Exporting Corruption THE · According to a French secret serv- ... billion in bribes to foreign...

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June 2000The CornerHouseBriefing 19: Corruption, Privatisation and Multinationals

Exporting CorruptionPrivatisation, Multinationals &Bribery

THE CORNER HOUSE

“There is always somebody who pays, and international business isgenerally the main source of corruption.”

George SorosInternational financier1

“Corruption has been going up geometrically over the past 10 years.”Raghavan Srinivasan

World Bank chief procurement adviser2

Corruption has become a major international concern. Thetopic of international conferences, policy forums and min-isterial speeches, it is also the subject of a recent OECD

Convention and the focus of an international non-governmentalorganisation, Transparency International. Corruption is increas-ingly cited as a reason for withholding foreign aid or debt relief.If a country’s inability to pay interest on its loans is due to itsleaders siphoning off national earnings into their own bank ac-counts, the reasoning goes, surely extending aid or cancelling thedebt will merely sanction further graft.

Most commentators on corruption — and on the “good gov-ernance” initiatives instigated to combat it — dwell on develop-ing countries, not industrialised ones. Most scrutinise politically-lax cultures in the South, not the North. Most call attention to thepetty corruption of low-paid civil servants, not to the grand cor-ruption of wealthy multinationals. Most focus on symptoms suchas missing resources, not causes such as deregulation of state en-terprises. Most talk about bribe-takers, not bribe-givers.

This focus needs to be shifted. If corruption is growing through-out the world, it is largely a result of the rapid privatisation (andassociated practices of contracting-out and concessions) of pub-lic enterprises worldwide. This process has been pushed by West-ern creditors and governments and carried out in such a way as toallow multinational companies to operate with increased impu-nity. Thus multinationals, supported by Western governments andtheir agencies, are engaging in corruption on a vast scale in Northand South alike. Donor governments and multilateral agenciessuch as the World Bank and International Monetary Fund fre-quently put forward anti-poverty and “good governance” agen-das, but their other actions send a different signal about wheretheir priorities lie.

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1. “Fund Management Guru Reveals Doubts”,Financial Times, 8 December 1998.

2. quoted in “Corruption: the search for thesmoking gun”, Euromoney Magazine, Sept.1996, p.2.

June 2000The CornerHouse

Briefing 19: Corruption, Privatisation and Multinationals2

Effective action against corruption has to involve effective sanc-tions by developing countries against multinationals which engage incorrupt practices; greater political transparency to remove the secrecyunder which corruption flourishes; and resistance to the uncritical ex-tension of privatisation and neo-liberal economic policies.

The Globalisation of CorruptionCorruption takes many different forms, from the routine cases of brib-ery or petty abuse of power that are said to “grease the wheels” to theamassing of spectacular personal wealth through embezzlement or otherdishonest means.

For multinationals, bribery enables companies to gain contracts (par-ticularly for public works and military equipment) or concessions whichthey would not otherwise have won, or to do so on more favourableterms. Every year, Western businesses pay huge amounts of money inbribes to win friends, influence and contracts. These bribes are con-servatively estimated to run to US$80 billion a year — roughly theamount that the UN believes is needed to eradicate global poverty.3 In1999, the US Commerce Department reported that, in the precedingfive years, bribery was believed to have been a factor in 294 commer-cial contracts worth US$145 billion.4 In 1996, the magazine WorldBusiness reported that the bribes paid by German companies alone wereover $3 billion.5

Not just companies are involved. According to a French secret serv-ice report, the official export credit agency of France paid around $2billion in bribes to foreign purchasers of “defence equipment” in 1994.6

Such bribery may be pervasive, but it is difficult to detect. ManyWestern companies do not dirty their own hands, but instead pay localagents, who get a 10 per cent or so “success fee” if a contract goesthrough and who have access to the necessary “slush funds” to ensurethat it does. Bribery is also increasingly subtle. It often takes the formof semi-legal fees or “commissions”, and inflated or marked-up prices.7

In contracts guaranteed by export credit agencies,8 such “commissions”are included in the costs and thus in the total contract value covered bythe guarantee. “It is obvious,” comments Transparency International,“that this practice constitutes an indirect encouragement to bribe which,in future, brings it close to complicity with a criminal offence”.9 Untilrecently, bribery was seen as a normal business practice. Many coun-tries including France, Germany and the UK treated bribes as legiti-mate business expenses which could be claimed for tax deduction pur-poses.

Paying the PriceCorruption poses a serious problem for public authorities and the pub-lic because it makes services more costly, undermines development,and distorts democratic processes and rational decision-making. Theamount of money lost to corruption which could, and should, be di-rected towards public services and to the development of democraticinstitutions is significant. Transparency International10 estimates that,on average, five per cent of public budgets go astray.11

Ultimately, corruption hurts the poor first and foremost, whether inthe UK or Africa or Asia. From the scandal in Britain of Westminstercouncil leader Dame Shirley Porter selling public housing for votes (at

3. http://www.oecd.org//daf/nocorruption/faq.htm

4. Fiddler, S., “Defence contracts ‘pervaded bygraft’”, Financial Times, 7 July 1999.

5. Tanzi, V., Corruption around the World —Causes, Consequences, Scope and Cures,IMF Staff Papers, Vol 45:4.

6. Cockroft, L., letter to Financial Times, 19February 1996.

7. Control Risks, Corruption and Integrity:Best Business Practice in an ImperfectWorld, Control Risks, London, 1996, citedin “Crime–Corruption: The World’s GrowthIndustry”, Inside Eye, October 1998.

8. Export credit agencies are government bod-ies which use public money to provide com-panies with insurance against the main com-mercial and political risks of operatingabroad. See CornerHouse Briefing 14, Ex-port Credit Agencies, Corporate Welfareand Policy Incoherence, The CornerHouse,Dorset, 1999.

9. Frisch, D., “Export Credit Insurance and theFight Against International Corruption”, TIWorking Paper, Brussels, 26 February 1999.h t t p : / / w w w . t r a n s p a r e n c y . d e /documents.work-papers.dfrisch.html

10. Transparency International, (TI) based inBrussels, was founded in 1993, primarilyby former World Bank staff. Its funders in-clude the US and European governments,the World Bank, several foundations andbusiness, including Enron, Exxon, GEC,Ford, General Motors, Lockheed Martin,Placer Dome, Rio Tinto Zinc, Shell, Texacoand Westinghouse. Its annual income is nowjust over $2.5 million. The record on corruption and humanrights of some of its business backers ispatchy. Enron was criticised in a 1999 Hu-man Rights Watch report for allowing se-curity guards at Dabhol Power in India, inwhich Enron had a 50 per cent stake, to beatup and harass local opponents to its energyproject. The project has been dogged bycorruption allegations. Canadian miningcompany PlacerDome has been criticised forcausing extensive environmental damage atthe Marcopper Mine in the Philippines,where corruption allegations also surfaced.In 1995, Lockheed Martin pleaded guiltyto paying a $1 million bribe to an Egyptianmember of parliament and was fined £21.8million by the US government. TI focuses largely on the “passive” cor-ruption of government officials who acceptbribes, rather than the “active” corruptionof the corporations who pay them. This fo-cus is perhaps due to two factors: first, mul-tinationals have a propensity to take legalaction against any statement which couldharm their business interests, but politiciansrarely do so; second, TI is bound to find ithard to criticise its supporters in public. TIproduces a widely-publicised league tableof countries that are perceived by businessexecutives as corrupt. The table has beencriticised for being “unjustly biased againstdeveloping countries”. TI does not deal withthe fact that the growth of privatisation cre-ates far greater incentives for corruption. SeeTI Newsletter, December 1998.

11. Atkinson, M. and Atkinson, D., “The BungBang”, The Guardian, 13 December 1997,p.26.

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a loss of £27 million to the council) to pilfered aid resources in India –former Prime Minister Rajiv Gandhi once told the Indian parliamentthat only 15 per cent of aid money got through to its intended benefici-aries – corruption makes the poor poorer. It is they who get squeezedout of decision-making and pushed to the political margins in situa-tions where money buys influence. It is they who lose out when moneythat could have been spent on improving services or basic living stand-ards is diverted to big expensive projects with lucrative “commission”potential. It is they who end up themselves having to pay bribes forbasic services or who lose out because they can’t afford to. As BritishMember of Parliament Hugh Bayley noted in a speech to the House ofCommons:

“The cost of bribes falls primarily on the poor. When a corruptcontractor from this or some other rich country pays a 15 percent bribe, he adds that to the price of his contract. His powerstation or irrigation scheme will cost more, and the little people– those who buy the electricity or the water to irrigate their crops– will pay the price of that bribe. Bribery is a direct transfer ofmoney from the poor to the rich”.12

Corruption and Privatisation in EuropeEuropean countries embarked on privatisation and associated practicesof contracting-out long before many other countries. The systems ofcorruption that have evolved there, accordingly, are distinctive and moremature.

Britain is a case in point. The single greatest source of corruption inthe UK is large public sector contracts and concessions issued to pri-vate companies, both of which have increased under privatisation. Po-lice estimated that there were 130 cases of serious public sector fraudin 1996:

“The overwhelming majority of corruption cases in Britain areconnected to the award of contracts. Compulsory contracting-out in local government, and the new Private Finance Initiativehave produced an explosion in the number of such deals”.13

The Confederation of Construction Specialists has said that the use ofillegal payments for contracts is widespread, one report estimating coststo the UK construction industry at £539 million each year.14

Bribery appears to be such a normal practice for some UK compa-nies that they employ people to recover bribes if the recipients do notdeliver the promised “benefit”. In a 1996 BBC radio programme, Vin-cent Carratou, founder of a corporate investigation firm, emphasisedthat his job was not to investigate the bribes that work but to get backthose that have failed to deliver:

“We’re called in where people have paid for certain things tohappen, to be done, and they aren’t done. So we are brought inrather than the police, or rather than officials, because they say‘Well, wait a minute, we have paid a lot of money for somethingto be done and it hasn’t happened. We want our money back orwe want what we paid to happen to happen.’ It’s as simple asthat”.15

UK multinationals routinely pay commissions to gain contracts fromother governments — and at least one UK government minister hasassisted them in this process. Jonathan Aitken, a former Minister forDefence Procurement, was jailed in June 1999 because he lied in courtabout his visits to France and Switzerland in 1993 to attend a secret

12. House of Commons, Hansard, Column 374,25 February 1998.

13. The Guardian, 3 October 1996. A rash ofcourt cases from 1990 to 1996 confirm thisstatement; see Public Services PrivatisationResearch Unit, Private Corruption of Pub-lic Services, London, 1994, and The Priva-tisation Network, London, 1996. The Pri-vate Finance Initiative is a government pro-gramme which gives long-term concessionsto private firms which fund the construc-tion of public works such as new roads,hospitals or computer systems.

14. H&V News, 23 March 1996.15. Speaking on BBC Radio 4, Talking Poli-

tics, in 1994, quoted from official transcriptof Bribes, transmitted by BBC Radio 4 on28 April 1996.

“Bribery is a di-rect transfer of

money from thepoor to the rich”

The single greatestsource of

corruption in theUK is large public

sector contractsand concessions.



meeting to negotiate contracts for an arms deal. Three UK companies(GEC, Marconi and VSEL) were hoping to obtain contracts to supplyweapons systems to Saudi Arabia after they had paid “commissions”into a Swiss bank account for Saudi agents. The bribes ranged fromthree to 10 per cent on orders worth hundreds of millions of pounds.16

Such practices were not limited to deals with Saudi Arabia:“The arms giant GEC . . . confirmed that it had agreed to sign afurther similar commission deal only last year [1998], this timerelating to Poland. It was to pay 10 per cent of the value of pos-sible Howitzer sales to an account controlled by Jonathan Aitken’ssolicitor.”17

So much for the claim of Lord Young, a minister in the government ofprivatisation enthusiast Margaret Thatcher, that “when you’re talkingabout kickbacks [bribes] you’re talking about something that’s illegalin this country and that, of course, you wouldn’t even dream of do-ing”.18

France, meanwhile, pioneered the system of privatisation of publicutilities through contracting-out or gestion déléguée — delegated man-agement. This system has led to widespread corruption, overchargingfor services and weak control over the privatised companies.19 InGrenoble, for example, a former mayor and government minister, to-gether with a senior executive of the private water company Lyonnaisedes Eaux (now Suez-Lyonnaise), received prison sentences in 1996 forreceiving and giving bribes to award the city’s water contract to aLyonnaise subsidiary. In Angoulème, a former mayor and one-timeminister was jailed for two years for taking bribes from companiesbidding in public tenders, including Générale des Eaux (now Vivendi).20

Executives of Générale des Eaux were also convicted of bribing themayor of St-Denis (Ile de Réunion) to obtain the town’s water conces-sion.

Suez-Lyonnaise and Vivendi (together with Bouygues), the largestconstruction companies in France, have been investigated for “an agreedsystem for misappropriation of public funds”.21 The companies ran acartel over building work for schools in the Ile-de-France region aroundParis between 1989 and 1996. Contracts worth about US$500 million

The Contradictions of “Designing Out” Corruption

16. The Guardian, 5 March 1999.17. The Guardian, 6 March 1999.18. Speaking on BBC Radio 4, op. cit. 15. The

chief of the London Metropolitan Policestated publicly in 1997 that corruption wasa major problem in the capital’s police force.Several Conservative Members of Parlia-ment, meanwhile, have been found guiltyof improperly accepting cash from busi-nesses — a major issue in the 1997 elec-tion defeat of the Conservative government.

19. The French water system is critically ap-praised in a report, La Gestion des Serv-ices Publics Locaux d’Eau etAssainissement, by France’s state auditor,the Cour des Comptes, Paris, January 1997.

20. Reuters, 1 July 1997.21. Le Monde, 10 December 1998.

Time was when the World Bankand IMF regarded corruption as a“political” problem outside theirpurview.

No more. Corruption has nowmoved to the top of the Bank’sagenda and increasingly to that ofthe IMF. At an anti-corruptionconference in 1999, World BankPresident James Wolfensohn saidthat industrialised countries “donot want to give money fordevelopment assistance that endsup in offshore bank accounts”.

Accordingly, the Bank hasbegun to help design and supportnational anti-corruption strategies,stress anti-corruption in the designof economic reforms, and press

for strengthened “governance” andpublic sector management. It nowplans to spend US$3 million annuallyon anti-corruption measures, includingsupport for anti-corruption agencies.Already, some $5 billion of its $29billion annual lending goes for “gov-ernance” — civil service reform,budget management, tax administra-tion, legal reform, judicial reform andinstitution-building.

The IMF, although slower than theBank to take up the anti-corruptionfight, agreed in 1997 to take “a moreproactive approach” in trying to“eliminate opportunity for rent seeking,corruption and fraudulent activity.” Ithas begun to demand that borrowinggovernments draw up anti-corruption

action plans and strategies. “Goodgovernance” is to be a feature of theIMF’s new Poverty Reduction andGrowth Facility (which is to replacethe much-criticised EnhancedStructural Adjustment Facility).

Such measures, however, tendto be at odds with the broadermacro-economic policies whichmany donor countries insist on –policies that do little to stop corrup-tion and much to exacerbate it.

Sources: Sweeney, P., Global Finance,Oct. 1999, pp.111-113; “The role of theIMF in Governance Issues: GuidanceNote”, adopted July 25, 1997; IMF,Poverty Reduction and Growth Facility:Operational Issues, 13 Dec. 1999(www.imf.org/external/np/pdr/prsp/poverty2.htm)

Western businessesspend at least $80billion a year onbribes.

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were shared out by the three groups. The system involved systematic,almost bureaucratised, political corruption: a levy of two per cent onall contracts was paid to finance all the major political parties in theregion.22 A director of one of the companies was later indicted for cor-ruption, bribery, favouritism and anti-competitive practices.23

In Austria, Belgium, Spain and Italy, too, leading politicians haveaccepted bribes from major companies.24 In Germany, there is an “es-tablished system of illegal acquirement and excessive allowances forpublic contracts”.25 In 1999, the entire European Commission, the high-est political body in the European Union, resigned because they hadlost the confidence of politicians and the public as a result of severalcorruption scandals. One case involved the BFr 600 million (£12 mil-lion) annual security contract for the EU’s buildings in Brussels, in-cluding the Commission’s headquarters, which was held by a privatecontractor, Group 4 Securitas. According to press reports, the contract“was apparently obtained by the above-mentioned firm in an irregularmanner, as it had prior knowledge of the bids made by rival firms sothat it could adjust its own bid”.26

The action taken against such corruption is often weak. Despite theprison sentences imposed in France, the water companies in questionstill hold concessions covering over two-thirds of the country’s waterindustry (although some local authorities have taken the opportunity toinsist on “savage” renegotiations of these contracts.) In the region ofHesse in Germany, the local authority’s ban on contracts with 60 com-panies convicted of corruption lasted only six months. Hesse’s districtauditor argued in 1995 that further action should be taken:

“Bribes do not flow of their own accord. Corruption begins inthe chief executive’s office in the private sector, and there is astronger measure to fight it than legal prosecution. Corrupt com-panies shouldn’t get any more public contracts . . . The six-monthban is . . . far too short. So far, the state has concentrated far toomuch on those who are corrupt. And too little on those who tryto corrupt others.”27

In the UK, three firms named in court in 1993 as paying £1.5 million inbribes to a Ministry of Defence official for ammunition contracts re-mained on the government’s list of approved tenderers.28

The EU’s directives on public procurement provide every publicauthority in Europe with the power to exclude a company from biddingfrom any contract if it is known to have engaged in corrupt behaviour.29

There is little evidence, however, that this provision is much used bypublic authorities.

The private sector faces similar problems of corruption involvingits own contractors, especially in infrastructure projects. German carmanufacturer Volkswagen, for instance, has uncovered systematic brib-ery by firms seeking lucrative construction contracts with the com-pany. The head of purchasing at Chrysler identifies big, one-off con-tracts as the worst problem because they “do not offer the chance tomake comparisons, especially on a regular basis”.30 Faced with similarproblems, General Motors was driven to impose a “draconian new codeof ethics” on staff and suppliers:

“Employees were forbidden from accepting hospitality of all butthe most mundane nature, and from accepting gifts. Even an in-vitation from a supplier to play golf was considered potentiallycompromising.”31

In the UK, meanwhile, police investigations uncovered a network ofmultinationals behind bribes offered to UK oil company executives inthe early 1990s:

22. Le Monde, 10 December 1998.. The fullpolitical spectrum of French political par-ties was covered, according to the reports.

23. Jacques Durand, commercial director of theVivendi construction company, GTM. Seeibid.

24. Recent books indicating the prevalence ofthe problem include Robert, D., Pendant lesAffaires, les Affaires Continuent, Stock,Paris, 1996; and Rugemer, W., Wirtschaftenohne Korruption?, S. Fischer Verlag, Frank-furt, 1996.

25. According to the district auditor for Hesse,quoted in Süddeutsche Zeitung, translatedin The Guardian, 23 February 1995.

26. Agence Europe, 21 August 1997.27. Süddeutsche Zeitung, op. cit. 25.28. Hencke, D., “Watchdog attacks ministry’s

failure to track bribes”, The Guardian, 10March 1995. The firms were GebruderJunghans of Germany; Fratelli Borletti ofItaly; and Raufoss of Norway.

29. Article 29 of the Directive on Public Serv-ice contracts (EC 92/50) states that “Anyservice provider may be excluded from par-ticipation in a contract who: . . . (c) has beenconvicted of an offence concerning his pro-fessional conduct by a judgement which hasthe force of res judicata; (d) has been guiltyof grave professional misconduct proven byany means which the contracting authori-ties can justify.”

30. Financial Times, 12 June 1997.31. Ibid.

“The state hasconcentrated far

too much on thosewho are corruptand too little onthose who try tocorrupt others.”



“The trail led to a series of firms including Thyssen, Mannes–mann, Sulzer and giant Japanese trading houses Itochu andMarubeni. An Itochu employee was subsequently cleared of con-spiracy despite admitting the charges. It was common practice atItochu and other Japanese firms to pay middlemen to gain a con-tract edge, the court heard, and the employee, Shigeki Furatate,only inherited established practice. The trial meanwhile of aMarubeni executive was cancelled after he skipped bail and fledto Japan. One of the largest contracts was a £33.5 million one forthe replacement of BP’s Forties export pipeline, which Thyssen’ssteelmaking subsidiary Thyssen Stahl Union won after allegedlypaying £1.4 million of commissions.”32

British Petroleum is suing both individuals and multinationals, includ-ing Thyssen and the Swiss company Sulzer, for compensatory and ex-emplary damages. A BP spokesperson said the company hoped both“to recover money which we believe we have lost and also to deliver amessage that we are not prepared to allow illegal inforamtion brokersto intervene in our business.”33

Exporting Corruption to the SouthMultinational corporations’ corrupt practices affect the South in manyways. They undermine development and exacerbate inequality andpoverty. They disadvantage smaller domestic firms. They transfer moneythat could be put towards poverty eradication into the hands of the rich.They distort decision-making in favour of projects that benefit the fewrather than the many. They also increase debt; benefit the company, notthe country; bypass local democratic processes; damage the environ-ment; circumvent legislation; and promote weapons sales.

Increasing DebtBribes put up the prices of projects. When these projects are paid forwith money borrowed internationally, bribery adds to a country’s ex-ternal debt. Ordinary people end up paying this back through cuts inspending on health, education and public services. Often they also haveto pay by shouldering the long-term burdens of projects that do notbenefit them and which they never requested.

The US company, Westinghouse Electric Corp, provides an infa-mous example. Westinghouse won a contract in the early 1970s to buildthe Bataan nuclear plant in the Philippines. It was alleged that it gavePresident Ferdinand Marcos US$80 million in kickbacks. The plantcost $2.3 billion – three times the price of a comparable plant built bythe same company in Korea. Filipino taxpayers have spent $1.2 billionservicing the plant’s debts – even though the plant has never produceda single watt of electricity because it was built at the foot of a volcanonear several earthquake faultlines. The Philippine government is stillpaying $170,000 a day in interest on the loans taken out to finance thenuclear plant and will continue to do so up to the year 2018. Com-mented Philippines Treasurer Leonor Briones recently:

“It is a terrible burden which never fails to elicit feelings of rage,anger and frustration in me. We’re talking of money that shouldhave gone to basic services like schools and hospitals”.34

Benefiting The Company, Not The Country

Bribing high-level officials ensures profits and helps off-load risks. Inmany power projects in Asia, for example, there has been, according to

32. Independent on Sunday, 4 August 1996.33. Lloyds List, 26 August 1996.34. quoted in Easton, A., “Philippines to scrap

nuclear albatross”, The Guardian, 7 Sep-tember 1999, p 15. After Marcos was over-thrown in 1986, the Philippine governmentbrought a US civil action alleging briberyand corruption in 1988 againstWestinghouse and put a case before the In-ternational Chamber of Commerce in Swit-zerland. The civil action was rejected, butthree months before the International Cham-ber of Commerce was to make a decision,Westinghouse agreed to pay the Phillipinesgovernment under President Ramos com-pensation of $100 million (including a cashpayment of $40 million and two state of theart gas turbines worth $30 million). TheWestinghouse settlement, however, does notcover even one year’s interest payments onthe debts the country incurred to build theplant. See “Westinghouse Electric–Peace inour time between Westinghouse and Ma-nila”, Power in Asia, 30 October 1995.

Corruptionpractised bymultinationals inthe Southunderminesdevelopment andexacerbatesinequality andpoverty.

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the World Bank, both “a high level of corruption” and a tendency tooverestimate demand for electricity.35

In Pakistan, some 21 Western companies were investigated by thenational anti-corruption agency in 1998 for alleged kickbacks to theprevious government of Benazir Bhutto and for over-pricing.36 Bhutto’sgovernment had signed so many contracts with power companies —some of which were for installations in totally inappropriate locations37

— that Pakistan was set to produce far more energy than it could possi-bly consume until 2010.38 Yet the government was contractually boundto buy all the electricity produced.

Although all the companies filed sworn statements denying corrup-tion, six of them subsequently confessed to offering bribes.39 So seri-ous were the allegations that the World Bank sent in a special team ofinvestigators.40 Yet far from receiving support from Western govern-ments for its anti-corruption efforts, Pakistan was warned by the Brit-ish, US, Japanese and Canadian governments that its clash with thepower companies would put off other investors.41 The IMF, meanwhile,went so far as to make a new package of loans at the end of 1998conditional on the government’s dropping the charges against the com-panies.42

Bypassing Local Democratic ProcessesBribery can be a useful way of getting around local opposition to aproject and of bypassing the usual democratic processes involved withawarding contracts. Take, for example, the Norwegian mining com-pany, MINDEX, which wants to carry out nickel and cobalt strip min-ing on the Philippine island of Mindoro. The local population believesthe mine will seriously damage the environment and ruin their commu-nities.

MINDEX has responded by attempting to buy off local leaders. Itgave gold watches to politicians in local authorities at a critical stageof the project’s Environmental Impact Assessment, which had to provethat the mine was socially acceptable to local people. MINDEX hasalso paid for local district leaders to go on a “study tour” to a luxuriousholiday island, built a new house for a local priest, and paid local jour-nalists to write articles favourable to the company. MINDEX claims itsgifts are a “sign of friendship”. Local people, who oppose MINDEX,believe that such gifts are an attempt to manipulate the local traditionof utang na loob or “debt of gratitude” towards those who carry outsmall acts of generosity, and could be against Filipino law.43

MINDEX has also gathered local signatures given to mark attend-ance at a meeting and used them to indicate local support for the project.At least one signature was actually a protest against MINDEX’sproject.44 The Mindoro Clergy felt obliged to issue a disclaimer:

“We refute the categorical statement of MINDEX that the localpopulation of Oriental Mindoro welcomes the mining project.Our people have consistently manifested their strong oppositionto mining operation in a series of protest actions . . . We are onewith our people in declaring our vehement opposition againstmining activity in our province.”45

Destroying the Environment andGetting Round RegulationsSome companies use bribes as a way of getting round environmentalregulations. A report into logging in Papua New Guinea in the 1980s

35. Montagnon, P., “Doubts at World Bank oninfrastructure sell-off”, Financial Times, 27July 1999, p.6.

36. “IPP crisis–Pakistan risks financial collapseover private power policy”, Power Econo-mist, 30 June 1998, p.13; Davis, N., “Na-tional Power reported ready to split off in-ternational operations”, Energy Daily, 14September 1999; Kielmas, M., “Expropria-tion by 2 countries is alleged–Pakistan, In-donesia criticized”, Business Insurance, 2November 1998; “Cover Story: an affair toremember”, Project and Trade Finance, 10May 1999.

37. Business Insurance, ibid.38. “IMF deal brings relief for Pakistan IPPs”,

Power Economist, 31 December 1998, p.15.39. Ibid.40. Dunne, N. and Fidler, S., “World Bank

helped Sharif in corruption probe”, Finan-cial Times, 12 November 1999, p.12.

41. “Pakistani court blocks Hubco remittance”,Reuters, 11 May 1998.

42. Power Economist, op. cit. 38.43. Eraker, H.,”Go Home to Norway,

MINDEX!”, Philippines International Re-view, Autumn 1999, pp.18-19. Under Re-public Act No. 3019, it is illegal for a pub-lic official to receive a gift from anyone forwhom the official “has secured or obtainedor will secure or obtain, any governmentpermit or licence, in consideration for thehelp given or to be given”. Section 14 ofthis Act, however, does allow for “tokensof gratitude or friendship according to lo-cal custom”.

44. Ibid.45. Position Paper on the Moral Stand of Ori-

ental Mindoro Clergy against MINDEXMining, Signed September 1999.



reported that companies were “roaming the countryside with the self-assurance of robber barons: bribing politicians and leaders, creatingsocial disharmony and ignoring the laws in order to rip out and exportthe last remnants of timber”.46 In May 2000, meanwhile, the AsianDevelopment Bank warned that the forests in Cambodia were in an“alarming state” because of corruption. Environmentalists have warnedthat, at the present rate of destruction, Cambodia’s forests will be goneby the year 2003.47

Sometimes such bribes come in the form of illegal political dona-tions. A 1999 audit by the Nicaraguan government revealed that a Ca-nadian mining company, Greenstone Resources, which controls 70 percent of the mined areas of Nicaragua, donated $20,000 to PresidentArnoldo Aleman. The company was alleged to have made further do-nations to other people in Aleman’s Constitutional Liberal Party andbribes to local officials in the area where Greenstone was mining. Nica-raguan law states that donations can be given only by Nicaraguan citi-zens from within the country.

In return for its money, Greenstone has consistently been allowed toget away with flouting environmental laws and regulations. It carriesout massive illegal logging around the mining area, and pollutes watersources and the local environment at the expense of local people’s health.Says Magda Lanuza, a Nicaraguan activist:

“You can smell the cyanide when you are near the mine. Chil-dren have headaches, and there are other health problems. Thetechnicians who visited the area with us say the water is harm-less, but when we ask them to drink it, they refuse.”48

Despite such evidence, Greenstone has received favourable environ-mental impact assessments from Nicaraguan officials. Ministry of En-vironment personnel visit the firm’s sites only when the company wantsthem, and pays them, to do so.

Promoting Arms SalesHalf the bribery complaints received by the US Commerce Depart-ment concern international defence contracts. A 1999 report noted thatallegations of bribery were made in 55 contracts between 1998-1999worth some US$37 billion (£23.6 billion) in total.49

Swedish armaments manufacturer Bofors was involved in “the big-gest bribery scandal in the history of independent India”. In 1986, theIndian government paid Bofors $1.3 billion (£802 million) for 400Howitzer field guns for the Indian army. Within months of the weaponsbeing delievered, Swedish radio claimed that £30 million worth of kick-backs had been paid to Prime Minister Rajiv Gandhi and his associ-ates. In June 1988, the Indian press published documents from theSwedish auditor-general identifying shell companies that had alleg-edly channelled Bofors’ pay-offs. In October 1999, the Indian CentralBureau of Investigation brought charges of “criminal conspiracy” againstIndian business people and Bofors middlemen and employees. What-ever the outcome of this court case:

“the affair has been disaster for the sub-continent. With all thejuicy allegations of larceny and intrigue to savour, it is easy toforget that Bofors guns added to the ever-growing armouries ofIndia and Pakistan, which now face each other in an unstablenuclear ‘balance of power’ . . . The consequences for Indiandemocracy have been as dire . . . The Bofors scandal led to Rajiv[Gandhi’s] defeat in the 1989 general election and the emergenceof the BJP as the dominant Indian party.”50

46. Baird, N., “Forests of Hope: Papua NewGuinea Saying ‘No’ to Asian Loggers”,People and the Planet, Vol.5, No.4, 1996.

47. “Cambodian forests threatened by corrup-tion, crime”, The Times of India, 11 May2000.

48. Bassett, C., “Gold and Poison”, AmericasUpdate, Vol. XX, No. 1, 1999, pp.15-18.

49. Fidler, S., op. cit. 4.50. Cohen, N., “Guns and the Dome”, New

Statesman, 15 November 1999, pp.11-13.

Half the briberycomplaintsreceived by the USCommerceDepartmentconcerninternationaldefence contracts.

9


Hiding The LootWestern Banks and Third World Assets

”Money laundering is thehandmaiden of internationalcorruption . . . Those who takebribes must find safe internationalfinancial channels through whichthey can bank their ill-gottengains. Those who provide thebribes may well assist the bribetakers to establish safe financialchannels and launder the cash.”

Frank VoglTransparency International

“America cannot have it bothways. We cannot condemncorruption abroad, be it officialstaking bribes or looting theirtreasuries, and then tolerateAmerican banks making fortunesoff that corruption.”

US Senator Carl Levin

Private banking services andoffshore financial centres are themajor conduits and repositories forbribes and corrupt gains. Anestimated US$40 billion from poorand former communist economiesfinds its way into US or Europeanbanks every year, much of itillegitimately gained. Some $30billion of Western aid “used as partof the Cold War game of winningfriends” has ended up in Swissbank accounts alone. Leaders fromsome African countries havecollectively had up to $20 billionon deposit in Switzerland’s banks.Haiti’s “Baby Doc” Duvalier isknown to have kept $300-900million in offshore banks, whilePhilippine President Marcos saltedaway well over $2 billion inWestern banks.

Private Banking

Today, private banking — increas-ingly used for confidential servicesto international elites — is believedto be worth as much as $17trillion worldwide, and is experi-encing phenomenal growth.Globally, private banking ispredicted to grow two to threetimes as fast as ordinary consumerbanking in the next few years.

The private banking boom hasits origins in the debt crisis and isa major reason for the continuedindebtedness of many poor

countries. Because of the debt crisisin the late 1980s onwards, Westernbanks had fewer opportunities tolend to Third World countries andthus started to pursue wealthyindividuals in the Third World toencourage them to place their wealthin private bank accounts. The resultwas a revolving door. Internationalloans to developing countries werecreamed off by those in power and“transferred into banks . . . ironicallyoften to ‘private banking’ branchesof the very same international banksthat had issued the international loan. . . in the first place.” This has beenat least as profitable for the banks asfor the individuals making thedeposits. The average rate of returnto banks for private banking ac-counts is over 20 per cent.

An estimated 80 per cent ofloans made by commercial banksduring the 1980s never reached theirdestined countries, remaining insteadin Northern bank accounts. In LatinAmerica, two-thirds of total debt isthought to have been deposited inNorthern banks.

Although the private bankingboom is a global phenomenon (inLatin America, for example, themarket is already estimated at $450billion), the biggest beneficiarieshave been US banks. According toRaymond Baker, a financial specialistat the Brookings Institute, the US“has, according to all credibleestimates, become the largestrepository of ill-gotten gains in theworld,” not least because of lax orinadequate oversight. A 1999 USSenate inquiry revealed that 350 ofCitibank’s 40,000 clients weresenior foreign government officials ortheir relatives, including:

• President Omar Bongo ofGabon, who transferred $100million through personalaccounts in Citibank’s New Yorkbranches. Bongo had twoprivate accounts in the name ofshell (or dummy) corporationsas well as a special account toreceive payments from oilcompanies (which includedalleged bribes or “donations”from the French government’soil company Elf-Aquitaine).Citibank made more than $1million a year net from Bongo’saccounts.

• Asif Ali Zardari, the husbandof former Pakistan primeminister, Benazir Bhutto, whotransferred some $40 millionthrough Citibank accounts, ofwhich $10 million is believedto be from kickbacks on agold importing contract.

• The three sons of Nigeria’sGeneral Sani Abacha, whoheld some $110 million inCitibank accounts, includingsome in the name of shellcorporations set up byCitibank. The bank lent twosons $39 million to deposit inanother bank account inSwitzerland after the newNigerian government beganinvestigations into corruptionin 1998.

• Raul Salinas, the brother offormer Mexican PresidentCarlos Salinas, who trans-ferred $80 to 100 million inalleged drug money out ofMexico between 1992 and1994 through Citibank’saccounts.

In Switzerland, too, private banksstill hide the assets of Bongo’s andAbacha’s families, as well as thoseof Mali’s Moussa Traore andZaire’s Mobutu Sese Seko. Theprivate-banking department atUBS, meanwhile, handles accountsfor the family of Kenyan PresidentDaniel Arap Moi.

Offshore Banks andCompanies

”There is no honest reason forbeing offshore. Bank secrecy andthe offshore money industry haveno place in a globalized economy.”

Jack BlumOffshore expert & UN consultant

Offshore banks and companies areanother part of the systemthrough which money is siphonedout of poor countries and hiddenwell away from its citizens.

Offshore financial centresbecame prominent in the 1960swith bank deposits in tax havensincreasing from $11 billion in1968 to $385 billion in 1978. By1989, there was an estimated$1.5 trillion offshore; by 1998, $5



trillion. In 1999, accounts in some61 offshore centres around theworld held $8 trillion. In theCaribbean and South PacificIslands alone, the OECD foundthat deposits had increased five-fold betweeen 1985 and 1994, to$200 billion.

Since the 1980s, offshorefinance centres or tax havens havebeen a magnet for money fromThird World countries, both cleanand dirty. In the mid-1980s, aMorgan Guaranty Trust study of“capital flight” from developingcountries found that, in one yearalone, a total of $198 billiondisappeared off-shore from 18developing countries. Offshorecentres impose little or no taxes,offer themselves to non-residentsto escape taxation in their owncountry, do not exchange informa-tion, lack transparency, and attractshell companies — businesses“with no substantial activities”.

Because of the secrecy withwhich they operate, offshorecentres have become excellentplaces to launder the proceeds ofcrime and corruption. They havebeen implicated in almost allmoney-laundering schemes. In1996, the IMF estimated that$500 billion — between 2-5 percent of global GDP — is launderedoffshore every year. Three yearslater, the IMF put the figure atanywhere between $590 and$1,500 billion. A 1997 UN reportlikewise calculated that launderedglobal revenues from corruption,fraud, pornography and prostitu-tion stood at between $500 billionand $1,000 billion. Arms dealersalso often use offshore bankaccounts to hide their tracks.

When dirty money disappearsoffshore, it becomes more difficultfor governments to tackle corrup-tion. The power of crime mafiasgrows, bringing yet more corrup-tion in its train and helping to“mafianize the state”.

In some offshore havens, newcompanies can be set up for aslittle as £100. Such companies,which can be set up in as little as24 hours, are not required to fileannual returns or accounts, or todisclose ownership. In fact, insome offshore centres, it is acrime to divulge any informationabout the ownership of banks,depositors or shareholders of anoffshore business. Not surpris-ingly, wealthy criminals hold much

of their money in such companiesrather than as individuals. Who thesecompanies really represent becomeseven more difficult to trace whenthey are owned by yet other offshorecompanies in different jurisdictions.

UK Offshore Tax Havensand Banking Secrecy

Most offshore financial centres arelocated in UK Overseas Territoriesand British Crown Dependencies.Some £400 billion, for instance —more than half Britain’s GDP — isheld in the country’s tiny offshoreislands. In 1997, bank deposits inJersey alone stood at £100 billion —up from £8 billion in 1980. Some90,000 anonymously-ownedcompanies are registered on theislands.

Between 1972 and 1988,Channel Island firms helped launder$1.2 billion that Prince Mohammedof Saudi Arabia received in bribeschanneled through former UKMinister Jonathan Aitken (see pp.3-4). Island branches of Barclays Bankwere used by arms dealer RudolphWollenhaupt to sell millions ofpounds worth of arms to the formerpresident of Congo-Brazzaville,Pascal Lissouba, which were thendeployed in a civil war.

Even more money — fully one-third of the world’s offshore wealth— is held in 17 Caribbean offshorecentres, most of which are UKOverseas Territories. Some estimatessuggest that between one-third andone-half of this money consists ofthe proceeds of crime. Caribbeanhavens are becoming increasinglyimportant as other banking countriessuch as Switzerland, Luxemboug andLiechtenstein are being forced byinternational pressure to open uptheir books.

Within the UK, at the same time,non-residents have deposited anestimated £1,000 billion. In fact, theUK “mainland” is such a magnet forcriminal funds and money launderersthat the US State Department ranksBritain ahead of many offshorecentres as vulnerable to money-laundering by criminals because ofthe country’s banking secrecy.Although the British governmentdisputes this, the fact that millionsof dollars of IMF loans to Russiawere laundered through the Londonbranch of the Bank of New Yorkunder UK regulations suggestsotherwise.

Recovering StolenWealth

International pressure has beenmounting in recent years to returnmoney which has been stolen frompublic treasuries and stashed awayin Western banks and offshore taxhavens. Several precedents existfor the return of such funds:

• In 1998, US$500 million offormer Philippines PresidentFerdinand Marcos’ money wasreturned from Swiss banks tothe Philippine government.The Presidential Commissionon Good Government set upafter Marcos was deposed hasrecovered overall some $1billion of the $5 billion thatthe Marcoses squirreled away.

• In March 1999, the HighCourt in London ordered thefreezing of all accountsbelonging to former Nigerianruler Seni Abacha’s family. InOctober 1999, the Swissgovernment called on fivebanks to freeze severalaccounts held in the name ofAbacha’s son, Mohammed,and thought to containhundreds of millions of dollarsplundered from the Nigeriancentral bank and oil revenues.In January 2000, Swiss banksfroze £390 million in accountsbelonging to Abacha and hisassociates. Four monthsearlier, the Nigerian govern-ment had announced that ithad already managed torecover some $700 million ofAbacha’s money. In all,Abacha is believed to havestashed $1.5 billion inembezzled funds in Westernbanks.

• In November 1999, the Bankof England identified and frozethe London bank accounts ofAngola’s rebel leader, JonasSavimbi, who was untilrecently aided and abetted asan anti-communist “freedom-fighter” by several Westerngovernments, including thoseof the US and UK.

Closing The Loopholes

More sweeping attempts to recoverstolen money will require bothpromulgating an internationalconvention and closing loopholesthat allow ill-gotten gains to leave

11


countries in the first place.Closing down offshore centres

is vital to stopping the launderingof corrupt money and the drainingof resources from the Third World.In poorer countries, however, theprocess will have to be gradual, inorder to provide time to build upother local industries. Many smallCaribbean and other islands andsmall states set up offshorecentres in the first place onlybecause they needed to diversifyout of tourism and agriculture. Inthe meantime, public disclosure ofoffshore corporate ownership, aswell as filing of company accounts,is an urgent necessity.

The West also needs to clean

up its own banking act by regulatingprivate banking and ending bankingsecrecy. Stronger “Know YourCustomer” laws aimed at bankclients making large deposits, as wellas at their paymasters, should be puton the books. Banking secrecy — asopposed to customer confidentiality— should meanwhile be abolished.This would enable Southern coun-tries to investigate accounts inNorthern banks held by peoplesuspected of corruption, as well asmake it harder for public officials todeposit ill-gotten gains in Westernbanks.

Sources: Vogl, F., “The Supply Side ofGlobal Bribery”, Finance and Develop-

ment, June 1998; Hampton, M.,“Where Currents Meet: The OffshoreInterface Between Corruption, OffshoreFinance Centres and EconomicDevelopment”, IDS Bulletin, Vol 27, No2, 1996; Toussaint, E., Your Money orYour Life: The Tyrrany of Global Finance,Pluto Books, London, 1999; Pallister, D.,The Guardian, 15 May 1998; Report onthe Second Commission Report to theEuropean Parliament and the Council onthe Implementation of the MoneyLaundering Directive, 26 February 1999,b(6); Wood, B. and Peleman, J., TheArms Fixers: Controlling the Brokers andShipping Agents, PRIO, NISAT andBASIC, November 1999; “FinancialHavens, Banking Secrecy and Money-laundering”, UNDCCP (United NationsOffice for Drug Control and CrimePrevention), 1998, p.2; Financial TimesFraud Report, October 1999, p.4.

Global Policies and Corruption“Huge international capital flows have meant an absolute boom inthe amount of money entering emerging countries. There is no ques-tion that this phenomenon has fuelled grand corruption in a majorway.”

Frank VoglTransparency International51

“It is not tenable to argue for political freedoms while at the sametime promoting policies that make the poor worse off.”

IDS Bulletin52

As Western governments and the World Bank and IMF shout ever moreloudly about corruption (see Boxes, pp.4, 17), their own policies aremaking it worse in both North and South. Particularly at fault are de-regulation, privatisation, and structural adjustment policies requiringcivil service reform and economic liberalisation. In 1997, the WorldBank asserted that:

“any reform that increases the competitiveness of the economywill reduce incentives for corrupt behaviour. Thus policies thatlower controls on foreign trade, remove entry barriers to privateindustry, and privatize state firms in a way that ensure competi-tion will all support the fight.”53

The Bank has so far shown no signs of taking back this view. It contin-ues to claim that corruption can be battled through deregulation of theeconomy; public sector reform in areas such as customs, tax adminis-tration and civil service; strengthening of anti-corruption and auditbodies; and decentralisation.54

Yet the empirical evidence, much of it from the World Bank itself,suggests that, far from reducing corruption, such policies, and the man-ner in which they have been implemented, have in some circumstancesincreased it.

PrivatisationSpurred by structural adjustment programmes, privatisation of stateenterprises increased dramatically in the late 1980s and early 1990s –four-fold in Latin America and three-fold in Asia.55 More than 10,000state-owned companies were privatised between 1988 and 1998.56

51. quoted in Sweeney, P., “The World BankBattles the Cancer of Corruption”, GlobalFinance, 1 October 1999.

52. “Can Aid promote good governance”, IDSPolicy Briefing, Issue 2, Feb. 1995, p.4.

53. The State in a Changing World, World De-velopment Report 1997, World Bank, Wash-ington, DC, p.105.

54. www.worldbank.org/html/extdr/pb/pbcorruption.htm. The Bank’s thinking ig-nores the fact that, according to Transpar-ency International’s corruption index, someof the least corrupt economies in the worldare the Scandinavian ones where there hasbeen a long history of state intervention inthe economy. It is also ignores the fact thatcorruption often has complex, historical andlocal features which cannot be treated witha “one size fits all” approach.

55. Cook, P. and Kirkpatrick, C., “Reflectionson Privatization in Developing Countries:Positive and Negative Lessons” in Devel-opment Policy Management Network Bul-letin, Privatization in Africa: Trends andLessons, Vol. V, No. 1, Dec. 1998. See alsoHildyard, N., The World Bank and the State:A Recipe for Change?, Bretton WoodsProject (PO Box 100, London SE1 7RT,UK), 1998.

56. Nash, D., “The Bahamas: Citizens Say Noto Privatisation”, Inter Press Service, 17March 1998.



Between 1988 and 1994, governments raked in $110 billion from thesale of 3,000 state-owned enterprises.57 Privatisation is a component of70 per cent of structural adjustment loans and 40 per cent of sectoraladjustment loans made by the World Bank.58

In many instances, privatisation has been accompanied by wide-spread corruption. Joseph Stiglitz, ex-Chief Economist at the WorldBank, admits that “it has proved difficult to prevent corruption andother problems in privatizing monopolies”:

“Advocates of privatization may have overestimated the ben-efits of privatization and underestimated the costs, particularlythe political costs of the process itself and the impediments ithas posed to further reform.”59

The head of the World Bank’s Asia-Pacific branch, Jean-MichelSeverino, confessed that infrastructure privatisations in the region be-came a “horror story” in which “there was a high level of corruption”.60

The “horrors” come about partly because of the inflexible and hastydeadlines set by the IMF and World Bank. Public services are priva-tised without enough time being allowed to set up workable frame-works for regulation. As the recent External Evaluation of the EnhancedStructural Adjustment Facility (ESAF)61 noted with some puzzlement:

“In most . . . ESAF countries undertaking programs of publicsector reform, the privatization process has always begun beforean appropriate legal framework in the form of a divestiture im-plementation or state enterprise law is passed.”62

The results are many-fold:• Governments are often unable to arrange transparent and open bid-ding processes or promulgate needed regulatory laws;• Managers and employees, fearful for their future and confident oftheir ability to escape punishment, commonly strip the assets of theentities undergoing privatisation;• Many interested parties are able to engage in insider dealing andpolitical manipulation of the process for their own profit;

The World Bank’s Corrupt AuditorsThe independent accounting firmappointed by the World Bank toinvestigate corruption in Bankprojects has itself been caughtpaying bribes in one of thecountries it was asked to investi-gate.

Société Générale de Surveil-lance (SGS) of Switzerlandadmitted in December 1997 tohaving paid a “substantial commis-sion” in 1992 to obtain a govern-ment contract for inspectionservices in Pakistan. The paymentwas channeled through JensSchlegelmilch, a Geneva-basedlawyer.

Sixteen months later, in April1999, Pakistan’s former president,Benazir Bhutto, and her husbandwere found guilty of acceptingbribes worth US$9 million fromSGS, sentenced to five years inprison, and banned from holding

seats in parliament for seven years (ajudgement the defendants haveappealed). The case had originatedwhen a Swiss judge started proceed-ings against Bhutto and an SGSsenior executive, citing kickbacksthat SGS and a former SGS subsidi-ary, Cotecna, had allegedly paidPakistani officials.

Prior to these developments, inSeptember 1996, World BankPresident James Wolfensohn hadhired SGS, the world’s largestinspection and testing company, toconduct “spot audits” in Poland,Kenya and Pakistan to try to uncoverany corruption in Bank-sponsoredprojects. “We want to put the fear ofGod in them”, Raghavan Srinivasan,the Bank’s chief procurementadviser, said at the time. The LahoreHigh Court has since barred thePakistani government from “allocat-ing any business to SGS”.

In August 1999, moreover,SGS was banned from operationfor five years in Ethiopia for illegalactivities including tax evasion andworking without proper worklicences.

Another firm, Price WaterhouseCoopers, which helps the WorldBank’s Internal Audit Departmentwas found guilty in January 2000by the US Securities and ExchangeCommission of “not only a lack ofsufficient global safeguards, butalso a systematic failure byprofessionals . . . to adhere toeven their own firm’s existingcontrols.” SEC found thousands ofinstances of Price WaterhouseCoopers’ staff and partners holdingshares in companies they audited.

Sources: Euromoney, 30 Sept. 1997;Financial Times, 17 Dec. 1997, 20Aug. 1998; 7 Jan. 2000; AsiaIntelligence Wire, 22 Aug. 1999.

57. Mutume, G., “The ‘P’ word’s no longer sodirty”, Mail and Guardian, 28 March 1997.

58. “Pros and cons of sell-offs”, Weekly Mailand Guardian (based on paper commis-sioned from Professor Ben Fine for NationalInstitute for Economic Policy) April 1997.

59. Stiglitz, J., “More Instruments and BroaderGoals: Moving Towards the Post-Washing-ton Consensus”, 1998 WIDER Annual Lec-ture, January 1998.

60. quoted in Montagnon, P., op. cit. 35.61. The ESAF is the successor to the Structural

Adjustment Facility, the IMF’s concessionallending programme to low-income coun-tries. Loans are made in return for a three-year commitment by the government to“comprehensive macro-economic and struc-tural adjustment programmes”; these gen-erally include cutting public spending, pri-vatising state enterprises, removing pricecontrols, raising interest rates, devaluing thecurrency and promoting exports. As of Feb-ruary 1999, the IMF had lent $9 billion to51 countries under 79 ESAF agreements.A 1997 internal review by the IMF foundthat countries under structural adjustmentprogrammes had lower economic growththan countries that were not under SAPs.In late 1999, the IMF renamed ESAF thePoverty Reduction and Growth Facility. SeeWorld Development Movement Briefing,“Can the IMF deliver on recent poverty re-duction promises?”, May 2000.

62. External Evaluation of the ESAF, Report bya Group of Independent Experts, IMF, 1998,p.94.

13


• Many state enterprises do not have the time to become economi-cally viable before being sold off, leading to frequent sales of indus-tries at below market value despite heavy government spending onrecapitalisation.63

Insufficient time is not the only problem. Some governments would beunable to control the process even if they were given more liberal dead-lines. As Kamal Malhotra, formerly of the NGO, Focus on the GlobalSouth, points out, under governments which are secretive, lacking strongregulatory institutions, and already corrupt, “privatisation cannot pos-sibly be the dream cure”:

“Indeed the scope for corruption could greatly increase as a re-sult of privatisation in this context leading to costly and badprivatisations.”64

In Nicaragua, 341 out of 351 state enterprises were sold off between1990 and 1994, despite the fact that no law regulating privatisation wasin place. Most of the deals lacked proper bidding procedures, and com-panies wound up being sold at up to 75 per cent below market price.65

Some government officials were allegedly bribed to sell the nationalsugar mills for sub-market prices.66

“Downsizing” and Undervaluing Civil ServicesEfficient, accountable, adequately-paid and well-motivated civil serv-ices are essential for combating corruption, and civil service reformhas been a major component of structural adjustment lending since the1980s. Yet for the World Bank and IMF, reform primarily means“downsizing”.

As the Bank itself has discovered, these cuts have produced neithergreater efficiency nor increased revenue. Eight out of 15 countries inAfrica actually increased their wage bills after downsizing because ofpay-offs to retrenched workers. In 40 per cent of cases, laid-off civilservants had to be rehired.67 In the Bank’s own words, the links be-tween downsizing and economic gains are “tenuous”.

An internal World Bank staff report noted in 1999, moreover, thatcivil service reforms were eroding governance.68 The ratio of civil serv-ants to population in Sub-Saharan Africa is now one per cent comparedto seven per cent in richer countries. A 1999 review of World Bankassistance for civil service reform found that just 33 per cent of caseshad “satisfactory outcomes” and concluded that “Bank-supported [civilservice reforms] were largely ineffective in achieving sustainable re-sults in downsizing, capacity building and institutional reform”.69

At the same time, structural adjustment programmes have led to alarge decline in wages for civil servants who remain employed. IMF-prompted wage reductions – 44 per cent in Nicaragua since 1990, anaverage of 14 per cent in 20 African countries over the same period70 –have resulted in lack of motivation, low morale, and increased risks ofpetty corruption.71

Development funders’ attitudes toward Southern civil services havefurthered corruption in other ways as well. In Africa, the use of outsideexperts, funded by technical assistance loans, has hampered the growthof local expertise and hands-on experience of governance.72 Seeing highsalaries paid to outside experts demoralises civil servants in poor coun-tries, encouraging them “to seek complementary resources by illegalmeans.”73 In Bangladesh, consultancies awarded to bureaucrats whosupported structural adjustment were found to distort incentives andundermine the civil service.74 In many poor countries, civil servants

63. Szeftel, M., “Misunderstanding AfricanPolitics: Corruption and the GovernanceAgenda”, ROAPE, No. 76, p.233.

64. Malhotra, K., “Public Good vs. Investor In-terest in Private Infrastructure Develop-ment: Whose Interests Should RegulatorsProtect and How?”, presentation at semi-nar, “Private Interest vs. Public Good: Gov-ernance Dimensions of Regulatory Frame-works for Private Sector Infrastructure De-velopment”, organised by the Asian Devel-opment Bank and the OECD, Switzerland,28 April 1998.

65. Vargas, O. R., Corruption in Nicaragua, re-port for Christian Aid, July 1999.

66. “Nicaragua sugar production seen up 14%in 96-7”, Reuters, 20 March 1997.

67. Rama, M., “Efficient Public SectorDownsizing”, Finance and Development,Sept. 1997, p.2.

68. “Social and Environmental Aspects: A DeskReview of SECALs and SALs ApprovedDuring FY98 and FY99”, draft documentfrom Environmentally and Socially Sustain-able Development Unit, World Bank, Wash-ington, DC, 24 May 1999.

69. “Civil Service Reform: a Review of WorldBank Assistance”, Sector Study No. 19599,Operations Evaluation Department, WorldBank, Washington, DC, 8 April 1999. http://www. wbln0018.worldbank.org/oed/oeddoclib.nsf

70. Lienert, I. and Modi, J., “A Decade of CivilService Reform in Sub-Saharan Africa”,IMF Working Paper, Fiscal Affairs Depart-ment, Dec. 1997, p.18.

71. Hentic, I. and Bernier, G., “Rationalization,decentralization and participation”, Inter-national Review of Administrative Sciences,Vol. 65, 1999, p.199.

72. Rama, M., op. cit. 67, p 2. See also Hibou,B., “The Social Capital of the State as anAgent of Deception”, in Bayart, J.F., Ellis,S. and Hibou, B., The Criminalization ofthe State in Africa, Longman, London,1999, p.98.

73. de Sardan, O., “A Moral Economy of Cor-ruption”, The Journal of Modern AfricanStudies, Vol. 37:1, 1999, pp.32-3.

74. Strucural Adjustment Pariticipatory ReviewInitiative, Bangladesh. http://www.worldbank.org/research.sapri/banglad.tor.htm. Developing countries are also being askedto introduce new schemes that even devel-oped-country civil services, with theirgreater levels of resources and experience,cannot yet implement. For instance, an in-vestigation by the UK Parliament’s PublicAccounts Committee in 1998 into corrup-tion in the state’s tax-collecting department,the Inland Revenue, found that: 40 per centof staff responsible for collecting taxes wereunfamiliar with the code of conduct for taxinspectors; there was no facility for a confi-dential reporting system for external com-plaints; there was no financial vetting sys-tem of staff; and annual declarations by staffthat they have complied with the code ofconduct were not required. Yet developingcountries are being forced to push throughrapid reforms which have taken developedcountries years to put in place and whichcan only really work properly if they are seenas long-term projects rather than quick-fixsolutions. See Select Committee on PublicAccounts Ninth Report: Inland RevenueSpecial Compliance Office: Prevention ofCorruption, http://www.publications.parliament.uk/pa/cm199899/cmselect/cmpubacc/77/7703.htm.



World Bank Privatisation and Corruption in UgandaUganda is considered a modelimplementer of IMF reforms. In1992, it set about privatising some142 public enterprises. The WorldBank estimated that the processwould bring in $500 million,pointing out that the governmentwas paying $200 million annuallyin the form of subsidies to statebusinesses.

In 1998, however, the processwas halted twice by Uganda’sparliament because, according tothe chair of a parliamentary selectcommittee, Tom Omongole, it hadbeen “derailed by corruption.” Atthe end of 1998, the governmentbank account set up to hold theproceeds from privatisation wasempty.

A World Bank mission sent toUganda reported “widespreadaccusations of non-transparency,insider dealings and corruption”.Corruption was uncovered in 12contracts, with one researcherestimating that 20 per cent ofprivatisations had serious corrup-tion problems.

The most common allegationswere of undervaluing, lack of openand transparent bidding process,and non-payment by the buyer. InJune 1998, for instance, purchas-ers of privatised companies stillowed the government $14 million.It has also been claimed that fundsfrom privatisation were used forthe President’s political party’selection campaign.

According to the current headof the Privatisation Unit of theUganda government, EmmanualNyrinkindi, the World Bank andIMF should take some responsibil-ity for the problems. Nyrinkindisays that consultants MorganGrenfell advised against theprivatisation of the UgandaCommercial Bank, as did theUgandan Parliament.

Nonetheless, the World Bankadvised the Ugandan governmentto push ahead with the sale. Then,Nyrinkindi says, “when it went

bad”, the Bank “disappeared off theradar screen”.

The privatised bank was boughtby a Malaysian engineering company,Westmont, with financing from abank linked to the President’s brotherand Senior Presidential Adviser onDefence and Security Major-GeneralSalim Saleh. In December 1998,Saleh resigned amid accusations ofconflict of interest and insiderdealing. The bank had to berenationalised after running intotrouble giving out millions of dollarsworth of dubious loans.

The World Bank and IMF re-sponse to these problems has beento call for greater concentration ofauthority in the hands of the Presi-dent — thus decreasing accountabil-ity — and for new privatisationguidelines. While many of the newrules are sensible, one of them holdsthat contracts should go to thehighest bidder — a clause thatbreaks World Bank procurementguidelines that contracts should beawarded “to the lowest evaluatedand responsive bidder”.

Civil Service Reform

According to Professor Tulyamuhike,a local consultant who has workedon civil service reform since theearly 1980s, major changes to theUgandan civil service, while much-needed, have been pushed too fastby the World Bank and IMF. Understructural adjustment, Uganda wassupposed to reduce its civil serviceto one-sixth of its original size, from320,000 people to 55,000, between1995 and 1997. In 1998, theUgandan government was requiredto undertake further large-scale civilservice reforms, including layoffs andmerging of ministries, within sixmonths.

Tulyamuhike relates how the IMFonce “rang the Ministry of PublicService from Washington and askedhow much they could reduce thewage bill.” According to Chris

Burges, a UK-funded technicaladviser to the Ministry, the IMFnever provided a satisfactoryexplanation for how it arrived at itsbenchmarks for civil servicereduction.

Reform – which until 1999,mainly meant “downsizing” – hasbeen so fast that the governmenthas been unable to pay retrench-ment packages on time. In 1998,the backlog amounted to US$7.9million.

The speed of reform has alsocreated difficulties in findingresources. Many ministries areworried about the “high level ofvacancies . . . which have notbeen filled because of resourceconstraints.” In one village in late1999, three teachers wereteaching 800 students. Theteachers had not been paid forover a year.

While Uganda has raised civilservants’ salaries, it has done sounevenly, benefiting those at thetop rather than at the bottom. Forexample, Permanent Secretariesreceived increases of 42,464 percent while primary teachers wentup just 930 per cent. This is in linewith World Bank and IMF advice toincrease wage differentials to“increase incentives”.

Some disgruntled retrenchedcivil servants have reportedly beenprovoked into joining oppositionand guerrilla groups. Cuts in thecivil service are also often seen ashaving increased incentives forasset-stripping and bribing asinsecure staff try to assurethemselves of a better future.

Sources: The East African, 17 Dec.1998, 14 June 1999; African News,29 March 1999; Roman, J., “Procure-ment Policies Under Bank FinancedProjects Incidence in Preventing Fraudand Corruption”, paper given at 8thInternational Anti-Corruption Confer-ence, 7-11 Sept. 1997, Peru; PublicService Review 2002, Ministry ofPublic Service, Uganda 1998; “Ugandasets new guidelines to improveprivatisation”, Reuters, 13 May 1999.

continue to receive wages just above the poverty threshold, increasingthe likelihood of corruption and ineffectiveness.

Liberalisation“Unless carefully managed,” the World Bank concedes, “economic lib-eralization . . . can open new avenues for corruption.”75 Many of theseavenues are now open for traffic. In countries like Russia which wereexpected to make a rapid transition to a market economy, open capital

75. Findings, Africa Region, No 38, March1999.

15


accounts turned out to be “an invitation to strip assets and ship wealthabroad.”76 By undermining the political credibility and regulatory ca-pacities of many states, liberalisation, according to one 1996 researchreport:

“has contributed to a more generalized process of political de-cay. This reduces the incentives for probity on the part of offi-cials and politicians, and creates a widespread social alienationfrom the political process”.77

Another, more recent, report highlighted the increased opportunitiesfor corruption and money-laundering created by liberalisation. Regu-latory mechanisms have been weakened; there is no longer any need toprovide economic justification for money transfers; and it has becomefar easier to exchange and transfer currencies and capital.78

DecentralisationIn theory, decentralisation – regarded by the World Bank as essentialfor combating corruption – is about bringing decision-making closer tolocal people and improving services. Over 56 developing and transi-tion countries have now embarked on decentralisation programmes,many of them with World Bank advice and supported with World Bankloans.

The catch is, as the World Bank itself points out, decentralisationcannot work if it does not provide adequate resources and training forlocal governments.79 It must be long-term and have the full participa-tion of local people. It must build the ability of local civil society tomonitor resources. Where decentralisation has worked, it has gener-ally been where local governments have been able to raise revenuelocally, especially through progressive tax reform.80

In practice, however, the type of decentralisation urged by multilat-eral development agencies has often gone forward without local bu-reaucracies being adequately prepared and without the necessary transferof financial resources.81 One result has been increased corruption. WhenIndia and Taiwan devolved some bureaucratic power, for instance, “theopportunities for bribe-collecting multiplied.”82 Even the World Bank’svice-president for Asia, Jean-Michel Severino, recently admitted that:

“decentralisation will lead to less governance and more corrup-tion spread around the country, disruption of public service anda fiscal burden.”83

In Uganda, according to grassroots research in rural villages:“Decentralisation was blamed for the perceived increase in cor-ruption . . . It was noted that if corruption is not curbed, it willcontinue to erode the value of decentralisation and may ruin italtogether.”84

Other research found that there were not enough checks and balancesto keep local government in Uganda accountable.85

Cleaning Up Their Act“There is no question that reforms in many countries would bestrengthened if there were more visible evidence that leadinginternational organizations and Western governments wereevenhanded in their anti-corruption campaigns, attacking the bribegivers with just as much force and fury as they now use to attack thebribe takers.”

Frank VoglTransparency International86

76. Former World Bank chief economist JosephStiglitz, cited in Reuters, 30 April 1999.

77. Harriss-White, B. and White, G., “Corrup-tion, Liberalization and Democracy’, IDSBulletin, Vol. 27, No. 2, 1996, p.2.

78. Hibou, B., op. cit. 72.79. Entering the 21st Century, World Develop-

ment Report, 1999/2000, World Bank,Washington, DC, 1999, p.9. The reportnotes that rules governing local governmentborrowing must be drawn up; this is nationalgovernments have had to bail out local gov-ernments which have got into debt as a con-sequence of decentralisation.

80. Armani, D., “Democratising the Allocationof Public Resources: A Study of the Par-ticipatory Budget of Porto Alegre, Brazil”,a study for Christian Aid, London, Oct.1997, p.9.

81. Hentic, I. and Bernier, G., op. cit. 71, p.202.82. “A global war against bribery has at last

been declared”, The Economist, 16 January1999.

83. Crampton, T., “Official warns Asia to fightcorruption”, International Herald Tribune,12-13 February 2000, p.13.

84. “Perspectives of the Poor”, draft report ofUganda Participatory Poverty AssessmentProject (UPPAP), Ministry of Finance, Plan-ning and Economic Development, Kampala,November 1999, p176.

85. Goetz, A.M. and Jenkins, R., “Creating aFramework for Reducing Poverty: Institu-tional and Process Issues in National Pov-erty Policy”, draft consultancy report forSIDA and DfiD, 1999.

86. Vogl, F., “The Supply Side of Global Brib-ery”, Finance and Development, June 1998.

Although Westerngovernments, theWorld Bank and

the IMF now shoutabout corruption,

their policies makeit worse in both

North and South.



International bribery is nothing new. A major late-1970s bribery scan-dal involving the US arms giant Lockheed led to talks in the UN andthe Organisation for Cooperation and Development (OECD) on meas-ures to curb bribery.87 One outcome was the 1978 US Foreign CorruptPractices Act (FCPA), which made bribing a foreign public official acriminal offence.

Not all US companies were happy with the results. Some began tocomplain that bribery by companies based in countries with no compa-rable legislation was undermining the ability of US companies to wincontracts. The US Commerce Department claimed in 1997 that UScompanies had lost nearly $15 billion that year because they were un-able to offer bribes.88 During the 1990s, accordingly, the US pushed foran international agreement on bribery.

OECD Convention on Combating BriberyAfter seven years of work by a special bribery working group at theOECD, an international Convention on Combating Bribery of ForeignPublic Officials in International Business Transactions was drawn upand signed in December 1997 by 29 OECD members plus Argentina,Brazil, Bulgaria, Chile and Slovakia,89 and finally ratified in February1999. The Convention requires that each signatory enact national leg-islation making it a criminal offence to bribe a foreign public official.The term “foreign official” is meant to include anyone holding a “leg-islative, administrative or judicial post in a foreign country” as well asanyone in public sector companies and international organisations.90

Bribery is prohibited not just in procuring orders but also in regulatoryproceedings (including those involving environmental permits), tax andcustoms matters, and judicial proceedings.91 The Convention also re-quires governments to:

• Ensure proper punishment for bribery of a foreign official (includ-ing prison sentences and hefty fines);

• Tighten accounting and auditing requirements by prohibiting “theestablishment of off-the-books accounts, the making of off-the-booksor inadequately-identified transactions, the recording of non-existentexpenditures, the entry of liabilities with incorrect identification of theirobject, as well as the use of false documents by companies . . . for thepurpose of bribing foreign public officials or of hiding such bribery”;92

• Provide for international legal cooperation, including extradition ofguilty parties;

• Take steps to end tax deductibility for illicit payments (a measurewhich France and Germany agreed to as soon as the Convention wassigned, and that was already on the books in Denmark, Norway, Polandand The Netherlands).93

As of November 1999, 18 of 34 signatories had passed national legisla-tion to incorporate the Convention. According to the OECD’s anti-brib-ery unit, however, there have been no prosecutions so far. Still, thevery existence of the Convention, together with the publicity it hasreceived, has helped to focus attention on the problem.94

What the Convention will achieve might be anticipated byconsidering the effectiveness of anti-bribery legislation in the US. There,despite provisions for stiff penalties, only one case a year on averagehas been prosecuted.95 What has mainly changed as a result of the lawis the way US companies bribe. Today, US corporations eager to gaincontracts tend to funnel money through subsidiaries, bribe foreign

87. Tether, C.G., “Bribery debate is for us, too”,Financial Times, 21 May 1976. The OECDcomprises 29 of the world’s richest coun-tries, including European countries, the US,Japan, Australia, New Zealand, Finland,Mexico, the Czech Republic, Hungary, Po-land and Korea. Based in Paris with an an-nual budget of $200 million, the OECD callsitself a “club of like-minded countries”which believe in market economics and plu-ralistic democracy. It provides a forum fordiscussion on economic and social policyissues for governments, as well as produc-ing research, policy papers, and interna-tional treaties and agreements. See http://www.oecd.org/about/general

88. The Economist, op. cit. 82. In 1996, the es-timate was US$11 billion.

89. There was plenty of resistance, however.Germany and Austria, for instance, wantedthe Convention to mirror only domestic lawswhich prohibited bribes made to legislatorsto buy their votes, and wanted their compa-nies excluded from more stringent condi-tions of the convention. See Daley, W., “TheOECD should take a stand against theplague of international corruption”, Finan-cial Times, 18 November 1997.

90. Graham, R., “Anti-Bribes conventionsigned”, Financial Times, 18 December1997.

91. Brademas, J. and Heimann, F., “Tackling In-ternational Corruption: No longer taboo”,Foreign Affairs, Sept/Oct 1998, p.19.

92. OECD Bribery Convention, article 8, 1.93. Governments are required to report to the

OECD on how they are implementing theConvention. A working group involving ex-perts from signatory countries is carryingout a peer review of each country’s legisla-tion to see if it meets the Convention’s re-quirements. In June 2000, that review willhave been completed and a report made tothe Ministerial meeting. It will be followedby a report on the effectiveness of the legis-lation and its application.

94. More still needs to be done, however, giventhat 38 per cent of business executives in-terviewed in a Gallup poll had never heardof the Convention. See Dunne, N., “Brib-ery ‘helps win contracts in developingworld’”, Financial Times, 21 January 2000,p.10.

95. The Economist, op. cit. 82.

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A Plague On Both Your HousesWorld Bank and IMF CorruptionThe World Bank and IMF havegood reason to be concernedabout corruption. The World Bankfinances some 45,000 contractseach year worth roughly US$45-50 billion. The IMF lent around$90 billion between 1998 and1999, $43 billion of which wasunder new programmes. Thismoney is public money in thesense that taxpayers in membercountries foot part of the bill ofthese institutions and guaranteethe rest. The British government,for example, currently spendsaround £38 million a year infunding the IMF, and £171 millionon the World Bank. Its contributionto the Bank is set to increase to£244 million by the year 2002.

Following allegations that IMFloans to Russia have been creamedoff by the Russian elite anddeposited in Western banks,pressure has been stepped up onthe Bank and on the IMF inparticular to clean up their act.Much of this pressure comes fromright-wing US interests and isdirected at reducing US financialcontributions to these institutions.In the process, real concerns aboutthe excessive openness of theWorld Bank to corporate lobbyingand the Bank’s inadequate moni-toring, evaluation and auditingprocedures are being ignored.

Corporate Lobbying

While 55 per cent of the $25billion that the World Bank lendseach year is disbursed locally, theother 45 per cent is disperseddirectly to foreign companiesthrough what is known as Interna-tional Competitive Bidding. Themajority of these contracts go tocompanies from OECD countries,mainly in the G7. The US andGermany each get six per cent ofcontracts and the UK three percent. Britain, in fact, gets moreback in contracts for its companiesthan it contributes to the Bank.

A host of specialised lobbyingfirms have grown up to helpcompanies win these deals. Manywere started by former World Bankstaff and representatives them-selves. International Development

Business Consultants, for instance,was set up by World Bank procure-ment chief Donald Strombom whenhe left the Bank in 1997. TrinityInternational Partners, which special-ises in putting together powergeneration deals in developingcountries for funding by the Bank, isrun by a former US Bank ExecutiveDirector, E. Patrick Coady. In France,World Business Inc, is headed by aformer adviser to the French Execu-tive Director at the Bank.

These lobbyists keep an ear outfor news about suitable projects onthe way, arrange meetings betweentheir clients and Bank staff, and helptheir clients structure bids. Some-times they or their clients even lobbythe Bank to take on new projects.

Consultancy contracts for Bank-financed projects — which absorbten per cent of the Bank’s $25 billionlending — are particularly prone tocorruption, partly because they arenot subject to international advertise-ment and competitive bidding.Getting the Bank to hire consultantswho are likely to write plans givingyour corporation lots of work is aservice worth paying for. As DianeWilkens, head of DevelopmentFinance International, recentlyadmitted:

“that’s the game that everybodyis playing. Let’s get consultantson these projects that prefer anAmerican solution.”

According to John Donaldson, theWorld Bank’s external affairs coun-sellor, Bank staff are having to spendmore and more time attending tocorporate lobbyists.

Monitoring and Auditing

“As a public institution we areaccountable for helping our borrow-ers to see that the money allocatedunder Bank-financed operations isbeing spent on what it should bespent on and that our borrowers aregetting good value for what is beingspent.”

James WolfensohnWorld Bank President

World Bank watchers have identi-fied several factors making itdifficult for the Bank to ensure thatits funds are used properly:

• Too few staff at a time whenloans have been mushroom-ing;

• Declining supervision budgetscoupled with new schemesdesigned to disburse moneyfaster;

• Pressure to disburse loans “atall costs” even if monitoringand evaluation are inadequate,leading the Bank to look onlyat (for example) “whetherschools get built, not how themoney was spent to buildthem”.

• More private co-financing.The Bank guarantees privatesector-backed projectswithout supervising procure-ment procedures, and moni-tors only a small portion ofUS$151 billion’s worth of co-financed schemes.

The most serious impediment tostopping corruption in World Bankprojects, however, is inadequateauditing procedures. According toJames Wesberry, Director of theUSAID-financed Americas’ Ac-countability/Anti-CorruptionProject:

“while audits are required byIFIs [international financialinstitutions], they are generallyinnocuous, untimely andtherefore useless. They furnishIFIs with only cosmeticaccountability.”

Audits of World Bank projects oftenamount only to looking at thebooks, without checking whetherthe records match reality. Priorreview of procurement contracts isundertaken on only a quarter ofWorld Bank contracts; the rest aresubject to post-procurement auditswith “independent firms of interna-tional repute”. Between 1997 and1999, only 50 projects out of atotal of 250 were audited. Yet 100contracts (out of a total of around45,000) were declared“misprocured”. Their total valuewas over $45 million. In April2000, a report from the USGovernment Accouting Officeconcluded that the World Bank



does not have reasonable assur-ance that “project funds are spentas intended”.

Conflict of interest is alsopervasive in World Bank auditing.The “independent firms of interna-tional repute” which the Bankhires to carry out audits are thesame ones it employs to set upthe accounts, information systemsand financial management of itsprojects. As one World Bank taskmanager put it, “If you’re PriceWaterhouse Coopers Lybrand, areyou going to go in and audit thebooks of your client and say thatthings are in atrocious shape withall kinds of fraud and embezzle-ment?”

The probity of some of theauditing firms used by the Bankalso leaves much to be desired(see Box, p.12)

Cleaning Up Its Act

In 1996, the World Bank finallyintroduced a new provision into itsprocurement guidelines to addressfraud and corruption, introducingpenalties for firms found to haveacted fraudulently. The Bank hasalso drawn up an “ineligible firms”list, is responsible for debarringcompanies found guilty of corrup-tion or fraud and, in a few in-stances, has undertaken investiga-tions. Late in 1998, two Bank staffwere fired for misuse of trustfunds, and in 1999, the Bankobtained a judgement against oneof its own officials accused oftaking kickbacks from a contractoron a water project in Algeria.

Questions remain, however,about responsibility for past loanswhich have been lost because of alack of Bank oversight. Oneillustration concerns the formerdictator of Zaire, Mobutu SeseSeko, who was known by theWorld Bank and the IMF to beappropriating between 30-50 percent of the nation’s budget forcapital investment every year. TheIMF commissioned a secret reportfrom German banker ErwinBlumenthal (seconded to Zaire’scentral bank in 1978) as early as1982 which stated: “There is no, Irepeat no, chance on the horizonfor Zaire’s numerous creditors toget their money back.” The WorldBank, however, did not stoplending to the Mobutu regime until1993. The IMF, meanwhile, lentthree times as much to Zaire

between 1982 and 1989 — after thereport — as before it. The debt ofZaire (now the Democratic Republicof Congo) is now some US$12,330million — or US$262 per person.

In another example, the WorldBank lent Indonesia a total of US$30billion in the course of GeneralSuharto’s three decades of rule. In1998, World Bank resident staff inIndonesia estimated that:

“at least 20-30 per cent of GOI[Government of Indonesia]development budget funds arediverted through informalpayments to GOI staff andpoliticians, and there is no basisto claim a smaller ‘leakage’ forBank projects as our controlshave little practical effect on themethods generally used”.

That means — by the Bank’s ownaccount — that up to US$9 billion ofWorld Bank loans to Indonesia werewasted through corruption — andthat World Bank staff knew it.Former USAID consultant JeffreyWinters argues that any newIndonesian government would have“a clear legal foundation” for suingfor relief of the debt accrued. Suchis the power of the World Bank,however, that any incoming govern-ment, were it to do so, would riskputting off future foreign investorsand incurring the wrath of theinternational community.

Given such facts of life, it is theduty of the IMF and the World Bankto do their own inventory of loanslost to corruption. An independentpanel of experts should determine,on a case by case basis, whereresponsibility lies. If it is found thatWorld Bank and IMF staff knowinglylent money to regimes who immedi-ately siphoned it off through corrup-tion, thereby contravening the twoinstitutions’ fiduciary mandates,negotiations about sharing liabilityshould commence immediately.

The IMF and Corruption

IMF loans go into the borrowingcountry’s general budget, as doWorld Bank structural adjustmentloans, making them hard to monitorfor corruption or misuse. The IMFdoes not monitor these funds strictly(and would argue that it cannot doso). It is more concerned to ensurethat the conditions attached to itsloans are met.

In the past, however, the IMF hastended to ignore signals of corrup-tion and misuse of its funds in

countries where governments haveshown willingness to take onboard IMF macro-economicpolicies or in those countrieswhich are strategically importantto some of the IMF’s morepowerful members. In Russia, forinstance, then President BorisYeltsin used some $5 billion ofmultilateral funds, including thosefrom the IMF, for his re-electioncampaign in summer 1996. TheIMF stayed silent and continuedlending to the country until late1999 when allegations surfacedthat its loans were being launderedback into US bank accounts. InMexico, meanwhile, the IMF alsocontinued lending to the govern-ment of President Carlos Salinasdespite strong evidence of corrup-tion. Countries less strategicallyimportant to the US, however, geta rougher ride.

As a result of strong politicalpressure following the scandals ofmisused IMF funds in Russia and“creative accounting” techniquesinvolving IMF funds in the Ukraine,the IMF has recently started totoughen up its oversight of itsfunds. In Russia, for example, ithas been keeping its new loans tothe country in its own bankaccounts. But given the strategicimportance of both countries tothe US, and given that both are ledby “reform-minded” leaders, anyfurther measures, such as stoppingfunds, are unlikely.

Sources: Addresses of World BankPresident James Wolfensohn to WorldBank Annual Meetings, October 1996and September 1997;www.worldbank.org/html/extdr/pb/pbcorruption.htm; Annual Report toParliament on UK Operations at theInternational Monetary Fund, October1998-September 1999; Srinivasan, R.,“Procurement Opportunities in WorldBank Operations”, paper presented at1997 World Bank and IMF AnnualMeetings, Hong Kong; Loewenberg, S.,Legal Times, 22 February 1999;Winters, J., “Criminal Debt”, paperprepared for the conference“Reinventing the World Bank: Opportu-nities and Challenges for the 21stcentury”, 14-16 May 1999; Wesberry,J., “International financial institutionsface the corruption eruption”, North-western Journal of International Lawand Business, 1998; “Summary of RSIStaff Views regarding the problem of‘leakage’ from World Bank ProjectBudgets”, document leaked from WorldBank offices in Jakarta, 1998; Burns, J.and Huband, M., Financial Times, 12May 1997, 16 March 2000; http://www.gao.gov/new.items/ns0073.pdf;Bretton Woods Project Update, issue17, June 2000.

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officials with company shares instead of cash, and use expense accountsto provide trips or other freebies. Many US companies set up branchoffices in Canada to take advantage of the relatively lax bribery lawsthere.96 An impressive 97 per cent of companies surveyed in Europeand the US have concluded that US companies use middlemen to getaround the legislation.97 As The Economist magazine puts it, “some saythe law merely encourages American firms to bribe more cleverly”.98

The international OECD Convention leaves open similar loopholes.For instance, it does not:

• Prohibit the funding of foreign political parties;• Make parent companies responsible for the corruption their

subsidiaries or agents engage in;• Include as bribery non-cash gifts such as shares, trips and other forms

of excessive hospitality;• Specify sanctions or means of enforcing the accord;• Spell out how cases should be brought to the attention of the

relevant national authority – by the government of the country

Testing Commitment to Combat Corruption

A case of alleged bribery andcorruption by a group of Westernbusinesses is now before thecourts in the southern Africancountry of Lesotho. Ten companiesand two consortia are accused ofpaying bribes of nearly US$2million (R25 million) into the Swissbank account of Masupha Sole,the chief executive officer of theLesotho Highlands DevelopmentAuthority, over a period of tenyears. Sole was the top officialoverseeing the construction of thecontroversial Katse dam inLesotho. He was found guilty inOctober 1999 by a Lesotho courtof receiving these bribes.

The British constructioncompany Sir Alexander Gibb andPartners is one of the companiesaccused. Other major Britishcompanies – Kier International,Stirling International, BalfourBeatty and Amec – have stakes inthe two consortia accused.

Other Western companiesimplicated include Impregilio ofItaly, Dumez International ofFrance, Acres International ofCanada, Lahmeyer International ofGermany, and Swedish-SwissABB. Many of the companiesinvolved are no strangers toallegations of corruption.

The Yacyreta dam on theborder of Argentina and Paraguay,which involved Impregilio, Dumezand Lahmeyer, was dubbed “amonument to corruption” byArgentina’s President Carlos

Menem. Yacyreta was projected tocost US$2.7 billion to build – thefinal bill was US$11.5 billion.

Lahmeyer and Impregilio also hadcontracts on Guatemala’s Chixoyhydroelectric dam, for which be-tween $350 to $500 million isestimated to have been lost tocorruption.

ABB and Dumez worked on theItaipu dam, a joint project betweenBrazil and Paraguay, which wasoriginally projected to cost US$3.4billion, but ended up costing US$20billion – more than five times asmuch. Numerous allegations ofcorruption surround the project.

The Katse dam project in Lesothohas always been surrounded bydispute. Critics have questionedwhether the project would be able tobring substantial benefits to thepeople of Lesotho. Hundreds ofpeople were moved from their homesas a result of the project, whosemain aim is to export to South AfricaLesotho’s “white gold” — water.Communities have been broken up inthe process, and the project has ledto increased social problems as wellas lower water quality and thedestruction of natural habitats.

Britain has a long history ofinvolvement in Katse. The projectwas the brainchild of Sir EvelynBaring, British High Commissioner toLesotho in the 1950s, although thedeal between South Africa andLesotho which enabled the project toget under way was not signed until1986. Finance for the project was

channelled through a London bankaccount to get around sanctionsagainst the apartheid governmentof South Africa. The involvementof British company Balfour Beattywas underwritten with Britishtaxpayers’ money (through theExport Credit Guarantee Depart-ment). British bilateral aid alsosupported the dam, as did WorldBank funding.

If the British companiesinvolved are found guilty of bribery,the UK government should ensurethat they are brought to justice inLesotho and in Britain, andpressure other OECD governmentswhose companies are involved todo the same.

A conviction would also be alitmus test of the World Bank’scommitment to countering corrup-tion. The Bank’s guidelines areclear as to the penalties:

“The Bank will declare a firmineligible either indefinitely orfor a stated period of time, tobe awarded a Bank-financedcontract if it at any timedetermines that the firm hasengaged in corrupt or fraudu-lent practices in competingfor, or in executing, a Bank-financed contract.”

Sources: Business Day, 5 Aug.1999, 2Sept. 99, 8 Dec.1999; The Observer, 5Dec. 1999; The CornerHouse, DamsIncorporated: The Record of TwelveEuropean Dam Building Companies,Swedish Society for Nature Conserva-tion, February 2000.

Western Dam Companies in Lesotho

96. “Report of the Commonwealth expert groupon good governance and the elimination ofcorruption in Economic Management”, in-terim report presented to Commonwealth Fi-nance Ministers, October 1998, reported inBourrie, M., “Commonwealth Agreementto Fight Corruption”, Inter Press Service, 2October 1998.

97. Atkinson, M. and Atkinston, D., op. cit. 11.98. The Economist, op. cit. 82.



Dragging Its FeetThe UK and the OECD Convention on Combatting Bribery

Although the UK government hasratified the OECD Convention oncorruption, it has so far failed topass a law forbidding orcriminalising bribery of foreignofficials or a law making bribesnon-tax-deductible. It has alsofailed to take measures to ensurethat its companies do not engagein bribery, and to establish clearand regularly-monitored anti-corruption rules for British busi-nesses working in the Third World.

Instead, the UK Home Office(the government departmentresponsible for drawing up newlegislation) maintains that existingnational legislation against briberydating back some 100 years isadequate to implement theConvention. (The 1889 PublicBodies Corrupt Practice Act makesbribery a criminal offence; the1906 Prevention of Corruption Actdeals with bribes given to orsolicited by agents; the 1916Prevention of Corruption Actextended the definition of “publicbody” to all local and publicauthorities.) This is despite thefact that this antiquated legisla-tion:

• Has never resulted in a singleprosecution in the UK forbribery of a foreign publicofficial;

• “Is not intended” in thewords of a UK civil servant,to result in prosecutions ofindividual UK businesspeopleoffering bribes overseas;

• Applies only in cases inwhich “an element of thecorrupt transaction”, orpreparations for it, took placein Britain.

In Breach of theConvention?

A March 2000 OECD review foundthat UK legislation on corruptiondid not comply with the Conven-tion, in particular, that it does notcover bribery committed by UKcompanies or their subsidiariesoverseas. Thus the OECD couldwell censure the UK for failure toenact further legislation to ratifythe Convention.

The UK Law Commission notedin 1998 that current nationallegislation on corruption was“obscure, complex, inconsistent andinsufficiently comprehensive”. Itrecommended that four new of-fences of corruption be created(drafting a new Bill to encompassthese) and that corruption beincluded as an offence under the1993 Criminal Justice Act which“extends jurisdiction of the Englishcourts over offence of fraud anddishonesty committed abroad”.

Two years on, and despite theOECD Convention, the UK govern-ment has done little to take up theLaw Commission’s recommenda-tions. To coincide with a June 2000OECD Ministerial meeting, it willpublish a discussion paper on itsproposals for reform.

Why is the British governmentdragging its feet? It seems not to beprepared to confront companieswhich claim that British businesseswill lose out on overseas contracts ifthey are not allowed to bribe, to thedetriment of British jobs. Withawareness of corruption increasingworldwide, however, Britain riskslosing more jobs if its companiesbecome publicly renown as bribers,particularly as other countries suchas the US take the OECD Conventionmore seriously. The UK governmentalso appears unwilling to shoulderthe costs of investigating Britishcompanies involved in corruptionabroad. Either way, it seems that theUK government has to be pushedinto taking bribery and corruptionseriously.

Further Measures

In addition to bringing its laws up todate, the UK could bring in othermeasures to crack down on bribery.For one thing, it could curb fundingof foreign political parties.

The Political Parties, Electionsand Referendums Bill, which regu-lates the funding of political parties,is currently making its way throughParliament. The Bill, by restrictingdonations to British political partiesfrom overseas, recognises thatforeign donations to political partiescan undermine the democraticprocess.

But the Bill requires compa-nies to disclose breakdowns ofpolitical donations only if theyare made outside the EU. Itshould be amended to includedonations made by Britishcompanies to political partiesinside the EU as well.

Transparency International’sFrank Vogl remarked after theOECD Convention was signedthat “it will be no good if theDepartment of Trade andIndustry . . . sets up an [anti-corruption] office but onlyemploys one person to monitorthe multinationals”.

Yet the British governmenthas not even gone this far.According to a Department ofTrade and Industry official, it isnot the role of the Britishgovernment to monitor how itscompanies behave overseas.Effectively, this means that noone is responsible for ensuringthat British companies are heldaccountable under the OECDConvention. Moreover, there areno clear procedures to enablecases against UK companiessuspected of corruption abroadto be brought before British lawcourts.

The UK government couldalso take other measures, suchas blacklisting from governmentcontracts companies foundguilty by international bodiessuch as the World Bank and UN(of which the UK is a member)of corruption. It could introduceclearer anti-corruption clauses ingovernment contracts. Critically,it could revise Inland Revenueprocedures to ensure greaterscrutiny of commissions madeoverseas which might includebribes.

Sources: Observer Business, 9August 1998, p.3, The Guardian, 13December 1997, p.26, 5 August1999, p.1; “The Prevention ofCorruption: Consolidation andAmendment of the Prevention ofCorruption Acts 1889-1916: aGovernment Statement”, June 1997,Home Office; Atkinson, M., “UKTardy in Bribery Battle”, TheGuardian, 30 March 2000; UK LawCommission, “Legislating theCriminal Code: Corruption”, ReportLaw Com No 248, 3 March 1998.

21


whose official has been bribed or by the government of the countrywhose company has offered the bribe.

It remains to be seen to what extent governments which have signedthe Convention are prepared to prosecute wrongdoers. Many are likelyto fear antagonising their business communities and will delay action.Indeed, the Convention’s origin as a measure to “equalise” competi-tion among OECD-based multinationals suggests that OECD govern-ments do not routinely enforce laws against their own multinationals.Mobilising the new, stronger provisions will be, in large part, a job forthe countries in which the offence takes place. Public pressure is likelyto be crucial in ensuring that both the government and business takethe Convention seriously.99

Blacklisting CompaniesIn 1998, the World Bank set up a sanctions committee to investigatecases of corruption by companies involved in bidding for or carryingout a World Bank-backed contract. The Sanctions Committee meetsregularly to review investigations and to debar firms found guilty. Italso publishes a comprehensive list of debarred firms, “The World BankListing of Ineligible Firms.” As of May 2000, there were 54 companieson this list, 36 of them British – by far the biggest country representa-tion on the list.100

The UK government could and should take action against compa-nies sanctioned by the World Bank. It could also take steps to helpensure that no Western or OECD company sanctioned by an interna-tional financial institution such as the World Bank, or prosecuted inany country in the world, obtains contracts with other international ornational institutions.101 This should particularly apply to contracts withUK government departments such as the Department for InternationalDevelopment (DfID) and the Export Credit Guarantee Department(ECGD). The UK government could also ensure that there are bindinganti-corruption clauses or corporate compliance programmes in all con-tracts at a national and international level.102

At a broader level, concerted international action on corruption couldinclude creating an international database of ‘blacklisted’ companieswhich governments around the world could use when deciding to whomthey should award a contract. Such a database could be held at theUnited Nations, by UNCTAD (UN Conference on Trade and Develop-ment), for instance. A model already exists, held by the InformationCoordination Group (ICG), an organisation set up by five oil compa-nies to combat illegal information brokering. The ICG has a databaseof 2,500 entries gathered from participating companies and other inter-national sources on individuals and companies known or alleged tohave been involved in procurement irregularities around the world.103

Law enforcement agencies already have access to this database andcompanies use it to make “integrity checks” before pursuing contracts.

NGOs are also calling for an international public index or rankingof corrupt companies.104 At the moment, the international anti-corrup-tion NGO, Transparency International, publishes an annual briberyperceptions index. The index ranks countries, however, rather than com-panies. Since it is not countries that do the bribing, this index remainsfundamentally flawed.

Government ActionAll governments need to clean up their act – but they need to do so inan environment in which donors are not imposing inappropriate, over-

99. For further discussion of the limits andpossibilities of the Convention, seeCockcroft, L., “Implementation of theOECD Convention: The Conditions forSuccess”, paper presented to seminar,“Corruption and Bribery in Foreign Busi-ness Transactions”, Vancouver, 4-5 Feb-ruary 1999. http://www.transparency/de/documents/work-papers/lc_oecd.html

100. These companies include Chase BerkeleyCavendish Ltd, Case Technology Ltd, Ag-ricultural Development Services Ltd, Con-sultants for International DevelopmentPLC, Cybertek International Ltd, DrillTechnologies and Co, Economic Consult-ing Group, Engineering Projects Interna-tional, International Development ProjectsServices, and West End Associates. See“World Bank Listing of Ineligible Firms,Fraud and Corruption”, http://www.worldbank/org/html/opr/procure/debarr.html

101. Transparency International, Evaluation ofImplementation of OECD Convention bythe UK, TI Working Paper, Brussels, No-vember 1999.

102. Ibid.103. Dealing with Bribery and Corruption: A

Management Primer, Shell UK, London,1999, p.55.

104. Commonwealth report, op. cit 96.

Public pressure iscrucial to ensure

that governmentsand business take

seriously theOECD Convention

on CombattingBribery.



hasty policy changes; in which resources and time permit genuine par-ticipation in social and economic decision-making; and in which inter-national agencies are not adding to the incentives for corruption.

Any successful anti-corruption programme has to be built up at anational level, be appropriate to local and national contexts, and havefull support from government employees at all levels. In addition, as a1998 Commonwealth report on corruption argues:

“Action programmes need to be designed to meet the expecta-tions of citizens, who need to be informed about the nationalstrategy to combat corruption. Effective action to fight corrup-tion is most likely through programs which are nationally owned,designed to meet national circumstances and built on the foun-dation of popular empowerment.”105

Imposing anti-corruption strategies by putting conditions on loans willnot work – and may even lead to governments implementing cosmeticchanges which, at best, do little and, at worse, undermine the anti-cor-ruption effort. In Uganda, for instance, the Ministry of Ethics and In-tegrity is seen by some observers as merely a show-piece created toappease creditors who demanded action on corruption. Its remit is un-certain and clashes with those of other departments engaged in devel-oping an anti-corruption strategy, such as the office of the InspectorGeneral of Governance and the office of the Auditor General. The newMinistry may even draw resources away from these desperately under-resourced bodies and, by diffusing responsibility across government,actually reduce the effectiveness of their work.

In some instances, governments may not be politically committedto reform. But as the Commonwealth report on corruption notes, “wheregovernments are less than enthusiastic in tackling corruption, popularsupport and the agencies of civil society can still be mobilised in sup-port of an anti-corruption agenda.”106

Several NGOs in North and South are doing just this by, for exam-ple, monitoring debt relief funds to see if they are being spent on pov-erty reduction measures; mobilising ordinary people and raising aware-ness; and developing the monitoring capacity of local civil society tokeep local governments accountable in a context of decentralisation.

In Nicaragua, a new anti-corruption movement, Citizen ActionAgainst Poverty and Corruption, has organised popular marches againstcorruption; is campaigning to get the President and other ministers andpoliticians to declare their personal income; and is in the process ofproducing a popular manual on corruption, which will be disseminatedat “corruption hearings”.

In Uganda, local civil society organisations including the UgandaDebt Network and the International Anti-Corruption Theatre Move-ment organise an anti-corruption week every year during which publicmeetings, plays and a march are held in a general attempt to raise aware-ness about corruption and existing laws holding politicians and minis-ters accountable.107

One of the most successful grassroots anti-corruption movements isthe Indian Mazdoor Kisan Shakti Sangathan (MKSS) or Workers andFarmers’ Power Organisation in Rajasthan. Since 1988, the MKSS hasbeen organising with local people to demand access to local govern-ment accounts and records. It holds public hearings to examine localdevelopment works and to check whether the accounts match up toactual spending. So successful have these hearings been that Sarpanchesor local leaders exposed in the hearings as fiddling the books havereturned the stolen money.108

105. Commonwealth report, op. cit 96.106. Ibid.107. “Uganda: the power of theatre”, TI News-

letter, June 1999.108. “Freedom of information is key to anti-

corruption campaign in rural India”, TINewsletter, September 1998, p.3.

Imposing anti-corruptionstrategies byputting conditionson loans mayunderminenational effortsagainstcorruption.

Two-thirds of thecompanies debarredby the World Bankare British.

23


World Bank and IMF: Putting Their Houses in OrderWorld BankTo stem corruption in World Bankprojects, NGOs in the South andNorth are calling for the WorldBank to:

• Make it a priority to reducecorruption in its own projects.If it fails to do so, the ironicoutcome could be that loansfor improving governance andfor anti-corruption initiativesmight get lost to corruption;

• Commit itself to improvingsupervision of projects and tomaking its audits compulsoryand more rigorous;

• Ensure that there are properguidelines for its staff to dealwith corporate lobbyists, andto conduct a serious reviewof the “revolving door”system by which formerWorld Bank staff becomeadvisers to private sectorclients;

• Make public its internalinvestigations into corruptioncases involving its ownprojects. National authorities

could then prosecute the partiesinvolved.

Structural Adjustment PoliciesNGOs are calling on the World Bankand IMF to:• Undertake a full independent

review of the link betweenstructural adjustment pro-grammes and corruption, aswell as the impact of structuraladjustment on governance.

PrivatisationNGOs are urging the World Bank andIMF to:

• Ensure that the privatisationprogrammes they imposeinclude provisions for appropri-ate and robust regulatoryframeworks to be put in placebefore privatisation is begun;

• Examine public sector reformswhich do not involve privatisa-tion, particularly in sectors suchas water and health, in whichservices to vulnerable groupscannot be provided at a profit;

• Review whether loans madetowards privatisation would be

more effectively spent onadministrative reform of theentities to be privatised;

• Draw up a plan of action toencourage accountability andtransparency in privatisationprogrammes.

Civil Service ReformMany NGOs recommend that theWorld Bank and IMF:

• Take their own expert adviceon civil service reformseriously;

• Shift their emphasis awayfrom downsizing towardsmore long-term solutions;

• Help governments make aconcerted effort to ensurethat civil service salaries areraised;

• Help governments increaseaccountability of the civilservice through more training,freedom of informationlegislation, whistle-blowerlaws, and punishment forwrongdoers.

DeterrentsEconomic sanctions are some of the most effective deterrents to cor-ruption. In Singapore, a middleman was convicted in 1996 of payingbribes totalling US$9.8 million on behalf of Siemens, Pirelli, BICC,Tomen and Marubeni. Not only did the government ban all five com-panies from bidding for any government contracts for five years. It alsobanned “firms associated with the five companies, any new companythat the firms may jointly set up, and firms that share the same direc-tors as the five”.109

Opening development projects to more public scrutiny can be an-other effective deterrent. In the state of Kerala in south India, a newlocal government structure, based on massive public participation, hasbeen acclaimed, even by the World Bank:

“Kerala’s decentralisation programme is probably the largest ofits kind in the world. Three million people (10 per cent of theState’s population) take part in meetings. This is a far-reaching,innovative and courageous new approach to rural developmentand local governance . . . It reflects a profound commitment to atotal change in which governments govern to empower disad-vantaged groups to voice their demands, and to make institu-tions responsible and accountable to them.”110

The system includes massive devolution of funds to local meetings,which are required to draw up plans for deploying them, and a con-certed effort to maximise public attendance at such meetings. Eightkey democratic principles are central, including: “maximum direct par-ticipation of the people; accountability (continuous social auditing ofperformance) and transparency through the right to information.”

109. Reuters, 16 February 1996.110. The Hindu, 24 May 1999.

Economicsanctions and

public scrutiny ofprojects can deter

corruption.



This briefing was written bySue Hawley and edited bySarah Sexton, LarryLohmann and NicholasHildyard of TheCornerHouse. The section“Corruption and Privatisa-tion in Europe” is taken fromDavid Hall, “Privatisation,multinationals, and corrup-tion”, Development in Practice,Vol. 9, No. 5, November1999, pp.539-556. See also thewebsite of Public ServicesInternational Research Unit(http://www.psiru.org)which contains regularupdates on all aspects ofprivatisation in publicservices, including corrup-tion. A report by Sue Hawley oncorruption in the WorldBank and IMF and corrup-tion caused by their policieswill be published in autumn2000 by the New EconomicsFoundation, London. The CornerHouse is a researchand solidarity group whichaims to support the growth of ademocratic, equitable and non-discriminatory civil society inwhich communities havecontrol over the resources anddecisions which affect theirlives and means of livelihood,as well as the power to definethemselves rather than bedefined only by others.CornerHouse contact details onpage 1.

The potential for corruption, a problem before the new system, isminimised by a commitment to transparency and openness of all docu-ments and decisions. As The Hindu newspaper notes:

“Total transparency is the only way to check the danger of de-centralisation degenerating into decentralisation of corruption.All documents on beneficiary selection, reports and minutes ofmeetings and all documents on works undertaken by the localbodies through contractors and beneficiary committees includ-ing bills and vouchers are public documents. Copies are avail-able on payment of a fee.”111

In Thailand, meanwhile, a new constitution has strengthened the demo-cratic rights of local communities, illustrated by electricity generation.Before 1997, governments, multinational companies and the World Bankhad pushed electricity privatisation by building independent powerplants with little regard to the interests of local people. The violentbreakup of any opposition would often have been the end of the issue.As a result of the 1997 constitution, however, large development projectsare now subject to public hearings, and local councils, which are nowelected rather than appointed, must give their consent to such projects.

ResistanceFighting corruption is increasingly engaging the energies of civil soci-ety groups around the world. To be effective, they must:

• Mobilise ordinary people. Civil society groups will need to beprepared to take on governments in innovative and sometimes con-frontational ways. They will also need to be committed to being trans-parent and accountable themselves.112

• Push for freedom of information and enable ordinary people touse that information. Only if they have the relevant knowledge cancitizens hold their governments accountable and ensure that resourcesthat belong to them are used in the right way.

• Help increase citizen participation in decision-making.113 InUganda, a popular phrase is abantu babisi, meaning “people do notknow what is going on”. It is used to show mistrust of governmentdecisions taken far away. Greater participation by groups that repre-sent the poor is a must in decision-making at every level – local, re-gional and national. Greater citizen participation is also required inmonitoring and auditing public expenditure. Civil society groups needto play a “critical auditing function . . . if they are to hold the stateaccountable to their poorer citizens.”114 In many countries, opposingprivatisation – for example, water privatisation plans in Panama andBrazil – has proved to be one way to remove potential sources of cor-ruption. Where work is put out to tender, it is critical to ensure thatthere is always an “in-house bid” from the public sector to set againstany private contractors’ bids, something that the UK Office of FairTrading recommends as a key method for avoiding being cheated by acartel.115 Ensuring that such bids are made also makes it difficult for acontractor to buy a contract at an artificially inflated price.Cracking down on bribery will not necessarily make international busi-ness more accountable. Nor will it end corruption overnight. But it willhelp send a clear message that the international community is intent onrestricting the “supply side” of bribery. Companies must not be allowedto continue to behave in unethical ways that undermine local democ-racy and development.

111. The Hindu, 24 May 1999.112. Jenkins, R. and Goetz, A.M., “Constraints

on Civil Society’s Capacity to Curb Cor-ruption: Lessons from the Indian Experi-ence,” IDS Bulletin, Vol. 30, No. 4, 1999,p.41. The first NGO Code of Conduct toCombat Corruption was drawn up inCameroon. See Swiss Coalition News,No.21, Sept. 1999, pp.10-11.

113. See also Richmond, J. and McGee, R.,“Who’s Round the Table? A Review ofCivil Society Participation in Aid Coordi-nation”, Christian Aid, October 1999; Sch-neider, H., “Participatory Governance: TheMissing Link for Poverty Reduction”,OECD Development Centre, Policy Brief,No. 17, 1999.

114. Ibid., p 45.115. The Office of Fair Trading, Cartels, De-

tection and Remedies, OFT, London,1995.

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