Peter Eigen: A plan of attack for tackling corruption

Corruption is the enemy of development. It can be stopped, says Peter Eigen, but true transparency – in both the developed and developing worlds – will require an extraordinary coalition of governments, businesses and civil organizations –

At the UN Conference on Financing for Development, held in Monterrey, Mexico, in March 2002, a succession of ministers from donor countries joined World Bank and IMF officials in a common judgment. Wherever corruption may reign, they concluded, development aspirations will remain an unattainable dream. But the corrupt are running out of excuses, and they are running out of places to hide.

That is the message of Global Corruption Report 2003, launched in January 2003 by Transparency International (TI), a global anti-corruption organization.

The book’s cover theme is “Access to Information”. Of the journalists killed in 2001, one in four died while investigating corruption. The TI Integrity Awards winners in 2001 included journalists recognized posthumously for their courage in exposing corruption.

Carlos Alberto Cardoso, an investigative journalist in Mozambique, was assassinated in November 2000 while investigating the largest banking fraud in the country’s history. Georgy Gongadze, a Ukrainian journalist who highlighted the corruption of the Ukrainian government on his internet news service, was decapitated and his body burnt with acid in the autumn of 2000.

The killing has not stopped. Valery Ivanov, editor of the Tolyatinskoye Obozreniye daily newspaper in Togliatti in central Russia, was killed on April 29, 2002, after his newspaper had established a reputation for reports on organized crime and the corruption of public officials. On May 13, 2002, Edgar Damalerio, managing editor of the Philippine weekly Zamboanga Scribe, was shot dead. He had been known for his reports on corruption among local politicians and the police.

From journalists and investigating prosecutors to corporate whistle-blowers, there are many unsung heroes who risk their lives – and those of their families – to shed light where darkness reigns.

And yet we all have a stake in increasing the quality and accuracy of the information available to us so that we can make informed choices and more effective decisions. Transparency in government and business is essential. Access to information is needed by all stakeholders – businesses, including employees and shareholders, governments and civil organizations.

The private sector, government and civil society are all crucial to a nation’s integrity, and the TI approach to building coalitions was evident in the evolution of the Anti-Bribery Convention adopted by the OECD.

The key to securing support for the convention, which came into effect in February 1999, was the support of large companies. No fewer than 20 European companies signed a letter drafted by TI, encouraging government ministers in their respective countries to sign the convention, which outlaws the bribing of foreign public officials.

We managed to get businesses on our side by offering them an escape route from a dilemma in which they found themselves. Many business people do not want to bribe anyone, but feel they have to do so because their competitors do.

While their competitors were bribing their way into winning contracts, it used to be an uphill battle to persuade businesses that the benefits of operating honestly outweighed the costs of losing business. Economists were inclined to agree that, in a bribe-demanding environment, the pursuit of profit would induce all competitors to behave in the same way.

Bribery will continue unless companies operate on a level playing field. The practice will be stopped only when firms know that bribe-payers will incur fines and blacklisting, and that executives will be put behind bars.

For governments to enforce the convention, they need to know that their companies will be on a level playing field. So all 35 signatory governments must provide resources to prosecutors, investigators, courts and tax inspectors to make sure that the convention is applied. They also have to make it clear that companies offering bribes will be investigated and charged.

The issue of bribing officials abroad hit the headlines in October 2002 when Acres International, a Canadian engineering consultancy, was convicted by the High Court of Lesotho. This judgment, against which an appeal is likely to be lodged, came in one case of many concerning 14 western companies facing charges of bribing a government official to win contracts in the Lesotho Highlands Water Project, an $8 billion scheme to supply water to South Africa.

The significance of the case lies in the fact that a court in a developing country has for the first time convicted an international company of paying bribes, rather than just prosecuting a local official for taking them.

If the developed world does not start applying the convention to its own companies in its own courts, it will be hard to sustain the arguments of the donor countries at Monterrey about the need for developing countries to demonstrate “good governance” and to fight corruption.

The mood of both governments and the private sector is changing rapidly. Since the Enron, Global Crossing and WorldCom scandals have jolted shareholders and pension fund contributors into reality, the public is no longer confident that a corporation’s books will show a true and fair statement of its finances. The implications for the efficient operation of capital markets are far-reaching.

Early progress

Campaigns for greater corporate disclosure are beginning to make real headway. On November 5, 2002, the world’s main diamond-producing and diamond-trading countries endorsed the UN-backed Kimberley Process Certification Scheme, which will trace rough diamonds from their point of origin. From January 2003, diamonds cannot be imported without a certificate of origin.

This measure is designed to stop the trade in diamonds from conflict zones, particularly Angola, Sierra Leone, Liberia and the Democratic Republic of Congo, where they have been used to enrich military elites and to entrench their interest in prolonging civil war.

Angola’s oil industry has also been the focus of a major campaign by several groups, including Global Witness, TI and more than 30 other NGOs. Close to 90% of Angolan government revenues come from the oil industry, but up to 40% of the country’s GDP has in some years failed to reach the treasury, being channelled into secret funds instead.

TI and Global Witness are now putting the case for regulators such as the SEC in the US to require oil, gas and mining companies to publish net taxes, fees, royalties and other payments to all governments as a condition for being listed on international stock exchanges and financial markets.

Relying on voluntary corporate disclosure has failed because firms fear discrimination from host countries. For instance, the declared intention of the UK oil company, BP, to “publish what it pays” in Angola drew threats from the Angolan state oil company, Sonangol, of unspecified “appropriate action” in retaliation.

Companies must establish codes of conduct, in particular rules designed to combat bribery at home or by their subsidiaries abroad. To this end, TI has developed, together with companies including BP, Shell, Tata and General Electric, a set of principles for countering bribery. The proposals include training to ensure that bribery is understood to be unacceptable.

Under the guidelines of another NGO project, the Global Reporting Initiative, companies are asked to describe their policies and procedures for addressing corruption. This includes saying how they meet the requirements of the OECD Anti-Bribery Convention.

The International Federation of Consulting Engineers has produced its own guidelines for “business integrity management”, based on the premise that companies must continuously document the information underlying their claims of integrity.

The Mining, Minerals and Sustainable Development project, launched in April 2000 by the International Institute for the Environment and Development, has been working with TI to encourage companies to publish basic information about revenue generated from particular projects and monies paid to governments.

The OECD estimates that annual budgets for government purchases worldwide run to $5 trillion. The scope for large sums being diverted in bribes is frightening, as are the lost opportunities when public expenditure is diverted from education, health care and housing. Moreover, if an import licence can be obtained only through bribery, and if foreign investors have to negotiate entry regulations, development is further undermined.

Shang-Jin Wei of the Brookings Institution in Washington DC investigated bilateral flows between 14 source and 45 host countries in 1990 and 1991. He found that an increase in the corruption level from that of Singapore to that of Mexico was equivalent to raising the corporate tax rate by more than 20%.

The Opacity Index, a project of the consultants PricewaterhouseCoopers, revealed that Russia loses up to $10 billion a year in potential foreign investments because of corruption, inadequate accounting procedures, weaknesses in its legal system and a lack of reliable financial information. The message is clear: investors tend to avoid countries that have high corruption levels and where there is a dearth of access to reliable information.

A sustainable business is a business with a lasting good name – and reputation brings added value, value recognized by a wide spectrum of stakeholders. That reputation rests on the fullest possible accountability to shareholders, customers and employees.

It does not mean that a chief executive should ask for permission before taking any step, but it does mean active consultation with other stakeholders and the explanation of decisions. It requires the highest standards of probity in the board’s audit committee and in the selection of an external auditor.

But, above all, it requires integrity on the part of the chief executive and senior management. Integrity is needed so that they report irregularities frankly and promptly, so that they consult other stakeholders – such as the local population as well as town planners when they want to build a new factory – and so that they have the courage to admit mistakes and rectify them without hesitation.

Peter Eigen
Peter Eigen is chairman of Transparency International (www.transparency.org).