Note: This pamphlet was first published in November 1998 as an electronic journal of the U.S. Information Agency onUSIA’s international home page (http://www.usia.gov/usis.html). Additional information on USIA’s electronic journalscan be found on the inside back cover of this pamphlet.

ECONOMIC PERSPECTIVES

Corruption: An Impediment to DevelopmentECONOMIC PERSPECTIVES A USIA ELECTRONICJOURMAL

There is no question that as we move into the global information age, foreigncorrupt practices threaten to undermine both the growth and the stability of ourglobal trade and financial system. Nowhere are the consequences more evident thanin emerging and developing economies. The financial crises in Russia and Asia haveclearly been deepened as a result of cronyism and corruption. As emergingeconomies open their doors to foreign investment and trade, corruption tends tothrive. At worst, it can impede the ability to attract overseas capital, it can damageeconomic development and reform, and it can hinder the growth of democraticinstitutions.

This issue of Economic Perspectives explores the economic costs of corruption andbribery and discusses new international strategies for tackling the problem. I hopeyou will support our efforts to fight this scourge, and I hope this discussion willhelp us focus on the steps we need to take to build a stronger global economy forpeople all around the world. - Vice President Al Gore

ECONOMIC PERSPECTIVESAn ElectronicJournaL of the U.S. Information Agency

CONTENTS

CORRUPTION: AN IMPEDIMENT TO DEVELOPMENT

LI FOCUS

PROMOTING THE RULE OF LAW AND ANTI-CORRUPTION IN A GLOBALIZED ECONOMY 4By Stuart Eizenstat, Under Secretary of State for Economics, Business, and Agricultural Affairs

Corruption damages economic development, hinders the growth of democratic institutions, and impedes the ability ofdeveloping countries to attract foreign investment.

THE OECD ANTI-CORRUPTION TREATY: WHY IS IT NEEDED, HOW WILL IT WORK? 8An Interview With Eleanor Roberts Lewis, Chief Counselfor International Commerce, U.S. Department of Commerce

A significant factor in the Asian economic crisis was corruption and cronyism. The OECD treaty offers an alternative tobusiness by bribery that is healthier and more stable for everyone.

CORRUPTION: A PERSISTENT DEVELOPMENT CHALLENGE 11-

-By J. Brian Atwood, Director, U.S. Agency for International DevelopmentDeveloped and developing countries alike share the growing view that corruption undermines their political andeconomic interests. USAID is at the forefront in providing strategies to developing countries to reform bureaucraciesand create independent judiciaries.

0 COMMENTARY

A BACK-TO-BASICS ANTI-CORRUPTION STRATEGYBy lames Wolfensohn, President, The World BankThe perception in donor countries that their money is being wasted by corruption is one of the greatest threats tofuture aid.

15

CURBING CORRUPTION: REFORMING THE BRIBE-GIVERS 18By Frank Vogl, Vice Chairman, Transparency InternationalIncreasing numbers of corporations around the world are becoming sensitive to the risks of being exposed as corrupt andto the merits of pursuing business with integrity.

CORRUPTION IN PROCUREMENTBy Donald Stromborn, President, IDBC

2 0

The best way to fight bribery is to reform the bidding process for government procurement contracts.

THE INTEGRITY PACT: A WAY OUT OF THE TRAPBy Michael Wieben, Chairman, Transparency International - Germany, and Carel Mobn, Chief Information Oficec

Transparency International

2 5

To initiate the process of cleaning up corruption in a given country, Transparency International has developed what itcalls an Integrity Pact. The pact is designed to eliminate bribery in a narrow market sector or limited geographical area.

2

JOURNALIST TRAINING TO CURB CORRUPTION 28By David Pezzullo, Consultant, Economic Development Institute, The World Bank

Media training in the broadest sense is arguably one of the most effective and justifiable means of curbing corruption insocieties in need of fundamental institutional reform.

CORRUPTION: THE POLISH AND RUSSIAN EXPERIENCESBy Timothy Frye, Assistant Professor of Political Science, The Ohio State UniversityBureaucratic reform is a key element to reducing corruption in Russia and Eastern Europe.

31

LI FACTS AND FIGURES

SUMMARY OF THE OECD ANTI-BRIBERY CONVENTION 33

TRANSPARENCY INTERNATIONAL’S 1998 CORRUPTION PERCEPTIONS INDEX 35

THE INTERNATIONAL CHAMBER OF COMMERCE’S RULES AGAINST EXTORTION AND BRIBERY 38

FOREIGN CORRUPT PRACTICES ACT ANTIBRIBERY PROVISIONS 40

THE LIMA DECLARATION AGAINST CORRUPTION 44

THE OAS INTER-AMERICAN CONVENTION AGAINST CORRUPTION 49

KEY U.S. GOVERNMENT CONTACTS AND INTERNET SITES 50

ADDITIONAL READINGS ON BRIBERY AND CORRUPTION 52-

3

FOCUS

Ll PROMOTING THE RULE OF MW AND ANTI-CORRUPTIONIN A GLOBALIZED ECONOMYBy Stuart E. Eizenstat, Under Secretary of State for Economic, Business, and Agricultural Afairs

The struggle against corruption is part of a Larger U.S. aim

to introduce rule of law into the international marketplace.In this article, Under Secretary Eizenstat presents the US.

case for trying to change the way international business hasbeen conducted in the past and describes the benefits the

changes will bring.

The development of the rule of law and effective anti-corruption strategies in the international arena, especiallyin developing and transitional economies, is very much inour national interest and has now become an integralcomponent of U.S. foreign policy. The transition ofemerging nations toward rule-of-law based societies freeof corruption helps to support the development ofaccountable democratic institutions and marketeconomics and to promote trade liberalization andeconomic growth from which American firms andworkers can benefit.

The Clinton administration has a real sense of optimismabout the rule of law and anti-corruption efforts. Therehas been a sea change in this area, with governmentsaround the world recognizing the importance of havinglaw-based systems and willing to discuss and address inmeaningful ways issues of corruption.

The development and implementation of a proper legalframework - modern constitutions with basic freedomsand human rights and an independent judiciary toenforce those rights - is vital to fostering democraticideals. The ability of citizens to turn to courts forprotection of their rights is fundamental. While theseconcepts are taking root around the world, the process ofeducation and change is a complex and long-term one.

The need for change is not just a matter of new laws oreven the building of institutions, but is systemic innature. It requires nothing short of the building of civilsociety in cultures long dominated by nondemocratic,autocratic traditions. This includes the cultivation of the

4

ethos of the rule of law and the need to replace cynicismabout the rule of law with optimism. The notions that agovernment is bound by rules and that individuals havethe right to challenge their governments have traditionallynot been established norms in many societies. Yet, it isfair to say that the movement globally is in the rightdirection.

FAIR AND PREDICTABLE LEGAL RULES

Having the necessary legal framework in place also is vitalto the development of the global marketplace. Theestablishment and implementation of a fair, predictable,and flexible set of legal rules is vital to the processes ofbusiness formation, the establishment of capital markets,the ownership and transfer of real property, theprotection of contract rights, and other key elementswhich undergird economic development. Likewise, theestablishment and enforcement of shareholder rights andrules on intellectual property are critical to fosteringmarket economics and a climate hospitable to the foreigninvestment necessary to generate economic growth. Anindependent judiciary also is important as a check againstarbitrary government actions that affect business - acommon problem in emerging markets - and as ameans of resolving private commercial disputes. I cannotemphasize enough the role that an independent judiciarycan play in both the development of democratic andmarket-based institutions. In short, as the Asian financialcrisis has revealed, the rule of law is important to long-term economic growth. Nobel economics laureateDouglass North expressed the connection betweendemocratic governance and economic development in hisNobel acceptance speech: “While economic growth canoccur in the short term with autocratic regimes, long-term economic growth entails the development of therule of law.”

The rule of law also supports social stability and peace bypromoting decision-making according to rules rather thanfiat; by providing reliable, nonviolent methods of settling

disputes; and by creating a framework of justice withinwhich violent conflicts involving war crimes and massivehuman rights abuses can be resolved. Enhancing the ruleof law also improves our domestic security by fosteringlegal institutions in other countries with the capacity tocombat transnational crimes such as terrorism, moneylaundering, drug trafficking, and trafficking in womenbefore they reach our borders.

The development of the rule of law is also important tothe current global efforts to combat corruption - whichhave been gathering a head of steam and have nowreached critical mass. The dilemma is that corruptiontends to thrive in developing and transitional economieswith incomplete and evolving legal systems; thephenomena are closely related.

The very complexity, overregulation, and lack ofpredictability in the legal systems in numeroustransitional and developing countries where governmentslack accountability and transparency serve as windows ofopportunity for corruption. Paradoxically, as theseeconomies liberalize and open their doors to foreigninvestment and trade, the very processes of change -privatization, procurement, and the like - become areaswhere corruption tends to flourish. Thus, corruption hasbecome more of a factor to U.S. and other firms doingbusiness in these emerging markets in recent years.

Corruption and related lack of transparency take manyforms, from grand corruption - outright requests forlarge payments as a condition for obtaining business -to petty corruption - the small payments typicallyrequested by a foreign customs agent. It includesprocurement fraud, money laundering, and classic casesof conflict of interest by foreign government officials. Arelated set of issues concerns insider dealings - cozyrelationships - that can be seen in state-owned orprivate firms in emerging markets. Also, U.S. firms havebeen faced with the unwillingness of foreign courts toenforce rulings in their favor.

THE HIGH PRICE OF CORRUPTION

Plainly, corruption damages economic development andreform and hinders the growth of democratic institutions.Corruption impedes the ability of developing countries toattract scarce foreign investment and distorts capitalallocation. Finally, corruption hurts U.S. exporters andsuppliers - in every state and district in the UnitedStates - and impedes international trade.

The U.S. government is aware of allegations of bribery inthe last year affecting international contracts worthalmost $30 billion by foreign firms, which are not boundby anti-bribery laws in their home jurisdictions. Ofcourse, in contrast, under the U.S. Foreign CorruptPractices Act, U.S. firms are criminally barred fromparticipating in the bribery of foreign governmentofficials in international business transactions. Thus,corruption has been a real impediment to American firmsseeking to do business abroad.

Paradoxically, while corruption concerns have been on therise in recent years in emerging and transitionaleconomies, there has at the same time been afundamental sea change in the willingness of manygovernments to address these issues. This is reflected in anumber of concrete steps being taken internationally tocounter corruption and promote the rule of law in avariety of ways - through multilateral conventions,bilateral diplomacy and assistance, international financialinstitutions, and the work of nongovernmentalorganizations.

A NEW TREATY TO COMBAT CORRUPTION

Of most significance, on December 17, 1997, on behalfof the United States, Secretary of State MadeleineAlbright signed the OECD Convention on CombatingBribery of Foreign Public Officials in InternationalBusiness Transactions. In this convention, 34 nations -our major trading partners - have agreed to enactcriminal laws which will closely follow the prohibitions inour own Foreign Corrupt Practices Act (FCPA).

This convention is a major achievement for the rule oflaw and has been a goal of successive administrationssince the 1977 passage of the FCPA. As then-PresidentCarter’s chief domestic advisor, I was involved indevelopment of the FCPA and can attest to the highpriority attached to getting a commitment from theworld’s largest industrial countries that they adopt strictanti-bribery laws of their own. The U.S. government,with the support of the private sector, has worked on thissteadily and has now met our goal of strengthening therule of law in international business and providing a morelevel playing field for U.S. businesses overseas.

The governments that signed the convention havepledged to seek its approval and the enactment ofimplementing legislation by the end of the year.Significantly, the United States has followed through on

this commitment. The U.S. Senate has ratified it, andCongress has passed implementing legislation, whichPresident Clinton has signed into law. Such earlyAmerican action will help to spur our major competitors,whose implementation efforts will directly benefit ourinternational interests and U.S. firms and theiremployees.

The convention obligates the parties to criminalizebribery of foreign public officials, including officials in allbranches of government, whether appointed or elected.This prohibition includes payments to oficials of publicagencies, public enterprises, and public internationalorganizations. This, therefore, would cover government-controlled parastatals, such as airlines, utilities, and statetelecommunications companies, which are increasinglyimportant in public procurement. Only those operatingon a purely commercial basis would be exempt.

The parties must apply “effective, proportionate anddissuasive criminal penalties” to those who bribe foreignpublic ofGals. The convention also requires that theparties be able to seize or confiscate both the bribe andthe bribe proceeds - net profits that result from theillegal transaction - or to impose equivalent fines so asto provide a powerful disincenrive to bribery.

The convention has strong provisions to prohibitaccounting omissions and falsification, and to provide formutual legal assistance and extradition.

The convention will cover business-related bribes toforeign public offlcials made through political parties,party officials, and candidates, as well as bribes paiddirectly to foreign public of&&. While the conventiondoes not cover directly bribery of foreign political parties,party off&ls, and candidates for political of&e, OECDmembers have agreed to discuss these issues on a prioritybasis in the OECD’s anti-bribery working group and toconsider proposals to address these issues by the May1999 OECD annual ministerial meeting. A follow-upprocess in the OECD will allow us to monitor andevaluate national action to implement and enforce theconvention.

Also, while the tax deductibility of bribery is not coveredby the convention, we are pressing our partners that allowsuch payments to be deducted as business expenses toeliminate this preferential treatment. Since a 1996OECD recommendation which called for such action,three countries - Denmark, Norway, and Portugal -

6

have completed the necessary legislative action, and 9 of10 remaining countries have begun the process ofchanging their laws so as to deny the tax deductibility ofbribes.

THE U.S. STRATEGY

The convention is the centerpiece of a comprehensiveU.S. government strategy to combat corruption andbribery and promote the rule of law. In this hemispherewe successfully concluded in 1996 the Inter-AmericanConvention Against Corruption, which also was recentlysubmitted to the U.S. Senate for ratification. Like theOECD convention, this convention, negotiated underthe auspices of the Organization of American States,requires the parties to criminalize transnational bribery ofpublic officials. It also addresses broader issues ofcorruption. The convention provides procedures forcooperation in extradition, seizure of assets, mutual legalassistance, and technical assistance where acts ofcorruption occur or have effect in the territory of one ofits parties. The convention also contains preventivemeasures that the parties agree to consider, includingsystems of government procurement that assure openness,equity, and efficiency.

Through a variety of mechanisms, the U.S. governmentalso has taken steps on the demand side of the corruptionequation to promote the rule of law and good governancein developing and transitional economies and, in sodoing, limit the opportunities for corruption in thesedynamic environments. Obviously, it only makes sense towork on these issues in countries where there is somehigh-level willingness by the governments involved toaddress these concerns. We are, however, seeing increasedinterest in these issues in the developing world. We alsowork closely with the international financial institutions,particularly the World Bank and the InternationalMonetary Fund, to encourage their increased emphasison anti-corruption activity.

We have identified eight key elements of the corruptionproblem and are developing programs to deal with eachseparately.

First, economic policy reform, including deregulation.Onerous and unnecessary licensing requirements need tobe removed, discretionary authority over business mattersneeds to be reduced, and more competition needs to beinjected into the economy. This involves reshaping therelationship between government and business into an

arms-length one, within an appropriate but not stiflingregulatory framework.

Second, transparency reforms, including steps tostreamline and make more predictable administrativeprocesses affecting trade and investment.

Third, public sector/civil service reform to shrink the sizeof bureaucracies in formerly state-controlled economiesand reduce their influence in markets. This includes theestablishment of a professional civil service and a merit-based system.

Fourth, public finance reform to create effectivesurveillance agencies armed with accounting and auditingskills. The need for procurement reform - theestablishment of fair and open procedures for publicpurchasing with World Trade Organization norms - alsois important.

Fifth, judicial reform to create independent court systemswith powers to enforce their rulings. This includes thedevelopment of independent judiciaries that operatepursuant to ethical principles and codes of conduct, andto establish the judiciary as a check against arbitrary statepower in both the economic realm and the area ofpersonal freedoms.

Sixth, commercial law reform to create appropriateregulation to deal with securities, shareholders’ rights, realestate, intellectual property, bankruptcy, anti-trust, andthe environment. The effort here is not only to createnew laws but to develop appropriate institutions toadminister them.

Seventh, strengthening civil society through publiceducation and civic awareness programs to improvepublic oversight and participation in government, as wellas support for an independent media. U.S. international

broadcasting provides anti-corruption programming on abroad range of issues, broadcast worldwide and to selectregions. The U.S. Information Agency also has providedgrant funds to organize international conferences andnetworks on the proactive role that civic education canplay in creating an environment resistant to crime andcorruption.

Eighth, reform of law enforcement agencies to root outinternal corruption and raise respect for human dignity,

In addition, there is the area of ethics reform - theestablishment of codes of conduct for governmentofficials and financial disclosure rules.

It is important to underscore that rule of law and anti-corruption efforts are by no means reserved for the publicsector. Indeed, our assistance efforts heavily rely onprivate sector support, and private/public partnershipsabound in this area. For example, the American BarAssociation’s Central and East European Law Initiative isa public service project designed to advance the rule oflaw by supporting legal reform in Central and EasternEurope and the Newly Independent States.

U.S. firms doing business abroad can help by establishingtheir own internal corporate compliance programs andguidelines and follow these standards in our businessdealings. The adoption of these private self-helpapproaches and the broad dissemination of corporate bestpractices are important in changing the landscape onbribery and corruption and advancing the rule of law inthe global business community.

These types of private efforts, together with theadministration’s efforts, can make a difference in workingtoward greater acceptance of the rule of law as we movetoward the 21st century. 0

Ll THE OECD ANTI-CORRUPTION TREATY:WHY IS IT NEEDED, HOW WILL IT WORK?An Interview With Eleanor Roberts Lewis, Chief Counselfor International Commerce, U.S. Department of Commerce

After a decade of negotiations, the 29 members of theOrganization for Economic Cooperation and Development

(OECD), plus tb ree emerging market countries in SouthAmerica and two in Eastern Europe, have signed a treaty

outlawing the payment of bribes to foreign government

oficials. The treaty is scheduled to go into effect in December

1998. Will [t be successfil?

Eleanor Roberts Lewis, who has represented the United States

in negotiating many international trade and investment

agreements including the North American Free TradeAgreement and the OECD anti-corruption treaty, says tbat

although bribery offoreip oficials is an accepted businesspractice in many countries, there is a growing realizationthat the costs are high not only for the multinational

company bribers but also for the development efforts ofemerging countries as well, This interview was conducted by

USIA Economics Writer Phillip Kurata.

Question: Why does the United States consider theOECD anti-corruption treaty to be so important?

Lewis: In the late I!VOs, the United States passed a lawcalled the Foreign Corrupt Practices Act, whichprohibited U.S. companies from bribing foreigngovernment officials. Our Justice Department has strictlyenforced that statute so that, in general, U.S. companiesare not involved in giving bribes. We had thought at thetime that other countries would follow us, and weworked through the United Nations and otherorganizations to encourage them to pass similar laws.They did not. The companies of other countries havecontinued to bribe foreign officials, and where significantbribes are given, people get the business. U.S. companiesare losing billions of dollars a year in business because ofthis unlevel playing field. We have been working for 10years in the OECD with other developed countries to tryto reach an agreement that no country would allow itsfirms to pay bribes anymore.

Q Other than make it easier for U.S. firms to getbusiness, what is this treaty intended to accomplish?

8

Lewis: It is important from the point of view of goodgovernance and economic development. Bribes arecontaminating developing countries, into which they aremostly paid. Bribery creates a situation that corrupts thegovernments of these countries, causes dislocations withintheir economic systems, and often results in theinappropriate allocation of development aid given tothese countries. Even though we at the CommerceDepartment are focused mainly on the effect of the treatyon U.S. business, there are definitely other effects that weshould be very concerned about.

Q On the surface, it appears that U.S. business showslittle enthusiasm for this international anti-corruptionaccord. How do you assess support for the treaty amongU.S. businesses and foreign businesses?

Lewis: As far as the United States is concerned, there is alot of business support, but companies are reluctant tocome forward individually because they feel the topic isso sensitive. It’s a little like the anti-boycott act and someof our sanctions treaties; people are afraid that if theyaddress the topic, it looks like they’re corrupt or there’ssomething wrong with them. So mostly they’ve beenaddressing it through certain organizations. For example,the Business Roundtable and the National Association ofManufacturers - both major U.S. business groups -have written letters to the U.S. Senate and the U.S.House of Representatives strongly endorsing the treaty,

U.S. companies support the treaty because they knowthey’re losing business as the result of bribery. When theybid for a procurement contract with a developing countrygovernment, their European and Asian competitors cancome in and offer multimillion dollar bribes. U.S.companies know they cannot do that under U.S. law.

Now not all foreign governments support the OECDtreaty, for obvious reasons. Their companies have beenwinning a lot of contracts during the last 20 years. Wehave had to strongly urge some foreign governments tosign this convention. But I think things are changing forseveral reasons. One is that a number of key countries

have had serious domestic political corruption scandalsthat may have made them think twice about publiclyobjecting to the treaty from the point of view of theirconstituencies at home. Also, some of their companieshave decided that the price has gotten awfully high. Somedeveloping country officials have upped the ante, areasking for more and more money and a higher and higherpercentage of the contract. Instead of 1 percent or 5percent, a few hundred thousand dollars or a milliondollars, we’re seeing bribes of 20, 30, 40 million dollars. Imean, really big dollars. It’s cutting into the bottom lineof some of these foreign companies. I think some of themhave gone to their governments and said, “Hey, if wecould all join hands and cut this out together, we wouldprefer it too.”

Q Critics of this treaty say it is an attempt by the UnitedStates to impose its version of corporate morality aroundthe world. Could you respond to that?

Lewis: I don’t think I could totally deny that. It’s not onlycorporate morality, it’s a little bit of good governancemorality. We feel very strongly that official corruption isbad for many reasons. As a country that is supposed to beleading in the world, not only militarily but also ineconomic issues, it is appropriate for the United States toencourage people to line up behind rules that supportgood governance and appropriate trading and investmentrelations.

We’ve done that in a lot of other areas. You could say thewhole GATT (General Agreement on Tariffs and Trade)was a U.S. government initiative, really. Many of the ruleswe have today in the international economic arena are theresult of our offering and encouraging and pushingpeople to set up international relations somewhat the waythey do their domestic relations. Under rule of law,instead of having everybody running around like wildand crazy cowboys, you have people or governments orcompanies working together under agreed-on sets ofstandards. It regularizes and stabilizes internationaleconomic relations. I use the word stabilize veryintentionally; our view is that a significant factor in theAsian economic crisis was corruption and cronyism in thegovernments and the companies and the banks of thecountries that are now suffering terribly under this crisis.We’d like to offer an approach that we think is healthierand more stable for everyone.

Q How is the OECD treaty going to be monitored andimplemented?

Lewis: In the OECD, there is a bribery working groupthat negotiated the treaty. Every member of the OECD,plus some outsiders who wanted to join the treaty(Argentina, Brazil, Bulgaria, Chile, and Slovakia) have aseat at the table. Once the treaty goes into effect, thatgroup will begin a multiyear monitoring program, Iemphasize multiyear because I realize that this is not amagic wand that will make all corruption go away nextFebruary.

The bribery working group will start by reviewing all theimplementing legislation of all the countries that haveratified the treaty. If we feel some legislation isinadequate, we’ll ask countries to improve it. Then we’regoing to use a peer-review mechanism. We will sendteams of experts, mostly criminal prosecutors, to visiteach country and see what organizational and physicalmechanisms have been set up to enforce the law. Whereare they located in their justice ministry? Is somebody incharge of enforcement? What investigative mechanismsand budget have been allocated to anti-bribery efforts?Once that phase is done, we’re going to watch ascountries bring cases. We have agreed to cooperate onprosecutions and to share information with each other.Let’s say a U.S. company comes to the U.S. governmentand says, “We believe we have good information aboutbribes in X developing country, and three or fourEuropean firms are involved in giving these bribes.” If wefeel that there is supporting information, we may give itto the European governments involved and take it to theOECD working group and say, “The next time your peerreview team visits those countries, follow through andfind out what they did with that information. Did theyinvestigate? Did they indict? Did they prosecute?”

Q What gives you confidence that this is going to work?

Lewis: One thing that encourages me is that, during thenegotiations, I talked with a lot with the prosecutors frommany of the countries involved. They were part of theircountries’ negotiating teams. It turns out that prosecutorseverywhere around the world are pretty much alike. Theyare used to prosecuting companies from their owncountries. That’s what they do for a living, unlike a tradeministry that is used to supporting and promoting itsbusiness people. It is possible that as soon as these locallaws go into effect, assuming that they are adequatelydrafted, anti-bribery prosecutions will start. That was theexperience of our Justice Department here in the UnitedStates. Our law was passed in 1977. By 1978, we had

9

some prosecutions and some people paying tines. I thinkthat will happen in a number of countries.

Q Is there any danger that one country will punishbribe-givers with taps on the wrist, while the UnitedStates imposes draconian penalties?

Lewis: I think that definitely is an issue. The conventionitself says specifically that the penalties must be at least assevere as the penalties for domestic bribery and they mustbe dissuasive. They have to be more than a slap on thewrist. If you have a multibillion dollar corporation givinga bribe of $50 million, you can’t fine it $1,000. Thatwould not be considered dissuasive under the conventionstandards. So we’ll take a look at the fines that judgesactually hand out.

Q You noted that many OECD countries are supportingthe anti-bribery treaty reluctantly. What incentives canthe United States offer to get the other signatories toenforce the treaty?

Lewis: I think the biggest incentive may be enlightenedself-interest. A number of companies are finding that bigbribes are eating substantially into their bottom lines. Ifthey felt that none of their competitors were givingbribes, they would be quite happy not to give themeither, and they’ve told their governments that.Enlightened self-interest is probably the best enforcementmechanism you have for anything, particularly in theinternational arena where we don’t have bribery policeforces to run around and arrest people across borders.

As far as negative leverage, the public diplomacy role isalways available. If countries are blatantly uncooperative,at some point we can go public. There are some countriesin which the local political dynamics would make thattactic effective.

Q Are any sanctions contemplated?

Lewis: No, there are no sanctions in the treaty. We’resitting down to a table of equals and pushing andbadgering each other.

Q Will the World Trade Organization (WTO) beplaying a role in implementing the OECD treaty?

Lewis: Not in implementing this treaty, but the WTOhas a very important role to play with regard to anotheraspect of the corruption problem. This treaty is aimed atthe supply side, or bribe-givers. We need the WTO tohelp us with the demand side, the developing countries.At the moment, there is nothing regulating them. Mostof the problems occur in government procurements.

Years ago, the WTO set up a government procurementagreement that was supposed to regulate that area, butthey did not make everybody sign it. As of now, only 25countries or so belong to it - mostly the same richcountries that belong to the OECD. Virtually nodeveloping country has signed this treaty. The UnitedStates has proposed that the WTO take up somethingcalled a “transparency initiative” under which agovernment would publicly advertise procurementcontracts, publish standards or criteria for those contracts,and open the bids publicly. If people object to thedecision, they would have a place to appeal. If the WTOcan succeed in that in the next couple of years, that willbe a major contribution to solving this problem. Thenwe’ll have both halves of the sandwich, the developedcountries and the developing countries. 0

Ll CORRUPTION: A PERSISTENT DEVELOPMENTCHALLENGE

By J. Brian Atwood, Director, U.S. Agemy for International Development

The United States, while spearheading the campaign by theOrganization for Economic Cooperation and Development

to criminalize bribery by multinational companies, is

working with developing countries to Lessen the opportunitiesfir government oficials to extract bribes. The U.S. Agency

fir International Development (USAID) is the prime

government agent in this effort. Brian Atwood gives anoverview of the policies and programs his agency has

undertaken to discourage corruption.

Worldwide economic conditions in 1998 show that thepath to sustained economic growth has taken someunexpected detours. Even the largest and most powerfulnations are not sheltered from the economic and politicalmeltdowns happening elsewhere. The economies ofvirtually all nations are closely linked through electroniccommerce, the Internet, and the free flow of internationalcapital. However, the freedoms of the global economyalso have an ominous downside if misused.

The recent turmoil in global markets, with its widespreadeconomic and social fallout, will test the commitment ofdeveloping countries to free market economies anddemocratic government. Many of these countries areexperiencing severe economic downturns and socialdisruptions. One contributing factor, perhaps, is the lackof institutional safeguards to protect their economies.Lacking the framework for good governance and the ruleof law, and troubled with inadequate regulation of banks,unsound investment decisions, questionable evaluation ofrisks, nontransparent accounting procedures, and limitedopenness in government, opportunities for cronycapitalism and corruption often surface in developingcountries. While economies were booming, these seemedto be ancillary issues. However, they deter economicgrowth and social progress.

THE FALLOUT FROM CORRUPTION

In recent years, corruption has had devastating impacts insuch countries as Nigeria, Indonesia, and Russia bycorroding their economic and political systems. Not

surprisingly, these countries fall at the bottom (mostcorrupt) of Transparency International’s 1998 CorruptionPerceptions Index, with ranks of 81, 80, and 76,respectively, out of 85 countries.

In Nigeria, the late General Sani Abacha and his croniessiphoned billions of dollars out of the oil industry, whichis the country’s primary source of wealth and accounts for80 percent of government revenue. Diversion of fundsfrom state coffers led to a marked deterioration ininfrastructure and social services and a near-collapse ofstate-owned oil refineries. The country’s per capitaincome, which was as high as $800 in the 198Os, has nowdropped below $300. As this oil-rich country faced a fuelshortage and depression, the government resorted to evergreater repression to stay ensconced in its position ofadvantage. Only the untimely death of Abacha hasprovided a possible opening for political and economicreform.

Another well-known example of government corruptionthat undermined the national economy is in Indonesia,where state banks channeled money to projects involvingformer President Suharto’s family and friends. In the199Os, banks allowed arrears on loan repayments tomount unchecked and circumvented rules to preventexcessive foreign-currency borrowing. Consequently,when the value of the rupiah fell in 1997, the wholefinancial system began to collapse. Bankruptcies andmassive layoffs have returned as many as half ofIndonesia’s ZOO million people to poverty.

Russia provides a third notable example of corruptiondamaging political and economic development. In Russia,corruption linking an oligarchy of financial-industrialgroups with government officials has distortedprivatization, undermined economic reform, deterredtrade and investment, and eroded public confidence instate institutions. The weak state of the economy,combined with the recent financial crisis, has given asubstantial political boost to former communists andother opponents of reform.

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SOME POSITIVE STEPS

Despite this sobering picture, many countries areattacking the underlying problems that give rise tocorruption. In Africa, for example, major anti-corruptionconferences have been held within the last 18 months inEthiopia, Mozambique, and Ghana. These conferencesprovided a forum for African leaders to developinnovative strategies to fight corruption, to exchangeinformation with other countries from around the world,and to inform the international community about thesteps they need to take to reduce corruption.

Parallel to these Africa-wide initiatives, several Africancountries have moved from rhetoric to action inaddressing corruption. In Botswana, the Directorate onCorruption and Economic Crime is a model for anti-corruption institutions, with more than 4,200 corruptioncases handled since 1994. In Uganda, the constitutionestablished an Offtce of the Inspector General, which hasa broad mandate and specific powers to addresscorruption, and which is required to submit periodicreports to parliament.

There is a growing consensus among the developed anddeveloping countries alike that the fight againstcorruption advances their national and economicinterests. At recent summits of the G-7 leaders and atmeetings of development ministers, communiquesunambiguously condemn corruption for weakening theglobal trading system, impeding sustainable economicdevelopment, and stifling the functioning of democraticinstitutions. Combating corruption is now one of thehighest priorities on the agenda of both internationaldevelopment agencies and lending organizations.

The United States, through its international affairsagencies, is committed to combating corrupt businesspractices and improving the poor functioning ofinstitutions that allow corruption to flourish. Bribery is abarrier to trade that hurts U.S. commercial interests andundermines the U.S. objective of promoting democracyand economic development in developing countries. Inaddition, the prevalence of corruption inhibits our abilityto foster the reconstruction of economies where there areimportant foreign policy interests.

USAID’S RESPONSE

As a development agency, USAID has a major interest inseeing that bribery does not become commonplace.

Consequently, USAID has identified anti-corruption -which is a key element in the Clinton administration’sstrategy to fight international crime - as a priority in itsdevelopment agenda. To borrow a phrase, “allinternational crime is local.” Thus, any long-termsolution to the problem of international crime, includingcorruption, must rely ultimately on strengtheninggovernment institutions, engaging civil society, andestablishing the rule of law in individual countries. Tosucceed, the fight against corruption cannot be a short-term, technocratic affair but must involve the public in along-term, sustained campaign.

USAID is designing a framework, in close consultationwith other bilateral and multilateral donors, foraddressing corruption and other forms of criminalactivity. This framework is based on many of the lessonswe have learned from working with developing countriesduring the past 35 years. These include, most notably, arecognition that political instability, weak publicinstitutions, and poor economic management create anenvironment in which widespread corruption and certaintypes of criminal activities flourish, and that theseconsequences, in turn, undermine economic growth,increase the potential for state failure, and feed theactivities of organized crime.

Some of the major USAID activities include:

l Raising awareness about the costs of corruption.Efforts to raise awareness about the costs of corruptionand to mobilize the political will for fighting it are centralcomponents of USAID’s program activities. USAIDsupports efforts to publicize procedures and rights,conduct corruption perception surveys, sponsor integrityworkshops, foster anti-corruption nongovernmentalorganizations, promote civic monitoring, provide trainingin investigative journalism, promote private sector effortsto prevent corruption, and advocate internationalcooperation and conventions.

l Promoting good governance. USAID works toimprove transparency and oversight in governmentthrough activities such as integrated financialmanagement systems and training and technical assistancefor audit institutions and anti-corruption agencies.USAID also seeks to realign incentives to governmentofficials through ethics codes and financial disclosurerequirements.

l Strengthening the justice sector. Corruption flourishes

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where institutions in the justice sector - including thejudiciary, prosecutors, police investigators, and the privatebar - are weak and incapable of investigating andprosecuting criminal activity. To strengthen these systems,USAID programs support drafting new criminal andanti-corruption laws, training prosecutors and judges, andimproving court administration to prevent tamperingwith records and reduce delays in hearing cases.

l Reducing the government’s control over the economy.Governments exert significant control over the economythrough state-owned enterprises, licenses, tariffs, quotas,exchange rate restrictions, subsidies, public procurement,and provision of government services. Often suchcontrols create opportunities for abuse and impedeeconomic growth. USAID works to reduce theseopportunities through deregulation, delicensing,privatization, and competitive procurement.

SPECIFIC USAID INITIATIVES

In the past year, USAID has taken a number of steps topromote anti-corruption efforts. Washington-basedofficers have convened an anti-corruption working groupthat meets monthly to exchange information andcoordinate work across bureaus. Given the cross-sectoralnature of corruption, both economics and democracyofficers participate in the group. A subcommittee of theworking group is developing policy guidance on anti-corruption activities for USAID. This fall, the agency’sCenter for Democracy and Governance completed aUSAID Handbook on Fighting Corruption, which isavailable by e-mail at docorder@dec.cdie.org or by fax at(703) 351-4039.

USAID is also supporting anti-corruption efforts througha grant to Transparency International (TI). This grantprovides $2 million for intensive anti-corruption work innine countries and for regional lessons-learnedworkshops. The country programs will start with anintegrity workshop to foster group diagnosis ofcorruption problems and development of an action planto fight them. Countries targeted in this grant areBangladesh, Benin, Bulgaria, Colombia, the DominicanRepublic, Ghana, Mozambique, the Philippines, andUkraine. USAID is also contracting with the Center forInstitutional Reform and the Informal Sector (at theUniversity of Maryland) to develop four case studies ofsuccessful anti-corruption interventions to feed intoregional workshops that TI will organize.

USAID regional bureaus also have developed a number ofanti-corruption initiatives. The Latin American andCaribbean Bureau has initiated an assessment of itsRegional Financial Management Improvement Project II,which has used $7 million over five years to improvegovernmental accountability and financial managementand plans to issue a follow-on contract in 1999. Theproject hosts a donor consultative group, publishes amonthly newsletter entitled Accountability/Anti-corruption, sponsors regional teleconferences calledRespondacon, and provides technical assistance. Similarly,the Eastern Europe/Newly Independent States Bureau hasestablished an anti-corruption working group, developedan anti-corruption strategy, and set aside $900,000 overtwo years to establish a donor consultative group, supporttraining workshops, assist assessment and strategy designexercises, develop a newsletter, and write reports andprogram materials. The Asia/Near East Bureau has setaside $200,000 for an assessment and development of aregional anti-corruption strategy.

In addition, USAID is co-sponsoring anti-corruptionworkshops with the Organization for EconomicCooperation and Development to follow up on andbroaden discussion of the anti-bribery convention signedin December 1997. And the agency’s Global Bureau is co-sponsoring an international conference on the role of theprivate sector in fighting corruption to be held inWashington, D.C., in February 1999.

USAID’s Inspector General has also furthered anti-corruption efforts through its work with Supreme AuditInstitutions (SAIs) in developing countries. These SAIsare national auditing agencies similar in many respects tothe U.S. General Accounting Office. Although SAIs canconstitute a country’s first line of defense in combatingfraud, waste, mismanagement, and corruption, in manycountries they lack the resources and expertise to fill thiscrucial role. To help fill this gap, the Inspector General’soffice has provided basic training to SAI staff in countriesreceiving USAID development assistance.

THE DEVELOPMENT CHALLENGE

Corruption is a global problem. The industrializedcountries are certainly not immune from corruptpractices, and all have a responsibility to be part of thesolution. However, corruption appears to exact a highertoll in developing countries and transition economiesbecause they can least afford the consequences.Corruption prevents many countries from addressing

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their most serious development challenges, deters foreignand domestic investment, undermines confidence inpublic institutions, and exacerbates budgetary problemsby depriving governments of significant customs and taxrevenues.

The recent upheaval in financial markets and indeveloping country economies underscores theimportance of transparency in public institutions andpublic decisions. USAID programming to furthersustainable development and foreign policy objectivessupports a wide array of activities to combat the rootcauses of corruption.

By supporting such efforts, countries become bettertrading partners with the United States and can attractforeign investment. Also, one of the United States’ keyforeign policy interests is the promotion of democraticdevelopment around the world; by supporting programsto combat corruption, developing country governmentsgain greater legitimacy and are better able to promotepolitical stability and economic development. And theybecome better development partners as well as countriesin which long-term sustainable development can beachieved. 0

COMMENTARY

Ll A BACK-TO-BASICS ANTI-CORRUPTION STRATEGYBy James D. Wolfensohn, President, The World Bank

The WorU Bank is one of the most voc;ferous critics of

comrption since its president, James Wolfensohn, laid out the

bank? anti-bribery policies in October 1996 Mr.Wolfensohn reiterated the Bankj commitment to$gbt

corruption with renewed vigor at the 1998 meeting of the

World Bank and the International Monetary Fund inWashington, D. C. He pointed to the practice as one of the

prime causes of the financial crisis afflicting much of Asia

and other emerging economies. In this article he spells out

the Banks strategy fir dealing with corruption and warns

governments in developing countries that they will jeopardize

their foreign assistance and investment by condoning

corruption.

Over the past year, much attention has been paid to thecauses and consequences of the global financial crisis.There is no doubting the sense of urgency when it comesto discussions about new financial architecture, betterbanking systems, and improved surveillance and riskanalysis. These are all vitally important, and cooperationin the search for common answers must continue.

But there is another crisis that has received far too littleattention. It is the human crisis. Hundreds of millions ofpeople risk being sent back into poverty in countriesseverely affected by economic turmoil. Decades of socialprogress hang in the balance. It is a crisis that hurtschildren by pushing them out of school and into hardand often dangerous labor. It is a crisis that throwsmillions of people out of work and tears at the cohesionand security of social life. It is a crisis about which wehave heard too little.

This crisis must be addressed. There is much to be done,but all strategies must begin with a commitment tobuilding economies and societies that are open,transparent, and, ultimately, accountable. This meansmaking a commitment to fighting the cancer ofcorruption. No matter how much investment and tradeflows into a country, and no matter how fast theeconomy is growing, economic stability cannot take root

in an environment subverted by corruption. Whether it iscronyism among huge corporations and governmentdecision-makers or low-level bribery of customs officialsor judges, corruption undermines the rule of law,strangles economic growth, and hurts the poor mostseverely.

THE TRUE IMPACT OF CORRUPTION

For years, it was believed that bribery and other forms ofcorruption were effective and even necessary tools fordoing business in developing countries. By greasing theright palms, so the thinking went, firms achieved acompetitive advantage. Not so. Research undertaken bythe World Bank and others shows .that far fromlubricating business activity, bribery actually fuels thegrowth of excessive and discretionary regulations. Bribery,in short, feeds on itself, producing layer upon layer ofbureaucracy eager to get in on the action. The fact of thematter is that in countries where corruption is recognizedto be high, firms spend more time with bureaucrats andpublic officials negotiating licenses, permits, and taxes.

The evidence also shows that countries with notoriouslyhigh levels of corruption risk marginalization in a worldof rapid economic integration. This is all the more cleartoday. Many of the challenges we face today can betraced, in part, to cronyism, shallow disclosurerequirements, and opaque record-keeping. Open marketscannot work behind closed doors. Both private capitalflows and off&l development assistance are increasinglydiscriminating with regard to policy performance andinstitutional integrity. Investors today have too manyoptions, and they are better able to move their money towhere the risks of corruption are less pronounced. Andofficial donors, with shrinking aid budgets, have alsodrawn the line. Well-informed publics and wary aidagencies and development institutions are seeking returnson their aid investments - in the form of povertyreduction and social development - with the same rigorthat private investors look for financial returns.Perceptions in donor countries that corruption in

recipient countries sends their aid assistance down a blackhole is one of the greatest threats to future aid. Again, itis the poor who suffer.

We at the World Bank, as with other multilateralorganizations, are fully aware that despite continuedvigilance and state-of-the-art auditing and investigativemeasures, the projects that we support are not immunefrom the pressures of corruption. There is simply no wayto fully isolate individual projects and program lendingfrom fraud if it is pervasive throughout the environmentin which they function. This calls for continued effortson the part of the Bank to pursue and prosecute fraudwherever we find it, while simultaneously strengtheningthe institutional structures that will ultimately help stopcorruption at its source. It will be a difficult, long-termstruggle. But make no mistake, it is a winnable fight, andone that must be fought.

TOWARD GOVERNMENT REFORM

Important steps have been taken. Corruption is not just adomestic public sector problem. For every taker of a bribethere is a giver; often this means private sector agentsbribing offtcials in other countries. Private businesspeople, wherever they are operating and no matter whatthe conditions, must follow the highest standard ofprobity. The initiative taken last year by the Organizationfor Economic Cooperation and Development (OECD) tocriminalize the bribery of foreign offtcials is a major stepforward in this direction. Continued progress in this areais essential.

The questions are: what can governments do to reducecorruption, and what is the role of internationalorganizations such as the World Bank? Many would liketo see the World Bank use its resources and skills tounilaterally rid a country of corruption overnight. Stillothers believe the Bank, to be serious, must completelycut off all lending to countries at the first sign of fraud.But we are not, and cannot be, a world policeman. Norwill corruption be eradicated overnight. There are,however, important steps that we can and must take toattack the root causes of corruption. What are these?

Since becoming president of the World Bank, I havetraveled to more than 84 developing countries. I can saywith certainty that corruption is a severe problem in somepoor and transition countries not because the people donot truly want integrity in public life. Rather, corruptionflourishes because conditions are ripe for it. Indeed, a

look back at the history of the United States, England, orany other industrial country reveals that all countries havehad to struggle against extreme corruption. This battlenever ends. In too many developing countries today,however, government institutions that provide theessential regulatory foundation for a healthy economy areeither weak or missing altogether. Deficiencies in bankingand financial regulation, corporate governance, taxcollection, judicial systems, auditing controls, and anumber of other areas that create transparency ineconomic affairs erode investor confidence and mitigateagainst long-term, stable investment.

Anti-corruption strategies must begin with strengtheningthese institutions. In the year since the World Bank issuedits Anti-Corruption Policy report, more than two dozendeveloping countries have approached the Bank forassistance in combating the problem. We are inconsultation with all of these countries and are alreadyworking to support strategies in a number of them.Specifically, the Bank seeks to work with borrowinggovernments on long-term institution building; onstructural changes, such as breaking up monopolies andother market distortions that provide opportunities forexploitation and corruption; in basics such as trainingcivil servants in standardized procurement anddisbursement practices; and, of course, in economicpolicy-making, such as lowering tariff barriers andintroducing competitive credit markets that createcompetition and reduce the stranglehold on importanteconomic resources. These changes are absolutely essentialfor building markets that place people first and thatreduce built-in economic, legal, and social power of thestrong over the weak.

In addition to reforming government, we must recognizethe powerful influence of public scrutiny andparticipation. This is important because it shines a lightnot only on those who are corrupt but also on those whoare struggling to bring integrity to public life. The Bank,through its Economic Development Institute (EDI), hasbrought together policy-makers, journalists, and businesspeople, often for the first time, to uproot and exposesources of corruption. Through such mechanisms asdiagnostic surveys on the provision of public services andbusiness practices, and training judges, parliamentarians,auditors, and journalists on how to identify and combatcorruption, the Bank is helping local communities andnational governments confront corruption in a practicalmanner. We know that it works. In Botswana, Uganda,Chile, Poland, and a number of other countries, real

progress has been made. People are living better livesbecause of this progress.

CONSIDERING THE HUMAN FACTOR

In this year that we commemorate the 50th anniversaryof the Universal Declaration of Human Bights, it isimportant to remember that development is about morethan economic policies and incentives. Economic growthcan only take place alongside dynamic social progress andwide-open civic discourse.

Government institutions that shape the place of citizensin the economy must, if they are to work, be shaped bycitizens. We have come a long way in recent years. Voters

no longer tolerate corruption or the misappropriation ofpublic trust. Civil society in nearly every country in theworld is holding leaders accountable. The internationalcommunity, including the private sector, is joining handsto build integrity into the rules that govern globalmarkets.

We have a long way to go. But by remembering that aglobal economy, while much more than the sum of itsparts, is in fact made up of people who live individuallives, with unique dreams, confronting specific challenges,we are better able to build a world marketplace in whicheveryone benefits. LI

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Li CURBING CORRUPTION: REFORMINGTHE BRIBE-GIVERSBy Frank Vogl, Vice Chairman, Transparency International

“The reality is that to maximize opportunities in thegrowing markets of Central and Eastern Europe and in

developing countries, corporations must strive to be seen as

honest, long-term, committed guests, “says Frank Vogl,

president of Vogl Communications, Inc., and vice chairman

of Transparency International. Vogl argues that even

allegations ofpaying bribes can reduce demand for a

company? products, pbnge its share price, and spark politicaland media investigations.

Multinational corporations are beginning to join a globalmovement to combat corruption. To have suggested thisfive years ago risked ridicule. Today, even the mostestablished organizations are on board in a vast uphillstruggle to fight back against bribery.

Let me cite just a few examples:

l Mark Moody-Stewart, chairman of Royal Dutch Shell,has crafted a whole new code of business ethics for hiscompany that fully embraces the edict that Shell will notengage in any form of corrupt practices.

l World Bank President James Wolfensohn, in recentremarks to finance ministers and central bankers frommore than 170 countries, called for a new developmentframework based on “good governance - transparency,voice, the free flow of information, a commitment tofight corruption.”

l Hans Engelberts, general secretary of Public ServicesInternational - the global public sector workers’ unioncoalition - has said that it is time for unions to bringthe issue of corruption center stage “and to start doingsomething about it.”

FOCUSING ATTENTION ON GLOBALCORRUPTION

The focus of the movement to stop bribing bymultinational corporations is the anti-corruption treaty ofthe Organization for Economic Cooperation andDevelopment (OECD). The treaty has been signed by the

29 OECD members and five countries with emergingmarkets in Latin America and Eastern Europe.

This agreement will take the U.S. Foreign CorruptPractices Act (FCPA) global. Until now, the United Stateshas been alone in making foreign bribery a criminaloffense. The OECD convention, once it comes intoforce, will focus attention on global corruption by leadersof business and labor. Corporations everywhere will facecriminal penalties in their home countries if they bribeforeign officials.

The OECD agreement against the bribe-givers also givesmomentum to institutions like the World Bank in itsefforts to convince developing countries to strengthentheir anti-bribery laws, create effective anti-corruptioninstitutions, and, in general, get serious about reducingthe abuse of public office for private gain.

Pressures on businesses, national governments, andinternational institutions also has been increased byTransparency International (TI), a not-for-profit,nonpartisan organization with chapters in over 70countries.

TI is striving to develop a Bribery Propensity Index (BPI)that would rank the biggest bribe-payers, probably byfirst looking at the home countries of multinationalcorporations that, in varying degrees, support foreigncorrupt practices by business. The BP1 wouldcomplement TI’s Corruption Perceptions Index, whichlooks at countries taking bribes. The BP1 will bedynamite in the hands of the media if it can be crediblyconstructed and will serve to add to the pressure onbusiness to be more honest in global commerce.

But it is not just external pressures that are graduallybringing about change in the halls of business power.Shell has sought to adopt a tougher anti-bribery stanceabove all because it believes it makes good business sense.It is difficult to expect corporate employees to be honestinside a firm and act with integrity toward theircolleagues when they are being encouraged to use bribes,kickbacks, and other unethical practices to win business.

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The Foreign Corrupt Practices Act has been around for ageneration, and a lot of U.S. firms have learned to livewith it and thrive. For example, despite the FCPA, whichsome business leaders in the United States see as ahandicap in their global competitiveness, 6 of the 10largest corporations in the world, based on the volume oftheir foreign assets, are American.

Not being able to offer bribes forces competitive globalcorporations to search for artful and ethical ways to beeffective competitors. Many U.S. multinational firmshave found useful approaches, and increasing numberscan learn from the leaders.

THE EMPHASIS ON REPUTATIONMANAGEMENT

While perceptions of corruption in many of thedeveloping countries of the world are desperately high,consider that Coca-Cola is operational in all of thesecountries, is doing well, is beating competitors, and is notpaying bribes. The company is thoughtful andpainstaking about how it enters new markets, how itselects local business partners, and how it conducts itselfin foreign countries. Integrity is key to its approaches.

Coca-Cola makes maximum effort to be transparent in itsdealings, to win public support, and to develop the kindof strength - from its consumers and the public at large- that makes top officials uneasy about seeking bribesfrom the beverage giant. What leader in any country iswilling to risk a public announcement by Coca-Cola thatit is quitting the country rather than pay a fat bribe to thehead of state? So far, none.

The reality is that to maximize opportunities in thegrowing markets of Central and Eastern Europe and indeveloping countries, corporations must strive to be seenas honest, long-term, committed guests. Corporationsmust impress upon host governments, customers,suppliers, and the general public that they seek fair, open,long-term relationships.

Coca-Cola, for example, has repeatedly demonstratedaround the world its recognition that heavy andconsistent investments in reputation management areneeded to establish this image. It trains its staff to learnabout the traditions, politics, and values of the people inall of the countries in which it operates. It gives keyresponsibilities to nationals of these countries and ensuresthat its image is never that of a ruthless multinational

colonialist corporation.

And Coca-Cola goes further. It plays a full role in most ofthe countries in which it works, supporting educationand the arts and social services in a long-term andgenuine way Coca-Cola understands that the key to itssuccess is its determination to show its business partners,no matter what their traditions and nationalities, that thiscompany values integrity and understands the language ofpartnership and respect. This attitude garners admirationfrom its host countries.

Another example is Levi Strauss & Company, which sellsits clothing around the globe and manufactures it indozens of countries. It is a corporation guided by a set ofvalues that daily impact its global strategies. Itunderstands the importance of ensuring that hosts inforeign countries are aware of its values from the outset offorging a new relationship. In its public corporatestatements, Levi Strauss has stated boldly, for example:“We will not initiate or renew contractual relationships incountries where the legal environment createsunreasonable risk to our trademarks or to otherimportant commercial interests or seriously impedes ourability to implement these guidelines.”

THE COSTS OF UNETHICAL PRACTICES

Paying bribes is only one consideration in the broaderarena of reputation management that concerns a growingnumber of firms - corporations that genuinely believethat acting ethically makes good business sense and thatknow that to be seen to be unethical can carry huge costs.Allegations of a lack of sensitivity to human rights againstShell, of paying bribes in Argentina against IBM, and ofexploiting child labor against Nike can reduce consumerdemands for corporate products, plunge the company’sshare price, make it difficult to recruit outstanding newstaff, spark political and media investigations, andmassively divert top management from crucial operationalwork.

It is against this background that increasing numbers ofcorporations around the world are becoming moresensitive to the risks of being exposed as corrupt and tothe merits of pursuing business with integrity. Curbingcorruption is a painstakingly slow process. But progress isbeing made, even with regard to the propensity ofmultinational corporations that are following orconsidering no-bribery strategies. And that is goodnews. Ll

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CI CORRUPTION IN PROCUREMENTBy Donald Strombom, President, IDBC

Government procurement contracts for construction projectssuch as airports, dams, and highways generate immenseopportunities for bribes, kickbacks, and other payofi. In thisarticle, Donald Strombom, a former chief ofprocurement for

the World Bank, Looks at the wasting effects of corruption on

development and offers a sober assessment of the dtQ@.dties

in dealing with the problem. Strombom is currently

president of IDBC, a consulting firm that advises and trains

its clients to win international contracts by competingintelligently and effectively within the rules, not by corrupt

practices.

Corruption takes many forms - the petty bureaucraticvariety, corruption in police and the judiciary, corruptionin the election process, to name just a few. But probablynone is more pervasive or has higher costs thancorruption related to procurement: government buyingof goods, works, and services. The reasons are simple. Ifone sets aside government salaries and social benefits,procurement typically accounts for the largest share ofpublic expenditures at all levels of government. Both theoverall amounts and individual contract amounts arehuge, and they offer correspondingly large opportunitiesfor bribes, kickbacks, and other payoffs. The potentialreward for a single contract directed to the right winnercan exceed the legitimate lifetime salary earnings of adecision-maker. The temptations are enormous and, intoo many cases, the risks of punishment are relativelysmall.

Public works construction projects - airports, dams,highways, subways, water systems - traditionally haveprovided the biggest, most publicized, and most dramaticcases of corruption worldwide. Other prime targets are“big ticket” equipment items - bus fleets, constructionequipment, airplanes, turbines, and generators - as wellas simple items like office supplies, pharmaceuticals,textbooks, and uniforms that are purchased in hugequantities year after year.

Corruption practices adapt to changing trends, however.The growing use of external consultants and theincreasing outsourcing of contracts for maintenance and

other services formerly provided by in-house staff are justtwo examples of new opportunities for corruption.Perhaps the ripest new opportunity of all, because of thegeneral lack of familiarity with what it involves and thenumerous high-value contracts, is in the informationtechnology field. The most spectacular, attention-catching cases are those in which millions of dollarschange hands over the award of a single contract or inwhich governments and political parties fall because ofbribery scandals brought out into the open.

It would be a serious mistake to think that corruptionoccurs only in these big, high-visibility cases. One couldargue, in fact, that these are the more easily monitoredand controlled situations - if the will and the meansexist to do so. The more difficult corruption to deal withis that which is ingrained in the culture and permeatesentire systems of government procurement, from thelowest-level contract officer and inspector in the field tothe ministers or higher who have final authority forcontract approvals.

FORMS OF CORRUPTION

How does corruption occur in procurement? The popularimage is of a would-be contractor arriving in a minister’sor a mayor’s office with a suitcase full of cash, just beforea critical decision is made about a contract award - anamusing caricature, but an awkward method and hardlyin keeping with modern technology. The reality is morelikely to be an electronic deposit in a foreign account,corporate stock shares, an elite school scholarship for ason or daughter. The fact that the recipient may use theproceeds for a worthy cause makes combating corruptionthat much harder. But the direct contractor-client payofffor a contract award is only one of many possiblescenarios, and not necessarily the most common or mostcostly form of corruption.

Bribery often occurs at a much earlier stage in theprocurement process: to get a firm included on arestricted list of bidders, for example, or to encourage aclient to write specifications in such a way that thewinning bidder is a foregone conclusion. Or corruption

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may be carried out entirely among competing firms,through collusion and bid-rigging, without the clientbeing involved or even aware it is happening. Firms mayagree in advance who will submit competitive bids and atwhat prices, who will win, and how the profits will beshared. To illustrate how complicated it can be toeliminate corruption, the prequalification of bidders by aclient to ensure that only qualified and financially soundfirms participate in bidding competition quiteunintentionally makes it easier for dishonest bidders tocollude, since all prequalified bidders are announced inadvance.

Quite likely the most extensive and costly corruptionoccurs after contracts have been awarded. Corruption isnot a charitable game; “winners” have every intention ofrecovering their bribery costs, and they have a variety ofways to do so. The first stage, especially in collusivebidding, is by inflating their bid prices. Further costrecovery can be achieved during contract performance byover-invoicing for quantities of goods delivered or workperformed, reducing the quality of materials used forconstruction or delivering cheaper models of goods, andobtaining contract change orders to increase the amountsof goods sold or works performed at overpriced unitcosts. Again, corruption in the post-award stage of acontract may be with the knowledge and consent of atleast some parties in the client’s organization, or it may bethrough well-concealed initiatives of the contractor alone.

In fairness to contractors, many of the above practices aremotivated by attempts to hedge against perceiveduncertainties and risks in clients’ systems of contracting,rather than deliberate corruption. In that sense, betterrisk management and contracting terms may be part ofan approach to reducing “corrupt” practices.

The debate about who is responsible for corruption inprocurement is largely irrelevant, for there is no singlepattern. Sometimes the initiative clearly comes from theclient in the form of explicit demands by a director for aspecified percentage of the bid price or from inspectorswho “certify” incorrect quantities for payments tocontractors. (This highlights one difficulty in fightingcorruption: clients are not monolithic, but rather aremany different individuals or groups looking out for theirown interests.) In other cases the bidder is first to offerinducements. In most cases there is some degree ofcomplicity between client and bidder/contractor. In allcases, the taxpayer and public at large are the losers.

THE COSTS OF CORRUPTION

What are the real costs of corruption in procurement?One way to measure this is to compare actual prices ofsimilar goods and services delivered under differentconditions; for example, in contracts awarded throughdirect negotiations or restricted bidding in comparisonwith open and apparently properly conductedcompetitive bidding. (This does not mean that contractsawarded by direct negotiations or restricted bidding arenever appropriate; in some situations these are preferredprocedures. The comparisons should be in cases wherethese are not likely to be the most economical or efficientmethods.) Price differentials on the order of 20 to 30percent are commonly found, and sometimessubstantially more. These comparisons are roughapproximations at best.

Some would argue that it is virtually impossible to find areference case that is completely free from the influenceof corrupt practices, and that the true cost differences aretherefore understated. Conservatively, where corruption issystemic, it probably adds at least 20 to 25 percent to thecosts of government procurement. Following a corruptionscandal in Milan several years ago, which led to manycriminal indictments and closer scrutiny of publiccontracting practices, unit costs of major works projectsfell by more than 50 percent, according to anInternational Monetary Fund (IMF) working paper,“Corruption, Public Investment and Growth,” by VitoTanzi and Hamid Davoodi. With annual purchasingbudgets running in the billions or hundreds of millions ofdollars, this begins to involve “real money.”

If costs of this magnitude are at stake, why isn’tsomething being done to correct the waste? Somerationalize inaction on corruption by the fact that “it’salways been there; it’s just part of the cost of doingbusiness.” There are those who argue that it isn’t really a“problem” because corruption produces economic benefitsby “greasing the wheels” of inefficient bureaucracies: howelse to get prompt customs clearances, expedite contractpayments, and the like? And the reality is that bribery offoreign officials, for example, is not illegal in manycountries; until very recently, only the United States had astrong and enforced foreign corrupt practices law. Morethan anything else, it has probably been a combination ofopposition from strong vested interests that benefit fromcontinued corruption and a lack of public appreciationthat corrupt practices and their costs can certainly bereduced, even if never completely eliminated.

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The good news is that significant steps are being taken tomake it clear that corruption is not an acceptable part ofpublic procurement. Various organizations operating ondifferent fronts are mounting a campaign to create publicawareness and citizen empowerment, broaden the use ofsound procurement practices, and penalize the violatorsof established norms.

ELEMENTS OF SOUNDPUBLIC PROCUREMENT SYSTEMS

What are the characteristics of a good publicprocurement system? It should be able to deliver thegoods and services needed by government to perform itsfunctions in a timely manner and at fair prices; in otherwords, it should be economical and efficient. Contractingopportunities should be widely publicized. Awards shouldbe made to those who are able to meet the stated needsand required standards and who make the best offers.Rules should be clear and fair, the process transparent,and the results predictable. Underlying the entire systemshould be a notion that public offtcials are accountablefor the proper use of public funds and should not enrichthemselves in the process. Unfortunately, all of theseconcepts are not yet universally accepted or practiced, andtherein lies one of the excuses or causes for corruption.

Wide international experience shows that these desirablecharacteristics can best be achieved through a system thatis based on appropriately designed methods ofcompetition among qualified suppliers of goods andservices. There is also broad agreement about the mainelements in a competitive bidding process; namely, itshould feature:

l Public notification of bidding opportunities;

l Documents that clearly set out the needs, describe thebidding process and contract terms and conditions, andgive the criteria for choosing the winner;

l Submission of secret sealed bids that are opened in thepresence of the bidders at a specified time and place;

l Impartial evaluation and comparison of bids bycompetent evaluators without influence or interference bybidders or other parties;

l Award of the contract to the bidder complying with allrequirements and offering the best bid, as defined by thepublished selection criteria.

TOWARD A UNIVERSAL STANDARDOF GOOD PRACTICES

Governments in many countries and at all levels havedeveloped and successfully used procurement proceduresbuilt around these basic elements. The major multilateraldevelopment banks (MDBs) - the World Bank, theAfrican, Asian and Inter-American development banks,the European Bank for Reconstruction and Development,and others - have all adopted rules for procurement thatapply to projects they finance. In order to use funds fromtheir loans, borrowers must follow the prescribed rules;the banks supervise their loans to ensure the rules areproperly applied. Failure to follow the rules may result incancellation of the loans.

In 1993, the United Nations Commission onInternational Trade Law (UNCITRAL) adopted a ModelLaw on Procurement of Goods and Construction as aguide for countries to follow for the evaluation andmodernization of their procurement laws and practices.This model law was particularly intended to helpdeveloping countries and countries in transition fromplanned to market economies to avoid inefficiency,ineffectiveness, and abuse in public procurement as aresult of an inadequate legislative framework. It embodiedvirtually all of the same principles that the MDBs hadbuilt into their procurement rules, as well asadministrative and judicial processes for review ofprocurement decisions, providing an important steptoward the development of uniform international rulesand procedures.

The most significant accomplishment in this regard wasthe development, as an integral part of the GeneralAgreement on Trade and Tariffs (GATT) negotiations, ofthe Agreement on Government Procurement, which wassigned in Marrakesh in 1994. This agreement, whichentered into force for signature countries in January1996, is more commonly identified as the World TradeOrganization’s (WTO) procurement rules. Governmentmembers of the WTO are encouraged to accede to thisagreement, although this is not a condition formembership. Whether or not there is formal countryaccession to the agreement, the rules and procedures itcontains become the closest thing there is to a universalstandard for good practices.

In parallel developments, member countries of theOrganization for Economic Cooperation andDevelopment (OECD) J‘oined in a concerted effort to

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promote the adoption of national laws, similar in natureto the U.S. Foreign Corrupt Practices Act, that makebribery of government officials, whether at home orabroad, and other forms of corruption in procurementcriminal offenses subject to severe punishment. In 1996,the Organization of American States approved an Inter-American Convention Against Corruption. That sameyear, the International Chamber of Commerce proposedanti-corruption rules of conduct for corporations andcorresponding actions for governments. Suddenly, muchof the offGal and corporate world seems to have decidedsomething should be done about corruption.

Transparency International has played a pivotal role bycreating public awareness of the scale of the problem andorganizing grassroots efforts to combat corruption. Theirinfluence has been a driving force behind many of thereform efforts under way around the world.

Do these converging positive steps mean that the end ofcorruption in procurement is in sight? Regrettably, no, forwhile the rules bring order and sound principles to theprocess, determined corrupters can still find ways aroundthem and get their payoffs. The MDBs, for example,spend considerable staff time and administrative budgetto supervise each lending operation, and particularly tomonitor and approve procurement procedures anddecisions. Yet recent disclosures suggest that 20 percent ormore of these funds in some countries may be lostthrough “leakage,” a euphemism for moneys misdirectedby corrupt practices into off&ls’ pockets and personalbank accounts.

Even before these estimates became public, theinternational financing institutions had taken steps tostrengthen their hands in combating corruption. Theyexpanded their procurement rules to include explicitprohibitions against fraud and corruption and to imposestrict sanctions in cases in which these practices werediscovered: denying contract awards to violators,prohibiting their participation in future bidding forcontracts financed by the banks, refusing to pay forimproperly awarded contracts, and canceling entire loansin extreme cases. In addition to their normal projectsupervision and financial audit requirements, the MDBsinitiated procurement audits by external companies todetermine whether borrowers were strictly observing theirrules and procedures.

Along with this tightening of project monitoring andsupervision, MDBs are taking parallel steps to ensure that

borrowers really understand and are able to apply soundprocurement procedures correctly. The World Bank, forexample, now requires regular assessments of itsborrowers’ procurement rules and their organizationalcapacity to implement them correctly. Conformity withaccepted practices and evidence of corruption are two keyareas for investigation. These country procurementassessments, conducted in collaboration with theborrower country, become the foundations for designingand funding technical assistance programs where neededto build professional competence.

STEPPING UP THE FIGHT

Experience of the international financing institutions andothers demonstrates one of the truisms in procurement:corruption is not stopped or curtailed simply by havingsound rules. It is increasingly clear that other, coordinatedefforts are needed to make a significant impact on corruptpractices. Everyone must be made aware that violations ofthe rules are illegal acts that will be discovered andpunished. This creates the need for effective monitoringand audit systems and for enforcement agencies that havethe will and ability to take actions against violators,regardless of their position. It requires a judiciary systemthat is not corruptible and is able to make and enforceconvictions. Cadres of procurement professionals must bedeveloped who are insulated from political interference incontract award decisions. Temptations for these people toengage in corrupt practices themselves need to be reducedby paying them a reasonable wage that compensates themfor their honesty. In short, corruption abatement mayrequire nothing less than a complete overhaul of civilservice and governance systems.

Creative thinking and innovative approaches are neededin the fight against corruption. One promisingdevelopment is the movement to inject transparency intothe procurement process by citizen groups that are notamused by government officials getting rich at theirexpense. Efforts to date are largely concerned withrecruiting like-minded citizens and publicizing cases ofcorruption, but these groups often lack systematic ways toget more deeply into the reform process. Means should bedevised for them, as true stakeholders, to take a moreactive role in monitoring and verifying that procurementprocesses are not corrupted. The challenge is how toengage them in meaningful ways without corruptingthem as well.

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The complexity of the fight against corruption should notbe taken as an excuse for doing nothing. Many publicbodies have already made notable progress in reducingcorruption, and enough experience has been gained topoint with some assurance to the kinds of measures thatare needed and will work. Public reaction againstcorruption has probably never been stronger, partlybecause it becomes increasingly clear that the public is thebig loser if corruption continues.

There is no better time to mobilize forces in a seriouseffort to take corruption out of procurement. But reformsmust be approached with realistic expectations about howmuch time and resources will be required. Lasting resultswill take years to achieve, and sustained efforts must beon a scale commensurate with the problem. It would beparticularly tragic if good intentions are backed up byonly halfhearted, quick-fix measures that allow corruptionin procurement to continue unabated and discouragereformers. 0

0 THE INTEGRITY PACT: A WAY OUT OF THE TRAPBy Michael Wiehen and Care1 Moth, Transparency International

Transparency International, a not-for-projt organization,was founded in 1993 by internationaljnanciers andbusinessmen committed to the proposition that corruptionshould be eradicatedfiom the world marketplace. During itsj%e years of existence, TI has transformed that notion fromthe marginal to a priority of the World Bank and theOrganization for Economic Cooperation and Development(OECD), consisting of 29 developed countries. TI hasdevised what it calh its Integrity Pact, a concrete programdesigned to exclude corruption from procurement contractsinvolving multinational companies and the governments of&eloping countries. Integrity Pacts have been implementedso far in three Latin American countries. Michael Wiehen,the chairman of the Germany chapter of TL and Care1Mobn, the chief information officer at TIs internationalsecretariat in Berlin, explain bow they work.

It’s a nightmare for every company, particularly if it isamong the more competitive ones in the market. Thepreselection phase in the bidding process of a publicprocurement exercise is past you, contract negotiationswith the government and the financing institutions havebeen successfully completed. All of a sudden unforeseenproblems are coming to the surface. Junior governmentoff&ls begin to question details of the contract anddemand renegotiating technicalities. Licenses and permitsyou need to apply for to start implementing the contract- mere formalities as the government representativesaf&ned just before the contract was signed - aresuddenly stuck in a seemingly impenetrable bureaucraticjungle. And, quite to your surprise, you find that even themore senior-ranking government officials are beginningto question the validity of the project. After havinginvested millions of dollars and thousands of staff hourson such a major project, everything seems to be inshambles. And the solution to saving the project fromsuddenly turning foul also gradually edges to the surface- extra payments or, simply, bribery.

When bidding for major projects, companies usually havea strong interest to avoid just that. A company that canrely on the quality of its products simply has no interestin entering into a field where there is no reliability, no

prospects to enforce contracts, no certainty as to thebehavior of clients, competitors, or counterparts on thegovernment side. In markets distorted by corruption,companies are facing a prisoner’s dilemma: while it maybe profitable for all competitors to put an end tocorruption, no one wants to take the first move for fear oflosing the contract to a less scrupulous competitor.

The OECD Convention that is likely to enter into forcein January next year wants to change that situation bycreating a level playing field for everyone in the marketand by giving the credible assurance that bribing an officeholder abroad will be prosecuted as a crime in all OECDcountries. While this international framework can beregarded as a major breakthrough and as a victory forthose who have long been calling for a stop to the recklessbusiness of exporting bribery from the North to theSouth, change will not come overnight. It will take timebefore foreign corruption will be prosecuted with thesame vigor and consistency all over the industrializedcountries. And in the immediate and mid-term future,the OECD Convention will only partially address theambiguity and uncertainty that exists in those marketsthat have traditionally been under the dark clouds ofcorrupt practices.

In that situation, a case-by-case approach in tacklingcorruption may prove to be more effective and willcertainly give companies greater assurance that they canreap in the profits of freedom from corruption withouttaking the risk of being the one to make the first move.

TI’S INTEGRITY PACT

The TI Integrity Pact (TI-II’) intends to accomplish twoobjectives:

- to enable companies to abstain from bribing byproviding assurances to them that their competitors willalso refrain from bribing, and that governmentprocurement agencies will undertake to prevent any formof corruption, including extortion, and to followtransparent procedures;

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- to enable governments to reduce the high cost and thedetrimental impact of corruption on public procurement.

A government may wish to begin by establishing first oneor several “Islands of Integrity” where for selectedprojects, or for all projects in a sector, corrupt practiceswould be eliminated by agreement among thegovernment and those companies interested in biddingfor services or the supply of goods. The Integrity Pactconcept could also be employed in similar situations, forexample, when a government, as part of its privatizationprogram, invites bidders to tender for the acquisition ofgovernment assets, or for telecommunications, mining, orlogging licenses.

The Integrity Pact would function as follows: agovernment, when inviting contractors or suppliers ofgoods and services to tender, for a specific contract,informs the potential bidders that their tender offer mustcontain a commitment, signed personally by the bidder’schief executive offtcer (CEO), not to offer or pay anybribes in connection with this contract. This covers, ofcourse, all stages of the procurement process as well as theexecution phase. The government, on its part, willcommit itself to prevent price-fixing and the acceptanceof bribes by its officials, and to follow transparentprocurement rules. Legally speaking, these commitmentsare nothing other than a commitment to respect andinvoke the existing laws of the country. It is expected thatthe explicit commitment and the mode of operationestablished by it can make a significant difference in thepolitical and business reality.

The sanctions provided for violations, and themonitoring system put in place, may go well beyond theexisting legal system. Bidders who violate theircommitment not to bribe will be subject to significantsanctions, such as denial or loss of contract, liability fordamages (to the government and the competing bidders),and forfeiture of the bid security. The government couldalso debar the offender from all government business foran appropriate period of time. By empoweringunsuccessful bidders, who have evidence of corruption bytheir competitors or the principal, to enforce sanctionsthemselves (through the courts or by internationalarbitration), their confidence in the integrity of theprocess as a whole will be increased.

Because a bidding company acts through many employeesand agents, the chief executive officer’s commitmentshould (not least for the CEO’s own protection) be

implemented through a compliance program whichassures that all employees and agents will observe the no-bribery commitment. Where the company already has awritten anti-bribery policy in effect, it can furnish a copyof that policy together with the compliance programimplementing that policy. Where a company does nothave such a policy, or does not have a written complianceprogram, it can furnish a copy of the complianceprogram established for the particular contract.

One key lies in transparency relating to payments toagents and other third parties in connection with thecontract. There are, of course, good and valid reasonswhy agents should be engaged to perform legitimateservices. However, agents’ commissions are a traditionalavenue for the concealing of bribes. The Integrity Pacttherefore envisages a requirement that all past andintended future payments to third parties be disclosed atthe bidding stage, and that they be formally recorded andreported during the execution stage by the successfulbidder, with appropriate certification by the CEO.

A second feature of the Integrity Pact is the involvementof CEOs personally or through other appropriate seniormanagers. The procedure requires them personally tocertify amounts of payments to third parties. They will berequired to be personally involved, so they will not beable to disclaim knowledge of malpractice as is often thecase. This requirement is bolstered by the complianceprovisions which the successful bidder normally musthave in place.

MOVING FORWARD WITH IMPLEMENTATION

While TI has discussed this approach in a number ofcountries from its very inception in early 1993, it wasintroduced only in a few rather different cases in LatinAmerica: in a refinery rehabilitation project in Ecuador(1994), in a modified version in the privatization oftelecommunications in Panama (1996), and inprocurement by the provincial government of Mendozain Argentina (1997); other initiatives are in varying stagesof implementation.

While the Integrity Pact concept has the backing of majorinternational financing institutions - World BankPresident James Wolfensohn has endorsed it as haverepresentatives of the regional development banks -Transparency International today faces the challenge ofproving that the concept can be applied on a broaderbasis and that it has matured beyond the pilot project

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phase. Numerous companies - many of them playing inthe top league of their sectors - have voiced their greatinterest in taking just the project-oriented approach thatthe Integrity Pact concept is propagating. They have seentoo many government-led anti-corruption campaignscome and go without achieving substantive change. Civilsociety also stands ready to work on concrete IntegrityPact projects, perhaps in the form of a national chapter ofTI, that would monitor the bid evaluation and the

selection of the successful bidder. With the support of theprivate sector, civil society, and the financing institutionsit is now up to governments to demonstrate that they arewilling to handle things differently - at least inindividual large-scale projects. Ll

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Cl TOURNALIST TRAINING TO CURB CORRUPTIONBy David Pezzullo, Consultant, Economic Development Institute, The World Bank

Corruption is a pervasive fact of life in many developingcountries, one that transcena5 politics and eludes tidy

programs and quickjxes. Reducing it requires an intensive

andprotracted effort that includes an aggressive and

unfettered press, says David Pezzullo. Pezzullo has worked as

an investigative journalist for Nicaragua? La Prensa daily,

which crusaded against corruption under the rightist

dictatorship ofAnastasio Somoza, the lefist Sandinistaregime, and the current democratic government. He now

designs and Leads anti-corruption programs, including

journalist training, for the World Bankj Economic

Development Institute.

Increasingly, evidence gathered by the World Bank andTransparency International suggests that cronyism,nepotism, bribery - corruption petty and grand -sands rather than greases even the strictly economicmachinery of society. The costs of corruption for theunderlying social and political culture are harder tomeasure. Yet judging by political stability, social cohesion,and citizen support for the state, the costs are immense,particularly in the developing world.

But where can needed changes in underlying attitude,behavior, and institutions to curb corruption best comefrom? And what can the world community do toeffectively encourage peaceful change?

As corruption moves into the development spotlight, therole of the press in curbing it is coming to the fore.Usually the first line in exposing corrupt acts, the press isoften also asked to do more because more is needed. Themedia are called on to press for reform and lead the effortto prevent corruption. Some argue that this is inherentlydangerous, that the media should not be taking onresponsibilities reserved for government and the widersociety. The press, it is said, does not have thewherewithal to effectively step beyond its traditional roleof exposing malfeasance. And it is not sufficientlyaccountable to lead reform.

In what follows, I briefly address the shifting role of thepress with regard to corruption in Nicaragua and East

Africa. In Nicaragua, I witnessed firsthand the power ofinvestigative media to expose corruption, as well as theimpotence of the media to actually stop it. One solutionto this dilemma may lie in the journalist trainingprograms sponsored by the World Banks EconomicDevelopment Institute, which have begun to showpositive results in challenging corruption in East Africa.

THE EXPERIENCE OF NICARAGUA

The Nicaraguan press, particularly during the Somozadictatorship, was a sancturary of democratic hopes in asea of repression and corruption. Since the 195Os, PedroChamorro had made the daily La Prensa the voice ofopposition to the abuses of the Somoza regime and hadbecome the leader of civil society opposition to thedictatorship. The opposition it fostered was broad based,addressing political, economic, and social issues.

Chamorro’s assassination in 1978 sparked a popularinsurrection that brought the Sandinista regime to power.The Sandinistas adopted the language of reform, butruled by force and used their power to become rich,much as Somoza had. Pedro Chamorro’s widow, Violeta,became the leader of the peaceful opposition to theSandinistas, and La Prensa, of which she was one-thirdowner, again took up the fight against corruption andrepression despite severe censorship.

In 1990, Violeta Chamorro became president ofNicaragua in a free election, but democracy did notsweep away the web of old habits of using power forpersonal gain that had existed for centuries. Effortsfunded by international donors to reform institutions andthe economy to serve all citizens and curb corruptionwere dragged down or distorted by patronage, nepotism,and abuse of power.

The government still reflected the underlying colonialarrangement in which the incoming governor woulddistribute lands and tribute to supporters by taking fromnon-supporters. In economic terms, this meant that mostgovernment contracts were rigged, bidding was typically afarce, and even reform efforts like privatization were

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distorted to enrich insiders. People of influence enjoyedtax and tariff exemptions, rich contracts, and sweetheartloans, pricing out the small and middle entrepreneurs andpassing on the high costs to the mostly impoverishedpublic. The judiciary was too weak to impose the fewlaws forbidding conflicts of interest and cozy deals. Andthe parliament was too partial to effectively updatelegislation. In essence, Nicaragua’s chance to build a stablesociety was being undermined by pervasive corruption.

RESTRAINING THE BEAST

We at La Prensa began producing investigative reportsbased on solid documentary evidence detailing how, forexample, only $20 million worth of hospitals were builton a $40 million loan from Spain. Having built a numberof strong cases, we assisted in presenting evidence to thecountry’s auditor general for further scrutiny. Most ofthese cases were picked up by the international media,multiplying pressure for a full accounting by thegovernment. In the process, we, along with journalists atother media and a number of reformers in and out ofgovernment, were able to describe the prevailingmechanism by which generous foreign assistance waseither misued or siphoned off. La Prensa? reportinggenerated public outrage but little far-reaching reform.We could only insinuate how key political decisions weretwisted for personal monetary gain and how the electoralprocess was undermined by dirty campaign money.

There have been a number of other cases in LatinAmerica where journalists like Roberto Eisenmann inPanama and Jacob0 Timmerman in Argentina haveresisted arbitrary rule. However, none of these efforts hasbeen able to generate systematic reform efforts.

Several foreign donors - the U.S. Agency forInternational Development and the U.S. InformationAgency among them - finance journalist trainingprograms principally for the print media. These effortsacquaint hundreds of local journalists with the latestreporting techniques and ethical standards, butinterference by owners and editors with political agendasattached to financial backing remains an impediment tofaithful reporting. In essence, the conflicts of interest atthe top compromise the objectivity of the press. Attemptsto modernize the media mirror efforts to modernize thestate, a process that is uneven and slow.

But change is on the way. A number of corruptionsurveys have been published in Nicaragua showing that

bribery is perceived to be high in the police, schools,hospitals and clinics, the judiciary, and parliament. Thefirst National Integrity Workshop in Nicaragua is plannedfor December 1998 to bring together a broad cross-section of stakeholders to design plans of action to curbtheft of relief and reconstruction aid following HurricaneMitch. The training plans for journalists involve teachingabout the possibilities for gathering information from theInternet and the need to double-check sources; they willbe cautioned not to publish unfounded rumors or pressreleases without context. Journalists will be encouraged toraise their sense of professionalism above political loyaltiesand share information with counterparts from competingmedia. The workshop will organize discussions onoutdated press laws that allow authorities extensivepowers to silence reporters.

Journalists will be brought together with government andprivate sector leaders to enhance comfort and access. Theprocess holds the promise of building consensus around afew measures that can make a difference. Upon this base,reforms proposed by a variety of stakeholders are muchmore likely to take root. And just the experience ofgovernment and civil society working as equals to planpolicy creates the opportunity for more open governmentand more active and constructive civil societyparticipation - making insider deals higher risk andlower benefit during the process of longer-term structuralreform toward a more accountable state.

Enhanced confidence and professionalism amongjournalists is likely to change the newsroom dynamic overtime, much as institutional reform and civil servicetraining are likely to gradually modernize government.The Economic Development Institute recently has stagedjournalist training workshops in Uganda, Tanzania,Ethiopia, Benin, Mauritius, and Cameroon. In additionto Nicaragua, the institute is planning similar workshopsin other Latin American countries with the hope ofproviding ideas to build a responsible and independentmedia to buttress the transition to fuller democracy.

LEARNING FROM EAST AFRICA

In Uganda, beginning in the late 198Os, an unelectedregime dominated by the military launched an ambitiousprogram to reform the corrupt and dictatorial state after aprotracted civil war. In the mid-1990s, the government,helped by the Economic Development Institute, beganexperimenting with a participatory process called an“Integrity System” to build public and civil society into

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the process of combating corruption. In Tanzania aroundthe same time, the elected president became a championof using training and broad-based participatoryworkshops to build accountability into government.

The Integrity Systems in both countries used surveys tomeasure public perceptions of corruption, track theprevalence of bribery, and identify problem areas.Focusing on solid survey data, working groups meeting atNational Integrity Workshops designed action plans forthe various key stakeholder groups - or “pillars ofintegrity” - such as the executive branch, theparliament, the private sector, the police, and the media.The plans of action emerging from the workshopsrepresented blueprints for anti-corruption policy, whereinlonger-term institutional reforms were mixed withshorter-term measures such as pledges, communicationscampaigns, and opening access to governmentinformation.

An ambitious journalist training program was launched aspart of the Integrity System in the belief that the mediawere in need of capacity building if they were toeffectively, responsibly, and credibly demandaccountability of government.

In both Uganda and Tanzania, more than half the printjournalists went through training in basic journalismethics, as well as investigative and reporting techniques.The journalists were trained in legal concepts such as libeland ethical standards that can enhance their credibilityand sources. Reporters were taught about the importanceof networking with each other so they could passinformation across political lines and get key storiespublished despite opposition from their editors, whooften were wedded to political parties and leaders. In theprocess, case studies were developed, and the effectivenessof local journalist groups such as the CommonwealthBroadcasters Association was enhanced. In Uganda a newnewspaper was founded by newly trained journalists.

As political will from the top to seek greateraccountability from insiders has waned, the modernizingmedia have become the central civil society stakeholderdemanding better performance from government. Inseveral instances, government off&h have beensanctioned by parliament or forced to resign because ofmedia reports of unaccountable wealth accumulated whilein o&e. And the media have become a check on lapsesfrom the ongoing institutional reform programs designedto substantively redesign the state. In Uganda, the

implementation of an ambitious decentralization programis being linked to radio journalist training at the districtlevel to encourage the process.

Corruption in both countries remains high according tothe Transparency International Index and other measures,yet the debate on corruption is much more concrete andbroadly based, and the rules have changed. The press ismore aggressive, the citizenry more vigilant, and officialsmore careful. And while factors such as regional tensionare likely to determine where the Integrity Systems willlead in the midterm, the training and action planning todate have built substantial impediments to abuses. At thevery least, there is far more capacity in civil society and atthe local level to demand probity in government.

THE ROAD AHEAD

Various stakeholders in Nicaragua, particularly thoseoutside the government, have pressed for the adaptationof an integrity-building effort like those adopted in EastAfrica, precisely because civil society and the press areafforded a central role. Complementing the more strictlytechnocratic reform measures that much of the publicneither understands nor trusts, the Integrity System isattractive because it brings reform programs into thegrowing public domain. Yet the notion of workingtogether as equals to devise action plans in public view isstill foreign to many in government, civil society, and thedonor community.

As various stakeholders take on new responsibilities toevaluate and even reform government, they need supportin reaching new standards of professionalism themselves.In this regard, media training is likely to be more effectivewithin a broader national process to enhanceaccountability, such as those being undertaken in EastAfrica, Nicaragua, and more than a dozen other countriesin the developing world. And it can accomplish more bytapping into larger international efforts - such as thoseof the Organization of American States and theOrganization for Economic Cooperation andDevelopment - to curb corruption. But it is still validon its own. Whether part of a more holistic effort or freestanding, media training in the broadest sense is arguablyone of the most effective and justifiable means of curbingcorruption in societies in need of fundamentalinstitutional reform. Cl

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tl CORRUPTION: THE POLISH AND RUSSIAN EXPERIENCESBy Timothy Frye, Assistant Professor, Department of Political Science, The Ohio State University

Corruption has devastated Russia? attempts to create a

prosperous market-based economy but has bad less impact onPoland2 conversion to capitalism. Frye says that effectivebureaucratic reform played a key role in Pokznds economictransition and suggests Russia might also benefit from public

sector rejhns.

Stabilization, privatization, and liberalization dominatedearly discussions of post-Communist transformation. Butsomewhat surprisingly, corruption has recently emergedas perhaps the most important obstacle to economicreform. While the experiences of Russia and Poland drivehome this point, they also reveal very different storiesabout the development and implications of corruption fortheir respective economies. The lessons of post-Communist societies suggest that practical steps can betaken to minimize the corrosive effects of corruption onthe development of market economies.

Analysis of corruption in Russia and Poland, as well aselsewhere in most of Eastern Europe and the newindependent-states of the former Soviet Union, shouldbegin with an understanding of how state bureaucraciesare organized. This is necessary because corruptionundertaken by so-called “disorganized” bureaucraciescauses greater economic damage than corruptionundertaken by “organized” bureaucracies.

Think of a business person who needs 10 differentpermits from the state to make her product. Under ascenario of disorganized corruption, 10 differentbureaucratic agencies have the power to issue permitsneeded to produce the good, and therefore each agencybehaves like a monopolist. Each agency sets the price(read bribe) for its permits to maximize its individualrevenue. Due to the number of independent agenciesissuing different permits, they cannot coordinate theiractions, creating a situation in which each charges a highprice. As the price for permit 1 increases, however,demand for permit 2 falls. This drop in demand forpermits 2 through 10 reduces overall demand, and, inturn, reduces each bureaucrat’s revenue. The businessperson also suffers under disorganized corruption because

she cannot pay all the bribes asked of her, does notproduce the good, and receives no revenue.

Under a scenario of organized corruption, one agency hasthe power to issue all 10 permits needed by the businessperson. In this case, the agency behaves like a jointmonopolist and sets the price for permit 1 lower thanunder the previous scenario because it does not want toreduce demand for permit 2. In turn, the agency sets theprice for permit 3 low so as not to reduce demand forpermit 4, and so on. The key notion here is that raisingthe price for permit 1 reduces demand for other permits.While organized corruption still leads to a misallocationof resources, it is less disruptive for the economy thandisorganized corruption because the business is able toobtain the permit and produce the good.

POLAND AND RUSSIA

I tested the scenarios described above by conductingsurveys of about 250 shopkeepers in three cities in Russiaand one city in Poland in 1996 and 1998 on a variety ofissues related to bureaucratic organization and corruption.I found that bureaucracies were far more disorganized inMoscow than in Warsaw. On average, shopkeepers inMoscow were inspected by almost four different agencieswhose offGals came to the average shop 19 times peryear. Shopkeepers in Warsaw were inspected by 2.6agencies whose officials came to the shop only nine timesper year. In addition, the average shopkeeper in Moscowhad to visit 6.6 different bureaucracies to open hisbusiness, versus only 4.3 for Warsaw. Also, the shopregistration process lasted 10 weeks in Moscow and lessthan four weeks in Warsaw.

As the numbers suggest, levels of corruption were higherin Moscow than in Warsaw. We asked shopkeeperssomewhat discretely: “How often do you think that theaverage shopkeeper in your city has to pay bribes, on ascale of 1 to 5 (1, almost never; 2, rarely; 3, sometimes; 4,often; 5, almost always)?” The answer for Moscow was2.9 and for Warsaw was 2.2 - a difference that isstatistically significant. We also asked shopkeepers to ratetheir biggest problems on a scale of 1 to 10 (1, small

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problem; 10, major problem). Moscow shopkeepers ratedcorruption at 7.4, while Warsaw shopkeepers gave it a3.1.

To reduce corruption in Russia, an environment must befostered where separate agencies no longer have the powerto arbitrarily set the price for doing business. Indeed,looking within Russia, we find that cities that havestreamlined the granting of business permits have lowerrates of corruption. For example,* bureaucracies were moredisorganized in Ulyanovsk than in Smolensk. The averageshopkeeper in Ulyanovsk had to receive permits from 6.1different agencies to stay in business versus 4.4 forshopkeepers in Smolensk. Moreover, the averageshopkeeper in Ulyanovsk had to receive 8.8 permits toopen his store versus 6.2 in Smolensk.

As expected, corruption is a bigger problem forshopkeepers in Ulyanovsk than in Smolensk.Respondents noted that the average shopkeeper had topay bribes more frequently in Ulyanovsk than inSmolensk (3.2 versus 2.6, using the five-point scaledescribed above). Shopkeepers in Ulyanovsk rated theproblem of corruption 6.3, but shopkeepers in Smolenskrated it 5.4 (using the IO-point scale described above).Again, we find that disorganized bureaucracies tend toproduce disorganized corruption that inflicts significantcosts on society. This suggests that reductions incorruption in Russia are possible and can be addressedthrough reform of the public sector.

CORRUPTION AND THE INFORMALECONOMY

The evidence from Poland and Russia suggests thatcorruption, whether organized or disorganized, can levydevastating costs on an economy. It reduces investmentdue to the potential for arbitrary actions by state officials.It also reduces competition by rationing permits to thehighest bidder rather than to the most efficient user.

Corruption, however, also has a more subtle effect oneconomic reform through its impact on the informaleconomy. Corruption tends to swell the informaleconomy because business deals involving corrupt officialscannot be enforced in state courts and are rarely subjectto offtcial rates of taxation. Rather than operate in the

formal economy, abide by legal rules, and pay taxes,business people who rely on corruption operate in theinformal economy, break legal rules, and pay few taxes.As people pay fewer taxes, the state is less able to providepublic goods necessary for economic growth.

By 1995, the informal economy had grown far larger inRussia and Ukraine than in Poland. Relying on rates ofthe use of electricity in different countries, one studyestimates that the underground economy made up 42percent of the GDP (gross domestic product) in Russia,49 percent in Ukraine, and only 13 percent in Poland.The dramatic expansion of the informal economy inRussia and Ukraine is somewhat surprising. Prior to1989, the underground economy to the total economywas much larger in Poland than in the former Sovietcountries.

Some scholars argue that certain national cultures aremore conducive to corruption. However, we often seelevels of corruption change in particular countries, evenwhile the culture remains constant. Moreover, corruptpractices are strikingly similar across very differentnational cultures. Regardless of its culture, what countrydoes not know corrupt customs agents? To reducecorruption, we should not look to national culture but tothe incentives facing bureaucratic agents engaged in it.

The most common solution for reducing corruption is tocurtail the discretionary power of state agents. Forexample, rather than let a bureaucrat grant a license toexport a product (and allow him to accept a bribe fordoing so), states should abolish export licenses andthereby allow economic factors to decide whether or notto export.

But this can provide only a partial solution since manyimportant social functions cannot be left to the market.Moreover, it is often not politically feasible to assign somefunctions to the market rather than the state. Thus, ifcorruption is to be kept in check, public sector reformthat makes the state more organized must operate intandem with economic reform. 0

FACTS AND FIGURES

SUMMARY OF THE OECD ANTI-BRIBERY CONVENTION

Following is a summary of the OECD Anti-Bribe yConvention prepared by the U.S. Departments of Commerce,State, andjustice.

The convention is a historic achievement in the fightagainst bribery. The convention obligates the parties tocriminalize bribery of foreign public officials. “Foreignpublic officials” is defined to include officials in allbranches of government, whether appointed or elected;any person exercising a public function, including for apublic agency or public enterprise: and any official oragent of a public international organization. A publicfunction includes any activity in the public interest,delegated by a foreign country. A public enterprise is anyenterprise over which a government or governments may,directly or indirectly, exercise a dominant influence. Anofficial of a public enterprise shall be deemed to perform apublic function unless the enterprise operates on a normalcommercial basis in the relevant market, i.e., on a basisthat is substantially equivalent to that of a privateenterprise, without preferential subsidies or otherprivileges.

Although the text does not specifically cover politicalparties, the negotiators agreed that the convention willcover business-related bribes to foreign public officialsmade through political parties and party officials, as well asthose bribes that corrupt foreign public officials direct topolitical parties. Some persons who are not formallydesignated as public officials but who may in fact performa public function (e.g., political party officials in singleparty states) may, under the legal principles of somecountries, be considered to be foreign public officials. Inaddition, under the legal systems of some countries, anadvantage promised or given to a person in anticipation ofthat person’s becoming a foreign public official may fallwithin the scope of the convention. Negotiators agreed toan accelerated work plan to address several outstandingissues related to the convention, including acts of briberyrelating to foreign political parties and relating to personsin anticipation of their becoming foreign public officials.

The results of this review will be reported to ministers bythe 1999 OECD Council meeting.

The negotiators agreed to apply “effective, proportionate,and dissuasive criminal penalties” to those who bribeforeign public offGls. Countries whose legal systems lackthe concept of criminal corporate liability must provide forequivalent non-criminal sanctions, including monetarypenalties. The convention further requires that countriesbe able to seize or confiscate the bribe and bribe proceeds(i.e., net profit), or property of similar value, or thatmonetary sanctions of comparable effect be applicable.

The convention requires that parties take necessarymeasures, within the framework of their relevant laws andregulations, to prohibit the establishment of off-the-booksaccounts and similar practices used to bribe foreign publicofficials or to hide such bribery. Parties shall make briberyof foreign public officials a predicate offense for purposesof money laundering legislation on the same terms asbribery of domestic public officials.

Parties are to establish jurisdiction over offenses that arecommitted in whole or in part in their territories. Partiesmay rely on the general jurisdictional principles -nationality or territoriality - recognized by their legalsystems. The territorial basis for jurisdiction is to beinterpreted broadly so that an extensive physicalconnection to the act of bribery is not required. Theconvention provides that parties will review their currentbases for jurisdiction and take remedial steps if they arenot effective in the fight against the bribery of foreignpublic officials. Parties shall consult when more than oneparty asserts jurisdiction. Participating governmentspledged to work together to provide legal assistancerelating to investigations and proceedings within the scopeof the convention and to make bribery of foreign publicofficials an extraditable offense.

At the May 1997 OECD Council meeting, ministersrecommended that member states submit to nationallegislatures by April 1, 1998, legislation to criminalize

33

bribery of foreign public officials and seek the enactmentof such laws by the end of 1998. The convention requiresthe parties to cooperate in a follow-up program, in theframework of the OECD, to monitor and promote fullimplementation.

The convention will enter into force when five of theOECD’s 10 largest exporting countries, which bythemselves represent 60 percent of the combined totalexports of those 10 countries, deposit their instruments ofratification. If this has not occurred by the end of 1998,

thereafter the convention will enter into force when atleast two signatories have deposited their instruments ofratification and declare their willingness to be bound. 0

Editorial note: The convention has been signed by the 29 OECD members

plus Argentina, Brazil, Chile, Bulgaria and the Slovak Republic. The

complete text of the OECD convention can be obtained from the OECD

homepage at: http://www.oecd.orgldaf/cmislbribery/2Onov1e.htm. An

update on steps taken and planned future actions by each participating

country to ratify and implement the convention may be obtained at:

htrp://www.oecd.org/daf.cmis.bribery/annex2.htm.

Ll TRANSPARENCY INTERNATIONAL’S 1998CORRUPTION PERCEPTIONS INDEX

Transparency Internationalb Corruption Perceptions Index (CPI) for 1998 ranks 85 countries in the group’s mostcomprehensive survey since it was founded in 1993. The group is a non-profit, non-partisan coalition that works to

mobilize civil society, business, academia and government to curb corruption. Transparency International definescorruption as the abuse of public office for private gain. The Berlin-based organization compiled its index from multiplesurveys of expert and general public views in many countries. Transparency International says its index deals with theperception of corruption, not corruption itself, which it says it does not have the means to quantify In the followingtable, countries are ranked from those viewed as least corrupt to those viewed as most corrupt.

The Transparency International 1998 Corruption Perceptions Index

CountryRank Country

1998CPIScore

Standard surveysDeviation Used

1011

14151617

1920212223

25262728

Denmark 10.6 0.7 9Finland 9.6 0.5 9Sweden 9.5 0.5 9New Zealand 9.4 0.7 8Iceland 9.3 0.9 8Canada 9.2 0.5 9Singapore 9.1 1.0 10Netherlands 9.0 0.7 9Norway 9.0 0.7 9Switzerland 8.9 0.6 10Australia 8.7 0.7 8Luxemburg 8.7 0.9 7United Kingdom 8.7 0.5 10Ireland 8.2 1.4 10Germany 7.9 0.4 10Hong Kong 7.8 1.1 12Austria 7.5 0.8 9United States 7.5 0.9 8Israel 7.1 1.4 9Chile 6.8 0.9 9France 6.7 0.6 9Portugal 6.5 1.0 10Botswana 6.1 2.2 3Spain 6.1 1.3 10

Japan 5.8 1.6 11Estonia 5.7 0.5 3Costa Rica 5.6 1.6 5Belgium 5.4 1.4 9

35

CountryRank Country

1998CPIScore

Standard SurveysDeviation Used

29

3233

36373839

414243

454647

49505152

5455

59

61

66

69

71

Malaysia 5.3 0.4 11Namibia 5.3 1.0 3Taiwan 5.3 0.7 11South Africa 5.2 0.8 10Hungary 5.0 1.2 9Mauritius 5.0 0.8 3Tunisia 5.0 2.1 3Greece 4.9 1.7 9Czech Republic 4.8 0.8 9Jordan 4.7 1.1 6Italy 4.6 0.8 10Poland 4.6 1.6 8Peru 4.5 0.8 6Uruguay 4.3 0.9 3South Korea 4.2 1.2 12Zimbabwe 4.2 2.2 6Malawi 4.1 0.6 4Brazil 4.0 0.4 9Belarus 3.9 1.9 3Slovak Republic 3.9 1.6 5Jamaica 3.8 0.4 3Morocco 3.7 1.8 3El Salvador 3.6 2.3 3China 3.5 0.7 10Zambia 3.5 1.6 4Turkey 3.4 1.0 10Ghana 3.3 1.0 4Mexico 3.3 0.6 9Philippines 3.3 1.1 10Senegal 3.3 0.8 3Ivory Coast 3.1 1.7 4Guatemala 3.1 2.5 3Argentina 3.0 0.6 9Nicaragua 3.0 2.5 3Romania 3.0 1.5 3Thailand 3.0 0.7 11Yugoslavia 3.0 1.5 3Bulgaria 2.9 2.3 4

Egypt 2.9 0.6 3India 2.9 0.6 12Bolivia 2.8 1.2 4Ukraine 2.8 1.6 6Latvia 2.7 1.9 3Pakistan 2.7 1.4 3

36

CountryRank Country

1998CPIScore

Standard SurveysDeviation Used

7374

7677

798081

838485

Uganda 2.6 0.8 4Kenya 2.5 0.6 4Vietnam 2.5 0.5 6Russia 2.4 0.9 10Ecuador 2.3 1.5 3Venezuela 2.3 0.8 9Colombia 2.2 0.8 9Indonesia 2.0 0.9 10Nigeria 1.9 0.5 5Tanzania 1.9 1.1 4Honduras 1.7 0.5 3Paraguay 1.5 0.5 3Cameroon 1.4 0.5 4

Notes: The “1998 CPI Score” relates to perceptions of the degree of corruption as seen by business people, riskanaIysts, and the general public and ranges between 10 (highly clean) and 0 (highly corrupt). “Standard Deviation”indicates differences in the values of the sources; the greater the standard deviation, the greater the differences ofperceptions of a country among the sources. “Surveys Used” indicates the number of surveys involved in assessing acountry’s performance. Twelve surveys were used; a country had to be named on at least three of them to beincluded in the 1998 CPI. 0

Source: Transparency International, September 22, 1998.

3 7

Ll THE INTERNATIONAL CHAMBER OF COMMERCE’SRULES AGAINST EXTORTION AND BRIBERY

The International Chamber of Commerce (ICC) is a global

business organization with 63 national committees and over

7,000 member companies and associationsjom more than130 countries. The ICC seeks to promote international trade

and investment, as well as rules of conduct of business acrossborders. The Rules of Conduct to Combat Extortion andBribery was adopted by the ICC in I996

These rules of conduct are intended as a method of self-regulation by international business, and they should alsobe supported by governments. Their voluntary acceptanceby business enterprises will not only promote highstandards of integrity in business transactions, whetherbetween enterprises and public bodies or betweenenterprises themselves, but will also form a valuabledefensive protection to those enterprises which aresubjected to attempts at extortion.

These rules of conduct are of a general natureconstituting what is considered good commercial practicein the matters to which they relate but are without directlegal effect. They do not derogate from applicable locallaws, and since national legal systems are by no meansuniform, they must be read mutatis mutandis subject tosuch systems.

The business community objects to all forms of extortionand bribery. It is recognized, however, that under currentconditions in some parts of the world, an effectiveprogram against extortion and bribery may have to beimplemented in stages. The highest priority should bedirected to ending large-scale extortion and briberyinvolving politicians and senior off&h. These representthe greatest threat to democratic institutions and causethe gravest economic distortions. Small payments to low-level offtcials to expedite routine approvals are notcondoned. However, they represent a lesser problem.When extortion and bribery at the top levels is curbed,government leaders can be expected to take steps to cleanup petty corruption.

BASIC PRINCIPLE

All enterprises should conform to the relevant laws andregulations of the countries in which they are establishedand in which they operate, and should observe both theletter and the spirit of these rules of conduct.

For the purposes of these rules of conduct, the term“enterprise” refers to any person or entity engaged inbusiness, whether or not organized for profit, includingany entity controlled by a state or a territorial subdivisionthereof; it includes, where the context so indicates, aparent or a subsidiary,

BASIC RULES

Article 1: Extortion

l No one may, directly or indirectly, demand or accept abribe.

Article 2: Bribery and “Kickbacks”

l No enterprise may, directly or indirectly, offer or give abribe, and any demands for such a bribe must be rejected.

l Enterprises should not (1) kick back any portion of acontract payment to employees of the other contractingparty, or (2) utilize other techniques, such assubcontracts, purchase orders, or consulting agreements,to channel payments to government officials, toemployees of the other contracting party, to theirrelatives, or to business associates.

Article 3: Agents

Enterprises should take measures reasonably within theirpower to ensure:

l That any payment made to any agent represents nomore than an appropriate remuneration for legitimateservices rendered by such agent;

l That no part of any such payment is passed on by the

agent as a bribe or otherwise in contravention of theserules of conduct; and

l That they maintain a record of the names and terms ofemployment of all agents who are retained by them inconnection with transactions with public bodies or stateenterprises. This record should be available for inspectionby auditors and, upon specific request, by appropriate,duly-authorized governmental authorities underconditions of confidentiality.

Article 4: Financial Recording and Auditing

l All financial transactions must be properly and fairlyrecorded in appropriate books of account available forinspection by boards of directors, if applicable, or acorresponding body, as well as auditors.

l There must be no “off the books” or secret accounts,nor may any documents be issued which do not properlyand fairly record the transactions to which they relate.

l Enterprises should take all necessary measures toestablish independent systems of auditing in order tobring to light any transactions which contravene thepresent rules of conduct. Appropriate corrective actionmust then be taken.

Article 5: Responsibilities of Enterprises

The board of directors or other body with ultimateresponsibility for the enterprise should:

l Take reasonable steps, including the establishment andmaintenance of proper systems of control aimed atpreventing any payments being made by or on behalf ofthe enterprise which contravene these rules of conduct;

l Periodically review compliance with these rules ofconduct and establish procedures for obtainingappropriate reports for the purposes of such review; and

l Take appropriate action against any director oremployee contravening these rules of conduct.

Article 6: Political Contributions

Contributions to political parties or committees or toindividual politicians may only be made in accordancewith the applicable law, and all requirements for publicdisclosure of such contributions shall be fully compliedwith. All such contributions must be reported to seniorcorporate management.

Article 7: Company Codes

These rules of conduct being of a general nature,enterprises should, where appropriate, draw up their owncodes consistent with the International Chamber ofCommerce rules and apply them to the particularcircumstances in which their business is carried out. Suchcodes may usefully include examples and should enjoinemployees or agents who find themselves subjected to anyform of extortion or bribery immediately to report thesame to senior corporate management. Companies shoulddevelop clear policies, guidelines, and training programsfor implementing and enforcing the provisions of theircodes. 0

Note: A related document, ICC Recommcndutiom to Governmenk andInternational Organizations on Extortion and Bribery, may be obtained on

the Internet at:

http://www.iccwbo.otg/Commissions/Extottion~btibe~/btibe~.doc.htmI)

3 9

Cl FOREIGN CORRUPT PRACTICES ACTANTIBRIBERY PROVISIONS

The following is excerptedfiom a brochure on the ForeignCorrupt Practices Act Antibribety Provisions prepared by theU.S. Department of Commerce. This U.S. Legislation

provided the model for the OECD treaty.

The United States’ 1988 Trade Act directed the U.S.Attorney General to provide guidance concerning theDepartment of Justice’s enforcement policy with respectto the Foreign Corrupt Practices Act of 1977 (FCPA)to potential exporters and small businesses that are unableto obtain specialized counsel on issues related to theFCPA. The guidance is limited to responses to requestsunder the Department of Justice’s Foreign CorruptPractices Act Opinion Procedure and to generalexplanations of compliance responsibilities and potentialliabilities under the FCPA.

U.S. firms seeking to do business in foreign markets mustbe familiar with the FCPA. In general, the FCPAprohibits American companies from making corruptpayments to foreign officials for the purpose of obtainingor keeping business. The Department of Justice is thechief enforcement agency, with a coordinate role playedby the Securities and Exchange Commission (SEC). TheOffice of General Counsel of the Department ofCommerce also answers general questions of U.S.exporters concerning the FCPKs basic requirements andconstraints.

Investigations by the SEC in the mid-1970s revealed thatover 400 U.S. companies admitted making questionableor illegal payments in excess of $300 million to foreigngovernment officials, politicians, and political parties. Theabuses ran the gamut from bribery of high foreignofficials in order to secure some type of favorable actionby a foreign government to so-called facilitating paymentsthat allegedly were made to ensure that governmentfunctionaries discharged certain ministerial or clericalduties. Congress enacted the FCPA to bring a halt to the

bribery of foreign officials and to restore publicconfidence in the integrity of the American businesssystem. The anti-bribery provisions of the FCPA make itunlawful for a U.S. person to make a corrupt payment toa foreign official for the purpose of obtaining or retainingbusiness for or with, or directing business to, any person.

The FCPA also requires issuers of securities to meet itsaccounting standards. These accounting standards, whichwere designed to operate in tandem with the anti-briberyprovisions of the FCPA, require corporations covered bythe provisions to maintain books and records thataccurately and fairly reflect the transactions of thecorporation and to design an adequate system of internalaccounting controls.

BASIC PROVISIONS PROHIBITING FOREIGNCORRUPT PAYMENTS

Anti-Bribery Provisions: The FCPA makes it unlawful tobribe foreign government officials to obtain or retainbusiness. The anti-bribery provisions apply both tocertain issuers of registered securities and issuers requiredto file periodic reports with the SEC (referred to as“issuers”) and to others (referred to as “domesticconcerns”). A domestic concern is defined as anyindividual who is a citizen, national, or resident of theUnited States, or any corporation, partnership,association, joint-stock company, business trust,unincorporated organization, or sole proprietorship thathas its principal place of business in the United States orthat is organized under the laws of a state of the UnitedStates, or a territory, possession, or commonwealth of theUnited States.

The FCPA’s anti-bribery provisions extend to two types ofbehavior. The basic prohibition is against making bribesdirectly; a second prohibition covers the responsibility ofa domestic concern and its offtcials for bribes paid byintermediaries.

The FCPA’s basic anti-bribery prohibition makes itunlawful for a firm (as well as any officer, director,employee, or agent of a firm or any stockholder acting on

behalf of the firm) to offer, pay, promise to pay (or evento authorize the payment of money, or anything of value,or to authorize any such promise) to any foreign officialfor the purpose of obtaining or retaining business for orwith, or directing business to, any person. A similarprohibition applies with respect to payments to a foreignpolitical party or official thereof or candidate for foreignpolitical office.

Payments by Intermediaries: It is also unlawful to make apayment to any person, while knowing that all or aportion of the payment will be offered, given, orpromised, directly or indirectly, to any foreign official (orforeign political party, candidate, or official) for thepurposes of assisting the firm in obtaining or retainingbusiness. “Knowing” includes the concepts of “consciousdisregard” or “willful blindness.”

Enforcement: The Department of Justice is responsiblefor all criminal enforcement and for civil enforcement ofthe anti-bribery provisions with respect to domesticconcerns. The SEC is responsible for civil enforcement ofthe anti-bribery provisions with respect to issuers.

ANTI-BRIBERY PROVISIONS: ELEMENTS OFAN OFFENSE

Basic Prohibition: With respect to the basic prohibition,there are five elements that must be met to constitute aviolation of the act:

l.who - The FCPA applies to any individual firm,officer, director, employee, or agent of the firm and anystockholder acting on behalf of the firm. Individuals andfirms may also be penalized if they order, authorize, orassist someone else to violate the anti-bribery provisionsor if they conspire to violate those provisions. A foreign-incorporated subsidiary of a U.S. firm will not be subjectto the FCPA, but its U.S. parent may be liable if itauthorizes, directs, or participates in the activity inquestion. Individuals employed by or acting on behalf ofsuch foreign-incorporated subsidiaries may, however, besubject to the anti-bribery provisions if they are personswithin the definition of domestic concern. In addition,U.S. nationals employed by foreign-incorporatedsubsidiaries are subject to the anti-bribery provisions ofthe FCPA.

2. Corrupt Intent - The person making or authorizingthe payment must have a corrupt intent, and thepayment must be intended to induce the recipient to

misuse his (or her) official position in order wrongfully todirect business to the payor. The FCPA does not requirethat a corrupt act succeed in its purpose. The offer orpromise of a corrupt payment can constitute a violationof the statute. The FCPA prohibits the corrupt use of themails or of interstate commerce in furtherance of apayment to influence any act or decision of a foreignofficial in his or her official capacity or to induce theofficial to do or omit to do any act in violation of his orher lawful duty, or to induce a foreign official to use hisor her influence improperly to affect or influence any actor decision.

3. Payment - The FCPA prohibits paying, offering,promising to pay (or authorizing to pay or offer) moneyor anything of value.

4. Recipient - The prohibition extends only to corruptpayments to a foreign official, a foreign political party orparty official, or any candidate for foreign political office.A “foreign official” means any officer or employee of aforeign government or any department or agency, or anyperson acting in an of&&l capacity. You should considerutilizing the Department of Justice’s Foreign CorruptPractices Act Opinion Procedure for particular questionsas to the definition of a foreign official, such as whether amember of a royal family, a member of a legislative body,or an official of a state-owned business enterprise wouldbe considered a foreign official.

Prior to the amendment of the FCPA in 1988, the termforeign official did not include any employee of a foreigngovernment or agency whose duties were essentiallyministerial or clerical. Determining whether a givenemployee’s duties were essentially ministerial or clericalwas a source of ambiguity, and it was not clear whetherthe act prohibited certain “grease” payments, such asthose for expediting shipments through customs orplacing a transatlantic telephone call, securing requiredpermits, or obtaining adequate police protection.Accordingly, recent changes in the FCPA focus on thepurpose of the payment, instead of the particular dutiesof the official receiving the payment, offer, or promise ofpayment, and there are exceptions to the anti-briberyprovision for “facilitating payments for routinegovernmental action.”

5. Business Purpose Test - The FCPA prohibitspayments made in order to assist the firm in obtaining, orretaining business for or with, or directing business to anyperson. It should be noted that the business to be

41

obtained or retained does not need to be with a foreigngovernment or foreign government instrumentality.

Third Party Payments: Generally, the FCPA prohibitscorrupt payments through intermediaries. It is unlawfulto make corrupt use of the mails or of interstatecommerce in furtherance of a payment to a third party,while knowing that all or a portion of the payment willgo directly or indirectly to a foreign official. The term“knowing” includes conscious disregard and deliberateignorance. The elements of an offense are essentially thesame as described above, except that in this case the“recipient” is the intermediary who is making thepayment to the requisite “foreign official.”

Permissible Payments and AErmative Defenses: Asamended in 1988, the FCPA now provides an explicitexception to the bribery prohibition for “facilitatingpayments” for “routine governmental action” andprovides affirmative defenses which can be used to defendagainst alleged violations of the FCPA.

Exception for Facilitating Payments for RoutineGovernmental Actions: There is an exception to the anti-bribery prohibition for facilitating or expeditingperformance of routine governmental action. The statutelists the following examples: obtaining permits, licenses,or other official documents; processing governmentalpapers, such as visas and work orders; providing policeprotection and mail pick-up and delivery; providingphone service, power and water supply, loading andunloading cargo, or protecting perishable products; andscheduling inspections associated with contractperformance or transit of goods across country. Actionssimilar to these are also covered by this exception.

Routine governmental action does not include anydecision by a foreign offkial to award new business or tocontinue business with a particular party.

Af%irmative Defenses: A person charged with a violationof the FCPA’s anti-bribery provisions may assert as adefense that the payment was lawful under the writtenlaws of the foreign country or that the money was spentas part of demonstrating a product or performing acontractual obligation.

Whether a payment was lawful under the written laws ofthe foreign country may be difficult to determine. Thosewho are in doubt should consider seeking the advice ofcounsel or utilizing the Department of Justice’s Foreign

Corrupt Practices Act Opinion Procedure reviewprocedure for such issues as (1) the issuance of anadvisory opinion by a foreign government agency; (2) theissuance of regulations by a unit of local government; and(3) a course of conduct of a foreign government orgovernment agency indicating that the payment is legal.

Moreover, because these defenses are affirmative defenses,the defendant would be required to show in the firstinstance that the payment met these requirements. Theprosecution would not bear the burden of demonstratingin the first instance that the payments did not constitutethis type of payment.

SANCTIONS AGAINST BRIBERY

The following criminal penalties may be imposed forviolations of the FCPA’s antibribery provisions. Firms aresubject to a fine of up to $2 million; officers, directors,and stockholders are subject to a fine of up to $100,000and imprisonment for up to five years; employees andagents are subject to a fine of up to $100,000 andimprisonment for up to five years. Fines imposed onindividuals may not be paid by the firm.

There can be civil penalties as well. The Attorney Generalor the SEC, as appropriate, may bring a civil action for afine of up to $10,000 against any firm as well as anyofficer, director, employee, or agent of a firm, orstockholder acting on behalf of the firm, who violates theanti-bribery provisions. In addition, in an SECenforcement action, the court may impose an additionalfine not to exceed the greater of (1) the gross amount ofthe pecuniary gain to the defendant as a result of theviolation, or (2) a specified dollar limitation. Thespecified dollar limitations are based on the egregiousnessof the violation, ranging from $5,000 for a natural personand $50,000 for any other person, to $100,000 for anatural person and $500,000 for any other person.

The Attorney General or the SEC, as appropriate, mayalso bring a civil action to enjoin any act or practice of afirm whenever it appears that the firm (or an offtcer,director, employee, agent, or stockholder acting on behalfof the firm) is in violation (or about to be) of the anti-bribery provisions. The SEC may also enter a cease-and-desist order against a person who violates, or is about toviolate, the anti-bribery provisions.

Alternative Fines: Under federal criminal laws other thanthe FCPA, individuals may be fined up to $250,000 or

42

up to twice the amount of the gross gain or gross loss ifthe defendant derives pecuniary gain from the offense orcauses a pecuniary loss to another person. The FCPA’spenalty provisions do not override the provisions in theseother statutes providing for alternative fines.

Other Governmental Action: Under guidelines issued bythe U.S. Office of Management and Budget, a person orfirm found in violation of the FCPA may be barred fromdoing business with the U.S. government. Indictmentalone can lead to suspension of the right to do businesswith the government. The president has directed that noexecutive agency shall allow any party to participate inany procurement or nonprocurement activity if anyagency has debarred, suspended, or otherwise excludedthat party from participation in a procurement ornonprocurement activity. No executive party or agency

will allow any party to participate in any procurement ornonprocurement activity if any agency has excluded that

party.

In addition, a person or firm found guilty of violating theFCPA may be ruled ineligible to receive export licenses;the SEC may suspend or bar persons from the securitiesbusiness and impose civil penalties on persons in thesecurities business for violations of the FCPA; theCommodity Futures Trading Commission and theOverseas Private Investment Corporation both providefor possible suspension or debarment from agencyprograms for violation of the FCPA; and a payment madeto a foreign government official that is unlawful underthe FCPA cannot be deducted under the tax laws as abusiness expense. 0

Ll THE LIMA DECLARATION AGAINST CORRUPTION

Concluded at the 8th International Conference AgainstCorruption, held September 7 to 1 I, 1997, in Lima, Peru.The conference brought together seniorjgures frominternational organizations and aid agencies, representativesofgovernments, officers of anti-corruption agencies andprofessional associations, a.s well asiournalists, academics,businessmen, and representatives of civil society. TheDeclaration is considered a blueprint for action and proFessand will be reviewed when the Conference reassembles inSouth Ajiica in 1999.

WE, over 1000 citizens drawn from 93 countries, comingfrom all the continents and from countries large andsmall, in every stage of development, rich and poor, andfrom varied backgrounds in government, the privatesector, and civil society,

AFTER a searching discussion of the means to containcorruption in all its manifestations around the globe andunited in our vision of an era of international andnational co-operation in the twenty-first century in whichthe evil of corruption is suppressed,

NOW JOIN TOGETHER in this Declaration of the 8thInternational Conference Against Corruption held inLima, Peru from 7 - 11 September 1997.

CONVINCED that corruption

- erodes the moral fabric of every society;

- violates the social and economic rights of the poor andthe vulnerable;

- undermines democracy;

- subverts the rule of law which is the basis of everycivilized society;

- retards development; and,

- denies societies, and particularly the poor, the benefitsof free and open competition -

BELIEVING that

- fighting corruption is the business of everyonethroughout every society;

- the fight involves the defense and strengthening of theethical values in all societies;

- it is essential that coalitions be formed betweengovernment, civil society and the private sector;

- a willingness to enter into such a coalition is a truetest of an individual government’s commitment to theelimination of corruption;

- the role of civil society is of special importance toovercome the resistance of those with a stake in the statusquo and to mobilize people generally behind meaningfulreforms;

- there must be a sustained campaign against corruptionwithin the private sector as, with greater privatisation andderegulation, it assumes a greater role in activitiestraditionally performed by the state;

- and that top leadership sets the tone in all societies, as“You clean a staircase by starting at the top” -

WE NOW CALL UPON governments, international andregional agencies and citizens around the world tomobilize their efforts and energies to join us in achievingthe following actions:

Actions at the International and RegionaI Levels

1. International institutions must support more fully thecreative role civil society has to play in advancing thedevelopment of good governance and work with them inpartnership to this end. They must work together toemphasize the positive aspects of globalisation, and tocontain its negative elements.

2. Tax deductibility of bribes by which exportingcountries actively subsidize and encourage the corruptionof officials in other countries must be ended.

3. The OECD should complete a convention tocriminalise the bribing of foreign officials by the end ofthis year, and its member states should implement itsprovisions before the end of 1998. The OECD mustthen carry out a strong monitoring programme to ensurestrict enforcement of the convention, with participationby civil society to ensure transparency.

4. All states of the Americas should ratify the OAS Inter-American Convention Against Corruption before theSummit of the Americas in Santiago in April, 1998. Weurge the OAS to promote and monitor implementationof the convention, and commend it as an excellentexample of regional cooperation against corruption forconsideration by other regions.

5. The World Bank and the IMF should accelerateimplementation of their new policies against corruptioninitiated by President Wolfensohn and Managing-Director Camdessus, and particularly the suspension oflending to governments who do not adequately addressthe corruption issue.

6. The European Union should accelerateimplementation of its own anti-corruption policiesrecommended by the Commission of the EuropeanCommunities in May, 1997; all EU member states shouldratify the European Union Convention on Corruptionadopted on 26 May 1997; and all member states of theCouncil of Europe should join in the work of its multi-disciplinary group against corruption to ensure that theCouncil’s summit in October yields concrete results.

7. The work of the United Nations on action againstcorruption must be supported. States must implementthe United Nations Declaration Against Corruption andBribery and the International Code of Conduct forPublic Officials. International funding agencies anddonor governments must further support the technicalco-operation activities of the UN.

8. The World Trade Organization must itself join in theglobal struggle and begin to address the serious impact ofcorruption on world trade.

9. All multi-lateral and bilateral aid agencies, togetherwith their development partners, must find practical waysof overcoming corruption in their development programs.

combat corruption. In particular, the transparency ofinternational and national government procurementprogrammes must be strengthened. Governance and civilservice reform must have a focus on suppressingcorruption as an essential element, and assure the politicalneutrality of the civil service itself.

11. International institutions must realize that theirinternational procurement practices are not yet fullysatisfactory, and that they should further developimaginative and new approaches to procurement inpartnership with individual governments and the privatesector, including the use of anti-bribery and integritypacts. Bidders who bribe should be blacklisted. TheGlobal Coalition for Africa should continue itsimaginative work with Transparency International andgovernments in this area.

12. International organizations with mandates in the area,including INTERPOL and the World CustomsOrganization, should take steps to strengtheninternational law enforcement co-operation.

13. Regulation of the operations of all internationalbanking centers must be improved so as to ensure thatassets under their control are governed by agreedinternational norms and that illicitly gained assets can betraced, frozen and forfeited. This should includeexclusion from the international monetary system of off-shore banking centers which fail to meet these standards.Banking secrecy must not provide a shield for criminalsand obstruct the exposure of corruption.

14. The reform and modernization of customs systems,with an emphasis on transparency and integrity, is stillurgently needed in many countries. Assistance should beincreased by the donor community, and particularlythrough the World Customs Organization (WCO).Members of the WC0 should implement fully theArusha Declaration of 1993 and the ColumbusDeclaration of 1994 and co-operate to ensure thattransparency and integrity feature in all internationaltrade transactions.

15. The International Chamber of Commerce mustpromote widespread acceptance by companies of codes ofconduct and compliance programmes to combatextortion and bribery at home and abroad. We urge theadoption of codes of conduct and effective compliance

10. Funding agencies should increase the assistance theygive to strengthen national integrity system programs to

45

programs as a requirement for the right to bid on majorprojects.

16. The International Association of Prosecutors and theInternational Bar Association should develop model lawswhereby the prosecution of corruption cases in each ofour various legal systems can be rendered less complexand more expeditious, while being consistent withinternational human rights norms.

17. Shareholders around the world should insist that thecompanies in which they invest subscribe to theobjectives of the corporate governance movement.

18. The various international associations of accountantsand auditors and the international associations of securityregulators must develop clear and universal accountingstandards with widespread international recognition. It isparticularly important for the fight against corruptionthat all financial transactions are recorded, and that thereare no “off the books” or secret accounts.

19. International professional societies should take amuch closer interest in their national affiliates and usetheir influence to ensure that national professionalstandards are protected, strengthened and raised.

20. The international financial and donor agencies shouldco-operate with civil society in developing world-wideindices of the costs of goods and services to identifyanomalies created by bureaucracy and corruption.

21. Regional and international institutions must do allthey can to advance our Declaration and developprogrammes to this end.

Actions at the National and Local Levels

22. All governments should operate in a transparent andaccountable manner at all levels, with the public havingaccess to information to the maximum extent possible.They should ensure that public accounts are open topublic scrutiny. The role of civil society is most crucial atthe national and local levels, where participation shouldbe fostered by providing open access to decision-makersand the holding of public hearings on matters ofimportance.

23. Civil society, too, must put its own house in order,with NGOs reforming themselves to ensure that asorgans of civil society they practice the same standards of

transparency and accountability that they expect fromtheir governments. It must also be vigilant in defense ofthose who are persecuted for opposing corruption.

24. All governments must assure the independence,integrity and de-politicization of the judicial system as thecornerstone of the rule of law on which the effectivenessof all efforts to combat corruption depends.

25. The Office of Ombudsman, as a bridge between thegovernment and the people, can make a majorcontribution to the elimination of bureaucraticobstruction and corruption, and so countries without thisnecessary post should examine its adoption as anindependent office of its elected congress.

26. Governments, in conjunction with civil society andthe private sector, should periodically review theaccountability features of all relevant organs of the stateand of constitutional office-holders, and at the local level,to ensure that these form an effective bulwark againstcorruption. Conflict of interest rules must receive specialattention. In this respect, the critical Of&e of theController (Auditor General) must play an important rolemaintaining and strengthening his necessaryindependence.

27. Governments who have not already done so mustrestrict to the minimum remaining economicopportunities for bribery and corruption, such asmonopolies, discretionary fees, onerous taxes, andregulations and licenses that impede business activity.

28. Civil service reform is essential to create anenvironment to fight corruption. All participants in theprocess should give particular attention to enablingproper salaries to be paid.

29. Particular attention should be given to thestrengthening of financial management systems, and torendering budget processes transparent and according arole to civil society.

30. Countries should improve the effectiveness of theirlaws dealing with corruption to the maximum extentpossible consistent with their constitutions andinternational human rights norms including:

- abolishing any requirement to prove that an officialwho received an illegal gift actually gave favors in return;

46

- providing a system for the declaration of assets bypersons holding public positions of trust (and theirfamilies), and placing on them the obligation to justifyincreases out of line with legitimate sources of income;

- introducing the periodic or random monitoring of theassets and lifestyles of significant decision-makers in thepublic sector (and their families and associates), whereappropriate by an independent agency;

- laws which effectively empower the freezing, seizureand confiscation of the illicitly acquired wealth of officialsfound guilty of corruption, wherever it may be and bywhomsoever it may be held;

- providing appropriate protection for witnesses (andtheir families) and protecting whistle-blowers;

- providing a system for the recording of gifts receivedby of%&;

- ensuring that officials at all levels cannot hide behindimmunities but are fully subject to corruption laws;

- and, debarring convicted criminals from standing forpolitical ofice and appointment to positions of publictrust.

The foregoing steps would make both prevention andprosecution more effective.

31. Governments should review their national and localadministration procurement processes, in co-operationwith the private sector and civil society, with a view toensuring that these are fair, open and competitive, and soyield both value for money for the public and an enablingcommercial environment for the private sector.

32. Bidders who bribe off&& in efforts to win tendersshould be blacklisted from competing for official businessfor an appropriate period, following a fair investigation.

33. As corruption is a major impediment in the electoraland political processes, urgent action must be taken toimplement effective ways in which donations topoliticians and political parties are regulated andpromptly publicly recorded, and campaign spendinglimits set and strictly audited. Continuing civiceducation programmes are essential.

lawyers, accountants, doctors and engineers, mustexamine the adequacy and effectiveness of their codes ofprofessional conduct and of the means of discipliningthose members who facilitate corruption.

35. The role of an independent media is essential, but forit to function effectively there must be freedom fromharassment, freedom of information laws (for citizen andjournalists alike) and a legal system which cannot bemisused to muzzle legitimate expressions of concern. Weurge governments, the media itself and civil society toensure that the conditions exist for the media to play thisrole.

36. Newspaper editors everywhere should reflect on theroles their publications can play in giving the public a“voice” to counter corruption, and in raising awareness ofcomplaints mechanisms and how the public can use theseeffectively. They must also consider how they can helpfoster a climate of public opinion which regards thecorrupt, however rich and powerful they may be, with thecontempt they deserve. The media itself must guardagainst accepting bribes and inappropriate hospitality.

37. As reform efforts will be in vain unless the culture ofcorruption is reversed, governments, schools and religiousinstitutions should launch education initiatives designedto raise awareness in the young of the incalculable harmdone by corruption, and of the personal risks they run ifthey are involved in this.

38. Codes of conduct should be introduced in manyspheres of life (including cabinet, parliament, thejudiciary and throughout government ministries), andgovernments should examine arrangements whereby theethics and integrity of their administrations can beassured.

39. Governments should encourage the use ofindependent surveys of public satisfaction with servicesand institutions as a valuable tool in identifying particularareas of difficulty as well as to monitor progress made inimproving services by making them less susceptible tocorruption.

40. Lastly, governments, civil society and the privatesector should consider designating annual “anti-corruption days” or “accountability days”, which inseveral countries has proved to be a focus for awarenessraising. This concept could then be extended by the

34. National professional associations, in particular of

47

United Nations designating an annual international dayof action.

We request the Chair of the Conference together with theSecretariat of the International Anti-CorruptionConference Council, Transparency International (TI), totake the necessary actions to bring theserecommendations to the attention of governments andrelevant institutions. We pledge that we, ourselves, willdo our part.

We look forward to our meeting again in South Africa, in1999. We afirm our conviction of the practicalusefulness and impact of periodic exchanges of experienceand success stories such as have taken place this last weekin Lima, and we believe that we have made significantprogress in moving forward the international debate onpractical steps against corruption. In South Africa in two

years’ time we will have the opportunity to assess theprogress made both in the struggle against corruptionitself, and the accomplishment of the actions proposedherein.

Finally, we express our heartfelt thanks to the OrganizingCommittee, the people of Peru, their government, theirprivate sector and their civil society, for the warmth oftheir welcome, the generosity of their hospitality, thedevelopment of a rich and relevant agenda, thepromotion or civil society participation in the fightagainst corruption, and the vision of a new millennium ofethics and integrity. tl

Lima, Peru

11 September 1997

0 THE OAS INTER-AMERICAN CONVENTIONAGAINST CORRUPTION

The following is a fact sheet issued by the U.S. Departmentof State on October IS, 1998.

The Organization of American States (OAS) Inter-American Convention Against Corruption is the firstmultilateral anti-corruption treaty instrument negotiatedin the world and is expected to enhance cooperationamong the nations of the hemisphere in the battle againstdomestic and transnational acts of corruption. Theproblem of corruption has been of particular concern tothe United States because of its corrosive effects ondemocratic institutions and economic efficiency andbecause of the links that often exist between corruptionand organized criminal activity such as drug trafftcking.

The convention:

l Breaks significant new ground by requiring parties tocriminalize the bribery of foreign officials, similar to theU.S. Foreign Corrupt Practices Act (FCPA);

l Requires parties to update their domestic legislation tocriminalize corrupt acts such as bribery;

l Requires states to assist one another in criminalinvestigations and prosecutions related to such acts; and

l Explicitly disallows the use of “bank secrecy” as a basisfor denying assistance.

Where did it come from? The Summit of the AmericasPlan of Action invited the Organization of AmericanStates (OAS) to develop a hemispheric approach tocombating corruption “through negotiation of a newhemispheric agreement . ...”

Who has signed? Twenty-five countries have signed theconvention since the conclusion of negotiations onMarch 29, 1996: Argentina, Bahamas, Bolivia, Brazil,Chile, Colombia, Costa Rica, Dominican Republic,Ecuador, El Salvador, Guatemala, Guyana, Haiti,Honduras, Jamaica, Mexico, Nicaragua, Panama,Paraguay, Peru, Suriname, Trinidad and Tobago, UnitedStates, Uruguay, and Venezuela.

Who has ratified? Ten countries have deposited theirinstruments of ratification with the OAS: Argentina,Bolivia, Costa Rica, Ecuador, Honduras, Mexico,Paraguay, Peru, Trinidad and Tobago, and Venezuela. TheClinton administration submitted the convention to theU.S. Senate for advice and consent to ratification in April1998.

When did the convention enter into force? Theconvention entered into force on March 6, 1997, 30 daysafter the second country deposited its instrument ofratification. It enters into force for each subsequentcountry 30 days after submitting its instrument ofratification with the OAS. tl

49

INFORMATION RESOURCES

KEY U.S. GOVERNMENT CONTACTSAND INTERNET SITES

KEY CONTACTS

U.S. Agency for International DevelopmentCenter for Democracy and GovernanceBureau for Global Programs, Field Support, and

ResearchWashington, D.C. 20523-3100 U.S.A.Contact: Phyllis DininioTelephone: (202) 712-0319Fax: (202) 216-3232http://www.info.usaid.govi

U.S. Department of CommerceAnti-Corruption ReviewOf&e of the Chief Counsel for International CommerceRoom 5624 I mailstop 5882Washington, D.C. 20230 U.S.A.Telephone: (202) 482-0937Fax: (202) 482-4076http://www.ita.doc.gov/legal

U.S. Department of JusticeCriminal Division, Fraud Section1400 New York Avenue, N.W.Washington, D.C. 20005 U.S.A.Contact: Peter ClarkTelephone: (202) 6 16-0437http://www.usdoj.gov/criminal/fraud/fcpa/fcpa.html

U.S. Department of StateBureau of Economic, Business, and Agricultural Affairs2100 C Street, N.W.Washington, D.C. 20520 U.S.A.http://www.state.gov/www/issues/economic/bribery.html

U.S. Information AgencyOf&e of Economic Security (I/TES)301 4th Street, S.W.Washington, D.C. 20547 U.S.A.Telephone: (202) 6 19-4 159Fax: (202) 619-6674http://www.usia.gov/topical/econ/bribes/

U.S. Of&e of Government Ethics1201 New York Avenue, N.W., Suite 500Washington, D.C. 20005-3917 U.S.A.Contact: Stuart GilmanTelephone: (202) 208-8022http://www.usoge.gov/

OTHER KEY INTERNET SITES

American Bar AssociationTask Force on International Standards for Corrupt

PracticesContact: Stuart Deming, co-chairc/o Inman Deming LLP1300 19th Street, N.W., Suite 260Washington, D.C. 20036 U.S.A.Telephone: (202) 293-l 33 1Fax: (202) 293-1338

Institute for Democratic Strategies909 Duke StreetAlexandria, Virginia 22314 U.S.A.Telephone: (703) 739-4224email: demstrat@clark.net

International Chamber of CommerceStanding Committee on Extortion and Bribery38, Cours Albert ler75008 Paris, FranceTelephone: (33) 49.53.28.28Fax: (33) 49.53.28.59http://www.iccwbo.org/Commissions/Extortion~briberyl

briberycom.html

Organization for Economic Cooperation andDevelopment

2, rue Andre-Pascal75775 Paris CEDEX 16FranceTelephone: (33) 01.45.24.82.00Fax: (33) 01.45.24.85.00http:llwww.oecd.org/daf/cmis/bribery/brindex.htm

Organization of American States19th Street and Constitution Avenue, N.W.Washington, D.C. 20006 U.S.A.http://www.oas.org

Transparency InternationalOtto-Suhr-Allee 9719910585 BerlinGermanyTelephone: 49-30-34 38-20-oFax: 49-30-34 70-39-12http://www.transparency.de/

United Nations Development Program (UNDP)Management Development and Governance DivisionBureau for Development Policy304 East 45th Street, 12th FloorNew York, N.Y. 10017 U.S.A.Telephone: (212) 906-5054Fax: (212) 906-6471http://magnet.undp.org

World BankGovernance and Anti-CorruptionEconomic Development Institute1818 H Street, N.W.Washington, D.C. 20433 U.S.A.http://www.worldbank.org/html/edi/gac/index.htm

World Trade OrganizationWorking Group on Transparency in Government

Procurement PracticesGeneva, Switzerlandhttp://www.wto.orglwtolgovtlgovt.htm

51

ADDITIONAL READINGS ONBRIBERY AND CORRUPTION

Brademas, John, and Fritz Heimann. “TacklingInternational Corruption: No Longer Taboo.” ForeignAfiirs, vol. 77, no. 5, September-October 1998.

Center for International Private Enterprise. “BusinessViews on Combating Corruption.” Economic Reform

Todzy, no. 2, 1998.http://www.cipe.org/newert.html#COMBAT

Control Risks Group, Information Services Team.Corruption and Integrity: Best Business Practice in an

Impe$ct World. London, Washington, D.C.: ControlRisks Group Limited, 1998.

Dininio, Phyllis, Sahr John Kpundeh, and Robert Leiken.US’D Handbook for Fighting Corruption. Washington,D.C.: U.S. Agency for International Development,Center for Democracy and Governance, 1998.

Elliot, Kimberly Ann, ed. Corruption and the GlobalEconomy. Washington, D.C.: Institute for InternationalEconomics, 1997.

Gantz, David A. The Foreign Corrupt Practices Act:

Professional and Ethical Challenges for Lawyers, 14 ArizonaJournal of International and Comparative Law 97 (1997).

Gupta, Sanjeev, Hamid Davoodi, and Rosa Alonso-Terme. Does Corruption Afect Income Inequality andPoverty? (IMF Working Paper WP/98/76). Washington,DC: International Monetary Fund, 1998.

Hotchkiss, Carolyn. “The Sleeping Dog Stirs: New Signsof Life in Efforts to End Corruption in InternationalBusiness.” Journal of Public Poliy &Marketing, vol. 17,no. 1, Spring 1998.

Howell, Llewellyn D. “Corruption and Crisis in theGlobal Economy.” USA To&y (magazine), vol. 126, no.2636, May 1, 1998.

Klitgaard, Robert. “International Cooperation AgainstCorruption.” Finance &Development, vol. 35, no. 1,March 1998.

Kpundeh, Sahr J., and Irene Hors, eds. Corruption and

Integrity Improvement Initiatives in Developing Countries.

New York: United Nations Development Program; Paris:OECD Development Center, 1998.

Martin, A. Timothy. Corruption and Improper Payments:

Global Trends and Applicable Laws, 36 The Alberta LawReview 416 (1998).

Mauro, Paolo. “Corruption: Causes, Consequences, andAgenda for Further Research.” Finance &Development,

vol. 35, no. 1, March 1998.

Qayyum, Ayesha. “New Anti-Bribery Treaty Analyzed.”International Commercial Litigation, no. 28, March 1998.

United States Congress. House of Representatives.Committee on International Relations. Anti-Corruption

Efforts in Ajhca: Hearing Before the Subcommittee onAjica. 105th Congress, 2nd Session, 20 May 1998.

United States Congress. Senate. Committee on ForeignRelations. Bribery of Foreign Public Oficiak HearingBefore the Committee on Foreign Relations. 105thCongress, 2nd Session, 9 June 1998.

Walsh, James. “A World War on Bribery.” Time

International, June 22, 1998.

The World Bank. World Development Report 1997: The

State in a Changing World. New York: Oxford UniversityPress, 1997.

Vogl, Frank. “The Supply Side of Global Bribery.”Finance &Development, vol. 35, no. 2, June 1998.

Kaufmann, Daniel. “Corruption: The Facts.” Foreign

Policy, no. 107, Summer 1997.

i” 52

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