U.S. GOVERNMENT PRINTING OFFICE

69–716 WASHINGTON : 2001

THE FIGHT AGAINST CORRUPTION: THE

UNFINISHED AGENDA

HEARING

BEFORE THE

COMMITTEE ON

INTERNATIONAL RELATIONS

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

SEPTEMBER 20, 2000

Serial No. 106–185

Printed for the use of the Committee on International Relations

(

Available via the World Wide Web: http://www.house.gov/international—relations

(II)

COMMITTEE ON INTERNATIONAL RELATIONS

BENJAMIN A. GILMAN, New York, Chairman

WILLIAM F. GOODLING, Pennsylvania

JAMES A. LEACH, Iowa

HENRY J. HYDE, Illinois

DOUG BEREUTER, Nebraska

CHRISTOPHER H. SMITH, New Jersey

DAN BURTON, Indiana

ELTON GALLEGLY, California

ILEANA ROS-LEHTINEN, Florida

CASS BALLENGER, North Carolina

DANA ROHRABACHER, California

DONALD A. MANZULLO, Illinois

EDWARD R. ROYCE, California

PETER T. KING, New York

STEVE CHABOT, Ohio

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

MATT SALMON, Arizona

AMO HOUGHTON, New York

TOM CAMPBELL, California

JOHN M. MCHUGH, New York

KEVIN BRADY, Texas

RICHARD BURR, North Carolina

PAUL E. GILLMOR, Ohio

GEORGE RADANOVICH, California

JOHN COOKSEY, Louisiana

THOMAS G. TANCREDO, Colorado

SAM GEJDENSON, Connecticut

TOM LANTOS, California

HOWARD L. BERMAN, California

GARY L. ACKERMAN, New York

ENI F.H. FALEOMAVAEGA, American

Samoa

MATTHEW G. MARTINEZ, California

DONALD M. PAYNE, New Jersey

ROBERT MENENDEZ, New Jersey

SHERROD BROWN, Ohio

CYNTHIA A. MCKINNEY, Georgia

ALCEE L. HASTINGS, Florida

PAT DANNER, Missouri

EARL F. HILLIARD, Alabama

BRAD SHERMAN, California

ROBERT WEXLER, Florida

STEVEN R. ROTHMAN, New Jersey

JIM DAVIS, Florida

EARL POMEROY, North Dakota

WILLIAM D. DELAHUNT, Massachusetts

GREGORY W. MEEKS, New York

BARBARA LEE, California

JOSEPH CROWLEY, New York

JOSEPH M. HOEFFEL, Pennsylvania

RICHARD J. GARON, Chief of Staff

KATHLEEN BERTELSEN MOAZED, Democratic Chief of Staff

HILLEL WEINBERG, Senior Professional Staff Member and Counsel

SHENNEL A. NAGIA, Staff Associate

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C O N T E N T S

WITNESSES

Page

Kwasi Abeasi, Director-General, Private Enterprise Foundation, Ghana, Assistant Governor, Rotary District 9100 (Africa) ................................................ 9

Fritz Heimann, Chairman, Transparency International USA ............................. 7

Robert Klitgaard, Dean, Rand Graduate School ................................................... 15

Roberto de Michele, Ministry of Justice and Human Rights, Argentina ............ 13

APPENDIX

Prepared statements:

Hon. Christopher H. Smith, a Representative in Congress from the State

of New Jersey ....................................................................................................... 29

Kwasi Abeasi ............................................................................................................ 34

Fritz Heimann .......................................................................................................... 30

Robert Klitgaard ...................................................................................................... 50

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THE FIGHT AGAINST CORRUPTION: THE

UNFINISHED AGENDA

WEDNESDAY, SEPTEMBER 20, 2000

HOUSE OF REPRESENTATIVES, COMMITTEE ON INTERNATIONAL RELATIONS, Washington, DC.

The committee met, pursuant to call, at 2:20 p.m. in Room 2172, Rayburn House Office Building, Hon. Benjamin A. Gilman (Chairman of the Committee) presiding. Chairman GILMAN. The Committee on International Relations

meets today in open session to receive testimony on ‘‘The Fight Against Corruption: The Unfinished Agenda.’’ We have a distinguished international panel, and I want to wel- come you all today. I will introduce you shortly. I also want to note

that we are disseminating this hearing over the Internet at the

same time as we are taking your testimony. The Committee on International Relations has a long-standing interest in the problem of international corruption. We are, of

course, concerned with the problems that our American firms face

when they are required to compete in foreign markets against companies which are able to give bribes. We don’t want to see Americans disadvantaged and markets lost.

But this is not the sole reason or even the main reason for our

Committee’s concern. A fundamental goal of American foreign policy is the promotion of growth and stability abroad, because it is

good for our Nation, and it is good for the individual human beings

around the world. Corruption, though, undermines the basis of that

growth and stability, particularly in the developing world. It deters

investment, it wastes precious external and internal resources, it

demoralizes entrepreneurs and ordinary citizens who deserve good

government. Corruption defeats democracy because those corruptly

enriching themselves will be unwilling to turn power over to democratically elected successors. They therefore have an added incentive to entrench themselves in power. The corrupt have an additional unfair advantage because their ill-gotten gains provide them

with the resources to widen their advantages over any opposition.

It is clear, however, that tremendous progress has been made in

recent years on this issue. The private sector, led by organizations

such as Transparency International, has done a tremendous job in

nurturing grassroots networks in support of anticorruption efforts.

The government, business and individuals supporting efforts such

as those by TI have really begun to pay off.

Brave and able government authorities have shown that in many

governments, impunity for the corruption is a thing of the past.

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The current administration deserves both high marks for its efforts on several fronts. It led the consensus that achieved, among

other things, the OECD Anticorruption Convention. Diplomatically

and through the development assistance program, it supported a

wide range of anticorruption efforts, and has prevented the

anticorruption movement from becoming a name-calling, us-versusthem exercise.

International organizations such as the OECD and OAS have

also played extremely important roles.

Present in our audience today and at the witness table are many

individuals who will be taking part in an anticorruption summit tomorrow through Saturday over in Arlington. I want to thank the

participants for their very important work they are doing, along

with our colleagues who could not travel there. We will be doing

all we can to support you.

I especially want to thank the conveners of the conference, the

International Consortium on Governmental Financial Management,

its supporters and sponsors, such as AID and GAO, those from our

government and international organizations who will be addressing

them, and particularly Jim Wesberry of Casals, who is busy coordinating the conference, but has found time to advise the Committee

on this hearing.

I also want to salute our Ranking Democratic Member, the gentleman from Connecticut, Mr. Gejdenson, who sponsored the legislation that was recently passed in the House and which should go

to the President soon that is reemphasizing and strengthening our

government’s anticorruption efforts.

We question where has the most progress been made and what

needs to happen next? Surely the conclusion of the OECD and the

Inter-American Conventions are highlights of the recent years.

However, the administration reports on the status of the OECD

Convention makes it clear that much still needs to be done to

choke off the supply of corrupt dollars flowing from rich nations to

the rulers of the developing nations. The Convention will not work

if it is not transposed into a good national law and those laws are

not enforced.

In that regard, the OECD needs to step up its monitoring and

enforcement efforts. In addition, our OECD partners need to establish internal corporate and accounting controls in businesses resident in their various nations, for without a paper or electronic

trail, there will be no way to prosecute those who would ignore or

violate the standards of this important Convention. We need more

tangible actions and less lip service from Convention signatories.

I would also call on other key exporting nations in all regions of

the world to consider joining this Convention and strengthening

their supply-side anticorruption efforts. More attention needs to be

addressed to developing institutions in developing countries so that

they can do more for themselves and in cooperation with other nations and with international organizations to build structures and

effective public opinion against corruption.

We need to consider more carefully how to help the countries of

the former Soviet Union and in the former Soviet bloc deal with the

vast array of ills that are exacerbated by corruption, and we need

to address those problems squarely.

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Our panelists today are going to offer their own perspectives of

what the most important remaining problems are and on where we

need to go. We can theorize about this, but, to do our best job, we

need to hear the voices of those involved in the struggle. So, again,

we thank our panelists for being here. After other Members make

whatever comments they may wish to offer, I will introduce our

panelists.

At this time I call on our Ranking Minority Member, the gentleman from Connecticut, Mr. Gejdenson.

Mr. GEJDENSON. Thank you, Mr. Chairman. It is clear that

America’s leadership in anticorruption issues started in the early

and mid-1970’s with the Foreign Corrupt Practices Act. I can remember companies in my own State complaining about being handcuffed in those days as a result of our restrictions on bribery to foreign government officials, how it disadvantaged us. But I would say

that time has won them over to our side, most of the companies

I talk to are, obviously, not happy in situations where other governments, even some of our closest allies like France, apparently,

allow the deductibility of bribes in contract competition. They have

made us a commitment they will repeal the deductibility of bribes

given, and I think American companies now get that it is the right

course of action.

We need to only look at not just what has happened in our hemisphere. In Africa and Asia, democracies are threatened by corrupt

practices of the government. The new democratic government in

Nigeria is struggling to undo decades of corrupt action by military

leaders who plundered billions of dollars from a very wealthy country, left their people impoverished and a failing infrastructure.

We can see the impact on American business as well in estimates

that as much as $26 billion may have been lost in the last 6 years

alone. I can tell you from small and large companies in my own

State, that oftentimes we find our closest allies bending, if not

breaking, the rules of international commerce with financing mechanisms or other encouragements that, if not bribes, come darn close

to bribes. Nobody wins in this process.

But I am heartened to see that the effort started by the Vice

President at the Global Conference on Fighting Corruption has

begun to take hold, that the G–7 is ready to take important action,

that the action that this Congress passed with my legislation with

the strong support of the Chairman on anticorruption issues is an

important beginning.

What I want to make sure people understand is this is not just

about making American companies more competitive. It is that. We

want American companies to win when they are in an economic

competition. But if we believe in democracy, and we want to build

a system where the world has faith in its elected leaders, we need

to make sure that we get rid of corruption. Corruption undermines

democratic institutions, belief in organized government, and it is

something we all need to fight. So we are thrilled to have all of you

here and look forward to hearing from you in your many perspectives.

Mr. Smith.

Mr. SMITH. Thank you, Mr. Chairman. I want to thank you for

holding this very timely and important hearing on the issue of comVerDate 11-MAY-2000 18:01 Feb 12, 2001 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 F:\WORK\FULL\H092000\69716 HINTREL1 PsN: HINTREL1
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batting corruption, clearly a threat to global peace, stability and

prosperity, but particularly challenging to those nations struggling

to develop democratic institutions and the rule of law.

The Helsinki Commission, which, as you know, I chair, has undertaken a series of hearings on this important topic, examining

the breadth and the depth of the problem in the OSE region and

what steps the OSE can take as an institution to combat corruption

and organized crime.

Mr. Chairman, the cancer of corruption and organized crime undermines public confidence in government and threatens development of the rule of law in the very countries that are trying to shed

the legacy of communism and its corrupt and repressive system.

Widespread corruption in the transition countries threatens their

ability to provide strong and independent legal regimes, marketbased economies and social well-being for their citizens. Corruption

has stymied economic reforms in these countries and impeded efforts to improve the standards of disadvantaged peoples.

In the absence of the effective rule of law, Mafias have flourished

through their corrupt connections, gaining powers over whole sectors of economies and derailing legislative reform agendas inimical

to their interests.

I would note that on July 17th, President Constantinescu decided

not to run in Romania for a second term, deciding instead to devote

his full time to the fight against corruption. But he made the point

that ‘‘when I began this campaign, I discovered a Mafia system had

been created in Romania in which the octopus-like front companies

were benefitting from high-level state institution support. This is

what made possible the fraudulent bankrupting of banks, the destruction of the fleet, and the huge damage caused by the oil and

chemical-fertilizer Mafias and the unrestricted growths of corruption.’’ A recent EBRD report recognizes the reality of corruption and

calls for greater efforts among governments and international organizations to depoliticize economic activities and develop measures

to constrain state capture by private interests. As a result of this

capture and siphoning off of public wealth, citizens deprived in

some cases of government-sponsored basic support mechanisms

have formed very negative opinions about democracy and free markets.

Mr. Chairman, as a concrete example, during a Commission

hearing in March of this year regarding the human rights situation

in Turkmenistan, one of the most authoritarian and repressive regimes in the region, opposition leader Avdy Kuliev cited three components of President Niyazov’s internal politics, the first of which

was corruption.

The fact that this Committee again is holding this hearing and

talking about corruption not solely in an economic sense, but corruption in government and in public institutions, is in itself refreshing. For a long time we could not even utter, or some people

did not want to utter, the ‘‘C’’ word.

Let me just say, Mr. Chairman, the Helsinki Commission has

pushed for a greater recognition of the threat of organized crime

and corruption in the OSCE and has supported efforts to develop

an OSCE strategy to combat them.

5

During the 1999 annual meeting of the OSCE Parliamentary Assembly in St. Petersburg, Russia, our delegation called for convening a meeting of the OSCE foreign ministers to develop strategies to combat these threats. I introduced a resolution there condemning cross-border trafficking in women and children. We had a

very robust debate, and the delegates from all of the countries that

make up the OSCE approved that resolution, which we again approved this year in Bucharest when we held another Parliamentary

Assembly. Interestingly enough, this year’s focus was on the very

matter of today’s topic, corruption, and all of its aspects and manifestations.

I would ask that my full statement be made part of the record.

Again, I want to thank you for this very timely hearing, and

thank especially our witnesses for being here and for the great

work they do to try to mitigate corruption.

Chairman GILMAN. Thank you, Mr. Smith.

[The prepared statement of Mr. Smith is available in the appendix.]

Chairman GILMAN. Mr. Menendez.

Mr. MENENDEZ. I want to commend you also for holding the

hearing, Mr. Chairman, and the question of corruption is a question of costs, enormous costs, I believe; the cost of doing business

certainly, but also the cost of corruption’s consequences for societies. The loss for businesses, for U.S. firms is considerable. The

State Department in a recent report says that over the past 5

years, it has received more than 350 allegations of bribery related

to international contracts worth $165 billion. U.S. firms allege actual losses in this period of $25 billion in contracts due to illegal

bribes by foreign competitors.

The financial incentives can be irresistible for any individual

firm. At any level, bribery hinders competition, distorts trade and

harms consumers and taxpayers, but I believe the costs to society

at large are even greater.

Corruption is about the rule of law, responsible development, and

citizens’ faith in their government. A corrupt society is a dangerous

society. Corruption facilitates crimes, destabilizes a society, and impedes all manner of economic, political and social development. It

undermines the rule of law and democracy, and a lack of democracy is very costly indeed.

For example, in Peru right now, the government is putting the

country and the Peruvian people in jeopardy by risking future investment due to corruption. Corruption in the tax administration

has made the government seek to make up for its losses by illegally

and illegitimately going after the tax deposits of an American firm,

an American firm that will clearly send a message to the community in the United States that it is not a country to invest in.

Also in Peru, Vladimir Montesinos, the feared and corrupt head

of the country’s intelligence service, was caught bribing an opposition political candidate. The bribes, and there were certainly more

than one, cost Peru democratic legitimacy. Maybe catching the perpetrator may help bring it back.

Indeed, if you look at Transparency International’s Corruption

Perception Index, you would see that the countries at the bottom

of the list are countries whose governments’ actions or inactions in

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terms of stemming corruption, promoting democratic governance

and investing in sustainable governance have proven costly for

their society.

In many cases, instability, a lack of democracy and even war in

these countries has forced the international community to spend

enormous amounts of money to help bring about peace and democracy. Yugoslavia, Indonesia, Nigeria, for instance, are all at the

very bottom of the list.

It may be a stretch to suggest that corruption contributes to poverty, intolerance and war, but I don’t think so. I believe that even

disasters, and ensuing disaster relief funds, would be lessened in

terms of the cost if corruption were reduced.

Witness Hurricane Mitch in Central America. Of course, corruption didn’t cause the hurricane or determine which countries were

hit, but the losses in the two countries most affected, Honduras

and Nicaragua, probably would have been greatly reduced if corruption were not such a problem in those two nations, which find

themselves at the bottom of Transparency International’s list.

Why? Corruption means that less development and infrastructure

money actually makes it into building quality homes, bridges and

roads. In other words, in my mind, corruption actually can kill.

In conclusion, Mr. Chairman, I welcome the attention to efforts

at corruption reduction, and I urge increased resources to combat

corruption. I am a proud cosponsor of Mr. Gejdenson’s

Anticorruption and Good Governance Act. I applaud his efforts. I

do wish the act authorized increased funding for the battle against

corruption, for the battle for democracy, but it is a step in the right

direction. I look forward to working with him and you to achieve

those goals.

Chairman GILMAN. Mr. Faleomavaega.

Mr. FALEOMAVAEGA. Mr. Chairman, I want to certainly commend

and compliment your leadership and for calling this hearing this

afternoon, and certainly offer my personal welcome to our distinguished guests here on the panel that will give us, I am sure, their

words of wisdom in trying to combat this very issue. I would also

like to commend the gentleman from Connecticut for his sponsorship and authorship of this important legislation.

I certainly echo the sentiments that have been expressed earlier

by my good friend from New Jersey, both gentlemen from New Jersey, and their insights into this very important issue. I don’t think

it has any limits in terms of what we talk about, corruption. We

can talk about the drug cartels, we can talk about the syndicates,

we can talk about all of this, we know it exists, and I think it is

very, very important that as well our business community are not

taken at a disadvantage when it is all right to bribe officials of

some countries and our companies there can become disadvantaged

as far as conducting fair competition as far as the business climate

is concerned.

So I think this legislation is very much appropriate, and I think

we need to do more, and I sincerely hope that the interests in the

Congress will not be in any way diminished in pursuing this, not

only certainly providing for our own Nation’s inadequacies and

maybe failings as well in seeking to go after corruption, but certainly as a demonstration of the kind of example that we could lead

7

or share our resources and our understanding with our sister nations throughout the world, hopefully that we can combat this very

insidious and very difficult situation that many nations of the

world are confronted with.

I thank you, Mr. Chairman. I yield back the balance of my time.

Chairman GILMAN. Thank you, Mr. Faleomavaega.

To our panelists, let me note we will be entering any of your

written statements you may wish to make into the record at the

hearing in full. Accordingly, I would ask each to please proceed for

5 to 7 minutes, and then we can have an appropriate dialogue.

Our first panelist today is Mr. Fritz Heimann. Mr. Heimann was

a founder of the Transparency International and is Chairman of

Transparency International USA. Mr. Heimann has a long career

of service in the General Electric Corporation, which has itself been

a great leader in the struggle against corruption for all the right

reasons. I think it is appropriate to recognize GE’s support of your

personal efforts and its leadership in this matter more generally.

Please proceed, Mr. Heimann.

STATEMENT OF FRITZ HEIMANN, CHAIRMAN, TRANSPARENCY

INTERNATIONAL USA

Mr. HEIMANN. Thank you, Mr. Chairman. I would like to compliment the Committee for calling this hearing. Your title, ‘‘The

Fight Against Corruption: The Unfinished Agenda,’’ is extremely

appropriate.

During the past few years, a good start has been made in addressing international corruption; however, much more needs to be

done.

TI was established in 1993. Our headquarters are in Berlin, Germany, and we have a network of national chapters now in over 75

countries. TI’s first objective, placing corruption high on the international agenda, has been largely accomplished. There is now widespread recognition of the damage done by corruption. This recognition is a big step forward from the time when corruption was treated as a taboo subject by the international community. The major

challenge now is to prove that tangible progress can be made to reduce corruption. There is still much skepticism whether reform will

work.

The current prominence of the issue gives us a window of opportunity; however, that window will close unless we can show successful results in the next 3 to 5 years. This requires realistic priorities. We must be selective in focusing resources, programs in countries where success can be achieved in the next few years.

I will concentrate on the OECD Convention because that is the

most promising initiative so far and is closest to achieving tangible

results. Demonstrating that the Convention will work will add momentum to the whole anticorruption effort. It is strategically important because if the major industrialized countries can show that

they have cleaned up their act, that will significantly strengthen

their leverage in trying to curb corruption elsewhere.

The OECD Convention is important because the member countries are the home countries of most major international corporations. Thus it becomes the ideal tool for controlling the supply side

of international corruption. Approximately 26 of the 34 signatories

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have now ratified, including 9 of the 10 largest exporters. This

means that the necessary critical mass is aboard. The focus now

shifts to making sure that the Convention is effectively implemented and enforced.

A key element of the Convention and the reason why we can

have confidence in it is that it provides a process of follow-up monitoring. During the past year, the implementing laws passed by 21

countries have been reviewed. The most telling sign that the monitoring process is off to a good start is that both the U.K. and Japan

were given flunking grades by the monitoring process. Not many

international institutions have the courage to criticize their largest

members.

During the next 12 months, we need to make sure that deficiencies in implementing laws are corrected and that the eight remaining signatories ratify the Convention. Considerable additional

work is needed to make sure that the good intentions of the Convention will be translated into practical results.

I will focus on four issues which I think deserve the attention of

this Committee; first, making phase 2 of the monitoring process

work. Early next year the OECD is going to begin the second phase

of its monitoring process, namely assessing the effectiveness of national enforcement programs. That will be the critical reality check

to determine whether the Convention is working. OECD teams will

be sent to six countries each year to conduct on-site reviews.

TI has made two suggestions to OECD to make sure that the

monitoring process works. First, we are convinced that much more

adequate staff and budget support must be provided. At present

only 3 out of the 1,800 employees of the OECD are working in this

area. As we move to evaluating enforcement, this becomes a much

more difficult task than the previous effort to examine the adequacy of implementing laws, and that will require much more staff

support.

The monitoring process must also be made more transparent.

Public hearings should be held each time the OECD conducts a

country visit. Civil society and private sector exports should be allowed to present their views and respond to questions from the

monitoring team. Making the monitoring process more transparent

remains quite controversial at the OECD. Many countries prefer to

conduct reviews behind closed doors. For them, proposals for nongovernmental participation raise the specter of Seattle-type confrontations. TI believes that a more open process will improve public acceptance and reduce the risk of confrontation.

The second step is to prohibit bribery of political party officials.

The OECD Convention as approved in 1997 prohibits bribery of foreign public officials, but does not cover bribery of foreign political

party officials. In TI’s view, this leaves a dangerous loophole which

will be increasingly exploited as the prohibition of bribery of public

officials goes into effect. The U.S. has pressed for such coverage,

but very few other OECD countries were prepared to tackle this

controversial subject.

TI believes that the recent scandals involving Chancellor Kohl

and his party demonstrate that the time has now come to close this

loophole. To that end, we are organizing a high-level international

group to develop recommendations for submission to OECD. The

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group will meet next month in Italy. This meeting will be chaired

by John Brademas, a distinguished former Member of the House,

and by Peter Eigen. A major effort will be required over several

years’ duration to convert this project into an effective move.

The third recommendation is to strengthen OECD’s focus on accounting, auditing and corporate controls. Last April, TI submitted

to OECD a detailed survey of current practices and requirements

in the financial area in 16 OECD countries, including the 10 largest exporters. The survey was conducted by a task force from the

big five international accounting firms. The study disclosed very serious deficiencies in most of the 16 countries.

Prohibitions against foreign bribery cannot be effectively enforced

unless there are adequate requirements for financial accountability

and transparency. TI has recommended that the deficiencies identified in our report be dealt with during the OECD monitoring process. To make that happen needs another strong push by the U.S.

Government.

The fourth need is to publicize the existence of the Convention.

Last fall TI published a survey called the Bribepayer’s Index which

looked at 19 leading emerging markets around the world. It

showed that very few of the respondents, only about 1 in 20, had

heard of the OECD Convention. What is most surprising is that respondents from major international companies were just as ignorant as those from local companies. TI has recommended that a

major educational effort be launched to make clear to businessmen,

both in OECD countries and in key foreign markets, that bribing

foreign officials is now a crime.

Chairman GILMAN. May I interrupt the witness? Would you try

to summarize? We have given you 7 minutes. We hope you can

summarize.

Mr. HEIMANN. I will be glad to stop here. There are a couple of

other points that are covered in my testimony, but I will be happy

to address that as part of any colloquy.

Chairman GILMAN. Thank you very much.

[The prepared statement of Mr. Heimann is available in the appendix.]

Chairman GILMAN. Our next panelist is Mr. Kwasi Abeasi. Mr.

Abeasi is Director-General of the Private Enterprise Foundation of

Ghana, which is an umbrella body for business associations in

Ghana. Mr. Abeasi has held a variety of private sector positions in

the oil and industrial sectors. He has an MBA from Syracuse, and

was also trained at Harvard. Mr. Abeasi is also Assistant Governor

of the Rotary District 9100 in Africa.

Mr. Abeasi.

STATEMENT OF KWASI ABEASI, DIRECTOR-GENERAL, PRIVATE

ENTERPRISE FOUNDATION, GHANA, ASSISTANT GOVERNOR,

ROTARY DISTRICT 9100 (AFRICA)

Mr. ABEASI. Thank you, Mr. Chairman. I consider this indeed a

privilege and an honor to make a presentation.

I have noted you rightly termed it ‘‘unfinished agenda.’’ I hope

in my short presentation I will be able to indicate what efforts we

are making in my country to make sure this fight is successful.

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Let me say at the outset I have decided to speak on the subject

not because I am the most appropriate person in Ghana or that I

am an expert, but only because I have in the past few years been

sufficiently involved in the fight against corruption in Ghana as the

private sector’s representative. And as the Director-General and

also with Rotary, I have experienced quite a bit of the fight to be

able to talk about it. I feel that from these two strategic positions,

I have enough experience to be able to give you some impressions.

I also hope that the impression that is given that the whole of

Africa is one vast block of corruption and that nothing is being

done would be corrected.

Mr. Chairman, corruption is not new, nor is it confined to any

particular part of the world. On the contrary, corruption is a global

phenomenon, although its severity differs from country to country.

For those of us in developing countries, its effect is very devastating. The cost of corruption and its effect on us is well-known,

and it is so enormous that all efforts must be marshalled to fight

this war. Needless to say, it is impossible to eliminate corruption,

but with a concerted effort, we believe that we can minimize it.

Previous efforts to combat corruption in Ghana, like several

countries, have been the effects of military interventions. The justification for virtually every successful or attempted military intervention in the Ghanaian politics has included a tirade of criticism

against the ousted regime for fostering corruption and being the

very embodiment of corruption. This is usually followed by a promise to stamp out the evil and to introduce probity, accountability

and transparency into the body politic. This, however, only proves

to be not true.

Previous national efforts to deal with the problem of corruption

have therefore centered around commissions of inquiry, special tribunals, religious crusades, criminal prosecutions and media exposure. In short, they tackled the stem and branches of the problem

and left the roots deeply entrenched in the well-nourished soil of

bureaucratic incompetence and arrogance, pockets of influence

amidst a sea of large-scale poverty.

Corruption in Ghana has been a source of worry and a great concern. Indeed, evidence to support this can be found in the findings

of the Global Risks Survey, TI’s Perception Index, and indeed in

our President’s own mention in sessional addresses to Parliament

and recently his address to the U.N. Millennium Summit.

The perception that corruption is rife in Ghanaian society is further collaborated by empirical studies conducted in 1998 by the

Center for Democracy and Development, an independent entity

with which I am connected. The good news, however, is that more

people are now bold enough to talk and do something about reducing corruption in the Ghanaian society. The verbal onslaught on

corruption in the Ghanaian society has been led by the President

himself.

In October 1998, we established the Commission on Human

Rights and Administrative Justice in conjunction with a number of

key stakeholders, including my organization, the Private Enterprise Foundation. We staged a National Integrity Workshop to create awareness of the social and economic costs of corruption and to

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ruption. We also established the Civil Fraud Office, which is also

a constitutionally created institution, in 1997.

In our strategies toward fighting corruption, we have indicated

that government may lead by example and commit adequate resources to the fight. While this is acknowledged by government, the

political will to go the full distance in punishing high government

officials who are found guilty of corrupt practices, however, needs

to be demonstrated.

CHRAJ is one of the key institutions that we are using to fight

corruption. The Civil Fraud Office is also another constitutionally

created institution which came into effect in 1997 amidst controversy that it was an organ which government intended to use

against opposition members, and yet in its short existence some effective work has been done.

The experiences of countries that have attained relatively impressive successes in their struggle against corruption indicate that

a fair and living wage policy is crucial to the successful implementation of any anticorruption program. Attention has therefore been

drawn to the low wages prevailing in the country, and the government has to provide the Ghanaian work force with a living wage

that will serve to insulate some of the most vulnerable groups.

We have also created a new role for the private sector. Indeed,

the OECD has just published the final report of the seminar we

had in Washington here on fighting corruption in developing countries and emerging economies, the role of the private sector. Because we were part of this seminar, we have already started implementing some of the findings and recommendations.

Recognizing the fact that for corruption to occur there are always

two parties, the corruptor, or the influencing source, and the corrupted, the private sector acknowledged the fact that very often the

corrupting influence is from the private sector. We therefore agreed

to get involved in this fight for the first time in my country in

1998.

It should also be borne in mind that both the local private sector

and the foreign private sector sometimes are guilty of acts of corruption. To this end even though we know that the foreign private

sector is usually fairly governed by business practices and regulations, sometimes there are a few of these ones who condone this.

We have therefore decided in taking steps, new steps, to combat

corruption in my country and done three things. First of all, we

have looked at the areas of contracts and have set up the SFO to

look into all contracts and ensure that the possible effects of corruption are minimized.

Secondly, we have also started drafting a code of ethics and conduct along the lines of the Commonwealth Association for Corporate Governance’s Guidelines and Principles for our business

community to augment the Company’s Code, which is also being reviewed, and we will need assistance in this direction. We want to

fashion it along the directions of the King Commission on Corporate Governance of South Africa.

We have also, with the help of the World Bank, established the

Ghana Anticorruption Coalition, on which I represent the private

sector. An action plan has been drawn up which would be launched

this coming Friday.

12

Finally, we also have started the Ghana Integrity Initiative as a

local chapter of TI in Ghana.

Civil organizations, like Rotary Clubs, are contributing immensely by way of changing the attitudes of the business professional men. In the 1989 Council of Legislation for Rotary International, it was highlighted that business and professional people

must concentrate on the ethical requirements of the vocation, as

well as the laws of their land and the moral standards of their

community. Surely with these noble objectives and declarations,

the more Rotarians we have in the country, the less corruption we

will have in that particular country. We have decided, therefore, to

increase the number of Rotarians in our country.

In conclusion, Mr. Chairman, let me say that we can conclude or

finish this agenda, or at least shorten the agenda, if all of us, governments, development partners, civil society and the private sector, will show a real commitment to this new coalition of forces

against corruption and augment each other’s efforts. We should try

all we can to make resources available to all the stakeholders or

members of this coalition, especially civil society and the private

sector.

By the private sector, Mr. Chairman, I do not mean the so-called

nongovernmental organizations, but rather private sector associations and institutions that can really be held accountable for the

use of these scarce resources. More mileage will be obtained by

tunneling these resources through credible private sector associations which can keep the pressure on governments to do more than

just pay lip service. Most donor groups, especially the Bretton

Woods institutions, have always cited their mandates as not allowing them to offer direct assistance by way of resources to the private sector. I believe, however, that these mandates are man-made

and can therefore be modified or changed.

Finally, let me also repeat the appeal of my President, Flight

Lieutenant J.J. Rawlings, to the U.N. Millennium Summit that the

fight against corruption will be greatly enhanced if proceeds from

these corrupt activities, especially by people in leadership positions,

which find their way into foreign bank accounts in your countries,

when detected are returned to the countries concerned from whom

the U.S. took them in the first place.

I thank you very much for your attention.

Chairman GILMAN. Thank you, Mr. Abeasi, who is also incidentally the private sector representative on Ghana’s anticorruption

commission. We thank you, too, for your work on the Washington

Conference Report on Corruption.

[The prepared statement of Mr. Abeasi is available in the appendix.]

Chairman GILMAN. Our next witness is Roberto de Michele. Mr.

de Michele heads the Transparency Unit of the Argentine Ministry

of Justice and Human Rights. An attorney, he is also a teacher, an

author and a translator. He is best known as a corruption fighter

in his own country, and is also consulted by authorities around the

world. He has a special perspective as a citizen of a developed

Latin American country to bring to us today.

Please proceed, Mr. de Michele.

13

STATEMENT OF ROBERTO DE MICHELE, MINISTRY OF

JUSTICE AND HUMAN RIGHTS, ARGENTINA

Mr. DE MICHELE. Thank you, Mr. Chairman, and thank you for

the invitation to this hearing.

Briefly I would like to first mention the current situation in Argentina. Argentina is going through a process to increase transparency and accountability in government, a process which started

showing some signs a few years ago when by decree the first code

of ethics in government was passed and an Office of Government

Ethics was created. By the end of last year, this decree was transformed into a law, national legislation, which includes rules for

ethics in government for the three branches of government, and

also creating special obligations in terms of conflicts of interest for

public officials.

At the same time, the new administration which took office in

1999 created by law the Anticorruption Office within the sphere of

the Ministry of Justice. The mandate of the Anticorruption Office

is to implement the rules and provisions of the Inter-American

Convention Against Corruption. In fact, this office has two

branches, two areas, one dedicated to investigation and the other

one dedicated to planning, designing, proposing and implementing

policies to increase transparency, accountability, and reduce incentives for corruption.

Some of the particular tasks that this office carries out is investigation of past and current situations in which public officials and

particularly the executive branch might be involved dealing with

cases stipulated under the Inter-American Convention as corruption.

The other area among the assignments the Direction for Transparency Policies deals, with issuing opinions on conflicts of interest

of current officials in government. In fact, it has issued so far more

than 50 opinions, including Ministers, Secretaries of State and officers of lower rank. The opinions instruct public officials on such actions as selling of assets and withdrawal from private activities

that might conflict with their public duties. It is also in charge of

administering the system of financial disclosure forms in which

citizens can track the possible evolution of assets of public officials

and therefore increase the social control that is needed as in any

sound policy to promote transparency.

Argentina is not only active within the sphere of the Inter-American Convention, it also takes part in other forums, such as the Financial Action Task Force dedicated to issues of money laundering.

It is active also within the United Nations Center for Research on

Criminal Issues and Justice, and is working there on proposing an

elaboration of the general convention against corruption within the

framework of the U.N.

Only 10 days ago, Congress in Argentina approved the OECD

Convention, which means that in a short time it will become law.

Our office is in charge now of analyzing the reforms to our substantial legislation that the new convention will require. The possible

changes will be focused basically on issues that have to do with

money laundering and the possible complementation or conflicts

with the existing legislation on money laundering.

14

Also it will have to deal with issues such as the ones mentioned

before by Mr. Heimann, referred to as accounting procedures and

rules in order to implement more standardized and transparent

ways in which corporations take notice of their economic operations.

There will be also some recommendations in terms of mutual assistance between judiciaries of different countries in extradition.

There is also going to be—part of the work will focus on the idea

of seizure of assets of people who are allegedly involved in cases

of corruption.

There has been a lot said and written on the effect of corruption

for the economy and the market, but let me perhaps introduce a

thought that not everyone shares. Corruption not only has to be

viewed as a problem, but perhaps as a consequence of the problem.

The basic problem is the lack of rule of law and weak public institutions. You are aware, Mr. Chairman, that unfortunately not all

the world shares the benefits of democracy and rights for the citizens and effective government. If the question is what can be done

in terms of making more progress in this arena, I would say that

a sound strategy should include a long-term vision, which is promoting the expansion of the rule of law and democracy around the

world as a more substantial basis on which to build an

anticorruption strategy.

In the short term, other actions can be implemented. We believe

that the monitoring process provided by the OECD Convention is

an adequate procedure by which different countries can into a more

elaborate and useful context in which the rules of the game are fair

for everyone, and therefore offer adequate guarantees that nobody

will be playing by their own standards or unaccepted rules.

Referring to this kind of procedure or process, you are probably

aware that the OAS, the Organization of American States, within

the Working Group on Probity and Public Ethics, will try in the

short run to adopt measures that are similar to the ones provided

by the OECD Convention.

Going back to the question of what can be done on this area, the

exchange of expertise will probably help countries involved in concentrating on the same focus or projects. In the particular case of

Argentina, we have a formal agreement with the U.S. Government,

particularly with the Office of Inspector General of the State Department and the Office of Government Ethics, that has proven

useful and a successful way in which we can exchange experiences

and collaborate in fields of mutual interest.

Again, Mr. Chairman, thank you for the time.

Chairman GILMAN. Thank you, Mr. de Michele.

Our final panelist today is Robert Klitgaard, the Dean of the

RAND Graduate School and the Ford Distinguished Professor of

International Development and Security. He served as an advisor

to many governments on economic strategy and institutional reform and has written seven books on a wide range of public policy

issues, including Corrupt Cities, a Practical Guide to Cure and Prevention.

Welcome, Dean Klitgaard. You may proceed.

15

STATEMENT OF ROBERT KLITGAARD, DEAN, RAND GRADUATE

SCHOOL

Mr. KLITGAARD. Thank you very much. It is a pleasure to be here this afternoon with you. One part of the next agenda in fighting corruption is how to in- vite in even more the private sector into that fight, and this afternoon I would like to share one idea for your consideration. The idea builds on a paradox that in all the countries that are

afflicted with systematic corruption, people in everyday life in the

private sector know how the systems work. After all, they are the

ones that are paying the bribes and being extorted, so that common

citizens know how corruption impedes the social services they do

and do not receive.

Lawyers understand how corruption afflicts the legal system and its implementation. Business people understand very well how corrupt systems of procurement and contracting work. Accountants

know very well how tricks are played in corporate governance

which become corrupt, evasion of taxation.

There is a paradox here, because on the one hand these people

know, but they cannot say. In many of these countries, speaking

up about the kinds of systems that exist to corrupt their country

is dangerous. It is a form of virtual suicide to speak up. They know,

but they cannot say. So the challenge, or a challenge, in the next

agenda, in the next step in this process, will be to figure out how

can we learn what they know without putting them in a very sorry

predicament?

So here is the idea I have for your consideration. Imagine that with the lead of the U.S. Government and our private sector, we

picked out three areas where we know corruption afflicts many of

our friendly countries, let’s say one in the economic area such as

procurement, one in the social area such as pharmaceuticals, one

in the justice area such as the legal system in the courts, and we

invite another set of countries to participate with us in a diagnostic

effort that builds on the private sector’s knowledge of how these

corrupt systems work.

So what I have in mind is going to each country, taking out 15

or 20 individuals who are involved in the private sector side in

each of these three areas, and engaging in confidential individual

interviews with them that lead them through the system to describe not individual people who are giving or receiving bribes, but

how the informal, possibly corrupt, system works in practice. How

are side payments made? How extensive is the problem? How do

the perpetrators of corruption keep their actions and the results of

those actions hidden from public scrutiny? How does the corrupt

system work?

With this diagnostic effort, improvements would then be sought,

again in cooperation with the private sector. On the one hand, how

can the formal systems be strengthened; on the other hand, how

can these corrupt informal systems be subverted through actions

ranging from public, private and nonprofit?

Let us suppose then with this effort reforms would follow, helped

by the American Government, helped by American business, and

then after some time, using the same methodology, we would actually try to evaluate the success, going back once again to business

16

people, lawyers and accountants, and asking how are we doing

after a year, 2 years, 3 years.

Now, I would like to contrast this idea with the current state of

play in international aid for anticorruption efforts, and I want you

to imagine you are the President of country X. Country X is a country that is receiving World Bank help or USAID help, and you have

received a loan or grant on the condition that you clean up corruption in your country. Okay. This puts you in a tough spot, because

when you announce an anticorruption effort, you are admitting

that your government is corrupt, and the opposition party says, of

course, we knew this all along. That is what we have been saying.

And your ministers and your civil servants are embarrassed at the

bashing that they take at your very hands.

So it puts you in a tough position, which is one reason why many

Presidents do not enjoy being given conditional loans on the contingency of announcing that their governments are corrupt and they

are going to heed the tune of the World Bank or the U.S. Government to clean it up.

In contrast, take the idea I mentioned to you. Imagine again you

are the President. You say, I am delighted to be part of this international effort to study the way corrupt systems afflict our world.

I am so happy that the private sector in our country and the citizens groups are taking part in this diagnostic effort, because, after

all, this is a problem that affects all of us, and all of us must be

part of the solution. The international nature of the effort, the fact

that the private sector and the opposition parties would also be involved in this effort gives you insulation as a President and a

chance to move forward with a more positive political face on this

issue.

Now, how might this work in practice? One final advantage of

this idea is it is fairly cheap. Imagine 150 to 200 interviews per

country, some convening and collecting of results both internally

and internationally, the financing of reforms, much of which should

be done by countries themselves, and then its follow-up surveys,

again abetted by the private sector. It is an idea that will not cost

us as much as many other ideas.

So practically, Mr. Chairman, how could this idea be pursued? I

suggest that you, this Committee, Members, develop this idea and

dialogue with USAID, with Transparency International, with the

Commerce Department, and then with friendly nations who would

be interested in participating. With this collaboration, using technical expertise, design the diagnostic, the interview instruments

that would be used and the procedures for gathering the data, organize the collection of the data in each country, and then enable

a system diagnostic to be drawn of each of those three areas that

we would choose as the focal points. Share the results of the diagnostic study with the governments of each of these countries and

work with them to develop transparent, openly discussed remedies

for the informal systems that we see that are corrupt. Then implement the recommendations, follow it up a year later, and use the

very processes developed, the participation of the private sector in

this effort, to develop further ideas for combatting corruption.

To conclude then, inviting the private sector means learning

what business people, accountants, lawyers and common citizens

17

know about the way corrupt systems work. The particular version

of the idea I have outlined here this afternoon, in this particular

version the United States would take the lead in organizing an

international collaborative effort to analyze how corrupt systems

work and how they might be cleaned up. Notice that the idea goes

beyond international conventions, beyond codes of ethics, beyond

foreign aid that is aimed at civil service reform or more of the same

in government. Instead, it looks at inviting the private sector into

the fight against corruption.

Thank you.

Chairman GILMAN. Thank you, Dean Klitgaard, for your very interesting proposition.

[The prepared statement of Mr. Klitgaard is available in the appendix.]

Chairman GILMAN. Let me ask some questions.

Mr. Heimann, are there any pressures that our government, as

opposed to the World Bank or other international institutions, can

or should put on foreign companies to adopt appropriate books and

records and practices so that the supply of bribes can be reduced?

Mr. HEIMANN. Thank you, Mr. Chairman. I will be very glad to

answer that question.

TI proposed to the World Bank several years ago that it should

encourage corporations to adopt antibribery compliance policies. At

the time the World Bank took the position that only American companies had these policies, and it would be inappropriate to apply

this requirement because it would shrink the pool of perspective

bidders.

We think at this point we are at a stage where over 20 countries

have ratified the OECD Convention. I think the time has come to

impose such a requirement not just on the part of the World Bank,

but on other international financial institutions, and we hope very

much your Committee would encourage that, because I think I

share Mr. Klitgaard’s view, you need the cooperation of the private

sector. Criminal law sanctions work only if the majority of companies comply voluntarily. Then the law can bring the other 10 percent in line. But a program of encouraging voluntary compliance is

essential to get the 90 percent aboard.

Chairman GILMAN. What should the United States be doing besides the International Bank?

Mr. HEIMANN. Well, what AID and other American agencies already require. The important thing is to get the rest of the world

on board. But the U.S., through its role in the World Bank, in the

Inter-America Development Bank and other similar institutions,

can promote this. Similarly, OECD has a group that works on bilateral aid programs. So I think there are a number of vehicles

available to the U.S. Government to push this. I think if your Committee encourages it, the government, the administration, would do

this.

Chairman GILMAN. Mr. Abeasi and Mr. de Michele, how have developing countries responded to the adoption of the OECD Convention? Have they welcomed the move to criminalize bribery, or do

they resent it as an intrusion in their internal affairs?

Mr. ABEASI. I think, for my part, it has been quite acceptable to

us, because as you indicated, it is a major cause of benefit for

18

Ghana, and therefore it is being welcomed, especially by those that

are getting into the democratic dispensation.

I just want to take the opportunity to say that the steps being

advocated by Mr. Klitgaard has already been taken by a few countries, including my country, for instance. We need to create a demonstration effect that people that have done that are going to get

ahead. Botswana, for instance, is well-known in the league for less

corrupt nations, and I think we need to create a few more of these.

I want to suggest that we are at a place where, with a little effort, we can have another example which will be showing that demonstration effect. But the OECD Convention appears to be in the

right direction.

Chairman GILMAN. Mr. de Michele?

Mr. DE MICHELE. Mr. Chairman, in my knowledge, there has

been no negative reaction to the adoption of the OECD Convention.

In fact, the adoption of the Inter-American Convention, which took

place 3 years in advance, shows that basically these kind of conventions and rules are adoptable by countries.

Now, the question still remains, how real will these provisions

become in each of these countries, and how far we can move in

terms of international cooperation.

Chairman GILMAN. Thank you.

Dean Klitgaard, can your proposition be pilot-tested? You have

heard Dr. Abeasi say they already tested it.

Mr. KLITGAARD. Yes, sir. It has been done in a few countries, for

example, with judges and prosecutors. We are asking lawyers how

the system actually works. Members of the bar association enabled

a description to be made of how that system worked, and then you

could close the loopholes and the risks. In other countries it has

been done in areas like road building and pharmaceutical supply,

where you can analyze the steps along the process of procurement

and contracting to notice where the systematic vulnerabilities are

to corruption.

What hasn’t been done yet as a pilot basis is this kind of international comparison with the systematic effort to build in the private sector in the civil society as part of an international effort. I

think that is something that would really add to the effectiveness

of the effort.

Chairman GILMAN. Dean Klitgaard, couldn’t your proposal be

tested out at the Washington Conference on Corruption and see if

they would voluntarily agree to undertake this?

Mr. KLITGAARD. Sure. We could try it out. You mean this week?

Chairman GILMAN. Yes.

Mr. KLITGAARD. We could try it out.

Chairman GILMAN. Try it out there and let us know how it works

out.

Mr. Gejdenson.

Mr. GEJDENSON. Thank you, Mr. Chairman.

You know, I can’t remember which Ottoman emperor, but it

seemed to me one of the Ottoman emperors said he was giving his

top staff access to his harems and treasuries. Others objected to

this, asking why he paid his people so well, and he said he didn’t

want to lose his empire for a handful of rubies.

19

It seems to me one of the issues we have to take a look at and

I didn’t hear discussed here is frankly, in some countries, compensation is at such a level that you have to get a little extra on

the side. If you are asking somebody to be a customs official, and

you are paying him an official wage that by no stretch of any

imagination, even with his spouse or her spouse working, even

with a second job, is enough to survive on, then the government is

saying, you have got to steal.

Is there any review of what happens to critical employees at

choke points where you can cut off corruption by training their salaries? Obviously many of these governments are in trouble, but unless, it seems to me, that the people who work for you are able to

survive on the salary you pay them, you know they are going to

cheat.

Mr. HEIMANN. You have put your finger on one of the most sensitive and most difficult areas to deal with. Like most corruption

issues, you have to develop local solutions to deal with it.

In many, many countries, the civil service is too large, and, as

you say, underpaid. However, the effort to go from that to a small

number of people who are competent and well compensated is a

very, very difficult step. It has got to be addressed.

Mr. GEJDENSON. It is the critical step. As long as I am making

one-tenth of what it takes to survive, I am going to find a way for

my children to eat.

Mr. HEIMANN. From a TI standpoint, our first priority is to deal

with grand corruption, big payoffs to top officials. Until you have

dealt with that issue, until you have got the top of the government

interested in reform, you can’t deal with low pay in the rest of bureaucracy and facilitate it.

Mr. GEJDENSON. I am not sure I agree with that premise.

Mr. HEIMANN. It has to be addressed.

Mr. GEJDENSON. I also want to thank you. We used a lot of your

agency’s work in drafting our legislation.

Mr. HEIMANN. Yes. We are very much aboard your effort, and we

want to continue working with you as it proceeds.

Mr. GEJDENSON. Yes?

Mr. KLITGAARD. I would like to take a crack at that question

also. In 1989, I wrote a paper in a journal called World Development called Incentive Myopia. It pointed out that the free market

reforms around the world were praising the value of incentives for

farmers and fishermen and industrialists, and getting the prices

right was the mantra, but we were not getting the prices right in

the public sector, where in many African countries the median

wage of a public servant could not feed a family of four, that we

were inviting corruption in the same way.

It is one thing to note the problem; it is another thing to create

a solution. The solution I proposed was to forget about the solution

through grand civil service reform and raising the average level of

pay of all workers in government. That is financially impractical.

Anyway, big civil service reforms don’t have a good track record.

Instead, pick some key areas where performance is measurable and

try some experiments to see if they work. For example, in public

works such as road building and ports, anything to do with power

supply, you have pretty clear measures that you can provide, reVerDate 11-MAY-2000 18:01 Feb 12, 2001 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 F:\WORK\FULL\H092000\69716 HINTREL1 PsN: HINTREL1
20

ward the laborers. This has been done in Ghana, in fact, back in

the days 15 years ago. They were very successful to pay people

with food-for-work money, additional bonuses for work successfully

done with results that followed.

Customs and tax bureaus in 1985 in Bolivia, they created a

scheme where if the public Customs officials hit a 60 percent increase target that they themselves had specified, 5 percent of the

additional 60 percent would go to them as payoff. In effect, they

doubled Customs revenue in 1 year in Bolivia in 1985.

So you have to begin with schemes that have a measurable outcome to show it works, and then try to spread to the more difficult

areas of government where it is very hard to measure. This is

where it is also very entrenched with corruption, such as the courts

and police. But I believe with an experimental approach as opposed

to a civil service reform approach that this kind of problem can be

addressed forthwith.

Mr. ABEASI. Mr. Gejdenson, if I may add to that, as he said, we

are attempting a Civil Service Performance Improvement Program.

The basis is we want to try to reduce the size of the civil service

and shift the excess toward alternate employment. The problem is

how do you generate the alternate employment?

Most people would want to get out of civil service that does not

pay properly so they can get into the private sector. So the innovation is to develop jobs that people can do themselves and empower

them by giving them new skills. This is the kind of operation that

reform is trying to achieve, but it is not easy. Again, you need to

be able to do a study that tells you the critical number of people

you need in this service. This is the step we are on.

Mr. DE MICHELE. My office has just finished a diagnostic of the

Argentine public administration that has been made public yesterday, specifically in procurement and human resources. I believe it

is one of the first diagnostics that was produced via interviews and

surveys on public officials themselves, high-ranking, mid- and lowranking. The study shows, one of the findings, that even when you

don’t have the problem of low salaries, you still do have the problem of incentives for corruption. That is one of the findings. The

other finding is that you have to be very careful to put a lot of

things under the same word. Corruption is too large a word. You

have to divide, analyze and——

Mr. GEJDENSON. Explain that. Explain what you mean by not

having the same title for all of it. Give me two different categories

from your perspective.

Mr. DE MICHELE. You can have similar situations in two agencies

and a different outcome. It all depends on the process that the

agency runs. Customs, running Customs is not the same as distributing syringes, not the same as contracting bridges. Therefore, you

can have some problems of low wages in those three agencies, and

in some of them you cannot have corruption. This requires—and I

think it has been said before—this requires to develop tools that

will allow for specific diagnostics.

As far as I know, Mr. Klitgaard is perhaps the expert at the

table, that we have not been very successful developing very specific tools. We are at the beginning of getting good instruments for

this. So everything that goes in that direction is positive.

21

Mr. GEJDENSON. Could I have the Chairman’s indulgence for one

more question?

Mr. Heimann, we have been very sanctimonious here in the

United States, kind of sitting back here and growling about our European compadres continuing to bribe at will.

What is your sense? One, are we missing some of our own ill

deeds here? Occasionally American companies do get caught violating our own laws. Are we doing a good job enforcing Americans

laws? And are the Europeans genuinely ready to not have the company deduct the bribe paid to the foreign official? Is Europe really

engaging us on this, are they ready to go forward, do they see this

as a serious challenge to democracy and society, or are they saying

Americans want us to deal with it, we will make a little noise, but

it is still not high on our radar?

Mr. HEIMANN. We are making progress. We have got a long way

to go. Three or 4 years ago, TI could not get German companies to

pay any attention to its agenda, and it took really the election

where the Social Democrats took over to change the climate. Now

German companies are actively participating in TI’s work. We are

making some progress in the U.K. France, the progress is kind of

slow. So you have to look at it country by country.

I think one of the important changes in the last few years, and

I think TI has played a role in this, is to make this an international issue and not just a U.S. issue. As long as we had the Foreign Corrupt Practices Acts and we said, well, you got to do what

we do because we are clean and you are dirty, that was not productive. Over the last several years, I think it is being regarded as an

international issue, and you are getting increasing support around

the world. While that is progress, there is a lot more to do. But

keeping it internationalized and being tactful how we push this

from the U.S. standpoint is one of the key ingredients, and I think

the administration deserves credit in having done this very, very

well.

Mr. GEJDENSON. Thank you.

Chairman GILMAN. Dr. Cooksey.

Mr. COOKSEY. Mr. Gejdenson, don’t leave. I am going to answer

your question.

Mr. GEJDENSON. Go ahead. I am listening.

Mr. COOKSEY. Mr. Gejdenson is a good friend of mine. We have

fun throwing barbs occasionally.

I want to go on a little bit different line of questioning. I see

some very young, idealistic people, hopefully students, in the back,

and I want to bring up a rather disturbing dirty subject. I want to

talk about the corruption in this country. I will give you some

quick examples. The question I would like each of you to answer

is do we keep our level of corruption down to the level that we

should? If so, why? If so, do we do it because we prosecute people

occasionally, or do we still let people get by? I am going to give you

examples.

The first example is a report from the World Bank. It is actually

from the William Davidson Institute that I am sure you are familiar with. But it shows that the U.K., Germany, Japan, France and

Russia, all give less kickbacks, bribery, for foreign investment than

the United States does. Austria is worse than us, Belgium is worse

22

than us, and Greece is off the chart almost. That is the first example. That is an international example.

Local domestic examples: An investigator with the premier law

enforcement agency in this country told me 2 years ago that in a

previous administration in this city, the District of Columbia, there

was a bribery kickback system going on in which the municipality

was sending city vehicles out, trucks, backhoes, bulldozers, to residential and commercial construction jobs in this city where we are

today, and the billing was done to another third-party entity. This

investigating agency put the whole case together, wrapped it up,

and there was never an indictment, never a prosecution.

I am going to tell you about my State of Louisiana. We have a

Governor who has been Governor for four terms, was recently convicted on 17 counts along with his son and other people for extortion or selling riverboat licenses. The Commissioner of Elections is

going to trial in the next 90 days for a similar bribery kickback

scheme.

There is in my town. I live in north Louisiana. I don’t live in

New Orleans, I live in Monroe. We have a former city official. So

you see, Mr. Abeasi, we have this in this country, too.

My question is—and I won’t tell you what party they were in—— Mr. GEJDENSON. Tell us what State they are from, if the gentleman would yield?

Mr. COOKSEY. They are from my State.

Mr. GEJDENSON. Thank you.

Mr. COOKSEY. But they were all in your party. Okay.

How can we judge these other countries? And I agree, it goes on

there. I used to work in Kenya. I used to go over there with truckloads of medical supplies when I was going over to do eye surgery.

I was adamant about following the rules, and I went through all

this, and one of my surgeons that went with me would get his

trucks through for $20. Finally I gave up. For $20 I would get mine

through in an hour. So, you know, it is easier to do it that way.

My question to you is do you think we are really clean in this

country? If not, why do we prosecute some people, and why do we

not prosecute others, and what can we do to improve our situation

in this country?

Mr. KLITGAARD. Are you a medical doctor?

Mr. COOKSEY. Yes, I am an eye surgeon. That is where I used

to make an honest living, before I got this day job.

Mr. KLITGAARD. Is there a lot of disease in the United States?

Mr. COOKSEY. Yes. There is more in Africa, where I used to work.

Mr. KLITGAARD. Should we therefore not get into the business of

curing disease in Africa, because there is disease in the United

States?

Mr. COOKSEY. We do, but there seems to be a neglectful attitude

in this country.

Mr. KLITGAARD. All right, but that is the same principle. The

principle would be something like this. There is corruption everywhere in the world, just as there is sickness everywhere in the

world, and we start from that point of view. And then we say, but

the distribution of illness, different kinds of illnesses, are differently intense in different parts of the world. We have more heart

disease than Africans do, we have more colon cancer than Africans

23

do, let’s say. They have more problems of hunger, malaria, diarrheal diseases and so forth.

Mr. COOKSEY. Infectious diseases.

Mr. KLITGAARD. So we don’t say, you are sick, we are healthy.

We say, do we know anything that can help you fight your diarrheal diseases, and the answer is yes, we do, and therefore we go

and try to help.

The same thing goes with corruption. I am often asked by foreign

journalists, are you saying, gringo, that you don’t have corruption

in your country? And I say, first of all, no. We have been historically the number one exporter of corruption historically. I don’t

think we are anymore, but I think we historically have been.

Mr. COOKSEY. We are still high.

Mr. KLITGAARD. And we lead the league in insider trading, or we

are close. We are doing very well in organized crime. At least historically we have done pretty well in that area. Being from Los Angeles, I can talk with pride about our police corruption being right

there at world standards. I am joking. And, finally, I might say in

this august body that in terms of campaign financing, there are

some who believe that the system of campaign financing that we

enjoy in this country, if not corrupt, legalizes influences and practices that in other countries would be thought to be inappropriate.

So we come from that point of view, yet nonetheless we can say

to them, do you think you are being held back by a judicial system

that is systematically corrupt? Ours is not, not systematically. Do

you think you are being hurt by banking and credit systems that

are undermined by favoritism, theft and patronage? Ours are not

systematically corrupt. Do you think there is any way we can help

each other to do better for mutual benefit here? The answer is yes.

So I think the medical analogy is a very good one to help us not

be proud, not be self-righteous, but to look instead—instead of saying, is there more heart disease in Argentina or in the United

States, say, I don’t know, but let’s get to work on this patient.

Mr. COOKSEY. A good response and a good answer.

Mr. Heimann?

Mr. HEIMANN. In my experience working in Transparency International with people from many, many other countries, the right

way to proceed is very much the way Bob Klitgaard had it. We

have to admit we do not have a perfect system, but in most of the

areas we are looking at, we have tried and we have been successful

in many, many areas, and we have to learn things from other countries, but other countries are willing to learn from us. We have a

much more transparent financial system. We have an SEC. Most

countries don’t have a SEC. We have an Office of Government Ethics that is being rapidly followed as an example by many other

countries. The Chinese sent people here to learn about the U.S. Office of Government Ethics.

So, nobody is clean. The reason we can work with each other is

because we all have to admit none of us are clean. TI conducted

a Bribepayer’s Index last year. We looked at not just corrupt officials, but who does the bribe-paying. The U.S. came out in the middle of the pack. We were 9th out of 19. This came up to us as a

real shock. We thought with the Foreign Corrupt Practices Act 20

24

years in existence we would be way ahead of the others. We were

not. But that in turn——

Mr. COOKSEY. Could you continue to answer the question?

Chairman GILMAN. Without objection.

Mr. HEIMANN. I am sorry?

Mr. COOKSEY. Go ahead.

Mr. HEIMANN. We are——

Mr. COOKSEY. We are over my time limit, but I appreciate your

comments.

Mr. HEIMANN. So campaign finance is obviously a major area

where we have got to learn. But that is one area where I don’t

think people can learn too much from us because of the first

amendment problem. I met with John Brademas the other day. The

1974 Campaign Finance Reform Act I think was a good move, but

the Supreme Court gutted it, and other countries don’t have the

first amendment problem.

Mr. GEJDENSON. If the gentleman would yield, I want to say the

Supreme Court has been wrong on other occasions, including separate but equal and a few other decisions through the years, so I

think that a future Supreme Court will recognize that you can

limit dollars without limiting speech, and if free speech and dollars

are equal, then obviously poor people don’t have an equal voice in

this democracy. So I think it is just a mistake the Supreme Court

made. I respect the Supreme Court, but I assume that a future Supreme Court will recognize that you can distinguish between the

pile of money you have and the issue of free speech.

Thank you, Dr. Cooksey.

Mr. COOKSEY. Absolutely.

Mr. Abeasi, would you comment?

Mr. ABEASI. I would want to say it is not new to us. I am not

surprised. We know that corruption occurs here. Indeed, when I

was coming here for the last seminar, I stopped through New York,

and the immigration officer asked me, where are you off to this

time? I said, to Washington. He said, what for? I said, I am going

for the corruption conference. He said, that is a good place to go,

you know.

So we know that it happens here, but the important thing is that

if you came with a holier-than-thou attitude, then it would be difficult to get us to take you serious. But we know that the damage

that it causes in the United States is such that you might not even

notice it, whereas if you took it to the developing country level, the

damage is so devastating that we need to do something about it.

Mr. COOKSEY. It is. It is very deep, and it is broad.

Mr. de Michele, would you like to comment?

Mr. DE MICHELE. Very briefly, I think, first of all, it is not my

intention to comment on the situation in the United States, but basically I would try to say that if you put the idea of corruption

along the idea that this is a personal or individual problem, I think

that is the wrong direction. If you put the idea of corruption in

terms of a systemic problem, something that it can be viewed somehow empirically and therefore improve the system, improve the

quality of government, then people don’t get personally hurt by

that, and then you can move faster.

25

Mr. COOKSEY. That is a good comment. Thank you, Mr. Chairman.

I would like to thank my friend Mr. Delahunt. I was probably

imposing on his time.

Chairman GILMAN. Mr. Delahunt.

Mr. DELAHUNT. I want to congratulate you on the work that you

have done, and I particularly think Transparency International has

earned and continues to enhance its reputation all over the globe.

But to pick up on the last point by Mr.—how do you pronounce

your last name?

Mr. DE MICHELE. de Michele.

Mr. DELAHUNT. Thank you.

In talking about the systems and your experience with corruption

in various governments, it is just my own observation that corruption appears to be more rampant, in those nations where there is

a weak judicial system. The problem of corruption is far in excess

as to what we see in democratic societies, democratic nations,

where the judicial system is an independent and healthy institution.

It would seem to me that much of what we do here in Congress,

as well as any administration, we should revisit what we do in

terms of what we describe as nurturing democratic institutions and

funding efforts and specifically focus on those judicial systems, because, again, thinking specifically of Latin America, and wherever

there is a serious problem with corruption. Just recently we have

had the President of Peru make an announcement that he was

going to call for new elections and wouldn’t be a candidate himself,

and that was based upon what presumably was a corrupt act that

was videotaped, by a high government official.

Invariably I believe it goes to more specifically a weak judicial

system and also a judicial system that has no independence—or little independence—from the executive branches of those nations.

That is just an observation. I would be interested if you have any

comment.

Mr. HEIMANN. You are absolutely right. If the judicial system is

corrupt, other methods of dealing with corruption are not going to

be effectively enforced. The other side of the issue, very few things

are harder to reform from the outside than judicial systems, and

a lot of money has been spent to try to inculcate the rule of law

from outside. It simply has not worked. This does not mean we

have to stop trying, because you are right, this is absolutely fundamental, and the way TI tries to work on this is through the national chapters to develop a local constituency interested in doing

this.

Mr. DELAHUNT. I think you are very effective in that, by the way.

I think there is a relationship between improvements that we do

see and the efforts of your national chapters, because I really think

you bring that attention and that focus and that spotlight to what

has occurred. But I agree. I mean, we have to persevere and persist

in trying to find a mechanism to effect the kind of change that I

think we agree is critical.

Anyone else?

Thank you, Mr. Chairman.

Chairman GILMAN. Thank you, Mr. Delahunt.

26

Mr. Gejdenson, do you have any further questions?

Mr. GEJDENSON. Mr. Chairman, no. I just want to thank—if I

could for one moment, thank the panel. I think it is something that

we have to continue to work on. There are a lot of preconceptions

that occur both here and elsewhere. I remember in 1972 I was in

Spain with a young woman who was a college graduate. At that

time Franco had been head for some time of the Spanish Government, and I was talking to her about democracy, and she says, oh,

we can’t have democracy in Spain. The Spanish people, we are just

not suited to democratic institutions. I just could not believe what

I was hearing from a young university person, well educated. You

know what? The Spanish people have been pretty good at having

democracy in Spain.

So I think a lot of these preconceived notions that there are

areas of the world—I think Mr. Cooksey’s point is well taken that

the Democrats in Louisiana have been caught, the Republicans

haven’t been caught yet, but certainly will be at some point, that

we have problems here as well, but we all have to work at doing

this better. We all have to work to make sure that we build the

institutions in every society that protect the citizenry, whether

from war or from thievery internally. We can do that together, focusing on the challenges and putting away our preconceived notions. Not that we are perfect, not that anybody out there is perfect, we have to do the best we can. There are lots of approaches.

I want to thank you, Mr. Chairman, for holding the hearing.

Chairman GILMAN. Dr. Cooksey?

Mr. COOKSEY. Incidentally, you have been wonderful witnesses,

and this has been a good discussion. It is something we really need

to address now. I was pleased with your very thoughtful and good

responses.

What do you think the comparative impact is of bribes from external sources as opposed to those from internal sources in a country? You know, let’s say there is one country that they are building

airplanes, and they use bribes to get you to buy their airplane, and

yet that that same country, they have a lot of internal bribery

going on. What is the—what are the impacts of that on that society, and what is the impact internationally? The question again,

what is the comparative impact of bribes from external sources and

those from internal sources? Internal being within, Louisiana is

bribing Louisiana, as opposed to French bribing French, and then

across country lines.

Mr. ABEASI. I believe that since the foreign exchange or difference in currencies, naturally foreign bribery has a lot more impact if you take the developing countries. Internal bribery, circulation of the few CDs or nada, or whatever, in there, but when it

transfers across borders, then a little bit of dollars transfers into

a huge amount of local currency. So the impact is really huge if it

is foreign bribery. This is why we need to more careful.

The only thing is that it is more difficult to detect bribery across

borders than within. Perhaps that is the only difference. But otherwise the impact is heavier when it is from outside.

Mr. COOKSEY. Thank you.

Any other comments?

Chairman GILMAN. Thank you, Dr. Cooksey.

27

Do any of the panelists want to make any closing statement?

Yes.

Mr. HEIMANN. I would just like to make one additional point at

this time. In your opening remarks, Mr. Chairman, you referred to

the Inter-American Convention as another important issue. We

couldn’t agree more. It is a terribly important initiative for the

Americas. The one deficiency of that Convention is that it did not

have a monitoring process, and we are convinced that you need a

monitoring process to go from good intentions to reality, and we

hope you and the Committee will help this effort along. Particularly there is a Summit of the Americas next April in Canada, and

we hope that the U.S. will make this a top priority deliverable from

that convention, to make sure from the Summit of the Americas

that they will then agree to launch this kind of a process.

Thank you.

Chairman GILMAN. Mr. de Michele, did you want to comment on

that?

Mr. DE MICHELE. No.

Mr. ABEASI. Mr. Chairman, I just wanted to ask you, Mr.

Heimann, it is not just the monitoring system, but we need a reward system that will, you know, highlight the fact that people are

making progress in fighting this battle so that it will have a demonstration effect, especially in our part of the world. Thank you.

Chairman GILMAN. Dean Klitgaard?

Mr. KLITGAARD. Nothing further.

Chairman GILMAN. I want to thank our esteemed panelists and

our Members who took part today. This has been, I think, a very

helpful session. Please convey our best wishes to those participating in tomorrow’s summit on corruption. We hope out of that

summit will come some worthy recommendations. Thank you

again.

The Committee stands adjourned.

[Whereupon, at 4 p.m., the Committee was adjourned.]

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A P P E N D I X

MATERIAL SUBMITTED FOR THE HEARING RECORD

PREPARED STATEMENT OF HON. CHRISTOPHER H. SMITH, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF NEW JERSEY

Mr. Chairman, I want to thank you for holding this very timely and important hearing on the issue of combating corruption—clearly a threat to global peace, sta- bility and prosperity, but particularly challenging for those nations struggling to develop democratic institutions and the rule of law. The Helsinki Commission, which

I chair, has undertaken a series of hearings on this important topic, examining the

breadth and depth of the problem in the OSCE region and what steps the OSCE

can take as an institution to combat corruption and organized crime. Mr. Chairman, the cancer of corruption and organized crime undermines public confidence in government and threatens the development of the rule of law in those

very countries which are striving to shed the legacy of communism and its corrupt

and repressive system. Widespread corruption in the transition countries threatens their ability to pro- vide strong and independent legal regimes, market-based economies and social wellbeing for their citizens. Corruption has stymied economic reforms in these countries

and impeded efforts to improve the status of disadvantaged groups. In the absence

of effective civil rule of law, Mafias have flourished through their corrupt connections, gaining power over whole sectors of economies and derailing legislative reform

agendas inimical to their interest. A recent EBRD report recognizes this reality and

calls for greater efforts among governments and international organizations to

‘‘depoliticize’’ economic activities and develop measures to constrain state ‘‘capture’’ by private interests. As a result of this ‘‘capture’’ and siphoning off of public wealth, citizens, deprived in some cases of government-sponsored basic support mechanisms,

have formed negative opinions about democracy and free markets. As a concrete example—during a Commission hearing in March of this year re- garding the human rights situation in Turkmenistan, one of the most authoritarian

and repressive regimes in the region, opposition leader Avdy Kuliev cited three components of President Niyazov’s internal politics, the first of which is corruption.

The fact that the Committee is holding this hearing and talking about corruption—and not solely in the economic sense, but corruption in government and public

institutions—is itself refreshing. In the not too distant past, many public officials were loath to mention the ‘‘C’’ word. Many corporations simply accepted the demand for bribes as a cost of doing business. In recent years, this attitude has begun to change and, frankly, I believe the globalization of our economies is in part responsible. There is a growing realization

throughout the world that bribery is not a harmless emollient to the deal. It is poisonous to emerging democracies; poisonous to economic development; and poisonous

to free and fair trade. The business community has come to realize that, in the longterm, competing on a level playing field with transparent rules of the game is more

beneficial to their bottom line, and they have strongly supported our government’s efforts through the OECD and other organizations to develop and implement anticorruption initiatives.

The Helsinki Commission has pushed for a greater recognition of the threat of or- ganized crime and corruption in the OSCE and has supported efforts to develop an

OSCE strategy to combat them. During the 1999 Annual Meeting of the OSCE Parliamentary Assembly in St. Petersburg, Russia, our delegation called for the convening of a meeting of OSCE Foreign Ministers to develop strategies to combat

these threats. We also introduced a resolution condemning the cross-border trafficking in women and children—a major industry, along with drugs and weapons,

for organized crime entities. This year, we were successful in having the OSCE ParVerDate 11-MAY-2000 18:01 Feb 12, 2001 Jkt 000000 PO 00000 Frm 00033 Fmt 6601 Sfmt 6621 F:\WORK\FULL\H092000\69716 HINTREL1 PsN: HINTREL1
30

liamentary Assembly adopt as the focus of its work during its Ninth Annual Session

in Bucharest, Romania, the topic of Promoting Transparency in Government and the

Rule of Law.

Our Commission worked closely with the State Department to ensure that com- bating organized crime and corruption was on the agenda of our heads of state during the OSCE Summit in Istanbul in November of last year. As a result, the OSCE

leaders issued their ‘‘Charter for European Security’’ in which they specifically rec- ognized that corruption poses a great threat to the OSCE’s shared values, generates instability and reaches into many aspects of the security, economic and human dimensions. The OSCE Heads of State committed themselves to step up efforts across

all dimensions of the OSCE to combat corruption and to promote the rule of law.

They directed the OSCE Permanent Council—the Organization’s primary working body—to examine how best to contribute to efforts combating corruption and to re- port to the meeting of OSCE Foreign Ministers scheduled to convene in Vienna,

Austria on November 27–28, 2000.

Members of our Commission, and our colleagues in the House and Senate, will continue our efforts to develop strategies within the OSCE process to combat corruption and promote transparency and the rule of law. Mr. Chairman, I look forward

to the testimony of our distinguished panel of witnesses and any recommendations

they may have as to how we can continue to address these issues here in the Congress and working with the OSCE. Thank you.

PREPARED STATEMENT OF FRITZ HEIMANN, CHAIRMAN, TRANSPARENCY

INTERNATIONAL USA

I want to compliment the Chairman and the Committee for calling this hearing. Your title—‘‘The Fight Against Corruption: The Unfinished Agenda’’—is most pertinent. Over the last half dozen years a start has been made in addressing international corruption. However, much more needs to be done. I represent Transparency International (TI), an NGO formed in 1993 to combat corruption around the world. TI’s headquarters are in Berlin, Germany, and we now have a network of national chapters in over 75 countries. I am one of the founding

members of TI, serve on TI’s board of directors, and am Chairman of its US chapter,

TI–USA. I am also Counselor to the General Counsel of General Electric.

TI’s first objective, placing corruption high on the international agenda has been largely accomplished. There is now widespread recognition of the damage done by

corruption: undermining democratic institutions, distorting market economies, and

crippling international development programs. This recognition is a big step forward

from the time when corruption was a taboo subject, and was treated by the international community with a mixture of apathy, cynicism and denial.

The major challenge now is to prove that tangible progress can be made to reduce

corruption. There still is much skepticism whether reforms will work. The current

prominence of the issue gives us a window of opportunity. However, that window

will close unless we can show successful results in the next three to five years. This

requires realistic priorities. The US Government, as well as TI, must be selective

in focusing resources on programs, countries and institutions where success can be

achieved in the next few years.

I will first discuss the OECD Convention on Combating Bribery of Foreign Public

Officials. That is the most promising initiative so far and has the best chance of

achieving tangible results. Second, I will discuss the outlook for other international

conventions and suggest some priorities. Finally, I will briefly comment on some

other initiatives.

I. OECD CONVENTION: CURRENT STATUS AND NEXT STEPS

International conventions deserve priority attention because, in a global economy,

bribery has taken on international dimensions, and multilateral programs are needed to combat it. The OECD Convention to Combat Bribery of Foreign Public Officials was signed in December 1997. Because the signatories are the home countries

of most major international companies, the OECD Convention is the ideal tool for

controlling the supply side of international corruption. Currently 24 of the 34 signatories have ratified, including nine of the ten largest exporters. This means that

the necessary critical mass is aboard. We must now make sure that the signatories

effectively implement and enforce the Convention.

Monitoring Process: Phase 1. A key element of the OECD Convention is its process

for follow-up monitoring. The first phase of the monitoring process, a review of national implementing laws, began in the Spring of 1999. The laws of 21 countries

have now been reviewed. TI and its national chapters have actively participated in

31

the monitoring process, submitting our own evaluations to the OECD. For example,

TI disagreed with the position of the UK government that new legislation was unnecessary. We pointed out that existing UK laws did not provide an effective basis

for prosecuting foreign bribery. In June 2000 the OECD Working Group reported to the OECD Ministerial on Phase 1 of the monitoring process. The most telling sign that the monitoring process

is off to a good start is that both the UK and Japan were flunked. Not many international institutions have the courage to criticize their largest members! As a result,

the UK has agreed to introduce new legislation this fall. The Japanese government

has also indicated that it plans to introduce corrective legislation. During the next twelve months we need to make sure that deficiencies in imple- menting laws are corrected and that the ten remaining signatories ratify the Convention. That includes Argentina, Brazil, Chile and the Netherlands. Considerable

additional work is needed to assure that the Convention will achieve its objectives

and that the behavior of companies in international trade will really change. Four

issues deserve the attention of your Committee.

First: Making Phase 2 of the Monitoring Process Work

Early in 2001 the OECD is scheduled to begin Phase 2 of the monitoring process: assessing the effectiveness of national enforcement programs. That will be the reality check to determine whether the Convention is working. OECD teams will be

sent to six countries each year to conduct on-site reviews. To assure that Phase 2 will be effective, TI has made two recommendations to

the OECD. First, more adequate staff and budget support must be provided. Evaluating enforcement programs is a much more difficult task than examining the adequacy of implementing laws under Phase 1. Sufficient OECD staff support is not

yet assured. Second, the monitoring process must be made more transparent. Public hearings should be held during each OECD country visit. Experts from civil society and the

private sector should be allowed to present their views and respond to questions

from the monitoring team. Making the monitoring process more transparent remains a controversial issue at the OECD. Many countries prefer to conduct reviews

behind closed doors. For them, proposals for non-governmental participation raise

the specter of Seattle-type confrontations. In TI’s view, a more open process will improve public acceptance and reduce the risk of confrontations.

Second: Prohibiting Bribery of Political Party Officials

The OECD Convention currently prohibits bribery of foreign public officials, but does not cover bribery of foreign political party officials. TI is concerned that this

leaves a dangerous loophole, which will be increasingly exploited now that bribery

of foreign public officials is prohibited. While the US has pressed for coverage of political bribery, very few other OECD countries were prepared to tackle this controversial subject.

TI believes that the recent scandals involving Chancellor Kohl and his party demonstrate that the time has come to close this loophole. To that end, TI is organizing

a high-level international group to develop recommendations for submission to the

OECD. The group will meet in mid-October in Italy. The meeting will be co-chaired

by John Brademas, a distinguished former member of this House, and by Peter

Eigen, TI’s Chairman.

Third: Strengthening Accounting, Auditing and Corporate Controls

In April TI presented to the OECD a detailed survey of current practices and requirements relating to (a) books and records, (b) auditing practices and (c) internal

corporate controls in sixteen OECD countries, including the ten largest exporters.

The survey was conducted by a task force from the Big Five international accounting firms.

The TI Study disclosed that most of the sixteen countries do not have legal requirements for internal control systems. Many countries do not apply books and

records requirements, for example, barring secret slush funds, to all companies engaged in international business or to foreign subsidiaries. The survey also revealed

shortcomings in requirements for outside audits and for financial disclosures.

Prohibitions against foreign bribery cannot be effectively enforced unless there are

adequate requirements for financial accountability and transparency. TI has recommended that the deficiencies identified by the Task Force be dealt with during

the OECD monitoring process.

Fourth: Publicizing the Convention

Last Fall TI published a survey of businessmen and other experts in international

trade, conducted by Gallup International in 19 leading emerging markets. It showed

32

that very few of the respondents had heard of the OECD Convention. Respondents

from major international companies were just as ignorant as those from local companies.

TI recommends that major educational efforts be launched to make clear to businessmen both in OECD countries and in key foreign markets that bribing foreign

officials is now a crime. Businessmen will not pay attention to laws of which they

are not aware. Another important audience should be procurement officials and

prosecutors in countries where bribes are paid.

The OECD should be encouraged to publicize the Convention, and the State Department could also play a role. A prosecution for foreign bribery would undoubtedly

provide the best learning experience.

OECD Outreach Program

Before turning to other issues, I want to comment on the OECD Outreach program. The Convention has been signed by five countries that are not OECD members, including Argentina, Brazil and Chile, and there is an outreach program to

obtain additional signatories. Accession by countries that play an important role in

international trade, such as China and Malaysia, would be helpful. However, much

broader expansion could be counterproductive.

The OECD operates by consensus, and it took years of work before sufficient cohesion was developed to make progress on difficult issues. In particular, the effective

functioning of peer group reviews, on which the monitoring process depends, requires reasonable compatibility of economic interests and of legal systems. Largescale expansion, including countries with incompatible interests, could disrupt the

present constructive atmosphere.

II. OTHER CONVENTIONS

The OECD is the best forum for controlling the supply side of bribery because it

includes the home countries of most major international companies. However, unless

the demand side is also addressed, pressure to pay bribes will continue, and ways

to meet such demands are likely to be found.

The demand side is more difficult to tackle because it is not as concentrated as

the supply side. Every country that imports goods and services, or accepts foreign

investment, must deal with the demand side of international bribery. While all

countries have laws prohibiting their officials from demanding bribes, in many countries such laws are not enforced, or only sporadically enforced. The TI Corruption

Perceptions Index for 2000, released last week, shows how widespread corruption

is around the world.

International conventions are important on the demand side because they create

a set of consistent norms to guide reform efforts, and provide a lever for civil society

and the private sector to encourage governments to take more effective steps to prevent their officials from soliciting bribes. In addition, providing for mutual legal assistance through conventions will facilitate investigations and prosecutions.

Efforts to promote international conventions are underway in a number of forums.

A. Regional Forums

Inter-American Convention Against Corruption

The Inter-American Convention has been ratified by 20 countries, including the

US. It is broader in scope than the OECD Convention, covering both supply and demand sides. However, its provisions are less specific, and there is no provision for

follow-up monitoring.

In our view, follow-up monitoring is essential to transform the Convention’s good

intentions into practical effect. The Organization of American States (OAS) provides

an institutional base for a monitoring program. However, the use of strong peer

pressure, as displayed by the OECD, goes beyond the customary practices of OAS.

During the past year there has been increasing recognition in the Americas that a

monitoring program is needed. This has been actively encouraged by TI’s national

chapters.

The OAS is currently considering what kind of monitoring process would be most

suitable, and should make its recommendation before the end of this year. The US

delegation to the April 2001 Summit of the Americas in Quebec should make it a

high priority to secure a decision by the leaders at the Summit to launch the monitoring process. We urge your Committee to support such action. Six OAS members,

including Argentina, Brazil, Chile and Mexico have signed the OECD Convention,

and are committed to participation in the OECD monitoring process. That provides

a useful precedent for similar action under the Inter-American Convention.

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An OAS monitoring process would require adequate resources. The Inter-American Development Bank should be asked to help provide funding.

Council of Europe Conventions

The Council of Europe is working on three conventions to curb corruption. One

covers criminal law, one covers civil law, and one establishes a monitoring program.

The membership of the COE includes the fifteen countries of the European Union

as well as countries from Central and Eastern Europe. The US has observer status.

The COE program should be encouraged by the US. In particular, the convention

establishing the monitoring program, referred to as GRECO, could become a potentially promising vehicle for strengthening the institutional capability of legal systems in Central and Eastern Europe. Whether this promise can be realized will depend on whether sufficient resources will be provided by the wealthier countries

from the European Union, and on whether there is enough political will to make

difficult changes in Central and Eastern Europe.

Prospects for Other Regional and Global Conventions

There have been proposals for regional conventions for Africa and Asia, as well

as for a global convention under UN, or possibly WTO, auspices. There is not

enough time for me to discuss these initiatives. I only want to refer back to my earlier comment about the need to concentrate on programs that have a realistic prospect for achieving tangible results in the next few years. Additional conventions

dealing with corruption are unlikely to be productive unless (a) the participants

have reasonably compatible legal systems and economic interests, and (b) there is

an institutional base for follow-up monitoring.

III. OTHER INITIATIVES

TI and the International Chamber of Commerce have promoted the adoption of

corporate compliance programs by the private sector. Such programs are an essential complement to international conventions and national legislation against corruption. Criminal enforcement can deal with a small percentage of violators, if the

majority of companies comply voluntarily. Laws remain ineffective if the majority

fails to comply.

TI believes that the World Bank and other international financing institutions can

promote more rapid acceptance of corporate compliance programs by making the

adoption of such programs a precondition for participation in project that they finance. When we previously proposed such a requirement, it was argued that this

would limit the pool of eligible bidders because few non-US companies had adopted

anti-bribery compliance programs. Such arguments are no longer appropriate now

that the OECD Convention has made foreign bribery a crime in 24 major exporting

states. Here again, support from your Committee would be very helpful

Before concluding I want to express TI’s appreciation for the role that the US

Government has played in the fight against international corruption. Without strong

US leadership such initiatives at the OECD and OAS Conventions would not have

gotten underway. Many people at the Departments of State, Commerce, Justice and

Treasury have been actively involved. We also appreciate the strong support provided by the Congress.

The fight against corruption now has broad international support. TI is proud of

its role in developing such support. We are convinced that continued US commitment is essential to move from an encouraging start to the next phase, achieving

of tangible results. Thank you for your interest and support.

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PREPARED STATEMENT OF ROBERT KLITGAARD, DEAN, RAND GRADUATE SCHOOL

Thank you for inviting me to testify on efforts to fight global corruption. I am Robert Klitgaard, Dean and Ford Distinguished Professor of International Development

and Security, the RAND Graduate School in Santa Monica, California. The Graduate School is part of RAND, a nonprofit institution that helps improve policy and

decisionmaking through research and analysis. The opinions and conclusions expressed in this testimony are mine and should not be interpreted as representing

those of RAND or any of the agencies or others sponsoring my research.

One part of the unfinished agenda in the international fight against corruption

is how to invite in the private sector.

After all, corruption does not just involve government. Business people and lawyers and citizens pay the bribes, even as they condemn bribery. They should be invited to become part of the solution. But how?

The first point to note is that business people and citizens know where corruption

exists and how corrupt systems work. Citizens understand how bribery shapes the

services they receive or don’t receive. Accountants know the illicit games played

with audits and taxes. Lawyers understand corrupt legal practices. Business people

know all about corrupt systems of procurement and contracting.

But there is a second point: they know, but they can’t say, at least not publicly.

In many countries, if an individual stands up to denounce a corrupt system, he or

she will be attacked by it.

So, the trick is how to learn what people know about corruption without asking

them to commit suicide.

Please consider this idea. With the leadership of the American government and

our private sector, other countries are invited to join in an international effort. Together we pick three areas that are particularly prone to corruption, such as procurement, pharmaceuticals, and the police.

In each country, people in the private sector are asked in confidential interviews

how corrupt systems work, but not about specific individuals. The results of many

such interviews becomes a diagnostic of each area. What is the informal process,

how extensive is the corruption, how does it work, how do its perpetrators avoid detection or prosecution?

Using the diagnostic, improvements are sought. How can formal systems be

strengthened? How can corrupt systems be subverted? Answers are developed

through cooperation between government and the private sector.

Reforms follow. And then, after some time, the same sorts of confidential interviews leading to diagnostics are used to monitor progress.

POLITICAL BENEFITS

This idea is politically attractive, especially compared with the usual anti-corruption strategies, which many countries find offensive.

Imagine you are the president of country X. Suppose you are told that as a condition for foreign aid you must clean up corruption in your government. This may put

you in a tough spot. If you agree to the demands, the opposition may say, ‘‘Yes, we

told you so and now they admit it’this administration is corrupt.’’ Your cabinet

members and your civil servants may wonder why you are bashing them.

Now contrast your reaction to the idea proposed here, an international effort that

invites in the private sector. You are pleased that all sectors and all countries are

combining to battle this universal problem, the cancer of international corruption.

You point out that the diagnostic studies are being carried out in many countries,

including the United States, and that these studies address the international dimensions of bribery as well. You are glad that the private sector and citizens in general

are recognizing that this problem involves all of us, that all of us must be part of

the solution. And so forth—I think we all can begin to write the speech.

There is a final advantage to the idea: it is relatively inexpensive. We are talking

about a total of perhaps 100 to 150 confidential interviews per country, some culling

and sharing both nationally and internationally, appropriate remedial measures,

and follow-up.

WHAT NEEDS TO BE DONE?

How might this idea be pursued?

1. Develop the idea in dialogue with USAID, the Commerce Department, business

organizations, and organizations such as Transparency International.

2. Share the concept with other countries for further refinement.

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3. With these collaborators, design the diagnostic study of the three or four sectors per country.

4. Organize the collection of data in each country. Confidentiality of individuals

surveyed is important, so it may be advisable to involve non-nationals in the

administration of the survey.

5. Share the results of the diagnostic study with the private sector, citizens’

groups, and government officials. Redraft it and come up with joint recommendations (for both the private sector and government, of both national

and international scope).

6. Share the results and recommendations in an international meeting.

7. Implement the recommendations, perhaps with international cooperation.

8. Follow up progress a year later and thereafter.

9. Leverage the partnerships developed through this process to take further steps

in the fight against corruption.

CONCLUSION

To conclude, ‘‘inviting in the private sector’’ means learning what business people,

professionals, and citizens know about problems and solutions but are unable publicly to proclaim.

In the particular idea I’ve outlined here, the United States would take the lead

in a set of international, private-sector-based studies of how corrupt systems work

and how they might be cleaned up. The idea goes beyond international conventions

and codes of conduct. It goes beyond foreign aid directed at capacity building or

‘‘more of the same.’’ Inviting the private sector should be part of the new agenda

in international cooperation against corruption.

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