Chapter 21

Fighting Corruption in International Business

Chapter Contents

Introduction

The media often carry news items of alleged transnational corruption involving huge corporations and public officials in the host country. In 2002, for instance, Thames Water, Britain’s biggest water company, was asked to renegotiate a contract to operate an $891 million1 Turkish water plant because of alleged irregularities in the commissioning of the plant. A number of Turkish Government officials were also investigated for misconduct in approving a government guarantee for the project. Wide publicity of such cases, however, has not seen a reduction in allegations of grand corruption.2 In 2005 the British Serious Fraud Office (SFO) started investigating3 an electricity trading enterprise, EFT, headquartered in London, for alleged corruption in the Balkans as a result of special audits commissioned by the UN’s High Representative in Bosnia. The allegation was that kickbacks may have been solicited by officials of a state owned power company to write advantageous electricity-swap contracts with private companies and that US government aid of $11 million, for providing electricity to war-torn states in the region, was diverted to offshore accounts.4 More recently, the SFO’s decision to drop the investigation of the highly publicised allegations of bribery of BAE’s arms deals with Saudi Arabia is another instance.5

The impetus for international measures to combat corruption of foreign public officials came from the US, which had passed the Foreign Corrupt Practices Act (FCPA) in 1977 in the wake of the Lockheed scandal6 and a report from its Securities and Exchange Commission (SEC) in 1976.7 This report found that more than 400 US-based companies had made illegal payments of well over $300 million8 to foreign government officials and political parties to ensure the facilitation of trade. It also revealed that questionable or illegal foreign payments to foreign public officials and foreign politicians were a widespread phenomenon in the US corporate sector and included companies from the chemical, aerospace, pharmaceutical and oil and gas sectors.9

Lowering standards of business engagement by adopting corrupt practices, of course, does no good to anyone: the business sector, the economy, the country or the citizens in the long run. In the economic context, it distorts the market, increases financial costs and risks, and substantially lowers economic efficiency and market integrity. As the report to the House of Representatives

1 All references to $ are to US dollars, unless otherwise indicated.

2For some recent allegations, see Simensen, ‘Volkert Arrested over VW Bribery Scandal’ Financial Times, 21 November 2006; Leigh and Evans, ‘BAE Secret Millions Linked to Arms Broker’ The Guardian, 29 November 2006. See also ‘Siemens Bribery Probe could Sink Nokia Merger’, 9 December 2006, available at http://uk.news.yahoo.com.

3This was made possible because of clarification of UK law relating to the bribery of foreign public officials by UK nationals or companies as a result of the Anti-Terrorism, Crime and Security Act 2001, which came into force on 14 February 2002.

4 See Leigh and Evans, ‘Fraud Office looks into British energy firm’s role in Balkans Company’ The Guardian, 26 February 2005; Leigh and Evans, ‘Firm loses fight to block corruption inquiry’ The Guardian, 23 July 2005.

5 See for example Leigh and Evans, ‘National interest halts arms corruption inquiry’ The Guardian, 15 December 2006. See pp. 680.

6The US company, Lockheed, had made illegal payments to government officials in various countries, including Japan, the Netherlands and Italy) to secure contracts for the sale of aeroplanes. The Lockheed scandal in Japan resulted in the prosecution of various officials including Kakuei Tanaka (Prime Minister in office from 1972–74). In the Netherlands, Prince Bernhardt resigned when inquiries into allegations that he had received $1 million from Lockheed were initiated. For more on this, see Markkovits and Silverstein, The Politics of Scandal, 1998, Holmes & Meier; Mitchell, Political Bribery in Japan, 1996, University of Hawaii Press.

7Committee on Banking and Urban Affairs, Report of the Securities and Exchange Commission on Questionable and Illegal Corporate Payments and Practices (1976).

8According to a recent report from the US Association of Certified Fraud Examiners, the problem of corruption is still a major issue in the US. They estimate that corruption and fraud claim more than $700 million a year in the US.

9 Openness to international trade is often seen as a contributor to high levels of corruption, especially in countries where there are complex bureaucratic structures. See Hors, ‘Fighting Corruption on Customs Administration: What can we Learn from Recent Experiences’Technical Paper 175, 2001, OECD. Also see Krugman, ‘Growing World Trade: Causes and Consequences’ 1975 Brookings Papers on Economic Activity.

correctly observed, such activities ‘cast a shadow on all . . . companies.The exposure . . . can damage a company’s image, lead to costly lawsuits, cause the cancellation of contracts, and result in the appropriation of valuable assets overseas’.10

Not much happened by way of international legislative initiatives between the 1970s and 1990s, but the mid-1990s suddenly witnessed a flurry of activity once the connection of corruption to socio-economic conditions and development was established.11 International bodies were willing to openly raise the problem and its debilitating effects on the economy, development and the quality of life for millions of people around the world in an open forum and think of ways to combat such practices, rather than treating corruption as a taboo subject.12 Tackling corruption has now taken centre stage on the policy making agenda of influential international economic institutions, such as the World Bank13 and the International Monetary Fund. Coupled with the pioneering work of the civil society organisation Transparency International (TI),14 this has further quickened the pace of policy makers to combat corruption. Often described as a cancer, affecting development and poverty reduction globally, regional and international institutions have worked over the last decade to produce suitable legislative instruments in the form of conventions for adoption by countries. The result is a plethora of regional and international criminal law conventions against corruption indicated by the list below:

(i)Organisation of American States Inter-American Convention Against Corruption 1996 (OAS Convention)15;

(ii)Organisation for Economic Cooperation and Development Convention on Combating Bribery of Foreign Public Officials in International Business Transactions 1997 (OECD Convention)16;

(iii)Convention drawn up on the basis of Article K.3 (2) (c) of the Treaty on European Union on the Fight Against Corruption involving Officials of the European Union Communities or Officials of Member States of the European Union 1999 (EU Convention)17;

10House of Representative, 95th Congress 1st Session, Report No 95–640.

11See Alatas, Corruption, Its Nature, Causes and Functions, 1990, Brookfield; Mbaku, ‘Africa after more than Thirty Years of Independence: Still Poor and Deprived’ (1994) 11 Journal of Third World Studies 13, Gould and Mukendi, ‘Bureaucratic Corruption in Africa: Causes, Consequences and Remedies’ (1989) 12 International Journal of Public Administration 427; Eliminating World Poverty: Making Globalisation Work for the Poor Cmnd 5006 (2000) London: HMSO; Rose-Ackermann, ‘The Economics of Corruption’ (1975) 4 Journal of Public Economics 187; Gray and Kaufmann, ‘Corruption and Development’ (1998) 35 Finance and Development 7, Tanzi, ‘Corruption Around the World: Causes, Consequences, Scope and Cures’ (1998) 45 IMF Staff Papers 559.

12Of course, it is possible to view this unwillingness to do anything substantial pre-1990s cynically as a means of protecting Western economic interests. Equally, the current frenzy toward adopting anti-corruption measures can be viewed as a means of protecting Western economic interests by ensuring that industries from newly emerging economies, such as China and India, do not obtain a competitive advantage in the global market as a result of engaging in corrupt practices. As it is, low labour costs in manufacturing industries in these countries are, to some extent, affecting the competitiveness of Western economic interests.

13According to the World Bank, the cost of corruption globally stands around $1,000 billion. Although the World Bank regularly raised concerns regarding corruption with its donees, it was only in 1996 that it announced its commitment to ‘fighting the cancer of corruption’. At the Ninth International Anti-Corruption Conference Mr Wolfensohn of the World Bank made their serious concerns known: So far as our institution is concerned there is nothing more important than the issue of corruption . . .

At the core of the incidence of poverty is the issue of equity, at the core of the issue of equity is the issue of corruption. Corruption has to be dealt with by a combination of forces within the country . . . the best we could do was to try and assist in the building of the coalitions and in the forging of that interest in the issue of corruption and inequity, and get it out there. See www.worldbank.org. See also Helping Countries Combat Corruption: Progress at the World Bank since 1997, 2000 Wasington: World Bank.

14TI publishes a Corruption Perception Index, based on surveys where information is provided by country experts. More information on TI and their corruption indices are available at www.transparency.org.

15Came into force on 6 March 1997.

16Came into force on 15 February 1999.

17Still in the process of receiving ratifications. See also Council Framework Decision 2003.568/JHA of 22 July 2003 on combating corruption in the private sector (OJ L 192 of 31.07.2003). According to Art 249 of the EC Treaty, as amended by the Treaty of Amsterdam, a decision is binding in its entirety on those to whom it is addressed.

(iv)Council of Europe Criminal Law Convention on Corruption 1999 (COE Convention)18;

(v)Southern African Development Community Protocol Against Corruption 2001 (SADC Protocol)19;

(vi)Economic Community of West African States Protocol on the Fight Against Corruption 2001 (ECOWAS Convention)20;

(vii)African Union Convention on Preventing and Combating Corruption 2003 (AU Convention)21; and

(viii)United Nations Convention Against Corruption, 2003 (UNCAC).22

It is not the intention here to examine all these conventions. The discussion will be limited to the OECD Convention since it deals with bribery in the context of international business transactions and the UNCAC since it is an international convention with well over 100 ratifications and is, thus, likely to be a major influence in harmonising anti-corruption laws across states.23 However, attention will occasionally be drawn, as and when pertinent, to other conventions for the purposes of comparison.

However, before proceeding with an examination of the two conventions, the following brief section on defining corruption indicates the difficulties in formulating a definition.

Defining corruption

Corruption is a complex concept that is affected by linguistic usage, ethical perspectives and cultural nuances. Taking linguistic usage first, as the following illustrations indicate, the word ‘corruption’ is used in a variety of contexts from perceived degradation of values in society and deep-seated changes in a person’s character in the pursuit of goals, to irregular practices that undermine the sense of justice and fair play. It is common for older generations to talk of the corruption of the young – for instance, by new aesthetic styles, be they in fashion, music, dance or other art forms. The reference here is not only to changes at the surface level, but also to changes taking place at the deeper level to the value systems of the youth that may not correspond with those of the older generation or meet with their approval.The older generation perceives such changes as undesirable and of a degenerative kind.The response by the older generation to the rock-and-roll style of popular music in the 1950s provides just such an illustration. We also talk of corruption of a person’s character, where his or her character takes a turn for the worse – for instance, where X, perceived as honest by his friends, betrays their confidences to a newspaper in return for a few minutes of fame. The word ‘corruption’ is also used in the context of institutions, as in institutional corruption where, for instance, the institution does not follow the processes that might have been set up to ensure impartiality, transparency and equality of opportunity in respect of staff promotions. Equally, systems are said to be corrupt – for instance where steps initiated for making an appointment within an organisation do not follow open and objective standards as where an individual is

18Came into force on 1 July 2002.

19Not yet in force.

20Not yet in force

21Came into force on 5 August 2006.

22Came into force on 14 December 2005.

23Much of this chapter has been derived from a number of my published papers: Carr, ‘Strategic Improvements in the Fight Against Corruption in International Business Transactions’ (2006) JBL 375; Carr, ‘Fighting Corruption Through Regional and International Conventions’ (2007) 15(2) European Journal of Crime, Criminal Law and Criminal Justice 121; Carr, ‘Corruption in Africa: Is the African Union on Combating Corruption the Answer?’ (2007) JBL 111; Carr and Outhwaite, ‘The OECD Anti-Bribery Convention Ten Years On, (2008) 5(1) MJIEL 3; Carr, ‘The UN Nations Convention on Corruption: Making a Real Difference to the Quality of Life of Millions?’ (2006) 3(3) MJIEL 3.