HC 847 International Development CommitteeWritten evidence from Global Witness
Global Witness
1. Global Witness welcomes the opportunity to make a
submission to the International Development Committee Inquiry into
Financial Crime and Development.
2. Global Witness is a London-based non-governmental
organisation that investigates the links between natural resources,
conflict and corruption. We aim to promote improved governance,
transparency and accountability in the management of the natural
resource sector to ensure that revenues from resources are used for
peaceful and sustainable development rather than to finance or fuel
conflicts, corruption and associated human rights violations.
3. While the vast flows of capital associated with the
extraction of natural resources present a huge opportunity to promote
peaceful, stable and democratic states in some of the poorest regions of
the world the reality is that these revenues have tended to initiate
and sustain conflict across the globe as well as entrenching the rule of
corrupt and repressive regimes. The development implications of these
sustained conflicts and repressive regimes are widespread and all too
evident
4. If the UK’s efforts to promote development abroad are
to be taken seriously the UK government must ensure that British
companies and banks are not complicit in this process by fuelling and
facilitating conflict, corruption and human rights violations abroad
through their business dealings.
Financial Crime and Development
5. Corruption has devastating impacts on development.
Money that should have been destined for investment in public services
is diverted into poor quality or pointless procurement projects or
indeed into private bank accounts. Corruption also entrenches poor
governance and undermines the rule of law. It damages investor
confidence and is a disincentive to entrepreneurship and diversification
in the economy. The poor, who tend to be more reliant on public
services, are the worst affected by corruption.
6. Corruption also fundamentally undermines UK
development assistance, in countries where illicit financial flows out
of the country dwarf incoming development assistance. In these cases,
tackling corruption is not just about ensuring the aid money is not
diverted. It means ensuring that the aid is not itself subsidising the
looting of the state, by providing basic state services, while corrupt
officials get on with the much more lucrative business of corruption.
Tackling corruption is an essential pre-requisite to development. As
this case will illustrate, it requires a coordinated approach across
government departments.
7. The terms “corruption” and “bribery” are often used
interchangeably but corruption is far more than just bribery. It can
also involve embezzlement of state funds, extortion, influence peddling.
Money laundering is usually involved, since it is hard to engage in
large scale corruption without a bank to put the money in and move it to
a place where it will be spent.
8. Corruption is not just a developing world problem.
Bribes cannot be received or solicited without companies willing to pay
them, and money cannot be looted or bribes paid without banks willing to
accept corrupt money. There are numerous ways that the UK government
can help tackle this fuelling and facilitation of corruption, especially
when it is done by British companies and banks. These are set out in
detail in the Bond Corruption Paper— Annex 1.
The BAE Tanzania Case
9. The BAE Tanzania case illustrates the need for a
coordinated UK policy towards transnational financial crime, and
specifically corruption.
10. The facts relating to the prosecution and fine of
BAE are well known. According to the judgment of Mr Justice Bean at
Southwark Crown Court on 21 December 2010, BAE pleaded guilty to
accounting failures under Section 221 of the Companies Act 1985 to
conceal payments of $12.4 million to a Tanzanian agent called Shailesh
Vithlani, employed by BAE as a marketing advisor. BAE agreed to make a
£30 million ex gratia payment for the benefit of the people of Tanzania
less a £500,000 fine imposed by the court. As the judge noted, BAE’s
basis of plea was that: “there was a high probability that part of the
$12.4 million would be used in the negotiation process to favour British
Aerospace Defence Systems Ltd.”
11. The International Development Select Committee is
right to look at the issues surrounding this case, and the questions
asked in the invitation to submit written evidence are pertinent ones.
We will answer those questions on which we have expertise. We wish to
draw the Committee’s attention, however, to some additional questions
about the facilitation of this deal which may lead to lessons learnt for
the UK’s approach to transnational crime.
12. The evidence suggests this damaging deal could not have gone ahead without:
payments made by BAE
export licenses and export credit guarantees granted by HMG
commercial financing from Barclays
13. The first was tackled in the court case, and the
implications for the UK’s new Bribery Act are examined below. The export
licences and export credit guarantees will be tackled, we believe, in a
submission from Campaign Against the Arms Trade. The last, the role of
Barclays, is examined in our final answer.
14. Our key recommendation is that the UK needs to
develop a joined-up approach to corruption which encompasses not only
bribery legislation, but export credit guarantees and export licenses
and, crucially, anti-money laundering regulation of banks. Recent events
in Egypt, Libya and Tunisia have shown how banks have been willing to
facilitate corruption by dictators and their corrupt regimes by
accepting their money. The unrest in the region has in part been fuelled
by such corruption.
How BAE will ensure that its payment to Tanzania is used effectively for development purposes/What advice DFID has given to BAE about how this money might be used
15. It should not be left to a private company to ensure
that its payment is used transparently and effectively. This process
should be conducted in coordination with the UK and Tanzanian
authorities who should ensure that money moves into, and through,
accounts in a transparent manner and that money is accounted for and
independently audited at each stage of the process. Effective civil
society oversight in Tanzania will be essential.
16. BAE should ensure that it publicly discloses all
payments made, including to whom they are made and which accounts they
are made into.
17. An appropriate use of the money might be to promote
transparency and accountability in the management of state revenues and
budget management, and to promote civil society oversight so as to
restore trust in the government and ensure that future incoming revenue
is used for development priorities. Tanzanian civil society should be
involved in setting priorities for the use of the money.
Whether the law needs to be changed to ensure that British companies and individuals found guilty of financial crimes in developing countries are always required by the court to make reparations to the developing country concerned
18. It would seem fair that where a public procurement
project has been affected companies should make restitution payments.
These should be greater than the amount that was influenced by the bribe
on the basis that it is extremely unlikely that prosecutors are able to
detect and prosecute every crime, and also the fines levied should be
large enough to deter future potential bribe payers who may conduct cost
benefit analysis.
Whether further changes to the Bribery Act 2010 or other legislation are required
19. The Bribery Act is a good act which is fit for
purpose. It has gone through extensive consultation with relevant
stakeholders including business groups and it passed with cross party
support. As such it should not be revisited despite the protests of
companies, which have nothing to fear from it unless they pay bribes.
The Act should be implemented as soon as possible and without further
delay.
20. However, an act is only as good as its
implementation—this will now largely fall to the Serious Fraud Office,
or its successor body, and the Crown Prosecution Service. The guidance
for business published by the Ministry of Justice on the 30th of April
2011 is extremely disappointing and raises a number of areas of serious
concern as set out in the following paragraphs. It also raises serious
doubt about the government’s commitment to effective implementation of
the Act. The particular sections that give rise to these concerns were
only added following the delay in the publication of the guidance and
intense pressure from business groups. In our view the guidance goes
beyond the remit of providing guidance to business and risk undermining
the act through its interpretation.
21. Our view is that the interpretation of the Act,
which was passed by parliament, should be left to prosecutors and the
courts, and should be free from intervention by the government and
business groups.
22. Firstly, the guidance is intended to provide
guidance to companies on complying with the act and putting in place
“adequate procedures” to prevent bribery, as such it potentially defines
the defence as set out in Section 7 of the act. Section 7 makes
companies libel for failing to prevent bribes paid on their behalf by a
third party, a company can defend itself in court by showing that it had
adequate procedures in place to prevent bribery on its behalf. The
guidance, as it is written, risks presenting a tick list for companies
to observe in order to avoid prosecution rather than simply providing
guidance on compliance. In our view it should be left to the courts to
interpret whether a company has adequate procedures in place to prevent
bribery, on a case by case basis.
23. Secondly, the guidance suggests that companies will
not fall within the jurisdiction of the Act just by virtue of their
listing on the London Stock Exchange. If this interpretation of the act
were to hold true large international companies which are listed in
London would potentially be able to avoid prosecution for overseas
bribery. The guidance also suggests that foreign companies who operate
subsidiaries in the UK would not fall under the jurisdiction of the Act.
This may well incentivise companies to operate subsidiaries in the UK
to ensure that they do not fall foul of the act hence restricting the
scope of the Act. This interpretation will unfairly disadvantage UK
companies, whilst failing to prevent the damaging practice of bribing
foreign public officials.
24. The Act should be used to investigate and prosecute
not only UK but also foreign companies who are either listed on the
London Stock Exchange, or who operate a subsidiary in the UK. This will
broaden its indisputably positive impacts and create a level playing
field for UK businesses.
25. Thirdly under Section 7 of the act, companies should
be held liable for bribes paid by joint venture partners and
subsidiaries where they benefit by virtue of their relationship to those
entities. The MoJ guidance appears to contradict this. This matters
because it will encourage UK companies to operate subsidiaries in high
risk environments which they distance themselves from in order to avoid
prosecution.
26. Successful implementation of the Act will be a
matter for prosecutors and courts. This potentially misleading guidance
from the MoJ should not get in the way of their ability to prosecute;
nor should it lull companies into a false sense of security
Further Recommendations:
Effectively enforce the Bribery Act, ensuring that the
UK is fully compliant with the 1997 OECD Anti-Bribery Convention; fines
and penalties should be large enough to both punish and deter. The UK’s
financial penalties for companies that commit financial crimes including
bribery and money laundering offences are currently woefully
inadequate. This is particularly true when compared to the US which has
levied substantial financial penalties against companies and banks that
have either been prosecuted for financial crimes or that have settled
voluntarily. If the UK is to successfully deter companies and banks from
paying or processing bribes or from accepting stolen assets then the UK
must levy fines large enough to act as a successful deterrent. In the
BAE case the size of the fine was restricted because any increase would
have decreased the size of the ex gratia payment to the people of
Tanzania. Such a structure should be avoided in future.
Ensure that sufficient dedicated resources are
available for the Act’s effective implementation. UK diplomatic posts
must have the awareness, capacity, political backing and will to assist
UK companies to deal with demands for bribes. UKTI and other UK
representatives should also be trained to identify risks and warn
companies.
Introduce greater transparency and consistency in relation to the terms of negotiated settlements in bribery cases.
Actively and effectively enforce Article 45 of the EU
Procurement Directive within the UK and work with the EU to ensure its
successful enforcement across the Union, to ensure that companies found
guilty of bribery are automatically precluded from government contracts.
Encourage self reporting and whistle-blowing as this is the most efficient way of bringing bribery to light.
The UK should use its anti-money laundering laws to
tackle bribery by treating profits from a deal struck following a bribe
as the proceeds of crime.
27. None of the above would require amendments to the
Bribery Act or further legislation. However we do have recommendations
for further legislation and regulation that would help curb financial
crime. The Bribery Act is welcome, but alone will never curb corruption,
or even bribery. Tackling bribery is not just about prosecution; it is
also about uncovering the bribes in the first place and making it more
difficult to pay them.
28. At present it is extremely difficult to detect
bribes as they are often paid through shell companies and other
corporate vehicles, often in secrecy jurisdictions or tax havens (half
of which are British). The fact that companies and individuals are able
to set up companies and trusts without providing their identity means
that they can make and receive payments anonymously. This makes it
enormously difficult to detect where bribes have been paid, slows down
investigations, and severely limits the effectiveness of any
anti-bribery legislation.
Recommendation:
29. Each country should maintain a verified national
registry of beneficial ownership and control of all companies
incorporated and trusts established there (ie, not just the immediate
shareholder). No one should be allowed to become a director or company
secretary or shareholder owning 10% or more of the shares of a UK
company without having first proved their identity to the Registrar of
Companies to the standards required by money laundering regulations for
the opening of a bank account. The use of nominees to record the
ownership of shares can be permitted, but only if the name of the
beneficial owner is also on public record.
30. This would have to be an international standard to work. Two possibilities exist for the UK to push it internationally:
through its membership of the Financial Action Task
Force, the OECD body that sets the global anti-money laundering standard
and is currently reviewing its standards, including this one
in Brussels, where a recent EC Internal Security review
called on the EU to amend its anti-money laundering standard to provide
greater disclosure of beneficial ownership and control of companies and
trusts.
How the government coordinates its policy against transnational financial crime
31. The following aspect of the BAE Tanzania story is
indicative of the need for a more joined-up UK strategy towards
transnational financial crime.
Barclays’ Loan to Tanzania
32. It was extensively reported at the time that
Barclays was providing the loan for the deal: a loan without which the
sale could not have gone ahead. When the deal first came up in 1995 it
could not go ahead because the Tanzanian Central Bank would not pledge
the country’s gold reserves as collateral.
33. According to the Guardian, Barclays made the loan at
a rate of 4.9% even though the World Bank and IMF refused to lend for
such a white elephant project. This was reportedly just
below market rates, even though Tanzania was not supposed to borrow on
commercial terms due to its existing debts, $3 billion of which had just
been written off by its donors. A World Bank report said that a civilian radar system could be bought for a fraction of the price.
34. Barclays’ involvement was criticised in Parliament
by Clare Short, then Secretary of State for Development, and Norman Lamb
MP.
35. Clare Short said: “under the HIPC [Highly Indebted
Poor Country] initiative, countries cannot borrow unless the loan is
concessional. Somehow a loan from Barclays Bank, which is funding the
project—there is no way that Barclays can provide concessional
funding—has been reported to the IMF as being concessional, so the
project squeaked through, which is very odd.”
36. Norman Lamb MP said that the IMF had written to him
explaining the financing Barclays had provided, saying “the terms of the
financing package obtained by Tanzania in 1999 for its air traffic
control system yielded a weighted average grant element of 35.9%, which
is consistent with the definition of concessionality under the terms of
the IMF’s concessional loan facility, the Poverty Reduction and Growth
Facility.”
37. As Mr Lamb pointed out, this seemed like an extraordinary thing for Barclays to do:
“Barclays might simply have had a fit of
generosity, but that seems unlikely. Perhaps it had something to do with
the fact that, on 11 October 2000, Barclays secured a banking licence
to operate in Tanzania. Was that the payback for subsidising the deal?
The other more sinister explanation is that the contract price was
fiddled and artificially inflated so that it looked to the outside world
as if Barclays was providing a concessional loan, which was necessary
to get the deal past the IMF.”
38. He continued: “When a Secretary of State alludes to
corruption, surely it is time thoroughly to investigate the financing of
the deal. I have also been told that bungs were paid to oil the wheels
of the deal.”
39. These questions about the role of Barclays in allowing this deal to go ahead were not satisfactorily answered at the time. Now
that that the payments by BAE have come to light and BAE has pleaded
guilty to accounting errors which hid them, it is once again pressing to
ask what due diligence Barclays did on this loan to reassure itself
that its funding would not facilitate a corrupt deal.
40. A leaked request for mutual legal assistance from the SFO to the Tanzanian authorities
says: “the SFO has reasonable grounds to believe that the financing
package was structured to circumvent, and in reality may have breached”
the requirements agreed with the IMF and World Bank.
41. In the same leaked document the SFO alleges that it
had reasonable grounds to believe that a recipient of payments from
Vithlani was the Tanzanian Attorney-General, Andrew Chenge. Without his
agreement, the SFO says, the financing package involving Barclays could
not be agreed.
42. According to the document the SFO had evidence to believe that:
Chenge was personally in charge of negotiations by 1995
Between 19 June 1997 and 17 April 1998 Chenge received $1.5 million into an account at Barclays
in Jersey in the name of a company he controlled called Franton
Investments Ltd. The money had previously come from another Barclays
account in Frankfurt, and may ultimately have been sent from LGT Bank in
Liechtenstein.
Barclays later became concerned over the governance of
the Franton accounts and ended the client relationship (a date is not
given).
Vithlani, the recipient of BAE’s payments, was involved
in setting up the financing package with Barclays. For example, the SFO
says that on 28 September 1999 Vithlani wrote to Barclays enclosing the
final draft of the financing package. He enclosed a legal opinion dated
15 September 1999 from Chenge concerning the financial arrangements,
including that they would not be subject to suit in Tanzania, that
English law would be used in the event of any dispute, and that these
arrangements would not cause Tanzania to become ineligible for IMF
funding. Such conditions, the SFO said, were important to Barclays’
willingness to proceed.
In September 2009 £600,000 was transferred by Chenge
from the Franton account at Barclays in Jersey to an RBS account in
Jersey. Later he moved the funds to the investment manager J O Hambro,
this time in his own name, and also had an account at Standard Chartered
in Dar es Salaam.
43. Chenge resigned in April 2008 following claims about
more than £500,000 in an account in Jersey. He denied wrongdoing and
claims, through the law firm DLA Piper, that the completion of the SFO’s
investigations vindicates him. The SFO’s plea bargain
preventing further investigation of matters prior to 5 February 2010
means that these allegations will not now be tested in court.
44. The SFO’s information about the Franton account at
Barclays in Jersey raises the extraordinary possibility—untested by the
case that concluded in December—that a bribe may have been paid into a
Barclays account to facilitate the agreement of conditions which allowed
a Barclays loan to go ahead to finance an unaffordable deal for
Tanzania.
45. We recommend that the Committee call Barclays to
account for its role in this deal. The questions which we believe need
to be asked include:
(i)Can Barclays confirm the IMF’s statement
to Norman Lamb MP that 35.9% of the loan was a grant, and explain what
this meant, and why this was done?
(ii)Can Barclays respond in detail to
allegations that the size of the deal was inflated to make it look as
though the loan was on concessionary terms?
(iii)What due diligence did Barclays do on Shailesh Vithlani and his role as an intermediary in arranging the financing?
(iv)How does Barclays justify its comment, reported in the Guardian in December 2001, that it was “not involved” in the debate surrounding the sale, when
its provision of a loan was so central to allowing the deal to proceed
it had received documents from Vithlani and
Chenge discussing Tanzania’s eligibility for IMF funding if the Barclays
loan went ahead, this being one of the questions at the centre of the
debate about the appropriateness of the deal?
(v)Has Tanzania repaid the loan to Barclays?
If so how long did it take? What is the total amount repaid including
interest? Does this exceed the ex-gratia payment to be made by BAE?
(vi)When exactly did Barclays close Chenge’s
Franton account in Jersey? It is to Barclays’ credit that it did so,
but had it identified its customer as a politically exposed person (ie a
senior official and therefore a greater corruption risk)? When it
closed the account, did it make the connection between suspicious money
received by its customer Andrew Chenge, and the fact that the same man
was responsible for giving the go-ahead for Tanzania to borrow heavily
from Barclays?
46. In addition, Royal Bank of Scotland, J O Hambro and
Standard Chartered—the banks that handled Andrew Chenge’s funds after
they left the Barclays’ account in Jersey— should be asked what due
diligence they did on Chenge and his source of funds. Did they identify
him as a PEP and do enhance due diligence? How did they reassure
themselves that these funds were not the proceeds of corruption? Did
they file any suspicious activity reports?
Recommendations:
47. Commercial banks should be required by law to
disclose loans made to sovereign governments or state owned companies,
including details of rates as well as all fees and charges. Proposed
loans should be published well in advance, allowing parliamentary
scrutiny in the recipient country and, if necessary, in the home country
of the company whose deal is being paid for by the loan. This would
need to be a global standard in order to be effective, but the UK, as a
major financial centre, is in a position to push this.
48. The UK should ensure that its anti-money laundering
laws, with their requirement to do customer due diligence, are
rigorously implemented both in the UK and in the Crown Dependencies and
Overseas Territories. The current furore over frozen funds belonging to
Ben Ali, Mubarak and Gaddafi shows that the lessons are still not being
learnt by banks when it comes to accepting corrupt funds. The current
light touch approach to AML regulation means that banks can tick the box
to say they’ve done their customer due diligence yet still do business
that fuels corruption.
49. The UK also needs to set up a whole of government
approach to tackling corruption which spans all the relevant government
departments. The current PEP group and Bribery groups are untransparent
and they do not cover all of the relevant issues. The UK government’s
efforts to tackle corruption have so far been largely limited to bribery
and asset freezing/recovery. We would urge the UK anti-corruption
champion to introduce an anti-corruption strategy that tackles all of
the aspects of corruption which UK companies and banks—and the
government itself—contribute to as set out in the Bond corruption paper,
see Annex 1.
Annex 1
BOND ANTI-CORRUPTION PAPER
Bond Governance Group
The Bond Governance Group is made up of
likeminded British NGOs who, through their work, witness the devastating
effects of corruption on developing countries every day. Our experience
has taught us that corruption continues to be one of the biggest
obstacles to development, poverty alleviation and good governance. Our
aim is to draw attention to the impact of corruption on developing
countries and provide a platform for the voices of our partners and
southern civil society organizations to be heard in the UK. We intend to
use our joint influence to campaign for changes in policy which will
help bring an end to corruption around the world. This paper was
prepared by the Anti-Corruption Sub Group.
Anti-Corruption Sub Group
CAFOD, Christian Aid, The Cornerhouse, Corruption Watch, Global Witness, Tearfund, Transparency International UK.
Bond Governance Group—Steering Committee
Care International—UK, Christian Aid, Global Witness,
One World Action, Oxfam GB, Plan International – UK, Practical Action,
Progressio, Save the Children, Tearfund, Water Aid, World Vision—UK
Introduction: About Corruption
Corruption has devastating effects on developing
economies and their citizens’ quality of life. Its cost in Africa alone
has been estimated at US$148 billion a year, representing 25% of the
continent’s GDP. Corruption undermines economic growth
rates and cripples public services, as money which should be destined
for re-investment and public expenditure finds its way into private bank
accounts, often abroad.
The size of financial flows from developing countries
into the rich world that deprive poor countries of revenue has been
estimated at up to $1 trillion each year. These flows,
which include state looting, tax evasion and abusive tax avoidance, rob
developing countries of much needed revenue and therefore seriously
undermine the impact of development assistance from the developed world. Tackling these flows will require measures which provide greater transparency.
Corruption seriously damages attainment of the Millennium Development Goals.
It undermines good governance and tends to permeate all levels of
society precluding the poorest from access to basic services and
creating barriers to business. Corruption remains one of the major
impediments to poverty alleviation, development, good governance and
stability, and is a proven source of conflict and insecurity.
Corruption is often thought of as just a developing
world problem. But it is driven and facilitated by external actors, many
of them in the developed world:
Companies (including British companies) can actively
fuel corruption by paying bribes, or passively fuel it by failing to
disclose the legitimate payments they make to governments.
Banks (including British banks) can sustain corruption
by doing business with corrupt officials and accepting looted funds or
bribes.
Financial secrecy jurisdictions (including the UK’s
Overseas Territories) and the financial and legal service providers who
operate in them can help the corrupt to hide their ill-gotten assets,
and facilitate large-scale tax avoidance that denies revenues to
developing countries.
Donors (including the Department for International
Development - DFID) have made steps forward in tackling corruption.
Donor aid provides vital assistance but does not always adequately
tackle corruption, promote state accountability to citizens and
transparency in highly corrupt aid-recipient countries.
In this context, the activities of British financial
institutions and companies, along with failures in the regulatory
frameworks, can seriously undermine development and the effectiveness of
aid provided by the UK and other donors.
There is also a compelling business case for tackling corruption, which includes:
Creating a level playing field for business, in which
sales and contracts are won through an open market rather than through
bribery.
Creating greater security for contracts.
Reducing the cost of doing business through eliminating the “bribery premium” in contracts.
Downgrading corporate risk in key markets, reducing the cost of capital, insurance premiums and other operational costs.
Increasing value for money in aid and development spending.
Creating a more politically stable and secure environment in which British companies and investors can operate.
This paper sets out to raise awareness of the numerous
different ways in which corruption is fuelled and facilitated by
external actors, and points towards actions the UK government needs to
take to curb it. So far the UK government has largely focused on the new
Bribery Act, which is certainly necessary and which Bond welcomes. But
corruption goes way beyond bribery and the remit of the Ministry of
Justice and DFID. To make any real inroads into overseas corruption the
government must develop a cross-Whitehall anti-corruption framework.
This document sets out the main external drivers of corruption over
which the UK has control and outlines the policy responses needed to
effectively address the problem.
A Cross-Whitehall Anti-Corruption Framework
There is pressing need for a cross-Whitehall framework
on corruption, including increased parliamentary scrutiny and civil
society participation. The policy processes and institutional mechanisms
required in the UK for tackling corruption are highly complex.
Complexity in itself is not necessarily the problem; in fact the
multi-faceted nature of corruption demands a plurality of responses.
However, a lack of coordination and clear channels of accountability
threatens the effectiveness of the UK’s anti-corruption efforts.
Action must be taken to ensure that there is a
comprehensive cross-Whitehall anti-corruption framework. Dealing with
corruption is inherently difficult. There are no quick fixes or one size
fits all solutions. It requires cross-party political commitment that
extends across successive governmental cycles and coordinated policy
interventions across government departments.
General recommendations for a cross-Whitehall anti-corruption framework and the role of the Anti-Corruption Champion
1.Formally commit the government to a “zero tolerance” policy on corruption in all aspects of its work around the world.
2.Set specific targets, based on the
recommendations in this paper, against which progress should be reported
on a biannual basis to Parliament.
3.Create mechanisms for a structured and regular dialogue, and coordination, between UK government departments and Ministers.
4.Involve civil society and other
stakeholders in a regular, open and transparent dialogue that allows
on-going input to, and comments on, the framework’s implementation.
5.Work with G8 and G20 partner countries to
keep anti-corruption high on the global agenda and report annually on
the UK’s implementation of G8 and G20 anti-corruption commitments.
6.Implement all commitments in the United
Nations Convention Against Corruption (UNCAC), to which the UK is a
signatory, including cooperation between Member States to prevent and
detect corruption and to return the proceeds of corruption to the
country from which it came.
The External Drivers of Corruption
Policy responses for a cross-Whitehall anti-corruption framework
1. Illegitimate payments: Bribery of foreign public officials
Bribery is the most obvious and best recognised form of
corruption. Bribery is not a victimless crime nor a regrettable but
unavoidable cost of doing business abroad. Bribery undermines the rule
of law and the principle of fair competition and entrenches bad
governance. Bribery of public officials results in government revenue,
which could be used for development, being wasted on unnecessary and
poor quality procurement projects, posing a risk to health and even life
where essential services are affected.
While many British firms are not involved in corrupt
practices, we know that some UK companies have used bribery to win
business overseas. The 2008 OECD phase 2 bis Report on the UK’s bribery record showed that the government needs to do more to tackle bribery.
As such, we welcome the UK Bribery Act, which greatly improves UK
law.We very much hope that the cross party support for strong
legislation will continue during the implementation process.
Recommendations
1.1Effectively enforce the Bribery Act,
ensuring that the UK is fully compliant with the 1997 OECD Anti-Bribery
Convention; fines and penalties should be large enough to both punish
and deter, as is the case in the US.
1.2Ensure that sufficient dedicated
resources are available for the Act’s effective implementation. This
should include ensuring that UK diplomatic posts have the awareness,
capacity, political backing and will to assist UK companies to deal with
demands for bribes.
1.3Introduce greater transparency and consistency in relation to the terms of negotiated settlements in bribery cases.
1.4Ensure that guidance for business on the
Bribery Act presents clear obligations and advice without providing a
safe haven under the “adequate procedures” defence under clause 7;
“Failure of Commercial organisations to prevent bribery.”
1.5Ensure that the UK actively and
effectively enforces article 45 of the EU Procurement Directive and
works with the EU to ensure its successful enforcement across the Union.
Bribery is an important element of corruption but
bribery should not be confused with, or treated as synonymous with,
corruption. Corruption extends far beyond illicit payments and takes
multiple forms.
2. Lack of transparency in legitimate revenue payments by companies
A lack of transparency in payments by companies to
foreign states, often for natural resources, allows corrupt leaders and
officials to personally enrich themselves by siphoning off legitimate
payments made for those resources by international companies. Without
transparency over how much companies are paying to foreign governments,
the people and parliaments of resource-rich countries are unable to hold
their governments to account. The lack of payment disclosure by
companies facilitates an opaque environment in which high level
corruption can take place on a grand scale, robbing countries and
citizens of much needed revenue. This opacity and associated corruption
also exposes foreign companies to greater investment and operational
risk that ultimately disadvantages shareholders.
The Extractive Industries Transparency Initiative
(EITI), spearheaded by the UK in 2002, is an important tool in improving
revenue transparency as well as providing space for civil society to
monitor revenues in producer countries. But as a voluntary initiative it
only reaches a limited number of countries and progress has been very
slow. On its own, the EITI is not and never will be a panacea for
corruption. It covers a crucial stage in the flow of resource revenues,
ie the making and receipt of payments, but it does not cover the
allocation of rights to companies to exploit oil, gas and minerals, nor
the marketing of oil by state agencies (which can be a major source of
revenue for the state in many oil-producing countries).
The US recently passed legislation as part of the
Frank-Dodd Financial Reform Bill which will require every US SEC
(Securities and Exchange Commission) registered company to disclose all
payments made to foreign governments on a country by country basis as a
condition of its stock exchange listing. This will include UK based
companies listed on the US SEC. Such transparency will not only reduce
opportunities for embezzlement but also help shelter companies from the
costs of bribery and corruption creating a more level and transparent
playing field in which to operate.
The Bond Anti-Corruption Sub Group believes that the UK
should adopt similar legislation, covering all companies operating in
the extractive industries in all their countries of operation. Failure
to do this could result in a situation where some foreign oil and mining
companies registered in the UK will be free from a requirement that
British companies registered in the US will not.
The remit of the EITI will also need to be strengthened,
improved and extended, over time to cover procurement contracts,
allocation of concession rights and additional payments. This process
should take place in consultation with its stakeholders in governments,
the private sector and civil society. It is important that any extension
learns from the lessons of the EITI process to date. This combination
of regulatory reform and voluntary initiative, overlapping and
reinforcing each other, is the best chance for addressing the problem of
corruption in resource revenue payments.
Recommendations
2.1Create a legal requirement for UK
companies, their subsidiaries and joint venture partners, to disclose
all legitimate payments made to foreign governments for access to
natural resources, and for the resources themselves.
2.2Promote and support a strengthened model of EITI building on lessons learnt to date.
3. Illicit and harmful financial flows out of developing countries:
a) Money laundering laws are failing to prevent banks sustaining corruption by accepting dirty money
Just as a bribe cannot be taken without a company
willing to pay it, large scale corruption cannot take place without a
financial institution willing to accept or process the money. The scale
of theft involved in state looting requires the involvement of the
financial system.
For example payments are made from the bank account of a
state oil company to that of a company owned by a government minister;
from the account of a company’s “fixer” to that of a state official;
from one of the accounts of a public official to another of his accounts
in a different jurisdiction. It requires a bank to accept corrupt
persons and their associates as their customers and then process the
payments to divert bribes or stolen public money into the accounts of
individuals, or the companies that they own. Otherwise these illicit
transactions could not take place. Combating the role of financial
institutions in the flow of illicit money is therefore absolutely
intrinsic to tackling corruption. So too is combating the role of those
who set up and audit the corporate vehicles behind which individuals and
legal persons hide, and which are still not properly regulated.
Banks and other institutions are required by anti-money
laundering laws to identify their customer and the source of funds, and
to file a suspicious activity report if they suspect the money is
illegally earned. However, weaknesses in the anti-money laundering
regulations, particularly in relation to due diligence on Politically
Exposed Persons (PEPs), combined with the deficiencies in
regulation in many secrecy jurisdictions (including the UK’s Overseas
Territories), increases the risk of UK institutions continuing to do
business with the corrupt.
b) A lack of transparency in the ownership and operation of companies is facilitating corruption, tax evasion and avoidance
Increased transparency in company ownership and
transactions is key to tackling corruption, since corrupt officials will
often hide their looted money behind a shell company. However, it also
has the knock-on effect of tackling the twin problems of tax evasion and
avoidance which are estimated to cost the developing world US$160
billion a year, more than one and a half times the total global aid
budget to developing countries.
Approximately 60% of global trade is conducted within
multinational corporations (MNCs), between subsidiaries of a parent
company. This allows companies to use intra-group
transactions to disguise profits in order to avoid tax liabilities. This
is possible due to the current level of opacity afforded by the current
regulatory structures and secrecy laws.
The International Accounting Standards Board is
currently developing a new standard for the extractives sector. It is
considering whether this should include a requirement for oil, gas and
mining companies to publicly disclose tax and other payments to
governments on a country by country basis. Such a policy would reinforce
the aim of the EITI by ensuring that companies routinely disclose their
tax and other revenue payments to countries where they operate. It
would also help tackle tax evasion and abusive tax avoidance.
Recommendations
3.1Strengthen regulations to explicitly
require institutions, including banks, to identify that the source of
funds being deposited by Politically Exposed Persons (PEPs, eg senior
foreign public officials) is legitimate. The Financial Services
Authority (FSA, or any successor body) should proactively supervise
these institutions to ensure that this happens.
3.2The UK should use its influence within
the Financial Action Task Force (FATF), the inter-governmental body that
sets the global anti-money laundering standards to;
(i)ensure that tackling the proceeds of corruption is a priority;
(ii)that loopholes in the global standard are closed;
(iii)and that the FATF’s members are
pressured sufficiently to ensure not only that they have regulations in
place meeting FATF’s standards, but that these regulations are
implemented and enforced.
3.3Corrupt politicians can hide behind a web
of tax havens, corporate vehicles and trusts. The only way to ensure
that these are not abused is transparency over ownership and control of
corporate and legal entities. The UK should push for the FATF standard
(recs 33 and 34) to require that every jurisdiction should
publish an online registry of the beneficial ownership and control of
companies and trusts.
3.4The UK should spearhead a multilateral
agreement for information exchange between tax authorities including
developing countries. This should be done with the ultimate aim of
enshrining automatic exchange of beneficial ownership information as the
international standard for information exchange.
3.5The UK should push for international
accounting standards to require all multinational corporations to
publicly report sales, profits and taxes paid at country level in all
the jurisdictions where they operate. This information should appear in
their audited annual reports and tax returns. This UK should engage with
the current debate on a new standard for the extractives sector.
4. Loans that fuel or subsidise corruption
There is a risk that in countries where corruption is
prevalent, loans to governments or state agencies (including state owned
companies) may be misappropriated or used to fill holes in the public
finances that have been created by corruption. This can leave current
and future generations of citizens to repay a debt from which they have
derived no public benefit. There are examples where debt obligations
currently crippling developing countries originate from loans that were
corruptly used; greater transparency would help to curtail this source
of corruption.
Recommendations
4.1The UK should lead in the establishment
of an international standard requiring commercial banks to publish key
details of their loans to sovereign governments and state owned
companies, including the amount, pricing and duration of the loan. This
information should be provided with plenty of time to allow democratic
scrutiny of the deal.
4.2The UK should require lenders to
governments and state owned companies to verify, and publicly confirm to
their shareholders, that these funds are not being misappropriated or
used to replace misappropriated public funds.
5. Export credit guarantees can legitimise corruption
The Bond Anti-Corruption Group is concerned that most of
the British companies that have faced law enforcement investigations
and penalties for overseas corruption have received backing from the
Export Credits Guarantee Department (ECGD). This raises serious concerns
about the adequacy of ECGD anti-bribery procedures for vetting
projects. Furthermore, it is not clear what action the ECGD has taken to
penalise those companies which have been subject to enforcement action,
particularly where there have been allegations that companies have made
false statements to the ECGD about use of agents and commission
payments.
The UK government should initiate an independent review
into the current ECGD anti-corruption regime to ensure that UK tax payer
money does not support companies associated with corrupt deals abroad.
Furthermore, UK companies that are convicted of corruption should be
automatically precluded from working with the UK government and state
procurement under the terms of Article 45 of the EU Procurement
Directive as well as ECGD support for a set period of time.
Recommendations
5.1Apply strong anti-bribery rules to all transactions supported by the Export Credits Guarantee Department (ECGD).
5.2Apply ECGD’s anti-bribery rules to all
business conducted through third parties, such as banks providing
short-term credits and reinsurance.
5.3Ensure that ECGD’s anti-bribery rules are consistent with best practice in other export credit agencies in OECD countries.
5.4Ban companies convicted of corruption from all ECGD support for a period of up to five years.
6. a) Donor aid provides vital assistance but does not always adequately tackle corruption and promote accountability and transparency in highly corrupt aid-recipient countries
Aid provides vital services to millions in the
developing world. Unfortunately, in many aid-recipient countries, high
level corruption and poor governance is undermining economic growth and
preventing countries from harnessing their own resources for
development. This can undermine the long-term impact of development aid.
As part of a whole-of-government approach, DFID can play
a vital frontline role in tackling corruption. It can do this by
improving its own internal due diligence and anti-corruption procedures
and by promoting good governance, natural resource and public financial
management, transparency and respect for human rights, particularly in
countries where corruption is endemic.
The Bond Anti-Corruption Sub Group welcomes DFID’s
efforts to place governance reforms at the heart of its programmes, its
increasing focus on the causes and not just the symptoms of corruption,
and its use of political economy analysis.
In Mozambique, bilateral donors funded a tribunal which
audited 35% of the government budget—both aid and general public funds.
The findings of these audits were acted on by both members of parliament
and the national media. Examples like this have shown that in the right circumstances donor assistance can lead to more accountable government.
Likewise, we welcome the coalition government’s new Aid Transparency
Guarantee which could be an important way to curtail mismanagement of
donor funds.
However, weak state structures, poor public financial
management and inexperienced or ill-intentioned governments have meant
that corruption remains endemic in many countries. This is often
compounded by a lack of civil society participation and democratic
oversight of government functions. In an age of tightening government
budgets, we encourage DFID, and the Foreign and Commonwealth Office
(FCO), to go further in leveraging their diplomatic and financial
influence in-country to support calls for transparency and combating
corruption. We believe that the following measures in aid programming
will strengthen the existing approach.
Recommendations
The UK should ensure that its in-country programmes
improve governance and incentivise greater accountability. Specifically,
it should:
6.1Include specific, targeted and measurable
anti-corruption benchmarks when negotiating jointly agreed performance
assessment indicators. Such benchmarks should not include economic or
fiscal conditionalities, as practiced in the past. Rather they should
include basic transparency and anti-corruption requirements demanded by
civil society in country, such as publishing incoming revenue and other
measures to curtail high level corruption.
6.2Continue and expand political economy
analysis to ensure a full and nuanced understanding of country context
which takes account of domestic incentives, drivers (both internal and
external) and concerns.
6.3Shift efforts to improve governance away
from purely technical focus on laws and procedures, towards a broader
agenda of promoting democratic oversight and impartiality. This approach
should include encouraging the provision of space for civil society to
enable it to monitor government revenue and expenditure, and securing
protection for anti-corruption whistleblowers and investigators. The UK
should avoid the promotion of the private sector at the expense of a
strong, functioning state.
6.4Work with change agents such as
parliamentarians, civil society and non-formal structures of authority
to strengthen democratic oversight of governments, and to provide
support geared towards strengthening the ability of these agents to
provide public interest information and advocacy and to ensure
accountability.
6.5DFID should continue to support the
implementation of the UNCAC abroad and to resource and support the UNCAC
review mechanism process.
6. b) Ensuring proper oversight and due diligence of Official Development Assistance (ODA) funding
Whilst DFID has made some strides forward in tackling
corruption, the Bond Anti-Corruption Sub Group does have some specific
concerns about the oversight mechanisms and due diligence for UK ODA
funding, particularly where channelled through intermediaries.
Of particular concern is the Commonwealth Development
Corporation, a UK government owned company, which has come under
particular scrutiny in relation to its investments in Nigeria.
Recommendation
6.6DFID should strengthen its oversight of
the funds operated by intermediaries such as the CDC to ensure that they
do not contribute to corruption.
7. Providing safe haven to corrupt officials
The developed world does not just provide a source of
illegitimate money and a safe haven for looted assets to corrupt
leaders, it is also the shopping destination and provider of educational
and medical facilities of choice. The UK should take a firm stand
against corrupt leaders who siphon off their national wealth. Action
should be taken to stop corrupt leaders spending their stolen money with
impunity in the UK and elsewhere. Such cases have a huge deterrent
effect on the perception of the UK as a safe haven for corruptly
acquired funds. For example, the Proceeds of Corruption Unit at the
Metropolitan Police, has successfully brought to trial accomplices of a
Nigerian state governor accused of corruption, and provided key support
to successful asset recovery actions against two other state governors
by the state of Nigeria.
While the UK has a procedure to deny visas to
individuals if their presence is not deemed to be in UK interests, it is
not made explicit that it will be used as an anti-corruption tool. The
US has specific legislation requiring the State Department to maintain a
list of corrupt foreign officials, and to deny visas to those on it;
the UK (and EU) should do the same.
Recommendations
7.1Continue to support the Proceeds of Corruption Unit at the Metropolitan Police.
7.2Strengthen and improve procedures to help
developing countries to recover looted assets and the proceeds of
corruption in line with UNCAC (The UN Convention Against Corruption)
commitments and ensure that repatriated assets are not in turn lost
through corruption.
7.3Work with other states to freeze the
assets of foreign officials against whom there is credible evidence to
suggest they are involved in corruption and state looting.
7.4Deny visas to foreign leaders, and their
families, against whom there is credible evidence to suggest they are
involved in corruption and state looting.
27 April 2011
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