By John D. Sullivan
May 01 - 07, 2000
Corruption is much the way Mark Twain once described the weather:
"Everybody talks about the weather but nobody does anything about it." The list
of recommendations below provides policymakers in developed and developing countries with
tools that they can implement right away.
In thinking about how the demand for corrupt payments can be
restricted, one of the key elements is to restrict the opportunity for such demands or
requests to be made. I am not suggesting that efforts to eliminate opportunities for
corruption should be considered as an alternative for enforcement mechanisms or police
actions. Rather, elimination of opportunities for corruption combined with tough
enforcement is the most appropriate combination of responses.
Establish sound procurement codes that require open bidding and tenders
to act as a preventative on corruption. Require all such bids to be open to public
scrutiny. Transparency International and the European Bank for Reconstruction and
Development have each advanced model procurement systems along these lines. The example of
Brazil's procurement systems reform that demonstrates that such efforts can be put into
place in developing and transitional countries.
International financial institutions should begin making procurement
reform a condition of adherence to many of the international organizations and utilize
their lending programmes to advance procurement reforms.
The Internet could be used to promote anti-corruption measures. For
example, having government tenders and decisions on the winning bids posted on the
World-Wide Web for all to see reduces the opportunities for special deals.
A related idea is to require third party monitoring on large
procurements funded through the multilateral development banks or other foreign assistance
instruments. Essentially, this would require recipient governments to agree to name third
party firms to monitor and report on construction of dams, procurements of goods and
services, and other large ticked items. The third party monitor would not only conduct
audits to verify that no suspicious payments were made but would also monitor building
materials, quality of services and goods, and other contractual obligations to ensure that
all deliverables are up to code. The US Congress is currently considering legislation to
Another worthy idea would be to require independent audits, on at least
a selective basis, as a condition for receiving loans or development grants. The precedent
for this action was set with the audit of the Russian Central Bank taken out in the wake
of the corruption allegations made regarding the Central Bank's handling of IMF loans.
Such audits could be directed at both loans and procurement processes thus providing an
incentive to adopt sound procurement systems.
Legal reform and simplification is becoming a key aspect of removing
barriers to business. One key aspect is to simply reconcile overlapping and duplicative
laws and regulations. When government officials have a large amount of discretion to
decide which laws or regulations apply in given situations, they have a great opportunity
to extract compensation for a beneficial decision. One immediate step that can be taken is
to recommend formation of a process of judicial reviews by which independent commissions
of judges have authority to reconcile or strike down such inconsistencies. Ecuador has
initiated such a system.
Private sector associations and think tanks could create an inventory
of legal barriers and duplicative regulations that need to be changed on a priority basis.
The light of international exposure may help to force change.
Each of the transitional and developing economies have large and, in
many cases, growing informal or gray economies. These exist because of the large number of
conflicting laws and regulations that make it impossible for even the best of companies to
legally comply while small and medium sized firms simply cannot cope. Independent research
in Ukraine, for example, has demonstrated that some firms may leave as much as 78
inspections per year. Efforts to simplify these regulations have proven to be very
difficult due to resistance from the executive branch agencies, lack of expertise in
rewriting legislations and the like. One approach used in both the United States and in
developing countries, is to create a small business exception. That is to simply pass a
law that stipulates that firms with less than a certain number of employees (from 10 to
100 depending on local circumstances) are exempt from certain regulatory requirements.
Taxes in transitional and developing economies constitute a serious
problem as well. Obviously all business people in all countries complain about the tax
burden especially in the area of labour and local government taxes. Again, the concept
that comes to mind is to create different standards and rate schedules for small and
medium sized companies. By reducing the tax burden, one automatically eliminates the
opportunity for bribes and side payments. In addition, increasing tax compliance sets
higher standards throughout the country.
Finally, paying civil servants a living wage that is competitive with
private sector salaries is another way to reduce the demand for extra-payments.
Supply Side Recommendations
Efforts to restrict the supply of bribes and other forms of corruption
can also be very beneficial. Again, the approach is to focus on the elimination of the
underlying causes and opportunities for making such payments. Promotion of corporate
governance standards along with efforts like the Organisation of Economic Cooperation and
Development (OECD) anti bribery convention are extremely important in this context.
1. Economic journalism training is an essential aspect of any effort to
prevent bribery or to reduce the supply of bribes. An independent media made up of
journalists equipped with the tools of analysis to detect fraud or corruption, especially
in privatization programmes and in government procurement, can be a major deterrent to
2. Involving think tanks, business associations, and other
non-governmental organizations in the process is essential to building public
understanding of the costs of corruption and the demand for change
3. The OECD's anti-bribery convention is one of the soundest measures
taken recently to reduce corruption, even though several developed countries have not yet
implemented domestic enabling legislation. Having gained widespread acceptance of that
convention, it is time to return to the negotiating table and remove one of the gaping
loopholes the exclusion of foreign subsidiaries of multinational corporations.
Parent companies should be held accountable for actions of foreign subsidiaries, and
should be held accountable within the parent company's home country. This is in keeping
with the US Foreign Corrupt Practices Act and is an essential element of any anti-bribery
4. Significant efforts need to be made to finalize the best possible
set of Internationally Accepted Accounting Standards as can be realistically completed in
the short term. Once these are set, efforts should immediately begin to negotiate even
5. The OECD's statement on Corporate Governance is a good start at
developing international standards for good governance. Such standards are a key part of
ensuring that all corporate transactions are transparent and in full compliance with
accepted international standards. OECD member governments should seek to implement them in
their home countries, which would have a direct impact on the corporate community. In this
respect, the principles are a very useful companion to the OECD anti-bribery convention.
6. The general guidelines contained in the existing OECD document
should be strengthened by seeking a second round of negotiations. More explicit standards
should be set out in the following areas at a minimum:
Countries should be required to establish independent share
registries. All too often, newly privatized or partially privatized firms dilute stock or
simply fail to register shares purchased through foreign direct investments.
Standards for transparency and reporting of the sales of
underlying assets need to be spelled out along with enforcement mechanisms and procedures
by which investors can seek to recover damages.
The discussion of stakeholder participation in the OECD
guidelines needs to be balanced by discussion of conflict of interest and insider trading
issues. Standards or guidelines are needed in both areas.
Internationally accepted accounting standards should be
Internal company audit functions and the inclusion of outside
directors on audit committees need to be made explicit.
7. Promote freedom of information/access to information laws for
governmental information subject to privacy protection considerations.
8. Promotion of clear and transparent rules on conflict of interest for
the public sector. In many countries, it is still possible for government officials, (or
their children, spouses, or lawyers) to hold additional paying positions in private or
state firms, or to accept consulting fees etc. from private firms. At a minimum, such
relationships should be disclosed and the officials bared from making decisions affecting
those firms. As a corollary, efforts should be made to limit officials' ability to leave
office and move into high paying positions in firms doing business with the ministries or
agencies that they served.
9. Clear guidelines should be issued requiring disclosure and setting
forth standards by which governmental agencies may award subsides, quotas, and exemptions
10. The OECD should work to promote the establishment of Ombudsman's
offices and Independent Auditing Agencies similar to the General Accounting Office (GAO)
in the United States.