national level, and require companies to report what they paid to governments and governments what they receive, and publish the figures so that the public can hold governments to account. It took a little time to recruit a board with representatives of each sector, to establish a secretariat, to draw up rules and procedures and a multi-donor trust fund in the World Bank to provide technical support. From 2006 on, the organisation grew quickly. There are now 51 countries implementing the EITI. Half are in Africa but it now includes a wide range of countries ranging from Peru, Mongolia, Iraq, Trinidad and Tobago and Norway, the US and UK.

Transparency and reporting requirements

Peter Eigen and Clare Short (former and new Chair of the Board of EITI / Extractive Industries Transparency Initiative) at 5th EITI Global Conference, Paris 2011.Wikicommons/EITI. Some rights reserved.There is no doubt that the EITI got off to a good start. The number of countries that volunteered to sign up to the reporting requirements grew steadily, as did the supporting companies and members of the NGO network. It is interesting to reflect on why all these different entities decided to join. They came together but each sector had slightly different motivation. The countries tended to want a reputation as a reformer so they could attract inward investment, the companies to prove that they did make payments to governments and the NGOs to try to ensure that the money was spent to help the poor. There have been declarations of support from the G8, the G20 and the United Nations General Assembly amongst others. Campaigning northern NGOs tend to believe that the EITI should be used to discipline countries with imperfect systems, whereas those with development experience understand that reform takes place when local reformers want it and see the potential benefits.

However a 2011 evaluation suggested that the simple pass/fail benchmark was inadequate as though reform was a simple matter of complying with basic EITI reporting rules and producing an EITI report. In addition academic commentators pointed out that a simple report of the amount of money paid by companies, and a reconciliation with government receipts, does not ensure that the original contract was fair, what was due to be paid was paid, that the money was properly spent, let alone that there are sensible plans to deal with price fluctuations and the economic consequences of exhaustion of resources.

This is the reason for the clause in the Dodd Franks legislation in the US, which plans to require listed companies to report their payments for oil, gas and mineral resources to governments in the developing world, country by country, project by project. The EU has introduced a similar Transparency Directive which is in the process of being implemented. We must conclude that a vague commitment to transparency is not enough to ensure good governance, and we cannot assume that multi-stakeholder groups on their own will have the capacity to build adequate systems of political accountability.

This is the reason also why EITI introduced more testing reporting requirements supported by all parts of the coalition at its conference in 2013 in Sydney. The new reporting standard requires transparency across the value chain including licensing system, state-owned enterprises and production levels. It also encourages openness on contracts and as full as possible reporting on beneficial ownership. There is a new requirement to provide an account of the overall context so that any concerned citizen could read the report and understand the importance of the sector and challenge of managing it to the benefit of future of their country. In addition, there is a new stress on making government systems more transparent and robust, rather than requiring more and more elaborate EITI reports. The aim of the EITI must surely be to encourage member countries to put in place transparent and robust government systems and to develop a more informed public debate in each country. Progress is being made but building strong and robust government systems and informed public debate takes time.

Multi-stakeholder governance is not for the fainthearted. Bringing together governments, companies and civil society in countries where they have rarely sat down together, can in very important ways help to build trust, dispel myths and focus on the real reforms needed to improve governance in the extractives sector. But on the International Board which has the same composition, campaigning northern NGOs tend to believe that the EITI should be used to discipline countries with imperfect systems, whereas those with development experience understand that reform takes place when local reformers want it and see the potential benefits.

This argument reflects that between those who see development assistance as a means to help countries build better systems and those want to withdraw aid to punish bad governance. No doubt these arguments will continue for a considerable time.

Illicit Financial Flows

In addition to the challenges posed by the OECD Convention on Bribery, and initiatives such as EITI that work to help countries with very weak institutions build governance systems that prevent corruption, the issue of Illicit Financial Flows has recently pushed itself to the forefront of the international agenda.

This has been triggered partly by an increased focus on the prevention of money-laundering to fund terrorist organisations and also by public anger over tax evasion. In recent years the G8 and the G20 have urged countries to strengthen their anti-money laundering regimes, enforce greater transparency on company ownership and to exchange information in order to tackle tax evasion. It remains the case that every year, huge sums of money are transferred out of developing countries illegally. While such practices occur in all countries – and are damaging everywhere – they are probably larger in scale in developing countries because the institutions are weaker. And the impact in poor countries is worse because there are less resources available for investment and to fund public services. Estimates of the scale of this problem vary greatly but the OECD concludes that "there is a general consensus that illicit financial flows likely exceed aid flows and investment in volume”.

According to the 2014 OECD report "Illicit Financial Flows from Developing Countries: Measuring OECD Responses”, illicit flows involve money laundering, bribery by international companies, tax evasion and trade mispricing. In practice such flows range from private individuals transferring funds into private funds abroad without paying taxes, to highly complex schemes involving criminal networks. Most of the public attention has focused on the behaviour of kleptocrats such as president Abacha of Nigeria, or president Marcos of the Philippines. They and others like them looted their countries and after death were found to have large fortunes invested overseas in a wide variety of assets. Deeply guilty as these rulers were, part of the guilt lies with western institutions; the problem would not reach such massive proportions if it were not possible to move such ill-gotten gains out of the originating country. This agenda also requires a cleanup of tax havens which is a particular responsibility for the UK with its large number of tax havens in its overseas territories.

In 2011 at an important meeting in Busan aimed at improving Aid Effectiveness, agreement was reached to "accelerate… efforts to combat illicit financial flows by strengthening anti money-laundering measures, addressing tax evasion and strengthening national and international policies, legal frameworks and institutional arrangements for the tracing, freezing and recovery of illegal assets". The G20 and G8 have taken forward this agenda. The most recent summit of the G8 hosted by the UK government at Lough Erne stressed the need to improve the exchange of tax information and knowledge of the real persons owning companies. To achieve these aims will involve a massive effort to help countries strengthen their tax systems in the countries in which the wealth is earned. This agenda also requires a cleanup of tax havens which is a particular responsibility for the UK with its large number of tax havens in its overseas territories.

United Nations Convention Against Corruption (2003)

United Nations Convention against Corruption, 2003. Wikicommons/UNCAC. Public domain.Another example of how recently the international system has moved to tackle corruption is the United Nations Convention against Corruption (UNCAC) which was adopted by the General Assembly in 2003 and has been adopted by 174 member states.

It is the first global legally binding international anti-corruption instrument. It is extremely ambitious. In its 71 Articles divided into 8 Chapters, UNCAC requires that countries implement anticorruption measures aimed at preventing corruption, including domestic and foreign bribery, embezzlement, trading in influence and money laundering. The Treaty is also intended to strengthen international law enforcement and judicial cooperation, provide effective legal mechanisms for asset recovery, technical assistance and information exchange, and mechanisms for implementation. It is the first global legally binding international anti-corruption instrument. It is extremely ambitious. TI, which has played a significant part in the negotiation of the Convention, said in its 2013 Progress Report on the reviews provided for under the Implementation Mechanism,

“It is important to recognise that the Implementation Review Mechanism must deal with daunting challenges that are orders of magnitudes greater than those of other anti-corruption treaties. These result from the UNCAC’s extremely comprehensive scope and its worldwide membership of countries with large differences in political and legal systems. What has been accomplished in three years is impressive, but the process is still evolving”.

The international efforts to reduce corruption that have developed over the past 20 years constitute a massive agenda which is being worked through in multilateral institutions, individual countries, companies and civil society campaigns. It will take years of reform to fulfil the commitments that have been made. But the prize is enormous.

If all these commitments are fully implemented,16 of the poorest countries in the world would retain their own wealth: their losses are estimated by the sober OECD as being worth as much as the total of international aid and inward investment to these countries. The result would be that institutions and government systems across the world would be cleaned up and we would have a safe, more equally developed world with more people having a fair chance in life. Corruption everywhere would be reduced because there would be fewer opportunities and great difficulties for the corrupt to move their money to safe hiding places. Tax evasion by companies and individuals would be massively reduced, so the public services will be more fairly funded across the world. This would surely be a morally preferable and safer world for all of us.

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