The Ups and Downs of the War Against Corruption

Stephen DeAngelis

December 15, 2009

One of the subjects that caused President Obama a great deal of concern as he contemplated increasing troop strength in Afghanistan was the widespread culture of corruption there that has set back rebuilding efforts and soured Afghanis on Hamid Karzai’s government. A naval officer with firsthand experience trying to battle corruption in Afghanistan reports that “the international community has striven to reduce corruption through encouraging development of robust autonomous auditing agencies, increasing the pay of public sector officials, and enhancing the criminal justice system — however, this is not completed overnight” [“Cleaning up corruption,” by Commander Michael Hallett, Armed Forces Journal, November 2009]. He continues:

“That corruption constitutes a significant constraint on state-building efforts in post-conflict situations is well known. Corruption is a friction generator, hindering activities in all domains of activity. In the economic domain, for example, corruption acts like a tax, strangling efforts to create the economic growth essential for effective post-conflict reconstruction. Although much progress has been made in Afghanistan, the daily experience of petty corruption and a belief that corruption among the major political actors will prevent meaningful change or progress in the political domain reduces incentives for people to take the risk necessary to support the nascent security and governmental administration structures. Indeed, this corruption threatens to undermine all international community efforts to enhance Afghanistan government capabilities.”

I agree completely with Hallett (see, for example, my post entitled Development and Stability). As a military officer writing for a military audience, Hallett asserts that everyone involved in nation-building, including the military, has a role to play in trying to eradicate corruption. He advocates the use of “clean teams.”

“These clean teams would consist of uniformed personnel recording interactions between citizens and government officials (politicians, police, customs officials and land registry agents), using commercial off-the-shelf recording devices such as hand-held video recorders, cell phones and webcams. The clean team recordings would serve two purposes. One, they will provide a disincentive to corrupt action on the part of officials. Two, and no less importantly, they will provide civil servants with protection against fraudulent accusations of corrupt behavior, thus encouraging respect for the rule of law. … Why think that the clean team recordings will motivate corrupt officials to modify their behavior? The clean team activities speak directly to the operation of what economist and social scientist Mancur Olson refers to as ‘selective incentives’ operative within the community. Selective incentives can be positive or negative, and are intended as ‘inducements offered to those who act in the group interest.’ Selective incentives are necessary because appeals to the collective good are insufficient to shape decision-making and thus behavior. The clean team’s presence will act as selective incentive, the effectiveness of which is derived, not from a willingness to follow the law because it is the law, but to follow the rules because failing to do so causes the corrupt actors to appear dishonorable in the eyes of their peers. It may be possible to rationalize corrupt behavior with a wink and nod when everyone is taking ‘sweets’ — doing so in clear view of one’s peers and family is less appealing.”

I like the idea of clean teams. As I wrote in a earlier post on corruption entitled Battle to Stop Corruption Wanes:

“Corruption is not something that can be treated solely by those from the outside. It’s a cancer that corrodes nations from within and the people of those nations must fight it from within. I realize that is easier said than done. People generally become corrupt because they can. That implies that they have power. Most people in poor countries believe themselves powerless. In some cases they are because they live in fear of their lives under tyrannical regimes.”

Putting recording devices in the hands of common citizens provides them with some power; but in situations where an outside force is unavailable to provide security for such teams I worry about their safety. Corruption is big business. Fight corruption and corruption fights back. Although corruption involves power, its primary goal is to accumulate wealth. A judge in Switzerland recently established a legal precedent that goes after such money [“Swiss judge sets precedent in global corruption fight,” by Frances Williams, Financial Times, 23 November 2009]. Williams reports:

“Action by a Swiss judge to order the confiscation of bank accounts held in countries outside Switzerland set a legal precedent that will help in the international fight against corruption, legal experts said. Yves Aeschlimann, a magistrate in Geneva, found Abba Abacha, son of Sani Abacha, the late Nigerian dictator, guilty of graft, sentenced him to a suspended prison term and ordered confiscation of $350m in funds held in Luxembourg and the Bahamas. The funds had already been frozen in the course of the investigation. The Geneva justice office said on Friday the 41-yearold Mr Abacha, who was arrested in 2005, had been found guilty ‘of participation in a criminal organisation’. Enrico Monfrini, a Geneva lawyer who acts for the Nigerian government, said the demand for seizure of funds outside Switzerland was a legal first for the country. The Swiss government has already handed over to the Nigerian authorities about $700m that the Abacha family stashed away in Swiss bank accounts. General Abacha is estimated to have plundered Nigeria’s public coffers to the tune of some $2.2bn between 1993 and his death in 1998. A year later the new Nigerian government asked the Swiss to open an investigation. In the same judgment Mr Aeschlimann also fined an unnamed Monaco-based financier for helping the Abacha clan hide its gains and ordered him to pay SFr10m ($9.8m, €6.6m, £6m), equivalent to the illegal commissions he received, to the canton of Geneva. The move marks a further step in international efforts to tackle theft by corrupt rulers by going after intermediaries as well as principals. … Despite its reputation as a home for illicit cash, Switzerland has recently been in the vanguard of international moves to track down and repay funds siphoned off by corrupt officials. In the past 20 years it has returned millions of dollars to countries ranging from Peru to the Philippines.”

One country that is starting to make some progress in its fight against corruption is Sierra Leone [“A mortal enemy,” The Economist, 21 November 2009]. The magazine reports:

“There are signs that Sierra Leone is at last having some success against corruption. The government was pleased by [the] publication of the annual Corruption Perceptions Index by Transparency International, a Berlin-based lobby, which showed Sierra Leone steadily climbing up the rankings, albeit only to number 146 out of the 180 countries surveyed. The days of impunity seem to be over. Twenty-seven public officials have been indicted for corruption in the past year or so, including judges and the heads of the post office and the national broadcasting service. The minister of health was sacked earlier this month after being indicted on three counts of corruption.”

The article notes that transparency, a proper legal framework, and leaders with integrity and courage are all needed to fight corruption.

“Two years ago Abdul Tejan-Cole took over as head of the [Anti-Corruption Commission]. A human-rights lawyer, he had spent much of his career abroad, so was untainted by the country’s partisan politics. He has pursued all malefactors with equal fervour. Last year he introduced a system whereby every public official must declare all his or her assets. He also persuaded parliament to change the law governing the ACC’s operation. Not only can it investigate corruption, as before; it can also now launch prosecutions on its own, without having to refer cases to the attorney-general, a political appointee. As in other countries, such as Kenya, the previous procedure had hampered anti-corruption campaigns. The new law has already raised the number of offences linked to corruption from nine to 29 and has lengthened minimum sentences. Such changes, says Mr Tejan-Cole, have given the ACC ‘more teeth’. The number of prosecutions has soared. The ACC has clawed back around 3 billion leones ($800,000) in assets from those found guilty of corruption. The 38-year-old Mr Tejan-Cole admits that the task of the ACC remains daunting. Some ministers, he says, have given it a distinctly ‘mixed’ reception. Too many of them are still appointed for narrow political reasons, regardless of their past record. Mr Tejan-Cole wants all the most senior people to be vetted by parliament or by the ACC before they take office. For that, he needs unqualified political support from the top. So far President Ernest Koroma has given it. It is essential that he continues to do so.”

Corruption only succeeds when there are two sides willing to engage in it — corrupt officials and those willing to pay them. The Economist reports that “governments around the world are making life difficult for corrupt firms” [“Ungreasing the wheels,” 21 November 2009 print issue]. The report continues:

“If ever a clash was inevitable between one country’s commercial law and another’s business culture, it would be between America’s Foreign Corrupt Practices Act (FCPA), which seeks to punish firms that bribe government officials, and China, where many businesses are owned by the government and bribery is endemic. A recent spate of prosecutions under the act of firms operating in China and other notoriously crooked places has stoked fear in the heart of many executives. Nor is the crackdown limited to America. On November 18th the British government became the latest to promise tough new anti-corruption legislation, during the annual Queen’s Speech to Parliament.”

The article goes on to detail a number of recent prosecutions involving companies doing business in China including DPC Tianjin, a company that makes medical devices, Lucent, Control Components, ITT Corp, and AGA Medical Corporation of Minnesota. The article continues:

“The two American agencies responsible for enforcing the FCPA, the Department of Justice (DoJ) and the Securities and Exchange Commission, have both made clear their intention to be even fiercer under the new administration than they were under the previous one. … Although the FCPA was enacted in 1977, enforcement was patchy until recently. … The fines imposed on firms are also getting bigger. In February American courts fined KBR, a construction firm, and Halliburton, its former parent, $579m over bribes paid to obtain contracts in Nigeria. Last year they hit Siemens, a German conglomerate, with an $800m fine—the biggest to date. The German authorities also fined Siemens a similar amount. That case has helped spur more zealous pursuit of corporate bribery in Europe, says Richard Dean of Baker & McKenzie, another law firm. In September British prosecutors secured their first big conviction, of Mabey & Johnson, a bridge-building company, over bribery of foreign government officials. But prosecutors are still weighing politically charged allegations of bribery involving BAE Systems, a defence contractor, and foreign officials. The British government says its proposed new law will close several loopholes and make prosecutions easier. … American lawyers worry that local prosecutors will remain tougher than their counterparts in other rich countries, putting American firms at a competitive disadvantage and deterring foreign firms from listing their shares on American stockmarkets. As one lawyer puts it, ‘They are catching up, but not that fast.’ That may be true. But the more striking trend is that it is getting harder for firms all over the rich world to get away with bribery, which must be a good thing.”

It’s hard to battle corruption abroad when companies from rich countries are complicit in the crime. Despite the efforts noted above, an accompanying article claims that corporate crime is on the rise. The crime is mostly from within, but bribery is part of the picture [“The rot spreads,” The Economist, 21 November 2009 print issue]. The article reports:

“The recession has taken its toll on morals as well as profits. PricewaterhouseCoopers (PwC), a consulting and accounting firm, has conducted a biennial survey of economic crime for the past ten years. The most recent, published on November 19th, is not only the most thorough, based on over 3,000 responses from firms in 54 countries. In many ways it is also the most worrying. A third of those responding reported that they had suffered at least one economic crime in the past year. The incidence was particularly high in developing countries, notably Russia; in financial services and communications; in big companies and in state-owned enterprises. The three most common forms of crime are theft, accounting fraud and corruption. Of these, fraud has shown a particularly sharp rise (see chart): 43% of all corporate victims of crime and 56% of those in financial services reported an increase. The rise in fraud stems from a mixture of increased opportunities and growingCorporate crime incentives. Companies have been reducing the number of people employed to monitor workers at a time when employees are more tempted to break the rules because their living standards are eroding and their jobs are looking shakier. The proportion of frauds committed by middle managers has shown a particularly sharp rise, from 26% in 2007 to 42% today.”

Although the article focused on crimes that affected corporate profitability (mostly from the actions of employees), the accompanying graphic shows that bribery and corruption remain significant problems. For anyone interested in economic development, eliminating corruption remains one the most important activities in which they can be involved. Until a real war against global corruption is waged, corruption will continue to undermine the best efforts of those trying to make a difference in the world. Corruption will also continue to erode faith in the free market system as corporate executives remain willing participants in illegal schemes that they believe will help them increase bottom line numbers and fill their pockets with money. Maybe it’s time to establish some corporate clean teams armed with recording devices to help keep activities on the up and up.