New Tools to Fight Corruption

Economic Reform Today Business Views on Combating Corruption New Tools to Fight Corruption

Economic Reform Today
Business Views on Combating Corruption
Number 2, 1998

by Nancy Zucker Boswell

Nancy Zucker Boswell is the managing director of the US chapter of Transparency International, the global non-profit

coalition to curb corruption in international business transactions.

Twenty-nine OECD members and five non-OECD members defied skeptics by concluding the Convention on Combating Bribery

of Foreign Public Officials in December 1997. Signatories agreed to criminalize bribery of foreign public officials and

significantly restrict the source or "supply side" of bribery.

Over recent years, numerous other organizations—the Organization of American States, the World Bank and the IMF—have

undertaken programs that will promote greater accountability. Recognizing that the costs of corruption are unacceptable,

these organizations are demanding immediate, concerted action. They consider good governance fundamental to economic

growth and political stability.

This profound shift in attitudes lags behind an earlier change in public opinion toward corruption. Public intolerance has led

to the removal of numerous officials from office. Finding they have a common transborder objective, citizens and civil

society organizations have raised public awareness and pressured governments and donors to pursue systemic anti-corruption

reform.

Intensifying competition for capital in the global marketplace has inspired the recent spate of activity: private capital

prefers transparent and accountable markets. Corruption has undermined investor confidence and prompted serious capital

outflows that have impaired productive investment and macroeconomic stability. This has increased pressure on donors to

direct resources to their most productive use and to promote reforms where corrective action is needed.

Anti-corruption sentiments are rising not only in the industrialized countries but also in the developing world and emerging

markets. The economic crisis in Asia, at least partially attributed to corruption, has swept away the last vestiges of the

belief that economic growth and corruption can coexist. There is now an awareness that corruption dissuades foreign

investment, undermines development, and destabilizes nascent democracies.

Being aware of these unacceptable costs has also led officials and organizations to the following realizations:

* solutions must focus on the underlying economic, political and institutional causes of corruption.
* all stakeholders—the government, private sector, civil society—must be involved in developing mutually supportive

systems.
* long-term, sustainable programs must comprise a host of economic and public sector reforms—deregulation,

privatization, transparency, and institution-building—as well as a wide range of preventive and enforcement measures that

are responsive to local conditions.


What is Transparency International?

Transparency International (TI) is a global coalition of civil society actors pursuing accountable government institutions and

an honest business environment. In over 70 countries, TI national chapters promote public awareness and comprehensive

integrity systems that are comprised of independent judiciaries, responsible investigative journalists, ethical public officials,

and vigorous public participation. These elements are fundamental to the consolidation of democracy, respect for the rule of

law, equitable development, and the expansion of open, competitive markets.

Making bribery a crime

The OECD Convention lays the groundwork for creating effective anti-bribery systems in countries with varied legal systems.

Its core provision makes it a crime for "any person" to "offer, promise, or give any undue pecuniary advantage, whether

directly or through intermediaries, to any foreign public official. . . in order to obtain or retain business or other improper

advantage in the conduct of international business." The prohibition goes beyond the US Foreign Corrupt Practices Act to

include bribery in government procurement, environmental issues, tax payments, other regulatory matters as well as in

judicial proceedings.

"Foreign official" refers to officials who control procurement in important areas, such as telecommunications, transportation

and energy. The term includes appointed and elected legislative, judicial and administrative officials as well as officials of

international organizations and government-controlled enterprises.

Criminal penalties for bribery must be "effective, proportionate and dissuasive." Countries whose legal systems lack the

concept of corporate criminal liability—Germany, Sweden and Switzerland—must provide for equivalent non-criminal

sanctions. The convention also provides for mutual legal assistance, including extradition, and requires signatories to take

preventive measures, such as establishing accounting standards and prohibiting off-the-book accounts.

The convention contains the fundamental elements of an effective regime. However, as might be expected of a product of

multi-party negotiations conducted on a tight time schedule about a sensitive subject, it also has shortcomings that could

allow for future circumvention. It does not cover improper payments to foreign political parties, party officials or

candidates. In addition, because of jurisdictional concerns, it does not provide comprehensive coverage of foreign

subsidiaries. The OECD Working Group on Bribery will take up these and other issues in May 1999.

Ending tax deductions for foreign bribes is another important element of the OECD program, and Norway, Denmark and

Portugal have taken steps to implement the 1996 OECD Recommendation to End Tax Deductibility. However, Austria, France

and Germany have indicated that they may deny tax deductibility only to people who have a prior criminal conviction for

foreign bribery. This is an unacceptable interpretation of the 1996 Recommendation, and it would leave most bribes tax

deductible.

Monitoring violations

The signatories are committed to seek ratification of the convention by the end of 1998. As of June, 1998, the US, Germany,

Japan, Belgium, and the Czech Republic had already transmitted it to their national legislatures, making it likely that the

deadline for ratification and criteria for entry into force can be met. The largest OECD economies—the US, Japan and

Germany—must ratify the convention for it to enter into force in 1998.

US leadership is critical to bring other signatories on board, and the US Congress is currently considering the convention

and implementing legislation. Because the convention promises to substantially, if not perfectly, redress the current

imbalance of anti-bribery restrictions, the US private sector strongly favors ratification.

After the convention enters into force, the next challenge will be to ensure the adequacy of national legislation and its

enforcement by 34 countries with major differences in their legal systems. A rigorous monitoring process to promote

effective and consistent implementation will be needed for several years.

The OECD Working Group has already begun to secure the signatories' support for a monitoring process that provides for

mutual and peer evaluation. While the convention permits some flexibility, evaluation is important to forestall major

differences in how foreign bribery is prohibited. Governments may be reluctant to impose relatively strict prohibitions on

their own companies compared to their competitors. This scenario raises the risk of a minimal level of implementation.

A monitoring process can address this risk by quickly sending a clear signal that all parties will be held to high standards.

The OECD Working Group has already begun on an informal basis to provide mutual assessments of draft implementing

legislation. This work is likely to be more effective at this stage rather than waiting until after inconsistent or ineffective

laws have been enacted.

The working group will also address issues related to the private sector and civil society, such as access to information and

the possibility for input. These groups provided input throughout the negotiation phase, and, since the convention's

conclusion they have monitored progress and served an important watchdog function.

The private sector will want to ensure that restrictions against competitors operating abroad are enforced consistently and

that it has channels for reporting concerns or problems. It can also play an important enforcement role by adopting

effective, voluntary anti-bribery policies and programs that will control its operations beyond national borders. The

International Chamber of Commerce (ICC) has adopted an extensive model, Rules of Conduct to Combat Extortion and

Bribery, that prohibits bribery. It is also developing a program to promote adherence to the rules by companies around the

world.

Beyond the OECD Convention

Donors and multilateral organizations are spurring the evolution of broad-based anti-corruption reforms. They will be key

players in maintaining the interest and resources that are necessary for what will inevitably be long-term efforts.

Organization of American States (OAS)

The OAS Convention Against Corruption, signed by 23 countries in March 1996, is an important regional initiative to fight

corruption. It provides for criminalization of transnational bribery and illicit enrichment, encourages mutual legal assistance,

and promotes "preventive measures," such as codes of conduct for public officials, steps to promote transparency in

procurement, disclosure of assets, and public access to information.

Although the OAS Convention has entered into force, only ten countries have ratified it to date. The 1998 OAS General

Assembly meeting endorsed a broadly worded "Program of Action," and a hemispheric symposium on strengthening probity is

expected to be held later this year in Santiago.

Implementation at the national level has been uneven, and the OAS is organizing important workshops in countries to raise

public awareness and provide technical assistance. These initial steps would be reinforced by establishing a specific time

frame for securing universal ratification and a permanent institutional mechanism within the OAS that could provide a forum

to share best practices and to encourage implementation.

World Bank

The World Bank has put good governance at the top of its agenda. It has adopted revised procurement guidelines to require

disclosure of agents' commissions, to provide for bank audits, and to institute procedures for investigating bribery

allegations and for debarring corrupt contractors. The rules also permit the use of anti-bribery pledges and reciprocal and

enforceable no-bribery commitments by the government and bidders on specific projects. The Inter-American Development

Bank adopted similar rules and procedures in January 1998, and the Asian Development Bank considered analogous revised

guidelines and an enhanced anti-corruption policy during its July 1998 board meetings.

The IMF

The IMF has also become proactive in fighting corruption by issuing guidelines to its staff to promote the development of

institutions and systems that eliminate the opportunity for bribery. The guidelines provide for more direct Fund involvement

when individual instances of corruption might have significant macroeconomic implications either because of the magnitude

of the amounts involved or because they might be indicative of systemic corruption. The IMF recently called for the

publication of fiscal information, clear ethical standards for public servants, openness in budget preparation and execution,

and public scrutiny of fiscal information.

More recently, the Fund adopted groundbreaking, transparency-related conditions for lending to Asian countries in crisis.

This potentially represents a highly effective approach to mainstreaming commonly accepted principles of fiscal

transparency and budgetary disclosure. The Fund has also increased the transparency of its own operations and has

encouraged borrowers to publish their letters of intent with the IMF.

World Trade Organization (WTO)

Ultimately, a WTO agreement on transparency in procurement will bring a wider universe of procurement activity under

consistent rules. Currently, there is an emerging consensus on the elements of transparency in procurement and on the need

for a binding agreement. In the Americas, where the Summit of the Americas process has launched negotiations for the Free

Trade Area of the Americas, governments will be asked to implement a regional agreement on transparency in procurement by

the year 2000 as evidence of the leaders' commitment to achieve early concrete progress. In Asia, the APEC working group

on procurement has defined the elements of transparency and submitted the results to the WTO. APEC leaders may find it

beneficial to support the conclusion of a WTO agreement on transparency in procurement based on these elements.

While the fight against corruption continues to expand across the world, there is no shortcut to transform the positive

commitments into reality. Concrete signs of real change over the short term will be critical to sustain or even rebuild public

trust in governments. Involving civil society in this process can overcome widespread public cynicism. Citizens expect action,

and the evidence suggests that they will not be disappointed.
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