Glenn T. Ware and Gregory P. Noone
Transnational corruption is one of the most complex, serious, and intriguing forms of criminal activity that impacts the developing world. This article seeks to unmask this form of corruption, which the authors have found has a common anatomy throughout the world. This article describes the various schemes repeatedly employed by corrupt actors worldwide: bribery, kickback brokers, front companies, bid rigging, official-owned enterprises, theft from government accounts, and abuse of public assets. Finally, this article recommends actions that international financial institutions can undertake to mitigate or reduce the incidence of this social, developmental, political, and national security threat.
“Corruption is an insidious plague that has a wide range of corrosive effects on societies… It undermines democracy and the rule of law, leads to violations of human rights, distorts markets, erodes the quality of life, and allows organized crime, terrorism and other threats to human security to flourish.”
(United Nations Secretary-General Kofi Annan speaking to the U.N. General Assembly)
Glenn T. Ware is an international/national security lawyer by training. He is currently Managing Director of Diligence LLC and was formerly with the World Bank Group. Gregory P. Noone is an international lawyer with the Public International Law and Policy Group and an adjunct professor of law at Roger Williams University School of Law and Case Western Reserve University School of Law. The authors would like to thank Antonia Chayes, Naira Hambaryan, Katherine Tobin, Brandon Edward Miller, and Leslie Benton. This article was edited by Dr. Diana C. Noone and Nicole Griffin. The positions and opinions stated in this article are those of the authors and do not represent the views of the
In the realm of international aid and development, various corruption schemes have been devised by individuals and corporations throughout the world. A German company and its subsidiaries collude to fix the price of contract bids on multiple water projects in
A European corporation, working on a roads project, steals from its own project in order to pay bribes to government officials to have their invoices paid. In the
These incidents are just a handful of examples of transnational corruption that occur within the developing world on a massive and systemic scale. This type of corruption is so pervasive that we have come to recognize it as “ubiquitous transactional transnational corruption.” Corruption is so embedded in the monetary transactions of the developing world that it becomes entangled with the fabric of the financial sector, making its detection and prevention all the more difficult.
Transnational corruption is one of the most complex, serious, and intriguing forms of criminal activity that impacts the developing world, which desperately needs foreign aid and development funds. Generally, corruption may be defined as a “behavior which deviates from the formal duties of a public role because of private-regarding (personal, close family, private clique) pecuniary or status gains; or violates rules against the exercise of certain private-regarding behavior.”
Transnational corruption is one of the most complex, serious, and intriguing forms of criminal activity that impacts the developing world.
For purposes of this article, transnational corruption is defined as the type of corruption that crosses borders, involves corporate and state actors, and employs sophisticated and grand schemes to siphon the wealth of a developing country from its rightful owners: the people of the country. Quite simply, it is the grand theft of public funds for private gain. This may be contrasted with other forms of corruption such as cronyism and small-scale shakedowns by low-level government officials.
The authors chose to focus on transnational corruption because this form of corruption is particularly devastating to developing countries and has the potential to create a disaffected civil society, which leads to a plethora of social evils. Societies of disaffected peoples do not support their elected leaders or respect the rule of law, allow their institutions to erode, and could ultimately see their society teetering on the brink of collapse. Some have even argued that grand corruption generates and then feeds terrorism – thus furthering one of the greatest threats to global peace and security in this millennium. To fight this grand social, development, political and national security threat, the authors seek to unmask its form and describe its anatomy. Thus, the operative question to be addressed in this article is, how do these interrelated state and corporate actors steal? After dissecting this anatomy, the authors will make recommendations to international financial institutions as to how to fight this global threat.
II. The Anatomy of Transnational Corruption
Of particular importance to the authors is the common anatomy of transnational corruption throughout the world. The authors have found that transnational corruption takes a widely similar form, shape, nature, and anatomical structure worldwide. The schemes employed by corrupt actors, whether in Africa, the Middle East, Asia, or
As a result, international regulators, enforcement officials, governments, international organizations and the like could attack transnational corruption globally using similar methods. This would not be the case if the anatomy was mutable in nature or contained features unique to specific geographical areas. Transnational corruption takes a widely similar form, shape, nature, and anatomical structure worldwide.
Implicit in this analysis is a critique of those who argue that corruption is largely a cultural phenomenon, as unique in character as local customs, music, art, and other forms of expression. Daniel Treisman claims that several cultural factors influence the perceived corruption levels of statesю He replicates the findings of previous academics and finds that, “countries with Protestant traditions and those with more developed economies have higher quality governments. Both factors are significantly and robustly associated with lower perceived corruption.” Treisman also finds that “countries with a history of British rule [are] robustly rated ‘less corrupt’” and that “…federal states were more ‘corrupt’ than unitary ones.” Finally, a “…long period of exposure to democracy” has a “significant” effect.
This theory of corruption as culture is confronted squarely by Dr. Daniel Kaufman Ph.D., who argued at the Conference for the United Nations Convention Against Corruption, in
There is no solid evidence that corruption is culturally determined. Thus, there is no basis to justify a lax approach to corruption due to a cultural justification….[W]hile historical factors are of relevance in understanding the evolution of the quality of governance and institutions in a country, there is no deterministic historical legacy which countries cannot transcend, as witnessed by the vastly different institutional, governance and anti-corruption performance of countries in the same region with very similar historical, cultural, and linguistic antecedents”
We have argued in the past that although a “precise universal boundary” between acceptable and unacceptable behavior does not exist, there is considerable evidence suggesting that all cultures recognize corrupt behavior and understand its impact. There have been volumes of research and numerous scholarly articles written on corruption from the perspectives of particular disciplines such as economics, law, sociology, anthropology, and business and trade. Several studies have attempted to explain corruption and what effect it may have on a nation. They have focused specifically on the definition of corruption, whether corruption has a positive or negative impact on a nation, and whether corruption lowers foreign investment and aid. It is fair to say that research in these areas has been adequate. However, some authors note that the attention given to corruption is not as thorough as it should be.
Relatively little is known about how corrupt individuals carry out their actions or the impact and interrelationships of the various corruption schemes. In addition, what is clearly lacking is an examination of the idea of a common anatomy of corruption. This article does not seek to dispute the existing definitions of corruption or argue against those who claim that grand transnational corruption escapes condemnation regardless of culture, region, or legal system anywhere in the world. Rather, this article’s purpose is to dissect and describe the various schemes repeatedly employed by corrupt actors to siphon hard currency from developing countries throughout the world.
The grand center-piece of corruption is bribery or “kickbacks”. Bribery is a universal phenomenon that occurs across the globe. It is the most common form of corruption and we have not found a culture or region where this practice does not occur. It is generally considered illegal in some form or another in every society (e.g., receipt side, payment side, or both).
However, in social discourse, most cultures have distinct words that describe it as a socially neutral matter, thus obscuring its illicit nature. However, we are not discussing the petty “administrative” payments that accompany requests for government services in developing countries, but rather the large percentage payments to government officials in exchange for senior level/ministerial action. Perhaps the largest and most damaging type of bribe in the area of grand corruption is the kickback associated with governmental contracts in the developing world. Many of these contracts are financed by multilateral development banks (MDBs), nongovernmental organizations (NGOs), wealthy donor nations, or a country’s own tax-derived resources. Kickback schemes are quite simple, even in their grandest form. A multinational company that wins a contract pays a large bribe to government officials, who influence the award of this contract. The amount of the bribe varies but is normally a percentage of the total contract value.
Relatively little is known about how corrupt individuals carry out their actions or the impact and interrelationships of the various corruption schemes. Even in international competitive bidding involving multinational companies contractors know the going “market rate” for bribes in specific regions and factor that percentage into the bidding process. Thus, a company does not enjoy a competitive advantage because they pay a bribe; the bribe is merely a fixed cost that all bidders must bear.
Recent evidence suggests that the average amount of bribe costs is on the rise, just like other costs such as labor, goods, and supplies. An emerging body of evidence demonstrates that this form of bribery is so commonplace that payments of the “market rate” to government officials are paid without objection by the multinational company and are simply regarded as “the way business is done” in these developing countries. As a result, this “market rate bribery” is built into the process with little documentary evidence of the payments, making it extremely difficult to detect.
B. Kickback Brokers (e.g. Loan Brokers)
In other cases of bribery where the rates of bribes fluctuate, the “market rate” has not been set, or high percentage rates of kickbacks are sought, other facilitation mechanisms are necessary. One common method is the use of a “broker.” These brokers appear on the scene in a variety of forms. A multilateral company that is bidding on a contract approaches or is approached by an individual or entity that offers to be a “local representative” for the multinational company. The local representative has knowledge and networks that can “assist” the multinational company in obtaining the contract. Obviously, partnering with local entities or individuals is a wise strategy, particularly when the bidding company does not have an established presence. Thus, not all local representatives are agents of corruption; however, a vast number of them in the developing world may serve that function in addition to providing local advice and expertise. The local representative acting as a “loan broker” will generally sign some type of subcontract or consultancy agreement with the multinational company to make the relationship appear legitimate. In illicit schemes, the consultancy or subcontract is signed and funded, often at extremely high prices, for little observable or quantifiable work.
A company does not enjoy a competitive advantage because they pay a bribe; the bribe is merely a fixed cost that all bidders must bear. The consultant is given specifications or terms of reference that are vague or general (e.g., “put the company in the position to win the bid”), and is paid extremely high premiums. What actually occurs is that the broker facilitates the award of the contract by spreading his fee to government officials who can ensure that the multinational company wins the award. By having this “go between,” the multinational company can claim distance and ignorance regarding what happened to the fees that were paid to the consultant. In order to gain insight into this relationship, the authors gained the confidence of a number of so-called “brokers,” who have described their tradecraft as extremely common-place and well-known within the business community.
C. Front Companies
Another mechanism used to siphon money is the awarding of contracts to companies owned or controlled by government officials. These companies are awarded large contracts, either because of rigged bids (discussed below) or because all bidders are colluding so that the designated front company wins. Since there is no true competition, the prices for goods and services are exorbitant. In other cases, the front company acts as a subcontractor to the multinational company and serves as the “broker” for arranging the contract award. In others, the company is simply the recipient of a bribe. Again, the front company has the outward appearance of a legitimate subcontractor. In many instances, the government officials who are awarding the contracts dictate to the multinational company that it would be “efficient” if it hired a particular local subcontractor to enhance its performanceю
Many multinational companies, particularly those based in jurisdictions where strong anti-bribery laws do not exist or have not been enforced (e.g.
Detecting these front companies can be difficult in a technical sense because they are incorporated by the laws of developing countries where adequate records of ownership are difficult to find or do not exist. One remarkably effective mechanism of gaining local knowledge concerning the ownership of front companies is questioning civil society in the developing country. The broker facilitates the award of the contract by spreading his fee to government officials who can ensure that the multinational company wins the award. Local residents are likely to know who owns and controls these companies and will readily share this information with would-be investigators, so long as they maintain the confidence and anonymity of the informant. While this local knowledge is generally not juridical evidence of corporate control, the information obtained from local residents can be of great use to investigators in developing leads to uncover corrupt front companies.
D. Bid Rigging
Bid rigging is a method of ensuring that a particular company wins a contract, either because kickbacks were paid by the company to ensure its receipt of the contract or because government officials hold secret (or not so secret) interests in the company. In order to rig a bid on a contract that is being tendered for international competitive bidding, government officials preparing the contract must employ a device or scheme to ensure that it is ultimately awarded to a designated bidder.
The simplest form of bid rigging is the establishment of an agreement among government officials as to who should win a particular bid. These agreements are made orally by government procurement officials with the understanding that they will receive some form of consideration (usually a kickback) for entering into this conspiracy. More elaborate forms of bid rigging include tailoring specifications to favor a particular bidder or providing a bidder with insider information so that the designated company can put in the lowest bid. Still other devices include instructing a bidder to “low ball” a bid with the understanding that upon award of the contract, the bidder will be able to acquire a contract amendment to increase the value of the contract in order to compensate for the low-balled contract.
Regardless of the scheme or device employed, the ultimate purpose of the rigging is to ensure the award of a contract to a designated bidder. This has the effect of depriving the government of true and honest competition – a necessity for obtaining the lowest price and best quality of goods.
The government officials who are awarding the contracts dictate to the multinational company that it would be “efficient” if it hired a particular local subcontractor to enhance its performance.
Perhaps even worse is that in environments where bid rigging is prevalent and known, honest companies will not waste resources in developing competitive bids, further depriving the citizenry of the benefits of competition. The rigging of bids though collusive practice has been found to be extremely prevalent in Asia, although the authors have found significant cases in
E. Official-Owned Enterprises
In many countries, local contractors are openly owned and run by prominent government families. These official-owned enterprises tend to receive a vast majority of government- financed contracts. In many cases, the ownership of these companies is not a secret.
The situation creates a monopolistic business environment depriving the public of proper competition and its intended benefits. In some rather startling cases uncovered by the authors, governments have proposed development projects with MDBs that have ostensible legitimacy, but are actually targeted towards enterprises in which government officials hold an interest. For example, in countries where government officials own road construction companies, MDBs tend to favor road development projects, thereby personally benefiting the government officials who own the road companies. This “pork-barreling” of development projects directs precious resources away from their best use and instead enriches the government leaders who propose the contracts.
F. Theft from Government Accounts and Abuse of Public Assets
In yet another form of corruption, officials may simply steal from project accounts by writing checks to themselves or to family members. Often, these check payments are based on fraudulent invoices. In a number of cases, payments for consumable office supplies allow for government officials to swindle government proceeds with ease. In still other abuses, projects financed by public proceeds for buildings are never utilized by the public, but rather are taken by the government officials and converted for personal use.
In environments where bid rigging is prevalent and known, honest companies will not waste resources in developing competitive bids, further depriving the citizenry of the benefits of competition.
In highly efficient corruption schemes, government officials will virtually employ the full panoply of corrupt devices to extract as much wealth as possible from a publicly financed project. The Kenyan Urban Transport Infrastructure Project is an example where virtually every element of the anatomy of transnational corruption has taken place. The scheme, designed by a host of local and international actors, employed front companies, middlemen, off-shore accounts, conflicts of interest and clever illicit tradecraft to siphon large sums of public funds.
Ultimately, the actors were identified and referred to law enforcement authorities. The case is noteworthy from an international perspective because it represented perhaps the first multi-jurisdictional criminal investigation coordinated among
III. Recommendations for International Action to Curb Corruption
Because the authors focus on a transnational form of corruption, our recommendations primarily address the international efforts that can be undertaken to mitigate or reduce the incidence of corruption.
A. Establishing an Investigative Capacity in International Financial Institutions.
It is well known the international community, particularly among MDBs, that corruption flourishes globally. Perhaps the most significant reason for the expansion of corruption is the understanding between multinational bribe payers and senior government officials that silence works in both parties’ best interests. This “conspiracy of silence” lies undisturbed because the government officials control the instrumentality of state (i.e., law enforcement), which would otherwise have the ability to detect and expose corrupt transactions.
In highly efficient corruption schemes, government officials will virtually employ the full panoply of corrupt devices to extract as much wealth as possible from a publicly financed project.
For years, this conspiracy of silence was left undisturbed by the donor community; it was seen as a purely domestic law enforcement issue and not one for the MDBs. At one time, the World Bank considered the problem to be solely political. As such, World Bank officials considered policing it to be outside the mandate of its charter. This view changed in 1996 when Bank President James D. Wolfensohn successfully argued that corruption was not a political issue, but an issue of development and poverty that needed to be attacked using a variety of mechanisms. One such mechanism, which now serves as a model for other MDBs, was the development of an independent investigative body. This body has the authority to conduct global investigations to ensure that World Bank proceeds are used for the purposes intended. The presence of an independent investigative body, not within the control of any one particular government, can act to disrupt the conspiracy of silence that exists between corrupt governments and multinational actors. By investigating and exposing these corrupt actions, it is hoped that government officials will come under pressure to reduce corruption in their governments. One piece of legislation enacted in 2001 by the
The act “internationalizes” a counter-fraud and corruption effort in U.S.-funded international financial institutions (IFIs) by threatening to withhold 10 percent of their funding if they do not develop internal fraud and corruption investigative offices within their respective institutions. The purpose of these offices is to ensure that the money lent by the institution is used for its intended purpose. This requirement is consistent with the charters of the World Bank and many other IFI’s and many have complied, including the World Bank, the Inter-American Development Bank, and the European Bank for Reconstruction and Development. However, the U.S. law stops with this requirement and does not explain what should become of the investigative findings or what sanctions – if any – should be imposed when acts of fraud and corruption are uncovered.
Perhaps the most significant reason for the expansion of corruption is the understanding between multinational bribe payers and senior government officials that silence works in both parties’ best interests.
In reality, this act is a preliminary soft push, stipulating only that IFIs take “steps to develop” these offices and withholds only 10 percent of the United States’ financial commitment if IFIs do not comply.
Thus, more work needs to be done. Recognizing this need, the U.S. Senate Foreign Relations
Committee launched an unprecedented investigation into corruption in MDBs. MDBs have a number of options after they obtain evidence confirming that fraud or corruption has occurred. They may debar corrupt companies, suspend or cancel funding to a borrower country, or provide the evidence to a country with proper jurisdiction for criminal prosecution.
Unfortunately, with the exception of the World Bank, the other MDBs have not created robust international investigative unit whereby they can take credible enforcement action. If the other banks invested in this capability, the MDBs could bring tremendous pressure to bear on the corrupt actors. However, this pressure will only work if the MDBs act boldly to publish their findings in the widest possible manner. The negative publicity associated with a new level of transparency among corrupt multinational actors would place tremendous pressure on the corporate boards of such actors.
B. Corruption Information Sharing and Collective Sanctioning by Multilateral Development Banks
Many MDBs have developed internal fraud and corruption investigation units, but a lack of information sharing and collective action limits the effectiveness of these efforts. Accordingly, MDBs should consider the creation of a “
In addition to information sharing, MDBs could deter corrupt transactions by collectively sanctioning offenders based on the findings of one MDB’s international corruption investigation.
Unfortunately, with the exception of the World Bank, the other MDBs have not created robust international investigative unit whereby they can take credible enforcement action.
Support for collective international administrative sanctions against corruption has gained momentum in international organizations like the World Bank and the International Monetary Fund (IMF). Both institutions now allow for the revocation of funding from entities or governments that have taken part in mis-procurement or widespread corruption. However, for such sanctions to truly become collective, more cooperation among various MDBs will be needed. For example, if the World Bank debarred XYZ Company because of corrupt practices and other MDBs debarred XYZ
Company based upon the World Bank’s investigative findings, collective sanctions would have a much greater effect. As a result, XYZ Company and its principals could not receive contracts from a borrowing country for construction projects if any MDB were financing the reconstruction effort within the borrowing country. Furthermore, if MDBs shared information regarding corrupt government activities, the MDBs could leverage their financial might to force governments to address these problems.
While collective sanctioning of fraud and corruption of this sort would be a new development in the realm of international organizations, support for such collective sanctioning may be found in the ongoing development of an international norm against corrupt and fraudulent practices, especially with regard to financial dealings in the developing world. There are numerous multilateral and regional efforts designed to foster cooperation among nations to fight fraud and corruption, including the international anti-corruption conventions of the Organization of American States (OAS) Inter-American Convention Against Corruption, the Organization of Economic Cooperation and Development (OECD) Convention on Combating Bribery of Officials in International Business Transactions, and the Council of Europe Criminal Law Convention on Corruption. These various conventions include scores of countries, but only varying degrees of legal harmonization.
Ultimately each of the conventions maintains national jurisdiction over such crimes.
Collective sanctioning among multilateral, bilateral and regional development institutions, as well as donor agencies, would require express agreements among these institutions. Like criminal sanctions, the main obstacles to developing collective sanctions would be the autonomy interests of each organization, the fear of politically motivated debarments, and competition among development agencies. As the authors have noted previously:
One regional MDB might not want to be bound by the findings of an IFI from another region, especially in cases where the sanctioning of a business from one region may favor a business competitor from another region. A fear that domestic business interests from a particular region prompted the sanction might lead to further suspicion of the collective sanctions approach.
These obstacles might be overcome if IFIs retain the right to autonomously review the findings of other institutions and make independent determinations, while working to harmonize their rules defining corruption and the standards of proof required for a finding of misconduct. Express agreements requiring cooperation rather than competition among IFIs would also help reduce non-cooperation. While the collective sanctioning system might not work flawlessly in all cases, international normative forces exist to support its creation. Indeed, the architecture for such a system of cooperation has already been laid down in the aforementioned international anti-corruption conventions. While there is clearly no silver bullet in eradicating fraud and corruption, there is still more that can be done by using and modifying existing international mechanisms.
C. Creation of Voluntary Disclosure Programs among the MDBs
In the mid 1980s,
While there is clearly no silver bullet in eradicating fraud and corruption, there is still more that can be done by using and modifying existing international mechanisms.
The contractor would make restitution of any damages to the DoD, agree to be audited, and create or strengthen internal compliance programs. In addition, the U.S. Department of Justice would look favorably on the disclosures of the contractor when considering whether to prosecute the company. In fact, since the inception of the program, only three of the approximately 500 entities in the program have been prosecuted, and those were for misrepresentations in the disclosure process.
As a result of this program, the burden of uncovering and cleaning up the defense contractor industry shifted in large part to the contractors themselves. This shift resulted in significant savings in investigative resources by the DoD. The MDBs should consider adopting their own Voluntary Disclosure Program modeled after the DoD’s. Contractors could come forward and disclose to the MDBs illicit activities in which they have engaged while working on MDB-financed contracts. This voluntary disclosure would be an extraordinarily powerful tool to uncover the anatomy of transnational corruption operating in the developing world. Adopting such a program however, is not without significant policy questions. What would the MDBs do with the information they receive from contractors? What if the multinational corporation disclosed to an MDB that it paid bribes to a country’s national leaders in exchange for a large contract? After all, if an MDB publicly disclosed such information, it might well destabilize the very nation the MDB was attempting to support.
These recommendations would go along way to curbing corruption in IFI-funded contracts. One method to induce these international organizations to reform their practices would be for other national authorities to follow the example of the 2001
Corruption is enduring, complex, and an aggressive cancer to development. It is a particular problem in post-conflict countries, which are often the focus of intense international aid. As a result, corruption thrives upon the very resources needed to stabilize unstable countries and worsens their plight.
As U.S. Sen. Richard Lugar (Republican,
– corruption remains a serious problem…. [N]ot only are the impoverished cheated out of development benefits, they are left to repay the resulting debts to the banks.”
– Many scholars have opined that culture is a major factor that fuels corruption in developing and post-conflict societies. However, culture is not a determinative factor in whether corruption will flourish. In the examples examined in this article, which occurred in different regions of the world, often with multiple cultures involved, corrupt state machines prospered regardless of culture. Corruption is not unique to particular cultures, to developing nations, or to post-conflict countries emerging from years of difficulty or strife. In reality, corruption conspiracies may fester anywhere in the world where there are inadequate controls, insufficient enforcement, and unsatisfactory compliance regimes in place to thwart this illicit activity. In the end, corruption is usually simply a matter of opportunity and greed.
This article has focused on the usefulness of coordinated efforts by IFIs in rooting out the corruption that takes hold in the post-conflict and developing world when international aid finally arrives. However, strengthening sanctions by IFIs is only one prong of what must be a multidimensional attack. Local and international NGOs devoted to combating corruption are necessary throughout the developed and developing world alike. NGOs, such as Transparency International, that advocate for financial and governmental transparency and accountability are critical to exposing corruption.
The role of a free and responsible media cannot be understated as an essential partner in this ongoing battle. Governments must also proactively take on corruption by establishing competitive salaries for civil servants based on merit, direct “hotline” access for complaints, ombudsman offices, as well as participation in international conventions that not only ban corrupt business practices but take affirmative steps to investigate and sanction such activity
Corruption is enduring, complex, and an aggressive cancer to development. Corruption is usually simply a matter of opportunity and greed.
Global efforts by individual states, regional organizations, international financial institutions, and NGOs are necessary to eradicate corruption in the developing world and post-conflict societies alike.