The Changing Face of Corruption in the Asia Pacific. Current Perspectives and Future Challenges [1st Edition] 9780081012307, 9780081011096

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The Changing Face of Corruption in the Asia Pacific. Current Perspectives and Future Challenges [1st Edition]
 9780081012307, 9780081011096

Table of contents :
Content:
Front-matter,Copyright,Contributors’ Biographies,ForewordEntitled to full text1 - The changing face of corruption in the Asia-Pacific Region: Its discontents, current perspectives, and future challenges*, Pages 1-20, Marie dela Rama, Chris Rowley
2 - Political finance and corruption in Southeast Asia: Causes and challenges, Pages 23-33, Andreas Ufen
3 - The effect of corruption on foreign direct investment inflows: Evidence from a panel of Asia-Pacific countries, Pages 35-55, Tristan Canare
4 - The role of multinationals in corruption in the Asia-Pacific region, Pages 57-70, Duane Windsor
5 - Private and public corruption: Facilitating payments, Pages 71-79, Antonio Argandoña
6 - It Takes Two People to Tango (or more!): The corrupt and debased culture of neoliberalism, Pages 81-92, Janet Dine
7 - Corruption, corporate governance, and building institutions in the Asia-Pacific*, Pages 93-108, Marie dela Rama
8 - 27 Years of fraud control in the New South Wales public sector: 1989–2016, Pages 111-125, Stephen Horne
9 - Money laundering activities in Australia—an examination of the push and pull factors driving money flows, Pages 127-147, Christopher Bajada
10 - Corruption in New Zealand: A case of reputational erosion?, Pages 149-166, Robert Gregory, Daniel Zirker
11 - The limits of anticorruption in China, Pages 167-177, Hugo Winckler, Jérôme Doyon
12 - Governance gridlocks and ubiquitous corruption: Charting causes, costs, and consequences of corruption in India, Pages 179-208, Roopinder Oberoi
13 - Competing for public acquaintances: The case of the Reliance group in India, Pages 209-219, Paul Caussat
14 - Corruption in Vietnam: The current situation and proposed solutions, Pages 221-231, Ngo T. Phuong
15 - Corruption in Myanmar: Insights from business and education, Pages 233-242, Tim G. Andrews, Khin Thi Htun
16 - From credible threats to credible commitments? the changing face of South Korean corruption, Pages 243-251, Ingyu Oh
17 - Indonesia’s anticorruption campaign: Civil society versus the political cartel, Pages 253-266, Johanes D. Widojoko
18 - The road to nowhere: The rise of a neo-patrimonialist state in East Timor, Pages 267-280, James Scambary
19 - The politics of Australian anticorruption policy to Papua New Guinea, Pages 281-293, Grant W. Walton
20 - Business feeling the strain: The changing world of anticorruption and beyond, Pages 297-311, Jane Ellis
21 - Is it as simple as ABC? a practitioner’s perspective on anti-bribery compliance*, Pages 313-326, Neville Tiffen
22 - Petty corruption in developing countries: Here for the long term, Pages 327-333, Andrew Proctor
23 - Corruption in the family: Financial abuse of older people in Australia, Pages 335-353, Richard Baldwin
24 - Moral corruption in a climate of vulnerability: Assessing COP21, Pages 355-367, Dustin Schmidt
25 - Future directions for research into corruption and anticorruption practice, Pages 369-377, Marie dela Rama, Chris Rowley
Index, Pages 379-392

Citation preview

The Changing Face of Corruption in the Asia Pacific

ELSEVIER ASIAN STUDIES SERIES Series Editor: Professor Chris Rowley, Cass Business School, City University, London, UK; Institute of Hallyu Convergence Research, Korea University, Korea Griffith Business School, Griffith University, Australia (email: [email protected]) Elsevier is pleased to publish this major Series of books entitled Asian Studies: Contemporary Issues and Trends. The Series Editor is Professor Chris Rowley of Cass Business School, City University, London, UK and Department of International Business and Asian Studies, Griffith University, Australia. Asia has clearly undergone some major transformations in recent years and books in the Series examine this transformation from a number of perspectives: economic, management, social, political and cultural. We seek authors from a broad range of areas and disciplinary interests covering, for example, business/management, political science, social science, history, sociology, gender studies, ethnography, economics and international relations, etc. Importantly, the Series examines both current developments and possible future trends. The Series is aimed at an international market of academics and professionals working in the area. The books have been specially commissioned from leading authors. The objective is to provide the reader with an authoritative view of current thinking. New authors: we would be delighted to hear from you if you have an idea for a book. We are interested in both shorter, practically orientated publications (45,0001 words) and longer, theoretical monographs (75,000 100,000 words). Our books can be single, joint or multi-author volumes. If you have an idea for a book, please contact the publishers or Professor Chris Rowley, the Series Editor. Dr Glyn Jones Email: [email protected]

Professor Chris Rowley Email: [email protected]

The Changing Face of Corruption in the Asia Pacific Current Perspectives and Future Challenges

Edited by

Marie dela Rama Chris Rowley

Elsevier Radarweg 29, PO Box 211, 1000 AE Amsterdam, Netherlands The Boulevard, Langford Lane, Kidlington, Oxford OX5 1GB, United Kingdom 50 Hampshire Street, 5th Floor, Cambridge, MA 02139, United States Copyright © 2017 Elsevier Ltd. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage and retrieval system, without permission in writing from the publisher. Details on how to seek permission, further information about the Publisher’s permissions policies and our arrangements with organizations such as the Copyright Clearance Center and the Copyright Licensing Agency, can be found at our website: www.elsevier.com/ permissions. This book and the individual contributions contained in it are protected under copyright by the Publisher (other than as may be noted herein). Notices Knowledge and best practice in this field are constantly changing. As new research and experience broaden our understanding, changes in research methods, professional practices, or medical treatment may become necessary. Practitioners and researchers must always rely on their own experience and knowledge in evaluating and using any information, methods, compounds, or experiments described herein. In using such information or methods they should be mindful of their own safety and the safety of others, including parties for whom they have a professional responsibility. To the fullest extent of the law, neither the Publisher nor the authors, contributors, or editors, assume any liability for any injury and/or damage to persons or property as a matter of products liability, negligence or otherwise, or from any use or operation of any methods, products, instructions, or ideas contained in the material herein. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data A catalog record for this book is available from the Library of Congress ISBN: 978-0-08-101109-6 For Information on all Elsevier publications visit our website at https://www.elsevier.com/books-and-journals

Publisher: Glyn Jones Acquisition Editor: Glyn Jones Editorial Project Manager: Charlotte Rowley Production Project Manager: Omer Mukthar Designer: Maria Ines Cruz Typeset by MPS Limited, Chennai, India

Contributors’ Biographies

Tim Andrews Dr. Tim G. Andrews is an Associate Professor based at Webster University (Thailand). His current scholarly interests include international brand management, indigenous culture constructs, and economic inequality for organizations doing business in Southeast Asia (particularly Thailand and Myanmar). He has authored numerous international journal articles and books including Building Brands in Asia: From the Inside-out to be published by Routledge (forthcoming). He is a coeditor of the Working in Asia book series (also with Routledge). Antonio Argandon˜a Antonio Argandon˜a received his PhD in economics from the University of Barcelona. He is Emeritus Professor of Economics and of Business Ethics and holds the CaixaBank Chair of Corporate Social Responsibility at IESE Business School, University of Navarra. He is a member of the Royal Academy of Economics and Finance of Spain, President of the Standing Committee on Professional Ethics of the Economists’ Association of Catalonia, a member of the Commission on AntiCorruption of the International Chamber of Commerce (Paris), of the Commission on Control and Transparency of the FC Barcelona, and a Director of the Home Renaissance Foundation (London). He has published numerous books, book chapters, and articles in prestigious journals in economics and business ethics. He has been the editor of books and journals, member of ethics committees of business associations and financial institutions, and has held government positions at IESE Business School and at scientific and professional bodies. Email address: [email protected] Christopher Bajada Christopher Bajada is an Associate Professor of Economics at the UTS Business School, University of Technology Sydney. He started his academic career at the University of New South Wales, from which he holds a PhD. He has taught economics in a variety of undergraduate and postgraduate courses, with his most recent teaching experience being in applied microeconomics. He has also served as Associate Dean (Teaching and Learning) at the UTS Business School from 2009 to 2015. In recognition of his teaching, he was awarded the University’s Teaching Excellence Award and a National Teaching Citation Award for Outstanding Contribution to Student Learning in Higher Education. His research is primarily in applied macroeconomics, with a special interest in tax compliance. He has worked

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with the Australian Taxation Office as a member of the Cash Economy Task Force and his research has attracted national publicity. In support of his research, he has been successful in several competitive research grants including from the Australian Research Council. He has also served as a member of Council of the Economic Society of Australia (NSW Branch). Richard Baldwin Richard Baldwin has over 40 years’ experience in senior roles in the health and aged care sectors including services management, teaching, research, and consulting. After an initial clinical career, he joined the NSW Department of Health and held several senior positions. More recently, he spent nearly a decade as a Director in the health advisory practice of PricewaterhouseCoopers and was a senior lecturer in and director of health services management at the University of Technology Sydney. He is an RN, has an MBA from UNSW, and a PhD from UTS. Currently he is Associate at UTS, a policy officer at Mental Health Carers (NSW), an Official Visitor under the NSW Mental Health Act, the Chief Examiner of the Australasian College of Health Service Management and undertakes consulting work concerning health and aged care. Email address: [email protected] Tristan Canare Tristan Canare is a Program Manager and Economist at the Asian Institute of Management (AIM) R.S. Navarro Policy Center for Competitiveness (formerly AIM Policy Center) in Makati City, Philippines. Previously, he also worked in such institutions at The World Bank, the Asian Development Bank, and the Asia-Pacific Policy Center. He has authored or coauthored journal articles, book chapters, and working papers on such topics as voting preference, mining, vote buying, impact evaluation, conditional cash transfer, competitiveness, local government spending, and among others. He holds master’s degrees in economics and in development economics from the University of the Philippines (Diliman) and a bachelor’s degree in economics from the University of the Philippines (Los Ban˜os). He is currently pursuing a PhD in economics at the Ateneo de Manila University. Email address: [email protected] Paul Caussat Paul is a PhD student within University Paris Panthe´on-Sorbonne and ESCP Europe. His topic revolves around MNC interactions with local actors in India, from acceptance to opposition, more particularly in the banking sector. He also teaches courses on international strategies of companies and territories as well as on the Indian economy. He received his education in economy and obtained his master’s degree in International Affairs (concentration: South Asia) from Sciences Po Paris. He also worked within the Economic Service at the Embassy of France to India, posted in Mumbai. He is also a board member of Asia Centre, a leading think tank on Asia’s political, economic, and strategic issues based in Paris. Email address: [email protected]

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Marie dela Rama Dr. Marie dela Rama is an academic in the Management Discipline Group at UTS Business School, Sydney, Australia and is a past recipient of the Australian Government’s Endeavour Research Fellowship. She has research interests in aged care, business ethics, business groups, corporate governance, corruption, economic sociology, and family businesses. She has published in a variety of areas in both academic and professional spheres including The Age, Asia-Pacific Business Review, Australian Journal of Public Administration, Australasian Journal in Ageing, The Economist, Health Care Management Review, Journal of Business Ethics, Korea Observer, Pensions: An International Review, Sydney Morning Herald, Third Sector Review, and others. She was cited by the Australian Government’s Senate Economics Committee inquiry into private equity and aged care (2007). Her previous books include the 4-volume Fundamentals of Corporate Governance (SAGE: London, 2008) and 3-volume Corporate Governance and Globalisation (SAGE: London, 2007). This is her first book with Elsevier. Email address: [email protected] Janet Dine Janet Dine is a Professor of International Economic Development Law at Queen Mary University of London and honorary Professor at Dundee University. She published the monograph: The Governance of Corporate Groups, Cambridge University Press 2000. In 2002, she took an MA in Theology and Society at the University of Essex further broadening her scholarship and became fascinated with the imbalance between individuals, states, and powerful companies. In 2005, she published another monograph with Cambridge University Press named “Company, International Trade and Human Rights,” CUP, 2005. Human Rights and international trade law were the focus of her edited book “Human Rights and Capitalism, Edward Elgar 2006” with Andrew Fagan. She details the lack of accountability for Human Rights violations by MNEs and analyses the tensions between property rights and Human Rights. Poverty, international trade, and power issues run through her work so she submitted a proposal to AHRC with Professor Granville in the same area which received a funding of d300,000; the projects was on “The Fairtrade Movement: legal support and social implications.” One outcome of the AHRC project was publishing a book entitled: “The Processes practices of Fairtrade: Thrust, Ethics and Governance (edited)” with Brigitte Glanville. In 2005, she was appointed as the Director of the Centre of Commercial Law Studies at Queen Mary University of London. During her term she planned the new Queen Mary LLM programme, found the Lincoln’s Inn Fields location for the CCLS and improved the staff gender balance and diversity. In 2003, she was appointed as a commercial law expert in a project funded by the World Bank, the EU and the Deutsche Gesellschaft fuer Internationale Zusammenarbeit (GIZ) GmbH which was aiming at assisting the Balkan states to join the EU. She drafted laws and advised governments in Kosovo, Serbia, Montenegro, and Albania to align their law with the EU acquis communautaire. With Michael Blecher she drafted “Albanian Law

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9901 on Entrepreneurs and Companies” of April 14, 2008, the Albanian work is ongoing. Email address: [email protected] Je´rˆome Doyon Je´rˆome Doyon is a PhD candidate in political science at SciencesPo/CERI (Paris) and Columbia University (New York). His area of research is mainly Chinese domestic politics; including elite politics, the Party system, and issues related to religions and minorities. His dissertation focuses more specifically on the evolution of the Communist Youth League and on the recruitment of Party officials. He is also an Associate Fellow at ECFR (European Council on Foreign Relations) and editor of China Analysis. He is the author of Ne´gocier la place de l’islam chinois: Les associations islamiques a` Nankin sous l’e`re des re´formes [Arranging a space for Chinese Islam: Islamic associations in Nanjing during the reform era], (L’Harmattan: Paris, 2014). Email address: [email protected] Jane Ellis Jane Ellis is the head of the Legal Policy & Research Unit (LPRU) at the International Bar Association (IBA) in London. The IBA is the world’s leading organization of international legal practitioners, bar associations, and law societies. The LPRU explores issues relevant to the legal profession in a commercial context. Its projects include anticorruption and antimoney laundering, business, and human rights, whistleblower protection, economic sanctions, social media, and judicial integrity. Prior to joining the IBA, Jane was a director, legal adviser, and consultant in Australia. As a director, Jane provided expert oversight and input to boards on governance, nominations, risk, and ethics. As a legal adviser and consultant, Jane worked with companies that sought to strengthen their corporate cultures and ethics and to effect change across their organization. Jane’s experience has been informed by, and developed through a career as a competition lawyer in one of Australia’s national firms, a long-term commitment to and involvement in anticorruption and water civil society organizations—specifically as a board member of the Australian chapter of Transparency International (2001 05; 2007 15) and WaterAid Australia (2009 15)—and studies in anthropology and archaeology. Jane has presented widely—from company and/or board specific seminars to international conferences hosted by the United Nations—on anticorruption, governance, business ethics, and competition. She received her undergraduate degree in law from the University of Melbourne (LLB (Hons)); in Arts (archaeology & anthropology) from the Australian National University (ANU), and her Master of Public Policy also from the ANU. Email address: [email protected] Robert Gregory Robert Gregory PhD is an Emeritus Professor of Politics in the School of Government, Victoria University of Wellington, New Zealand. He has published widely in the fields of public administration and management and public policy, with particular attention to issues of accountability and responsibility, and corruption. He was the winner of the 1996 annual Sam Richardson Award for the most

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influential article published in the Australian Journal of Public Administration. Email address: [email protected] Stephen Horne Stephen Horne is a public sector specialist who developed a career in internal audit within the NSW Government, moving on to management and strategy reviews. He joined the NSW Audit Office in 1991 as a foundation member of its new performance audit function, and became NSW Assistant Auditor-General in 2004. In July 2006 Stephen was appointed as chief executive of IAB Services, a NSW Government Trading Enterprise that successfully competed against the private sector as an outsourced provider of a wide range of improvement services including internal audit, management consulting, and misconduct investigations to State, Local and Commonwealth Government bodies in NSW. In 2015, he established a global consultancy in the fields of integrity services, risk, governance, internal audit, and performance audit. He has contributed widely to public sector improvement, with a particularly strong focus in the fields of fraud control, corruption prevention, e-government, corporate governance, risk management, internal audit, and performance reporting. He is the author of widely distributed and highly regarded better-practice publications on fraud control, probity in procurement, and public sector governance. He is also a leading figure in the ongoing evolution of performance audit methodologies and annual reporting. He has a Bachelor of Business Studies (Public Sector), and postgraduate studies in management communications and fraud control. He is a fellow and Professional Member of the Institute of Internal Auditors (PFIIA), a Certified Internal Auditor (CIA), Certified Government Auditing Professional (CGAP), Certified in Risk Management Assurance (CRMA), a qualified Company Director (GAICD), and Company Secretary (FGIA). Khin Thi Htun Dr. Khin Thi Htun is currently a Director of Builder’s International Trading Ltd based in Bangkok. A Burmese national with a background in medicine, she is also a member of the Myanmar Women Entrepreneurs Association (MWEA) in Yangon. Her research interests focus on the role of women in a changing Burma, as well as the experiences of base-of-the-pyramid employees in Burmese organizations working abroad. Roopinder Oberoi Dr. Roopinder Oberoi is a teaching faculty member at the Department of Political Science, Delhi University for 14 years. She received her MA, MPhil, and PhD from the University of Delhi. She specializes in the area of political science, public administration, public policy, and corporate social responsibility and sustainable development. In 2009 she was awarded a Post-Doctorate Research Fellowship by the University Grant Commission. She also received an Emerald Outstanding Contribution Award in 2016. She has published a book on Corporate Social Responsibility and Sustainable Development in Emerging Economies, Lexington

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Publisher, United States (2015). Her forthcoming book is on Reappraising Globalization to be published by Lexington, United States. She has contributed nearly 32 papers in various peer reviewed national and international journals and presented 45 papers at national and international conference in the field of public administration, new governance paradigm, corporate governance, and corporate social responsibility. She is on the advisory board of research committee 35, of the International Political Science Association. Ingyu Oh Ingyu Oh is a Professor of Korean Studies and Sociology at the Research Institute of Korean Studies, Korea University. Previously, he taught at Bristol Business School, UC Berkeley, Ritsumeikan Asia Pacific University, and the University of Waikato. His main areas of research and publications are Economic Sociology (Mafia States and Organizations), Cultural Studies (Global Pop Culture), Ethnicity and Migration (Korean Diaspora), and International Business Management (Strategic Alliances and Asian Varieties of Management). Ngo Thai Phuong Ngo Thai Phuong earned a doctoral degree from the Business School of Flinders University in South Australia. She gained a master’s degree at Vietnam’s National Economics University in 2004 and has worked for the Vietnamese Government ever since. Previously, she worked in the banking industry and brings many years of professional work experience. Her research interests are in the areas of business ethics, entrepreneurship and strategic decision-making, cross-cultural issues in management, and human resource management. She is a contributor to several management books. Her work has been published in several journals, including the Asian Journal of Business Ethics, the International Journal of Management and Business, and the Journal of Knowledge Management, Economics and Information Technology. She can be reached at [email protected] Andrew Proctor Andrew Proctor has had a long career in private sector development, specializing, for the past 35 years, in foreign investment policy and promotion. For the 10-year period to mid-2003, he was the regional manager for Asia and the Pacific for the Foreign Investment Advisory Service (FIAS)—an advisory unit within the World Bank Group (now part of the Bank’s Trade and Competitiveness Global Practice). For most of this time, he was based in Sydney as the manager of the FIAS Asia Pacific Regional Office, working closely with the IFC and World Bank Offices in the region and the Australian and New Zealand development assistance agencies, which contributed to the funding of the Office. Prior to joining FIAS, Andrew spent 12 years as a consultant with Coopers & Lybrand (now PwC), based successively in London, Nairobi, the Eastern Caribbean, Canberra, and Washington. While living in the Caribbean, he worked on a large, USAID-funded regional private sector development project and for much of the rest of this period was involved with projects funded by a range of development assistance agencies, often dealing with the

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policy interface between the government and the private sector. Earlier in his career, he was employed as a country economist and project economist at the Asian Development Bank and served for several years in the Australian Government in Canberra. Since 2004, he has been a freelance consultant, working principally for various parts of the World Bank Group, with much of his work focussed on deregulation, within the general context of improving the business enabling environment of the client countries. While his work experience covers more than 60 countries, his principal focus has been Asia and the Pacific and, since 2004, he has worked exclusively in South Asia, SE Asia, and the Pacific. Email address: [email protected] Chris Rowley Prof. Chris Rowley, GradCIPD, BA, MA (Warwick), DPhil (Nuffield College, Oxford), Visiting Fellow, Kellogg College, University of Oxford and Professor Emeritus, Cass Business School City, University of London, United Kingdom. He also holds appointments as Visiting Fellow, Institute of Asia and Pacific Studies, Nottingham University, United Kingdom; Adjunct Professor, Asia Institute and Asian Studies Department, Griffith University, Australia; and Professorial Fellow, Institute of Hallyu Convergence Research, Korea University, Seoul, Korea. At Cass he was the founding Director of the Centre for Research on Asian Management, Subject Leader and won several international grants for Asian research, including from the British Academy, ESRC/AIM Overseas International Fellowship, RCUK Academic Fellowship (2006 11) and Korea Foundation Fellowship (2016). He was twice awarded for “Outstanding Contribution to Reputation and Impact Through Research” with prizes for research and publications (FT list) at Cass and also in Asia. He has experience of many different universities and systems. He acted as an advisor and also Director of Research and Publications for an education charity in Singapore (2008 14). He has held appointments at Cardiff Business School, Cardiff University, School of Management, Royal Holloway, University of London and also taught in Korea (Korea University) and Switzerland (University of Lugano). He has examined over 30 PhDs in the United Kingdom and internationally and has had a range of external and visiting appointments at universities internationally. He has acted as an external and moderator on a range of programs at universities in the United Kingdom and globally. He is Editor of the SCI (and ABS) rated leading academic cross-disciplinary journal on Asia, Asia Pacific Business Review (Routledge) and also the Journal of Chinese Human Resource Management (Emerald) and serves on many journal Editorial Boards. He is Book Series Editor of Working in Asia (Routledge), Asian Studies (Elsevier), and Asian Business and Management Studies (World Scientific Press). He collaborates with a network of international colleagues and thought leaders, such as Dave Ulrich from the United States and has published widely, with over 600 journal articles, books, and chapters and other contributions in practitioner journals, magazines, and newsletters. He has given briefings, talks, and lectures at universities and companies in Asia and has consultancy experience with unions, businesses, and governments on a range of topics, including cultural awareness, diversity, leadership, knowledge management

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and employment, and human resource management policy and practice issues generally and Asian business. He also writes regularly for, and gives interviews and comments to, international practitioner outlets, news services and newspapers, TV, and radio. Email address: [email protected] James Scambary Dr. James Scambary is a research consultant and Visiting Fellow at the State, Society and Governance in Melanesia program at ANU. Since 2006, his research has been focussed on an ethnographic understanding of the intersections between conflict, peacebuilding, governance, corruption, and organized crime in East Timor. He has conducted research consultancies for a range of agencies including the New York Social Science Research Council, the Geneva Small Arms Survey, the World Bank, and the Asia Foundation. He has also held a number of academic roles, including as a lecturer in political anthropology and South East Asian politics, and as a research fellow with Swinburne University and most recently, with the Royal Netherlands Institute for South East Asian and Caribbean Studies, Leiden University. Email: [email protected] Dustin Schmidt Dustin is a graduate student at the Department of Philosophy, University of Washington, Seattle. He has a BA in philosophy from Reed College and an MA in philosophy from the University of Washington. Neville Tiffen Neville is a Principal of Neville Tiffen & Associates. He is a specialist consultant and mentor in corporate governance, compliance, and business integrity. Currently, Neville is an independent member of the Victorian Department of Education Integrity Committee; member of the OECD Secretary-General’s high level advisory group on integrity and anticorruption; member of the World Economic Forum’s advisory panel: Building Foundations for Transparency; Project Lead on Social and Governance drivers for rebuilding trust and integrity; and Fellow of the Governance Institute of Australia. Previously, he was the Global Head of Compliance for Rio Tinto and held other senior corporate governance and legal roles, including Regional General Counsel, US & South America; Chief Counsel, Australia and Corporate Secretary/Chief Counsel, Comalco. Neville advises boards and senior management in assessing the culture of business integrity and compliance with laws and internal controls. He also advises on designing and implementing frameworks for compliance, anticorruption, antitrust, whistleblowing, and related matters. Neville is a sought after speaker at international conferences on these topics. His clients include listed companies and small- to medium-sized organizations. He was retained by the Australian Federal Police to participate in their internal workshops on foreign bribery. Neville can be contacted at [email protected] or through LinkedIn.

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Andreas Ufen Andreas Ufen is a senior research fellow at the German Institute of Global and Area Studies in Hamburg, Germany. He is also an editor of the Journal of Current Southeast Asian Affairs. Among his publications are books on politics in Malaysia and Indonesia, edited volumes on Democratization in Post-Suharto Indonesia and on Party Politics in Southeast Asia, Clientelism and Electoral Competition in Indonesia, Thailand and the Philippines, and articles in journals such as Pacific Review, Southeast Asia Research, Democratization, Critical Asian Studies, and Asian Survey. Email address: [email protected] Grant Walton Dr. Grant Walton is a Research Fellow for the Development Policy Centre at the Crawford School of Public Policy, Australian National University. With a background in human/political geography he researches issues related to corruption, organized crime, international development, civil society, and the environment. Over the past decade, Grant has conducted research on Papua New Guinea, Liberia, Fiji, and Afghanistan for academia as well as international donors and nongovernmental organizations. Grant has published in numerous academic journals and books and has authored major reports for donors and NGOs. This includes publications in Political Geography; the Journal of Development Studies; Society and Natural Resources; Asia Pacific Viewpoint; Crime, Law and Social Change, and Public Administration and Development. He is the Deputy Director (International Development) for the Transnational Research Institute on Corruption and a University House (ANU) Early Career Academic Fellow. Grant is also a principal investigator on the research project, Strengthening State and Society Responses to Corruption in PNG (2016 18), which is funded by the Australian Aid program. Email addresses: [email protected] and [email protected] Johanes Danang Widoyoko Johanes Danang Widojoko is a former Executive Director of Indonesia Corruption Watch (ICW), a leading anticorruption NGO in Indonesia. Currently, he is a PhD student at the Department of Political and Social Change, Coral Bell School, College of Asia and the Pacific, Australian National University. He is writing a thesis on the political economy of the construction sector. Email address is [email protected] Hugo Winckler Hugo Winckler is an attorney-at-law specializing in foreign direct investments between China, Europe, and Africa. He is also actively involved in compliance and CSR matters. He holds LLM and LLB degrees from Paris II Law School, an MBA from National Taiwan Normal University, as well as a master’s and bachelor’s degree from Paris VII University in Chinese studies. Email address: [email protected]

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Contributors’ Biographies

Duane Windsor Duane Windsor, PhD (Harvard University), a Rice alumnus (BA), is Lynette S. Autrey Professor of Management in the Jesse H. Jones Graduate School of Business at Rice University. He was an editor (2007 14) of the journal Business & Society (BAS) founded 1960 and sponsored by the International Association for Business and Society (IABS); BAS has expanded from quarterly publication in 2007 to eight issues per year in 2016. He served as elected program chair and head of IABS and of the Social Issues in Management (SIM) Division of the Academy of Management. He received the Sumner Marcus Award for Outstanding Service from the SIM Division (2009), and a Distinguished Service Award from IABS (2014). He has published several books or monographs. His recent work focuses on corporate social responsibility and stakeholder theory. His articles have appeared in Business & Society, Business Ethics Quarterly, Cornell International Law Journal, Journal of Business Ethics, Journal of Business Research, Journal of Corporate Citizenship, Journal of International Management, Journal of Management Studies, Journal of Public Affairs, and Public Administration Review in addition to other academic publications. Email address: [email protected] Daniel Zirker Daniel Zirker is a Professor of Political Science at the University of Waikato, New Zealand. A former US Peace Corps Volunteer in Brazil (1970 72), and Fulbright senior lecturer (University of Dar es Salaam, 1989 90), he chaired the Research Committee on Armed Forces and Society of the International Political Science Association (1999 2005). He has published on democratization, economic development, and civil military relations, as well as having coauthored a number of articles and book chapters exploring the changing state of corruption and corruption scandals in New Zealand. He has edited or coedited four books on civil military relations, ethnicity, and democratization in Europe, Africa, Latin America, and Central Asia, including Forging Military Identity in Culturally Pluralistic Societies (Lexington, 2015), and Militares e Democracia; Estudos sobre a Identidade Militar, with Professor Suzeley Kalil Mathias (Cultura Academica [Brazil], 2016). His article with Patrick Barrett, “Corruption versus Corruption Scandals in New Zealand: Bridging a Wide Gulf?” is forthcoming in the journal Political Science. Email address: [email protected]

Foreword

Corruption is not new. Historians of the Roman Empire argue that, by the fourth and fifth centuries, corruption became not merely an abuse of the system of government but an alternative government system itself. This decline powerfully contributed to the dismemberment of the Western Empire. A millennium later Machiavelli could observe in his Discourses on Livy that “[f]or the degree of corruption to which the kings had sunk was such that, if it had continued for two or three successive reigns, and had extended from the head to the members of the body so that these were also corrupt, it would have been impossible to have reformed the state.” Yet corruption seems to be peculiarly a phenomenon of our time. Economic globalization has changed the context and incentives for corruption so that it seems no exaggeration to speak of a globalization of corruption. If we think of corruption primarily in terms of the corruption of public office, this is itself something of a paradox since globalization’s effect is to undermine the state’s monopoly of legitimate power over its territory and to enlarge that of business enterprises, especially those of a global character. Globalization’s compact—free capital flows and free trade and investment regimes—integrates on the economic axis but fragments on the political. Globally operating enterprises are not regulated globally; no global sovereign exercises authority over business and no international tribunal adjudicates grievances of irresponsible business conduct including corruption. Domestic regulation by host states depends on regulatory capacity and disposition. Especially for those host states with weak governance traditions and institutions, regulatory disposition is undermined both by the competitive environment for foreign investment and the temptation for elites to subordinate the public good for private gain. Protective counter-movements have emerged over the past 40 years to reembed markets into society. That process with respect to corruption is told in these pages. Civil society organizations such as Transparency International have been powerful advocates of change. The Carter Administration’s Foreign Corrupt Practices Act, enacted in the United States in 1977, prohibiting the bribery of foreign officials was a major step forward. To level the business playing field, the OECD exported these prohibitions to other member states through the OECD Anti-Bribery Convention, and later the United Nations Convention against Corruption came into force in 2005. Significantly for business, in view of the importance of London for global financial markets, the UK Bribery Act 2010 went further to proscribe bribery in both public and private sectors and requires firms carrying on any business there to have procedures to prevent bribery. Of course, not all corruption is business-related and not all business-related corruption has a global connection although few domestic enterprises are now

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Foreword

disconnected from the global economy in view of the lengthy value chains of international production systems. Corruption is a particular blight in emerging economies without developed rule of law traditions and supporting institutions but developed democratic states are no less susceptible to its corroding effect. The forms of corruption are many and reflect the particular social and political circumstances, and institutional vulnerabilities, of the individual state. A common feature is their impact upon the enjoyment of human rights. Corrupt governance has a negative impact on all human rights whether civil and political rights or economic, social, and cultural rights. As the Office of the High Commissioner for Human Rights has noted, the corrupt management of public resources compromises the state’s ability to deliver health, education, and welfare services; the economically and politically disadvantaged suffer disproportionately since they are particularly dependent on public goods. Anticorruption and the international human rights mechanisms have historically followed parallel tracks; closer integration offers scope for achievement of shared goals. Legal measures and anticorruption commissions are ineffective without strong and engaged civil society. Equally, anticorruption civil activism flourishes under a strong legal framework, an open political system and the human rights system’s articulation and assertion of the entitlements of human dignity. In each of these respects anticorruption initiatives can benefit from international human rights principles and mechanisms, and the experience of its civil society actors. The tracks of separate development might merge to mutual advantage. The chapters in this book respond to the difficulty of the challenge presented by corruption in the Asia-Pacific region. The tripartite approach adopted is a particular strength. The integration of theoretical perspectives with country case studies and practitioner reflections upon future challenges from their professional experience brings together a body of thought and experience that sheds a strong light on the problem. The geographic focus upon corruption in the Asia-Pacific region enables close attention to country and cultural differences within a region that nonetheless confronts shared challenges of economic as well as social development. The theoretical discussion addresses fundamental questions such as the understanding of the scope of corruption and its reach beyond bribery of public officials; the myriad forms it takes are explored in the sensitive country case studies. Similarly, the theoretical discussion of issues going to foreign direct investment and corruption and the building of resilient anticorruption institutions sets a sound platform for the country case studies. The distinct practitioner perspectives in the third part from law, business and economic development add significantly to the development of a nuanced understanding not only of future challenges but of potential ways forward in addressing problems identified for countries in this important region. The editors are to be commended for the intellectual architecture they have created and the individual authors for the construction of the individual elements of the structure. Professor Paul Redmond AM University of Technology, Sydney, NSW, Australia 21 November 2016.

The changing face of corruption in the Asia-Pacific Region: Its discontents, current perspectives, and future challenges

1

Marie dela Rama1 and Chris Rowley2 1 Management Discipline Group, UTS Business School, Ultimo, NSW, Australia, 2 City University, London, United Kingdom; Griffith University, Australia

1.1

Introduction

This book brings together a diverse group of academicians, practitioners, and contributors and their knowledge of, and/or experience of, corruption in the AsiaPacific Region. Hand in hand, the theoreticians inform, while the practitioners enlighten. This complementary group and their collective wisdom demonstrate the ills and ramifications of corruption and how breathtaking it is in its depth. They note the different changes that have occurred in the region from the latter half of the 20th century to the early decades of the 21st century as it emerged an economic powerhouse: the “Asian Century”a is here. Corruption’s costs have not gone away: plus c¸a change, plus c¸a meme chose. They have, instead, been modified and appear (and in some cases, persist) in different forms. The names of the people and the organizations involved may have changed, but specialists in the area can still denote the behavioral characteristics that define petty and grand forms of corruption. Our book provides plenty of examples of both. Indeed, this book’s very publication is, perhaps, testament to a current willingness to discuss an issue that is a source of political, economic and sociological angst and that, even only a generation ago, was marked by a clear reluctance to engage in public discussion, especially by those from within institutions. Corruption, derived from the Latin word “corrumpere,” signifies to rot or rottenness.b Corruption’s “decomposition” is analogous to cancer affecting and 

The editors would like to thank Andrew Proctor for his extensive contributions to this chapter. This phrase refers to a white paper published by the Australian Government in 2012 on Australia’s role and the rise of the region. See Australian Government (2012) Australia in the Asian Century, White Paper, October ,http://www.defence.gov.au/whitepaper/2013/docs/australia_in_the_asian_century_white_paper.pdf. Accessed 28.07.16. b The entry from the Oxford English Dictionary further expands that corrumpere comes from corrumpere (with or to rot) ,http://www.oed.com/view/Entry/42045?redirectedFrom 5 corruption&. Accessed 12.02.16. a

The Changing Face of Corruption in the Asia Pacific. DOI: http://dx.doi.org/10.1016/B978-0-08-101109-6.00001-0 Copyright © 2017 Elsevier Ltd. All rights reserved.

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The Changing Face of Corruption in the Asia Pacific

attacking a healthy body. Left untouched, it grows malignant and takes over, rendering the healthy functions undermined. Corruption is also the, sometimes, unspoken dark underbelly of organizations. Ignored or left without light, it creates a culture where ethical norms of a civilized society are discarded, allowing power to reside in those most likely to abuse it. It is timely to recall one of corruption’s maxims, written by Lord Acton, that “Power tends to corrupt and absolute power corrupts absolutely.”c Without checks and balances to inhibit corrupted power, once healthy societies become infected and ill, rotting from within. Appealing to a person’s selfish atavistic base becomes the order of the day. Corruption is the biblical “scarlet thread . . . that rot good intentions and retard progressive policies” (Nye, 1967, p. 417). It is the profane to democracy’s sacred. This book seeks to explore the changing face corruption in the Asia Pacific, its discontents, current perspectives, and future challenges in its full, debased glory. In his role as U.S. Supreme Court Justice in the early 20th century, Brandeis (1914) suggested that “Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.” In this form, sic luceat lux, our book shines light on many of the facets of corruption. Corruption’s reach is far and wide, deep and profound. Our book will help increase awareness of its different forms in the region and the reader may gain significant understanding and knowledge so that preventative actions may be taken in future. Our contributors make several suggestions for such actions: recognizing and correcting corrupt behavior, constant vigilance, and anticorruption practices, amongst many other ways, can stop corruption’s terminal hold. It will be effective implementation and the adoption of best practice that will yield the most beneficial results. To paraphrase the Nobel Economist Joseph Stiglitz’s (2002) book on globalization and its discontents, our book discusses the content of corruption across three themes—the theories of corruption, corruption’s impact on different countries, and the future challenges contributors have pinpointed as sources of concerns in the future. A tabular summary of our coverage is provided to allow readers a quick grasps and overview of the content and structure of our book. This is in terms of themes and county and methods coverage as well as findings and implications. As can be seen, our book is structured in three main parts, covering theory, country cases, and future challenges. The geographical coverage of our book takes in countries that are both more commonly covered, such as Australia, New Zealand, China, India, and South Korea and less so, such as Vietnam, Myanmar, Indonesia, East Timor, and Papua New Guinea (PNG) (see Table 1.1).

1.2

Part 1: Theoretical discourse on corruption

In the first part of our book, academic contributors discuss the theoretical ideas underpinning an analysis of corruption in the region. From political corruption to c

Letter to Archbishop Creighton from Lord Acton (1887). ,http://history.hanover.edu/courses/excerpts/ 165acton.html. Accessed 12.02.16.

Table 1.1

Overview and summary of coverage and content

Chapter

Authors

Coverage

Methods

Foreword 1

Redmond dela Rama & Rowley

Summary of corruption research Introduction and overview

Findings

Implications

Failed regulation and clientelistic networks proliferate in the region FDI repelled by corruption but rewards countries making strides to fight corruption MNCs should decline to engage in host country corruption and support anticorruption campaigns Facilitating payments have harmful effects as they damage socioeconomic wellbeing of a society Political ideology and role in proliferation of corruption Corporate governance practice strengthens government institutions and promotes business investment

Political structure needs to be addressed; Rise of civil society Level of FDI indicates attractiveness of a country’s economic growth

Part 1: Theoretical discourse 2

Ufen

Political corruption

Qualitative literature review

3

Canare

FDI and corruption

4

Windsor

MNCs and corruption

Quantitative Arellano-Bond difference GMM methodology Qualitative literature review and survey

5

Argandon˜a

6

Dine

Private and public corruption: facilitating payments Neoliberalism’s role in corruption

7

dela Rama

Building institutions to address corruption

Qualitative literature review

Qualitative literature review Qualitative literature review

Differentiate MNCs that do good and those that do not get caught Addressing facilitating payments must be part of anticorruption strategy Broader definition of corruption

Institutional building important part in combating corruption

(Continued)

Table 1.1

(Continued)

Chapter

Authors

Coverage

Methods

Findings

Implications

Efforts of internal audit and fraud control to prevent corruption Push-and-pull factors in money laundering No complacency in matters of corruption and international reputation Limits of anticorruption efforts in one-party system

Fraud control requires time, patience and concerted efforts Increase push factors to deal with money laundering Positive reputation of a country may erode over time

Part 2: Country case studies 8

Horne

Australia

Internal Audit practitioner

9

Bajada

Australia

Quantitative

10

Gregory and Zirker

New Zealand

Qualitative case study

11

Winckler and Doyon

China

Practitioner and qualitative case study

12

Oberoi

India

Qualitative case study

13

Caussat

India

Qualitative case study

14

Phuong

Vietnam

Qualitative

Institutional preconditionalities determine corrupt transaction Emergence of a family business through opaque processes Formalization of country’s anticorruption efforts

Anticorruption campaigns may demonstrate political ambitions rather than real change Governance and institutional perspective to address corruption Businesses must adapt to anticorruption environment in order to survive Institutional building to fight against corruption is long and complex process

15

Andrews and Htun

Myanmar

Qualitative case study

Instances of corruption in a transitioning democracy

Liberalization of economy is provoking change toward accepting corrupt practices

16

Oh

South Korea

Qualitative case study

Political business nexus has detrimental effects

17

Widojoko

Indonesia

Qualitative case study

18

Scambary

East Timor

Qualitative case study

19

Walton

PNG

Qualitative case study

Political and business elites undermining democracy Existing power structure threatened by anticorruption commission Clientelist and neopatrimonialist modes of distribution and governance become entrenched Political elites have implicit approval from outside

Increasing regulatory pressures on business worldwide to prevent corruption Organizational and cultural leadership important to prevent engagement in corruption

Organizations cannot be complacent in managing corruption risks

Civil society as a force of good in fighting corruption

White elephants are symptoms of self-destructive pattern of public expenditure

Political corruption best fought by those willing to take political risks

Part 3: Future challenges 20

Ellis

Anticorruption and pressures on businesses

Legal practitioner case study

21

Tiffen

Antibribery compliance

Business practitioner case study

Antibribery compliance programs difficult in implementation but helped by leadership commitment (Continued)

Table 1.1

(Continued)

Chapter

Authors

Coverage

Methods

Findings

Implications

22

Proctor

Petty corruption

Economic development practitioner case study

Major contributing factors to incidence of petty corruption

Addressing petty corruption is slow process but a necessary one

23

Baldwin

Corruption in the family: elderly abuse

Qualitative case study

With ageing populations, governments must be prepared to regulate financial abuse

24

Schmidt

Moral corruption and climate change

Qualitative literature review

Increasing incidences and forms of elderly abuse usually committed by known persons to individuals Climate change is great moral challenge of our time

dela Rama and Rowley

Future directions for research

Qualitative literature review

Governments, businesses and societies around the world must tackle this issue collectively

Conclusion 25

Four main areas of anticorruption research and practice

Political corruption, institutions and bureaucratic corruption, civil society, technology, and business will play an important role in anticorruption in the region

The changing face of corruption in the Asia-Pacific Region

7

petty corruption, countries in the region have been subject to and continue to experience the gamut of this negative externality. Ufen’s chapter on political corruption in the region shines light on the negative aspects resulting from dysfunctional relationships between business and politics in some of the countries. He also dissects the commercial elements of the political party structure of several countries and the expenditure required to rise to power, seize, and/or hold on to power. However, he sees hope with new technologies and stronger civil society groups challenging the status quo, as shown by his point: Political corruption is often an effect of the failed regulation of political finance and is manifested by clientelistic exchange, patronage, vote buying, and the increasing power of business elites in politics. Movements in opposition to the deeply ingrained behavioral patterns of lax regulations and law enforcement are still weak, but are challenged by some innovative practices invented by civil society groups.

For democracy to flourish in a meaningful form in the region, removing the clientelistic networks that proliferate in the political system remains a major obstacle. Indeed, when business mixes with politics, the outcome is rarely satisfactory for the ordinary citizen. Ufen’s chapter also provides additional context to instances of political corruption described in several of the country case studies found in Part 2 of our book. Canare’s chapter formalizes the link between foreign direct investment (FDI) flows and corruption in the region. The region is recipient of nearly a US$1 trillion worth of inward investment or around 45% of the world’s FDI flows (UNCTAD, 2015), while the prospects for inter and intraregional business are staggering. In general, FDI benefits regions by bringing in capital, physical, and intellectual flows and the region is “an important destination” for FDI. The Asian century, with China core to this engine of growth, is materializing. With investment, comes increased scrutiny of business practices. So, the region is booming; however, in his chapter, Canare points out that the effects of corruption are wholly negative for a country— there is a macroeconomic discount to a country with a perceived high rate of corruption. Corruption is a significant cost to investors and it is the additional uncertainty of its cost that deters them. Canare’s study divided the sample of countries and found that for low-to-middle-income countries, corruption had little influence on FDI outcomes. It is China and other developed countries in the region that continue to receive higher rates of FDI despite, or in spite of, perceptions of corruption. Success in reforming the business environment or lessening corruption is a strong motivator for investors. Indeed, Canare points out that Both the level of corruption and the change in level of corruption have significant effects on the level of FDI inflows . . .. The former means that countries with less corruption receive more FDI inflows; the latter means that countries that improved their level of corruption also receive more FDI inflows. Thus, country A, which is not corrupt, and has stayed that way for many years, tends to receive more FDI

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The Changing Face of Corruption in the Asia Pacific

inflows. Similarly, country B, which is relatively more corrupt, but has made significant improvements in the past years, also tends to receive more FDI inflows. This could have significant policy implications because it shows that investors are looking to invest not only in countries with low levels of corruption to begin with, but also in countries that have made strides in the fight against corruption.

Canare’s chapter demonstrates the strong linkage between FDI and corruption in the region and encourages policy makers to continue the fight against corruption. Correspondingly, Windsor’s chapter looks at corrupt behavior by one of the largest categories of foreign investors—multinational corporations (MNCs)—in the region and analyses their role through the lens of corruption markets. First, he defines the field by looking at the economic actors in both the supply and demand sides of corruption markets. He lists five key participants or stakeholders in the region to prevent corruption or influence anticorruption efforts: anticorruption activist organizations, domestic businesses, governments, MNCs, and multilateral organizations. Whether all are equally as effective in corruption preventative efforts remains unclear. Windsor defines the four distinctions in the corruption markets: bribery and extortion, bribery and facilitation payments, bribery and gifts, and commercial and governmental corruption. Second, Windsor provides details of several cases of MNC misconduct in the region: Siemens, Glaxo Smith Kline (GSK), Walmart, and Goldman Sachs. The immature attitude displayed after these companies were shown to have operated corruptly reflected violation of the “11th Commandment of doing business”: “Don’t get caught.” Argandon˜a’s chapter looks at different forms of private and public sector corruption through facilitating payments. Historically, the narrative around corruption was mainly formed from an ethical view point but, from the 1970s onward, the economic aspect of corruption became a more solid argument to dissuade its proliferation. Facilitation payments, as a form of petty corruption, are insidious and have negative consequences on the economy and society as a whole. In his chapter, Argandon˜a explains the origins of such payments, why they exist (opportunity, benefit, cost, and risk), the structure of these payments, and their ethical dimensions. As Argandon˜a points out: “Corruption is often an organisational phenomenon, not only for the agent and the principal, who convert facilitating payments into a modus vivendi, but also for the client, who prefers not to oppose any resistance.” In short, an organization involved in a corrupt transaction (whether on the supply or demand side) is severely affected by such payments. Corrupt transactions destroy the organization’s reputation or sully its culture. Argandon˜a’s chapter is complemented by later chapters in our book from contributing practitioners. Dine’s contribution focuses on the ideological environment that allows corrupt transactions to take place and flourish. This chapter begins with a multifaceted debate on defining corruption before discussing institutional corruption in detail by way of tax avoidance schemes and regulatory arbitrage. It also explores corruption as a form of “moral deflection” and the ideological stances, such as the expansion of neoliberal orthodoxy, in explaining and even justifying its presence. The final chapter in this section by dela Rama looks at corruption, corporate governance, and building robust institutions. The chapter begins with articulating the

The changing face of corruption in the Asia-Pacific Region

9

Rose-Ackerman (2008) model of corruption and defining the different forms of petty and grand corruption. It then summarizes the impact of three OECD publications (1999, 2004, 2015) and discusses the importance of strong institutions and good corporate governance practice to mitigate corruption in the Asia-Pacific Region.

1.3

Part 2: Country case studies—corruption around the region

Next, Part 2 of our book shows how the diverse effects of corruption not only affect industries and all levels of government but also the countries themselves. The country case studies show that irrespective of size or stage of economic development, corruption is present and prevalent. Accordingly: “Fortunate is a land that lives in confidence under the rule of law, with elected parliaments, uncorrupted officials and independent judges” (Former Australian High Court Justice Michael Kirby in Marr, 2009). In this part, 10 countries in the region are the focus of study (spread over 12 chapters) by both academics and practitioners. Geographical, economic, or cultural variations do not prevent immunity to corruption and to the form it takes. Whether a country is strongly democratic or recently transitioning to a democracy from dictatorship, corruption does not discriminate. This part shows that irrespective of the size of a country, state, province or territory, or the stage of economic development, it has reached low, middle, or high income; examples of corruption are prevalent and continue to present challenges. To begin this part, Horne, an internal audit practitioner with over three decades of experience in the public sector in the state of New South Wales (NSW), takes us through a personal account of his journey in dealing with fraud control. NSW, whose capital is Sydney, is the largest state (by population) and the economic engine of Australia. This chapter highlights the instrumental changes and attempts he has made in his role at the Audit Office of NSW and the Internal Audit Bureau by preventing fraud from taking place in the state’s public service. Strong institutions are necessary functions of strong democracies. However, institutions are run by humans and so influenced by the vagaries of human conditions. Horne provides an insight into the intricacies and realities of government bureaucracies as the professional bureaucracy deal, interface, and interact with their political equivalents toward a common goal. Building relationships, being proactive, and being innovative are key and it is in the implementation, rather than the policy decisions, that reforms can succeed or not. In the area of fraud control and corruption, watershed institutions and legislations were established, while reports were published and surveys conducted to address weaknesses in institutional arrangements. In the next chapter, Bajada investigates the specific issue of money laundering in Australia by researching the push-and-pull factors driving such financial flows. Bajada reviews the legislative and regulatory reforms that impact on the level and deterrence of crime—the effects of which influence money laundering activities in

10

The Changing Face of Corruption in the Asia Pacific

the country. The author points out that money laundering has severe socioeconomic consequences, such as the impact on key economic variables, including the stability and solvency of the financial sector; reducing competition due to pressures on legitimate businesses and, subsequently, tax revenue; increasing in law enforcement costs and security measures; distortions in economic data; and supporting acts of local and global terrorism. The pull factors of money laundering are high rates of crime and corruption and bank secrecy provisions, while the push factors are antimoney laundering legislation, effective policing services, and information gathering powers. Placing greater emphasis on the push factors, suggests the author, is the key to dealing with the country’s money laundering threat. Across the Tasman Sea, New Zealand, a country that has an enviable renown for transparency and low corruptiond is the subject of an assessment of reputational erosion by Gregory and Zirker. This chapter critically analyses the perception that New Zealand is as clean a country as it claims. They argue that New Zealand’s significant fall in rankings from a coveted first to fourth place (in 2015) in Transparency International’s (2016) Corruption Perceptions Index reflects changing business conditions and attitudes during this period. For a country that prides itself “as a clean, green country with a vibrant democracy, a relatively fair income differential, and little or no corruption,” they suggest that the institutional chinks in this pristine armor, such as the absence of a “single agency with requisite independence, impartiality and resourcing (which) has been assigned the responsibility of policing corrupt practices,” are starting to show and the national reputation is the worse for it. This chapter looks at different examples in the country that—once amplified—point to wider systemic problems, making the country somewhat less wholesome than is implied by the ranking it has been given. Touching on political corruption in the country, the authors lambast the political and bureaucratic elite in their country who have the means, power, and influence to change the institutional culture for the better but, in recent times, have opted for the worse: Those political and bureaucratic grandees who greedily capture state assets by virtue of their high positions in government, the kleptocrats, contrast with middle and lower-level officials who pettily seek to enhance their income by exploiting the discretionary authority they are able to exercise over citizens with whom they directly transact. Loosely speaking, the former is venal, the latter venial.

This chapter warns against the harms brought on by politicization that has beset and weakened the administrative arms of other countries in the region (Mulgan, 1998; dela Rama, 2009). Gregory and Zirker illustrate that even in countries which have a gilded reputation for cleanliness, complacency is a curse and anticorruption advocates must remain vigilant to unsavory and degenerate practices. d

According to Transparency International’s 2015 Global Corruption Perceptions Index, New Zealand is ranked 4th out of 167 countries surveyed. See ,http://www.transparency.org/cpi2015#results-table. Accessed 26.07.16.

The changing face of corruption in the Asia-Pacific Region

11

Doyon and Winckler’s chapter looks at the limits of anticorruption campaigns in China from both a legal practitioner and academic’s perspective. In the early part of the 21st century, the state has been involved in curbing the rise of corruption, which the party sees as incompatible and detrimental to the maintenance of strong economic growth in the country. Similar to the stance of our other contributors, the authors do not see corruption in China as a specific cultural affliction but, rather, a result of its “political and institutional configuration.” This institutional configuration includes the lack of independence of the judiciary and the censorship of the “fourth estate.” These institutional weaknesses are present in the absence of an anticorruption law, the limited investigative powers of regulatory authorities, and the inconsistent enforcement by government bodies of the existing antigraft and antibribery laws. These weaknesses are highlighted in cases which deal with alleged corruption committed by Communist Party members. Juvenal’s phrase applies here: “Quis custodiet ipsos custodies?” Loosely translated, the question asked is who will guard the guardians themselves? Indeed, who can investigate the Party members themselves in a unitary party system? The opacity of jurisdictional powers leads to the impression of Party members as being “above the law” or existing beyond the law applied to a common Chinese person. For the author, this impression is formalized with the shuanggui procedure: . . . which entails that corruption investigations and the disciplinary sanctioning process of corrupt Party members are conducted outside the Chinese legal system and in an opaque manner. Shuanggui means double standards, and is also known as “double designation” (liangzhi), since the procedure starts with the summoning of a Party Official, stating a place and a time for interrogation. Following the shuanggui procedure, a Party member can be detained for an undetermined duration outside of the legal system . . . the anti-corruption efforts within the PartyState are mainly in the hands of the Party itself. There is no independent agency in charge of investigating and prosecuting corruption . . . such an institutional configuration leads, by design, to a selective struggle against corruption, mixing governance related objectives with political ones.

These institutional weaknesses need to be addressed as the country propels itself to a more influential and powerful role in the global economy in the 21st century. Popular actions such as human flesh search engines (renrou sousuo) are an impactful way to shame misdeeds, however briefly, especially those committed by the country’s public officials and/or “princelings” while at the same time mobilizing ground-up support for reform. The country’s censorship agencies prevent longterm, concrete official actions and explicit, rather than implicit, actions are required. Anticorruption campaigns are also seen as being politically motivated, rather than legitimate attempts to sustain meaningful institutional reform. Winckler and Doyon conclude that anticorruption campaigns in the country are evidence of the party state nexus rather than evidence of political change. Two of our chapters are devoted to India, the most economically dominant country in south Asia. The first chapter, by Oberoi, focuses on the current state of governance in India, while the second chapter is a case study on the Ambani Brothers,

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The Changing Face of Corruption in the Asia Pacific

one of the biggest conglomerates in the country. Oberoi’s contribution focuses on how political corruption is an issue that has profound effects on the health and governance of the state. She posits that the Indian state must meet a number of preconditions before it can improve its governance, an outcome which can only promote the economic development of the country and with it, improving welfare for its population. India must tackle its governance issues as it addresses underlying corrupt activities at the same time. As Oberoi observes: the captured economy is trapped in a vicious circle in which the policy and institutional reforms compulsory to improve are undermined by collusion between powerful vested interests and state officials who reap substantial private gains from the prolongation of weak governance.

Similar to our other chapters, Oberoi provides significant examples of endemic corruption that occur in the country. A more specific example is provided by Caussat in his case study of the Ambani family-owned company, Reliance. This explores the rise of Reliance in India from its humble beginnings and an entrepreneurial founder, with political savoir faire, to its conglomerate status. Akin to a few other family-owned business groups in the region, the Reliance story shows the mafia-like behavioral actions it undertook in order to navigate through—and survive—India’s challenging business environment. The company’s actions as the country went through a series of market liberalization reforms have come under critical scrutiny. Using the privileged status of their connections, the Reliance story is emblematic of what it takes to succeed in business in the country—albeit, not a laudatory one. Caussat argues that the DNA of Reliance is based on its political strategies. However, future challenges face the group. In an era of globalization and increased demands for transparency, Reliance’s future, similar to that of other business groups in this position, will have to be based on adaption and evolvement to the requirements of the global marketplace in order to survive. More primitively, it faces the bane of any family business: succession issues. The second generation of the family has the challenge of successfully passing its vast business interests on to the third generation. In the case of Vietnam, Ngo Thai Phuong summarizes the early achievements of nascent corruption laws in the country. As a developing economy which has grown spectacularly in the first decade of this century, Vietnam’s growth needs to be managed with an efficient and effective public service. In particular, this chapter covers the frequent instances of corruption amongst public servants, the sectors where corruption occurs more frequently and the legislative remedies being used to tackle these issues. As in any developing country facing embedded corruption in some sectors, preventative measures are required before such unsavory practices become institutionalized. Also, as with any emerging economy, instances of private-to-private sector corruption and private-to-public sector corruption remain underreported. Andrews and Khin Thi Htun explore corruption in Myanmar by studying two sectors in the country: business and education. Similar to some other countries in

The changing face of corruption in the Asia-Pacific Region

13

the region, Myanmar’s transition from dictatorship and democracy has provided threats as well as opportunities. The country faces significant challenges internally, such as poor infrastructure, being resource rich but poorly managed and civil divisions along religious and ethnic lines. The political vacuum after the military dictatorship supports a junta that once had political power but is slowly and most reluctantly relinquishing it in the face of democratic pressures. In this situation, they have replaced their political powers with economic ones, resulting in detrimental effects to the rest of societye: and the authors conclude: “. . . it is difficult to see how the plight of the country’s poor (i.e. the vast majority) can change until this commercial, economic and administrative stranglehold is addressed.” The authors provide vignettes in their account of endemic cronyism and nepotism rivaling those of China’s princelings in public sector organizations and petty and grand corruption across many sectors as the country opens up to foreign investors. They also note that the country’s attitude toward corruption is changing as more scrutiny is placed on the opaque transactions occurring in one of the region’s fastest growing economies. From one of the poorest to one of the richest countries in the region (see Rowley, 2013), Oh argues in his damning treatise that South Korea’s institutionalized corruption through political and business elites is the result of successive predatory governments and their cozy private sector counterparts. Oh expands on why the democratic reforms of the country can unravel when people in control of these two powerful spheres of business and politics in the country pursue their selfinterests above all else. In particular, the family-owned and run conglomerates or chaebol, such as Samsung (see Rowley and Paik, 2009), have long cast a shadow on the democratic reforms of the country. By virtue of their size and influence, the impression that they are above the law is not easily dismissed. Oh shows that every chaebol-related illegal action weakens the judiciary’s powers and erodes the trust of the Korean people in their own institutions. Oh’s lamentation over the country’s business political nexus parallels Miliband’s (1969) description of an instrumental state, whereby the elite “capitalist class controls the state apparatus for its own economic benefits” to the detriment of its society. Widojoko’s illuminating chapter on civil society as a force against corruption in Indonesia provides significant insight into the painful transition the country has been undertaking from decades of dictatorship to building strong, inherently democratic institutions. For example, he notes that the country’s reactionary political cartel and police force have attempted several times to destroy the country’s anticorruption commission. However, the commission’s strong support from mainstream social movements has, at the time of writing, managed to ensure its survival. The use of technology and social media is empowering and mobilizing Indonesia’s civil society to fight injustices and to protest quickly against corruption within their public institutions. In the absence of a visible willingness from Indonesia’s political elite (with 82 politicians found to have behaved corruptly by the independent corruption commission from 2005 to 2015) and law enforcement leaders (who have been the subject of the commission’s investigations) to support the country’s e

Myanmar’s military elite share commonalities with East Timor’s covered later in this part.

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The Changing Face of Corruption in the Asia Pacific

ongoing anticorruption efforts, Indonesian’s nascent civil society will need to continue being the instigators to sustain further efforts toward institutional transparency and accountability. As Widojoko notes: Without active participation of civil society, there would not have been such a strong anti-corruption commission established in Indonesia. Domestic ownership would be an important factor that enabled independent institutions to survive despite numerous attempts to dissolve it by predatory interests.

How do newer nation-states cope and transition to democracies? Scambary’s chapter looks at the case of East Timor, a half-island-state which fought for and gained its independence from Indonesia in 1999. As a country with rich natural resources but socioeconomic indicators that place it as one of the poorest on the planet, East Timor is caught in a dilemma of trying to improve the welfare of its citizens while also trying to manage its neighbors’ intentions. Scambary points out that it is under the political leadership of former rebel leader, Xanana Gusma˜o, that the country is tending toward becoming a clientelist and neo-patrimonial state. East Timor’s experience echoes previous examples of authoritarian rulers who have sought to stabilize an unstable state, rightly or wrongly, through undermining the very foundations and institutions that are supposed to give long-term cohesion and security in a nascent democracy. As the authors state: East Timor’s unique constellation of historical, cultural and economic factors in particular, its resistance networks and relationship with its former occupier Indonesia while potentially a source of strength, have instead combined to set East Timor on a self-destructive political and economic trajectory.

It is precisely at the beginning of independence, where a political power vacuum is at its most prominent, that a vulnerable nation-state must ensure it does not simply emulate nor inherit the attitudes of a loathed ancien re´gime. Unfortunately, as Scambary shows, under its current political leadership, East Timor has joined the ranks of Francoist Spain, postprivatized Russia and other faltering examples where an omnipotent, but charismatic, leader oversees the painful transition of their country into becoming a quasi-democratic state. In East Timor, the power vacuum since independence and the shift to democracy has not been well regulated nor executed well. The “relevance deprivation syndrome”f that affects formerly powerful people is playing out in East Timor. The political jostling for influential positions by former rebel leaders—who are now in civilian life and not commanding the power and prestige they used to command under Indonesian rule—continues. The question remains how terminal this political situation and structure will be and whether the postrebellion yoke and colonial baggage can finally be conquered. f

This phrase is attributed to the former Foreign Minister of Australia, Gareth Evans, see Evans (1999) Valedictory Speech to the House of Representatives. ,http://gevans.org/speeches/old/1998-1999/ 300999_valedictory.pdf. Accessed 23.06.16.

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The final chapter in this part focuses on corruption in PNG. As a former Australian colony, PNG has also been undergoing a painful transition into a fully fledged democracy. While its independence was not as fraught as East Timor’s, Walton’s chapter on political leverage and anticorruption efforts in that country shows the enduring legacy of colonialism. Walton suggests that “political corruption is best fought by those willing to take political risks.” Australia, as its former colonial master, has poured significant amounts of aid into the country aimed at improving governance and promoting anticorruption efforts. However, such efforts do not tackle high-level political corruption which impacts on the independence of the judiciary and the enforcement of the rule of law. Some of Australia’s foreign policy initiatives, particularly its “Pacific Solution,”g mean it has an uneasy relationship with PNG. The result is that, as long as PNG accepts Australia’s asylumseekers, Australia becomes complicit to the institutional weaknesses in the country as its political leverage to improve PNG’s governance is substantially reduced. As Walton asserts: “While donors can talk big about corruption they are bound by broader diplomatic relationships. These diplomatic relationships often trump concerns about political corruption.” Echoing the experience of other countries, with the complicit approval of external forces, the PNG elites have shaped the country to suit their needs rather than suiting the needs of the many.

1.4

Part 3: Future challenges

The last part of our book begins with three practitioner chapters proffering their perspectives on the future challenges of corruption from a legal, business, and an economic development perspective. They are followed by academic chapters on two challenges future generations face: an ageing population and climate change. Ellis’ chapter is a legal practitioner’s perspective on addressing business misconduct in the area of bribery and corruption, from the macroview to what it means in daily business operations. This chapter complements Tiffen’s approach. Ellis provides practical steps a company can take to prevent or address bribery and corruption from taking place. This chapter first explores the current history of international anticorruption conventions, beginning with the landmark U.S. Foreign Corrupt Practices Act (FCPA) of 1977. In the intervening years, other conventions have sought to strengthen anticorrupt practices with varying degrees of success. The chapter tracks the origins of Transparency International and the need to tackle the “cancer of corruption.” Other landmark conventions include the 1997 OECD Anti-Bribery Corruption Legislation and the 2002 UN Convention Against Corruption. Enforcement, according to Ellis, was bolstered in the aftermath of 9/11. g

The phrase “Pacific Solution” refers to Australia’s policy of settling maritime refugees seeking asylum in Australia to other countries such as PNG. See Phillips (2012) The “Pacific Solution” revisited: a statistical guide to the asylum-seeker caseloads on Nauru and Manus Island’, Social Policy Section, Parliamentary Library. ,http://www.aph.gov.au/about_parliament/parliamentary_departments/parliamentary_library/pubs/bn/2012-2013/pacificsolution.. Accessed 12.07.16.

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The Changing Face of Corruption in the Asia Pacific

The need to address significant corporate malfeasance through bribery and corruption also saw the introduction of the 2010 UK Bribery Act, which cast a wider net than the US FCPA. Company reputations that have been built over a long period of time can easily be undone by even a whiff of bribery. For businesses operating globally today, the need to have strong and enforceable codes of conduct, company policies, and compliance programs is critical in order for them to meet international anticorruption requirements. As this chapter recommends, a company’s anticorruption compliance program is the first line of defense and as such requires significant time and resources to implement and sustain. It also emphasizes the necessary due diligence that is required and suggests questions a company should ask whenever there is third party involvement. Finally, it points out that corruption is increasingly viewed as part of, or contributing to, human rights abuses. The case of the Bangladesh Rana Plaza fire in 2013 is testament to the wider sociocultural ramifications of bribery and corruption. The anticorruption approach by a company ought to be owned or embraced by all and not left to the legal division of an organization—an ethical culture rather than a compliance culture in an organization is infinitely preferable, as it means anticorruption is committed to in substance, not just in form. Tiffen’s chapter contains his practitioner’s experience in the area of antibribery compliance. As a member of the OECD’s high-level advisory group on anticorruption and integrity, Tiffen discusses in a straightforward, frank manner the factors a compliance officer must consider. With many years of extensive international experience in the field, Tiffen pinpoints the fundamental building blocks of a company—leadership and culture— as pivotal to predicting whether the organization can behave appropriately in international business transactions. The chapter calls for international standards to be uniform and accepted in order to provide guidance for practitioners working in the field. The ambiguity on terms surrounding what constitutes (or not) miscreant behavior shows the importance of language when formulating the regulatory guidance on compliance. The chapter also shares his experience in dealing with the thorny issues of company gifts, entertainment, third parties, facilitation payments, per diem payments—one or all of which may encourage business deals to proceed but, on the other hand, commit the parties involved to be in serious ethical or legal quandaries. The chapter also provides examples of clear communication and training strategies to prevent such organizational issues from arising. Peppered with vignettes, Tiffen explains one particular moment that crystallized what it means to be dealing with corruption at the coal face: I recall a session in Kazakhstan, when asked why there was so much corruption, a participant said it was because bribery was “cultural”. This led to a good discussion bribery was commonplace but most people hated it, therefore the conclusion was that it was not cultural and could be resisted.

While Tiffen’s chapter provides his business practitioner’s perspective and Ellis’ her legal practitioner’s perspective, Proctor provides an economic development

The changing face of corruption in the Asia-Pacific Region

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perspective on corruption. This chapter highlights the significant cost of petty corruption in developing countries. With many years of practitioner experience at the foreign investment advisory arm of the World Bank Group, this author states that petty corruption continues to be an impediment to social and economic progress. As the chapter points out, ordinary citizens in developing countries encounter petty corruption in their daily lives, and its effects (as opposed to grand corruption) are more widespread. The chapter summarizes three common scenarios where petty corruption and bribery normally takes place and demonstrates the ramifications of each to the different social classes in a society. Those who live on incomes well below the poverty line (or any income at all) cannot readily engage in such activities and it is noted that: While small payments to officials to ensure that they fulfil their duties may be an annoyance to more affluent people, they do not generally have a substantial impact on the lifestyle of these people. The less affluent, however, are often in the situation of having to make difficult choices as to whether access to the service they are asked to (illegally) pay for is more important than the other, often fundamental, demands on their limited incomes.

The chapter identifies contributing factors to the prevalence of petty corruption and suggests some areas in which improvements in developing government policies could be made and on which international development agencies could focus. With the former, it suggests addressing three key areas: the perennial problem of low civil service salaries, inadequate legal structures and services, and poorly draft legislation, regulations, and procedures. Similar to points in our other chapters, it is noted that technology as a driver of positive change may make a difference in reducing forms of petty corruption by shaming those who have chosen to engage and reify this practice, notwithstanding the presence of proper infrastructure in those countries in the first place. Thus: it is recent advances in information and communications technology that are providing the opportunities for consumer-driven initiatives aimed at combatting petty corruption. These initiatives have often been based on exposing corrupt practices using smartphone apps and dedicated internet sites to which those experiencing such practices can make referrals. Such schemes would appear to have substantial potential, in that they remove the individual from the normal one-on-one situation with corrupt officials and allow them to add their experiences anonymously to a larger grouping.

For international development agencies, the chapter suggests that private sector development, such as improving the business environment, should not be the only focus where the agencies can exercise their power and influence but other areas of government where petty corruption is most common. It is difficult not to foresee widespread petty corruption creating an environment in which grand corruption takes hold. Accepting petty corruption as the norm in any form is disheartening as it strikes at the heart of the legitimacy of governments. Addressing petty corruption

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may be slow and unyielding but the long-term outcomes of a satisfied populace outweigh the short-term gains of a few. The last two chapters in this part in our book seek to highlight the pertinent current and future challenges of an ageing population and climate change as it relates to corruption. These twin challenges to future generations were highlighted in a 2010 Intergenerational Report published by Australia’s Treasury Department.h In the case of an ageing population, Baldwin’s chapter looks at corruption within the family. This chapter is a somber but a necessary one—it shines light on a subject that is unpalatable: the abuse of the weak and the vulnerable. It is the sum of the corrupt behavior of individuals that allows us to study corruption in institutions, organizations, and nation-states (as our contributors in this book attest). In this chapter, corrupt behavior is focused on the financial abuse of older people in the country by individuals related to them. Thus: It is particularly those with dementia who are more vulnerable to the actions of others who may seek to use a variety of mechanisms to access the older person’s assets for purposes that are not in the best interest of the older person. This presents a challenge to government authorities and to the community as they explore mechanisms to protect the rights of vulnerable older persons.

Baldwin’s chapter adheres to the maxim that the test of any civilized society is how it treats its most vulnerable. This necessarily thought-provoking chapter looks at the different financial mechanisms to take advantage of the vulnerable through theft, denial of access to funds, misuse of powers, mishandling of assets, deception and predatory lending. The chapter also provides vignettes of corruption committed against the elderly. While elder abuse is almost universal, the varying degrees of reporting are a concern. It recommends several ways to overcome and address continuing abuse against older people, including strengthening whistleblower legislation and mandatory reporting. From a family problem to a global problem, as the world is facing significant global climate change challenges, Schmidt’s chapter looks at moral corruption and the implications of the 2015 Paris Agreement of COP 21. This chapter extensively details the perfect moral storm and the intergenerational challenges that beset global climate change negotiations. The devil is, after all, in the details, and the chapter perfectly captures the ethical dilemmas that the living generation faces in deciding for, and on behalf of, yet-to-live generations. However, the significance of COP 21 is what it has achieved so far. As the chapter points out: The sheer fact that the world’s leaders convened and agreed to stringent emissions reductions while acknowledge the complex intersection of climate change, justice, indigenous cultures, intergenerational justice, intrinsic value of ecosystems . . . shows a real commitment to address the complex severity of the issue. No

h

Australian Treasury (2010) The Intergenerational Report. ,http://archive.treasury.gov.au/igr/igr2010/ report/html/01_Executive_Summary.asp.. Canberra: Commonwealth of Australia. Accessed 28.07.16.

The changing face of corruption in the Asia-Pacific Region

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coordinated global effort will happen without such an agreement, and that COP 21 includes recognition of such a complicated moral landscape shows real progress in our global effort to frame the problem.

As with any international agreements, it is the multiple series of minor steps that count. With anthropogenic climate change, it behooves this species to do all it can to address the greatest moral problem of our time. The final chapter summarizes our book. It uses a framework of four main parts: political, institutional, and bureaucratic corruption; civil society and technology; the role of business; to discuss the issues raised. It also provides some directions for future research into corruption and recommendations for anticorruption practice in the region.

1.5

Conclusion

Our book covers a topical and highly emotionally charged and contested area and its different aspects, such as political, institutional, and bureaucratic corruption and the role of business. We do this by bringing together a diverse group of academicians and practitioners with knowledge and experience of corruption across the diversity of the Asia-Pacific Region. The explanations and recommendations contained within this work have major policy implications and it is up to each government in the region to implement them and each business to recognize them. Fighting against corruption requires the triumvirate of political will, explicit business support, and the constant vigilance of civil society in the region if its longterm social and economic success is to continue.

References Australian Government. (2012). Australia in the Asian Century, White Paper, October, Canberra: Commonwealth of Australia. ,http://www.defence.gov.au/whitepaper/2013/ docs/australia_in_the_asian_century_white_paper.pdf. Accessed 28.07.16. Australian Treasury. (2010). The intergenerational report. Canberra: Commonwealth of Australia. ,http://archive.treasury.gov.au/igr/igr2010/report/html/01_Executive_Summary. asp. Accessed 28.07.16. Brandeis, L. D. (1914). Other people’s money and how the bankers use it. New York: Frederick A. Stokes Company Publishers. dela Rama, M. (2009). Pension funds in a highly-politicised environment: The case of the Philippines. Pensions: An International Review, 14(4), 242 258. Evans, G. (1999). Valedictory speech to the house of representatives, 30th September, Hansard, p. 8370, Canberra: Parliament of Australia. , http://gevans.org/speeches/old/ 1998-1999/300999_valedictory.pdf . Accessed 18.01.17.

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Marr, D. (2009). Curtain falls on last act of Kirby’s long drama, Sydney Morning Herald, 3 February. ,http://www.smh.com.au/news/national/curtain-falls-on-last-act-of-kirbyslong-drama/2009/02/02/1233423135548.html. Accessed 03.03.09. Miliband, R. (1969). The state in capitalist society. New York: Basic Books. Mulgan, R. (1998). Politicising the Australian public service? Research Paper 3, Politics and Public Administration Group. Canberra: Parliament of Australia. ,http://www.aph. gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/ rp9899/99rp03. Accessed 01.12.16. Nye, J. S. (1967). Corruption and political development: A cost-benefit analysis. American Political Science Review, 61(02), 417 427. OECD (1999). Principles of corporate governance. Paris: OECD. OECD (2004). Revised principles of corporate governance. Paris: OECD. OECD (2015). G20/OECD principles of corporate governance, Paris: OECD. ,http://www. oecd-ilibrary.org/governance/g20-oecd-principles-of-corporate-governance2015_9789264236882-en. Accessed 28.07.16. Phillips, J. (2012). The ‘Pacific Solution’ revisited: A statistical guide to the asylum seeker caseloads on Nauru and Manus, 4th of September, Parliamentary Library, Canberra: Parliament of Australia Island. , http://www.aph.gov.au/about_parliament/parliamentary_departments/parliamentary_library/pubs/bn/2012-2013/pacificsolution . Accessed 18.01.17. Rose-Ackerman, S. (2008). Corruption and government. International Peacekeeping, 15(3), 328 343. Rowley, C. (2013). ‘The changing nature of management and culture in South Korea’. In M. Warner (Ed.), Managing across diverse cultures in East Asia: Issues & challenges in a changing globalized world (pp. 122 150.). London: Routledge. Rowley, C., & Paik, Y. (2009). The changing face of Korean management. London: Routledge. Stiglitz, J. (2002). Globalization and its discontents. New York: WW Norton and Company. Transparency International (2016) Corruption Perceptions Index. (2015). ,http://www.transparency.org/cpi2015#results-table. Accessed 26.07.16. UNCTAD. (2015). World Investment Report: Reforming international investment governance. Geneva: UN. ,http://unctad.org/en/PublicationsLibrary/wir2015_en.pdf. Accessed 14.11.16.

Political finance and corruption in Southeast Asia: causes and challenges

2

Andreas Ufen GIGA Institute of Asian Studies, Hamburg, Germany

2.1

Introduction

This chapter focuses on political parties and parliaments because they are often perceived by the wider public as undermined by illegal practices. A Transparency International survey in 2009 on institutions affected by corruption (scores were between: “1, not at all corrupt” and “5, extremely corrupt”) showed a very critical assessment of political parties in the region. The scores for these parties in Brunei (2.1), Singapore (2.1), Cambodia (3.0), Philippines (4.0), Malaysia (3.9), Indonesia (4.0), and Thailand (4.1) were above the overall average except in the first three countries mentioned here. According to the Global Corruption Barometer 2013 (Transparency International, 2013), in Indonesia 86% of respondents felt that political parties were “corrupt or extremely corrupt.” Other “corrupt or extremely corrupt” institutions were parliaments (89%), and the judiciary (86%), whereas only the police were perceived as being worse (91%). The respective scores for political parties, parliaments, the judiciary, and the police were in Cambodia 28%, 16%, 60%, and 37%, in Thailand 68%, 45%, 18%, and 71%, for Vietnam 27%, 28%, 49%, and 72%, for the Philippines 58%, 52%, 56%, and 69%, and for Malaysia 69%, 44%, 35%, and 76%). This indicated that young democracies such as Thailand (until 2014) and the Philippines or highly competitive authoritarian regimes such as Malaysia are more prone to foster forms of corruption within political parties and parliaments. In systems in which civil liberties and political rights are more restricted such as Vietnam, corruption seems to be less concentrated in parties and parliaments but are more centralized by elites who have direct and uncontrolled access to state resources. Against this background, the paper looks at political finance in Southeast Asia that encompasses the funding of political parties and candidates and includes donations by individuals and groups or companies and public money. Political corruption is often an effect of the failed regulation of political finance and is manifested by clientelistic exchange, patronage, vote-buying, and the increasing power of business elites in politics. Movements in opposition to the deeply ingrained behavioral patterns of lax regulations and law enforcement are still weak but are challenged by some innovative practices invented by civil society groups. The Changing Face of Corruption in the Asia Pacific. DOI: http://dx.doi.org/10.1016/B978-0-08-101109-6.00002-2 Copyright © 2017 Andreas Ufen. Published by Elsevier Ltd. All rights reserved.

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The chapter starts with a broad overview of the development of expenses by candidates and political parties and by presenting recent incidents of political corruption in order to substantiate a trend of commercialization of politics. As this tendency is uneven, the chapter focuses on regimes with a higher degree of political competition and outlines the main factors for the rising costs and the resulting corruption. It concludes with a description of initiatives for reform.

2.2

The costs of competition

In most Southeast Asian countries, political parties and candidates spend much more money today than in the past. But this trend is not always easy to verify (Schafferer, 2006). It is impossible to get exact data on the illegal spending of candidates and parties. Instead, observers are often dependent on anecdotal evidence. The so-called professionalization of campaigning with surveys, TV, “spin doctors,” and others has resulted in skyrocketing costs (Plasser & Plasser, 2002; Qodari, 2010). In the first democratic elections in Indonesia (1955), surveys were unknown and television did not play a role. Door-to-door campaigning and rallies organized by committed party followers stood at the center of voter mobilization. Therefore, costs were still quite low. This has been transformed only recently. There is now a clear trend of commercialization in comparison to the 1950s, especially since the country’s redemocratization in 1998. Political parties spend most of their budgets for media advertisements. Since the mid-2000s, campaigning has been much more based on surveys. Arguably, the introduction of direct elections in 2004/05 at all levels has raised election costs immensely. Candidates have to bear a major part of campaign costs. A gubernatorial candidate disburses between Rp60 billion and Rp100 billion (c. US$6 million to US$10 million) for campaigning. Presidential campaigns are, not surprisingly, even more expensive. According to their official reports, in the last presidential elections the pair of candidates Prabowo Subianto and Hatta Rajasa spent Rp166.5 billion (US$14.3 million), whereas the subsequent winners Joko “Jokowi” Widodo and Jusuf Kalla paid almost double the amount, Rp311.9 billion (The Jakarta Post, 2014). Prabowo and Hatta spent Rp88.2 billion on media advertisements, Rp57.5 billion on campaign activities and Rp13.1 billion on campaign paraphernalia. The JokowiKalla camp disbursed Rp151.2 billion alone on media advertisements. In the 2014 parliamentary elections, patronage distribution was a central campaign strategy by candidates, and vote-buying was widespread and had obviously increased in comparison to earlier polls (Aspinall & Sukmajati, 2016). Today, the majority of Indonesian MPs are entrepreneurs or managers. In contrast, the Philippines were much more advanced in election spending from early on, may be because Indonesia had only once, in 1955, competitive elections before 1999. Vote-buying, bribing, and others, generous expenses for foods and drinks, paraphernalia, and others “drove the price of election up 10-fold between Magsaysay’s 1953 victory and Macapagal’s 1961 triumph” (Brands, 1992, p. 277).

Political finance and corruption in Southeast Asia: causes and challenges

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In 1960/61, campaigners spent 14 times more in the Philippines than in the United States on each vote relative to the average industrial wage (cf. Pinto-Duschinsky, 2002, p. 83). In 1969, Ferdinand Marcos won the presidential elections because he expended one-quarter of the government budget for campaigning (Brands, 1992, p. 277). He even hired the former consultant of US presidents Kennedy and Johnson, Joseph Napolitan. The engagement of such professionals has become a common practice. In the late 1980s, for example, Corazon Aquino engaged media consultant David Sawyer (Perron, 2008, p. 365). Although in the Philippines, expenses seem to have been very high since the 1950s, may be with a peak in the late 1960s, costs of campaigning in Thailand began to rise significantly from the late 1970s/early 1980s onward. It has risen steadily since then because entrepreneurs saw politics as a means to improve business opportunities and began to “invest” huge amounts of money in gaining public positions. Within parties, these businesspeople as “godfathers” together with their followers formed factions and employed regional vote-canvasser networks (Waitoolkiat & Chambers, 2015). In 1996, the per capita costs of the elections (relative to average wages) were four to five times higher than in the United States (Pinto-Duschinsky, 2002, p. 83). In Malaysia, costs rose steadily over the years, but only recently have they soared significantly (Gomez, 2012, p. 1381). This trend has deepened in 2013. The federal government paid RM531 million (US$175 million) for advertisements during the first half of that year, most of it ahead of the national elections, whereas the opposition only disposed of a tiny fraction of such an amount. Moreover, the Prime Minister’s Department organized the most expensive campaign in the history of the country and distributed c. US$19 billion from April 2009 until May 2013 for different kinds of subsidies, bonuses, services, and others (Ufen, 2015). Likewise, the Cambodian Communist Party (CCP), which is to a large extent identical with the state apparatus, had to raise US$15 million for its campaign in 2013, whereas the main contenders, the Cambodia National Rescue Party (CNRP) spent c. US$3.5 million and the National United Front for an Independent, Neutral, Peaceful, and Cooperative Cambodia (FUNCINPEC) US$500,000 (COMFREL, 2013, p. 26); these amounts of money do not even incorporate media expenditures, gifts, and vote-buying. The high costs are also a result of stronger competition in relation to previous polls. But there are exceptions to the regional trend. Although Singapore has the highest per capita income in Southeast Asia, the ruling People’s Action Party (PAP) expended only S$5.3 million for the 89 seats it contested in the 2015 elections, which was S$2.16 (PAP) and 73 cents (the opposition parties combined) per voter (The Straits Times, 2015). In this case, the authoritarian government is interested in reducing competition and restricting campaigning. In addition, the fight against corruption is effectively implemented as part of a state-led developmental strategy. The PAP is an example of a regime party in which leadership positions are achieved on the ground of a meritocratic system, although good connections to the established political and administrative elites may help. Yet, gaining party offices through “money politics” is very improbable, in contrast to many other parties in

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The Changing Face of Corruption in the Asia Pacific

Southeast Asia. In this vein, it has to be stressed that the commercialization of politics is also visible within political parties. In Malaysia, within the ruling United Malays National Organization (UMNO), this was a result of a rise of businesspeople. Beginning in the 1980s, intraparty competition was more and more decided by illicit financial transfers. At the 1984 UMNO elections, more than RM20 million (US$8.5 million) were spent to bribe delegates, whereas in 1993 RM200300 million were handed out by one faction alone (Gomez, 2012, p. 1386). In order to confine “money politics” and vote-buying within UMNO, the leadership decided to widen the selectorate at the UMNO elections in 2013, but, arguably, this did not eradicate these practices. In Indonesia, as another example, intraparty competition is often based on illicit or at least questionable financial transfers (Mietzner, 2015). A few years ago, according to the former treasurer of the Partai Demokrat, a few million US$ were handed out to delegates ahead of the party elections (The Jakarta Globe, 2013). Recently, during the last National Congress of the Golkar Party in May 2016, businessman Setya Novanto was elected as the party chairman although he was suspected of being involved in shady deals with US-based mining company PT Freeport. He was the richest candidate with officially US$8.7 million in assets and was backed by Aburizal Bakrie (The Jakarta Post, 2016). Bakrie, the former Golkar chairman, belongs to Indonesia’s oligarchy such as Jusuf Kalla (Golkar), Sutrisno Bachir (National Mandate Party), and Surya Paloh (Nasdem Party) who were able to take over leading positions because they disposed of large financial resources. In the Philippines, and increasingly in Indonesia, many parties are mere vehicles of designated presidential candidates and financed by them or their rich supporters. In Thailand, former prime minister, media mogul, and billionaire Thaksin Shinawatra built his own Thai Rak Thai (“Thais Love Thais”) party, engaged managers from his companies for party work, paid “his” MPs extra salaries, and induced opposing parties and politicians to switch into his camp. In these cases, financiers and parties are almost similar.

2.3

Corruption as a result

Some parties and candidates need a huge amount of money. Among their incomes are public subsidies and indirect public funding, indigenous and foreign private donations by individuals or corporations, membership fees, levies from members of parliament, and sometimes commercial profits by political parties. In contrast to European parties, membership fees are usually nonexistent or extremely small in Southeast Asia. The fact that MPs have to donate a part of their salaries to their respective parties in Indonesia, Thailand, and Malaysia, but not in the Philippines, shows the weakness of political parties in the latter country. State subsidies are usually rather low. In Indonesia in the mid-2000s, they were even reduced by c. 90% from 1000 rupiah to 108 rupiah for each vote won (The International Herald Tribune, 2013).

Political finance and corruption in Southeast Asia: causes and challenges

27

The increasing political competition in tandem with rising costs results in a commercialization that makes transparency and regular financing almost impossible. A cursory view on the biggest recent scandals in Southeast Asia vindicates this assumption. In Indonesia, for example, until 2011, 155 regional heads (out of around 530), among them half the governors, were named corruption suspects (The Jakarta Post, 2016). At the national level, the Democrat Party (PD) of former president Susilo Bambang Yudhoyono (200414) and the Islamist and Justice and Welfare Party (PKS), once to many a religion-based model for clean politics, lost many of its supporters ahead of the 2014 elections because of illegal party financing. Supporters of the PD were stunned by their own party treasurer who chose to spill the beans about the wheeling and dealing of the president’s party. Later, the public heard about the enormous wealth and the various amatory adventures of the ever-smiling chairman and some of his party colleagues in the PKS (Kramer, 2014). In the Philippines, members of parliament, senators, and former president Gloria Macapagal Arroyo were accused of embezzling 10 billion pesos (US$220 million). The money was channeled through fake nongovernmental organizations. These “pork barrels” from disaster relief and development funds were obviously used as kickback payments for the benefit of the legislators (Abjorensen, 2015). But Philippine voters are accustomed to excesses of money politics at least since the reign of former autocrat Ferdinand Marcos. Macapagal Arroyo’s predecessor, Joseph Estrada, was removed from office via impeachment because he was allegedly involved in illegal gambling. Even worse were developments in Malaysia where prime minister Najib Razak received almost US$700 million prior to the 2013 elections. When the Wall Street Journal reported on the bank transfers to his personal account in mid-2015 (The Wall Street Journal, 2015) and pressure on the prime minister in his home country grew, he denied any wrongdoing, sacked deputy prime minister Muhyiddin and the attorney general and did everything to hinder independent investigations by the Central Bank, a parliamentary commission, and the Malaysian Anti-Corruption Commission. Najib muzzled media outlets, ordered the arrest of whistleblowers, and spoke of a “personal donation” from a prince of Saudi Arabia’s royal family. Later, international investigations suggested that more than a billion US$, much of it was skimmed from state investment firm 1Malaysia Development Berhad (1MDB), had been sent to Najib. 1MDB, which was founded by him in 2009, is mired in US$10 billion debt (The Wall Street Journal, 2016).

2.4

Factors for rising costs and corruption

The main factor for rising costs and corruption is the political system at large. The more there is competition between parties and candidates, the more candidates/parties have to strive to mobilize voters. Under authoritarian rule, party politics is marginalized. Political parties, thus, do not need to establish intricate organizational machines. Campaigning, if it exists at all, is restricted. Southeast Asian examples of

28

The Changing Face of Corruption in the Asia Pacific

authoritarian systems with multiparty elections that were only rudimentary competitive are Indonesia under Suharto from the late 1960s until 1998 and the Philippines under Marcos from the late 1970s until 1986. In both these regimes, costs of campaigning were relatively low. Although the Indonesian regime party, Golkar, had more or less direct access to state money and business donations, opposition parties in the country were cash-strapped. Political finance as part of electoral laws was not a topic of much interest. Likewise, in the Philippines, only after redemocratization did the expenses for campaigning rise to predictatorial levels. Within competitive authoritarian and especially electoral democratic systems, there is a tendency to inflate expenses. More often than not, wealthy groups have an interest in cost-intensive campaigns. The more competition, the more money is spent to woo voters. Corporations decide to donate money to candidates and parties in spite of (or in addition to) bribing bureaucrats. Individuals invest into party politics because they can use their positions as politicians to further their business interests. Politics is thus becoming itself a part of the economy. Competition is also enhanced by specific electoral systems. A candidatecentered system (through direct elections and majoritarian or plurality vote, especially in multimember districts) often strengthens the impact of corrupt practices because it raises the costs for campaigning. Countries with competitive elections and multiparty systems such as Indonesia, the Philippines, and Thailand try to evade public scrutiny, but civil society is becoming stronger. That means, in these countries, a frequent, but often ineffective redesigning of regulatory frameworks, is characteristic. Countries with a relatively good rating from Freedom House, a pro-democracy, US-based non-governmental organization, are not necessarily ranked better than authoritarian regimes such as Singapore, Brunei, and Malaysia in terms of corruption control (see Table 2.1). Campbell and Saha (2013) even found a clear relationship between democratization and corruption. Democratization at the beginning reduces corruption, later on increases it, and reduces it substantially with increasing democratic deepening. But different scores for corruption control could also be a result of divergent socioeconomic conditions. The three countries with the highest GDP per capita (Singapore, Brunei, and Malaysia) are the ones with the best scores with respect to corruption control. In contrast, the three worst scores for “control of corruption” are those for Myanmar, Cambodia, and Laos where the GDP per capita is very low. It seems that higher economic development strengthens state capacities and, thus, law enforcement. Arguably, corruption is essentially a result of the relations between economic and political actors. In most countries, there is an increasing direct and indirect involvement of businessmen in politics. The dominant party in Malaysia, UMNO, was for a long time a party of teachers and bureaucrats that morphed into a vehicle for businesspeople (or politicians-cum-entrepreneurs) in the 1970s and 1980s. In Thailand, this business influence grew markedly from the 1980s onward, in Indonesia after 1998 and accelerating since the mid-2000s. Only in the Philippines have private entrepreneurs (in the 1950s often as big landholders) always been the dominant party stalwarts and were able to subordinate the administrative apparatus.

Political finance and corruption in Southeast Asia: causes and challenges

29

2.1 Major indicators: corruption, political rights/civil liberties, and GDP per capita in Southeast Asia

Table

Country

TPIa rank 2015 (168 countries)

TPI score 2015 (highest score 100)

Control of corruptionb (ranges from 22.5 to 2.5) (2010)

Freedom House (2016) (political rights/civil liberties)

Nominal GDP per capita (US $, 2014)c

Brunei Cambodia East Timor Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam

 150 123 88 139 54 147 95 8 76 112

 21 28 36 25 50 22 35 85 38 31

0.86 21.21 20.95 20.73 21.07 0.12 21.68 20.82 2.18 20.34 20.58

6 and 5 6 and 5 3 and 3 2 and 4 7 and 6 4 and 4 6 and 5 3 and 3 4 and 4 6 and 5 7 and 5

36,607 1081 3638 3534 1693 10,804 1221 2865 56,319 5445 2053

a

Transparency International measures how corrupt a country’s public sector is perceived to be and draws on data from expert and business surveys. The “Control of corruption” score is one of the six dimensions of the Worldwide Governance Indicators by the World Bank. It measures perceptions of petty and grand forms of corruption, as well as state capture by elites and private interests. Higher values correspond to better governance outcomes. c International Monetary Fund World Economic Outlook (October 2014). b

Therefore, scholars working on the Philippines stressed, over a long period of time, the outstanding role of landed interests and patronclient relations and of bossism. Sidel (1997, p. 961) distinguishes a range of its manifestations: economic machine politicians, local business magnates, members of landed clans, urban bosses, logging-based “warlords,” and others. Thailand witnessed the rise of a party, the TRT, which can be described as a “business firm party” (Hopkin & Paolucci, 1999). These are led by very rich individuals, often media magnates (akin to Berlusconi in Italy). Thaksin, like Berlusconi, used his wealth and his TV and radio stations to “sell” a political party and its product in vague terms but with the promise to renew the country. The organization of the party is top-heavy, the leader reigns like the owner of a business conglomerate, marketing and advertising is professionalized. Party financing is monopolized, and Thaksin was even able to “buy” other parties or factions of them in order to establish a large majority in parliament. Quah (2003) stresses the role of low salaries of the civil servants and politicians, and the high chance of being exempted from punishment for corruption in Indonesia, the Philippines, and Thailand. In all of the countries covered by the International IDEA (2016), for example, vote-buying as well as foreign donations to political parties are usually forbidden, but noncompliance with and nonenforcement of legal norms, weak oversight, and feeble sanctions are endemic.

30

The Changing Face of Corruption in the Asia Pacific

The Committee for Free and Fair Elections in Cambodia (COMFREL), for example, observed hundreds of cases of systematic misuse of state resources banned by different laws during the flawed July 2013 elections (COMFREL, 2013, p. 27). Policy-makers consider, from the very beginning, opportunities to circumvent regulations. These are frequently mere devices for window-dressing. Regulatory frameworks are often quite impressive on paper, but de facto in many countries, parties and candidates can receive as much money as they want; they only have to conceal the names of very big donors who donate more than the allowed sums of money. This can be done by using fictitious names of donors, for example. It has to be borne in mind that “Western” notions of illicit behavior are not always helpful to understand politics in Southeast Asia. Min-Wei and Yu (2014) show that the perception of public sector corruption differs markedly between international experts and domestic citizens. A reason could be that in some countries, a form of vote-buying (i.e., handing out of food, smaller amounts of money, etc.) is part of generally accepted norms of everyday life. In Thailand, poll watcher ANFREL (Asian Network for Free Election), for example, found vote-buying in the form of “in-kind gifts, cash handouts, electronic transfer of funds, payment to attend party rallies, politicians funding birthday parties, free telephone cards and supermarket coupons, transfer of money through fake wins at gambling, and free ‘sightseeing’ trips” (ANFREL, 2011, p. 54). Many voters perceive this as a negligible, even a welcome form of campaigning.

2.5

Initiatives for reform

In Southeast Asia, major problems of party and candidate financing are the predominance of clientelistic over programmatic linkages between politicians and voters, resulting in the uncontrolled flow of “black money.” Income from membership dues is, in most cases, insignificant and candidates often finance their campaigns independently from political parties. Expensive political marketing strengthens entrepreneurs seeking to influence policy making. As a consequence, private donations (often from corporations or a handful of wealthy individuals) play an important role. Moreover, state funding is often marginal (or even nonexistent). Even in countries where state subsidies are paid such as in Indonesia, Thailand, and East Timor, it does not form the mainstay of party incomes and is merely an addition. Attempts at curbing illicit forms of funding and/or the predominance of rich people in politics have been manifold. One way is to install powerful electoral commissions or agencies such as the powerful Corruption Eradication Commission (KPK, Komisi Pemberantasan Korupsi) in Indonesia. Another is stronger regulation and the introduction of public funding. Free airtime and restrictions on TV and radio advertising, for instance, is seen as a potential good means to cut costs for all competitors. Particularly since the 1990s, reforms of political finance regulations are gaining traction in an array of Asian countries. The main reason for this is the wave of democratization that swept from Korea, Taiwan, and Mongolia to Thailand

Political finance and corruption in Southeast Asia: causes and challenges

31

(until the latest military coups), Indonesia, and East Timor. It does not mean that democratization leads automatically to stricter and better regulations. In some cases, the heightened competition among parties and/or the establishment of cartels as well as commercialization and increasing business influence may enhance oversight and enforcement problems. Moreover, Scarrow (2007, p. 201) noted that “regulations can have the perverse effect of ‘scandalising’ previously tolerated behaviour.” Among the most active proponents of reform are different nonstate organizations. In the Philippines, the Pera at Pulitika 2010 Consortium (Balgos, Mangahas, & Casiple, 2010) represents inter alia the Consortium on Electoral Reforms (CER), a national coalition of 47 organizations. In Indonesia, nongovernmental organizations like Indonesia Corruption Watch, Perludem, and Transparency International cooperate to fight questionable forms of political finance. In Malaysia, organizations such as the election watchdog, Malaysians for Free and Fair Elections (Mafrel), are working on election-related issues. In 2007, 2011, 2012, and 2015 tens of thousands of demonstrators demanded free and fair elections in Kuala Lumpur. They gathered under the leadership of the opposition movement Bersih, the “Coalition for Clean and Fair Elections” (Gabungan Pilihanraya Bersih dan Adil). Covering the whole region, ANFREL (the Asian Network For Free Elections) monitors elections, conducts research and education and training, and engages in advocacy work. Such initiatives support innovations by civil society activists who have invented new forms of crowdfunding. Joko Widodo, elected president in Indonesia since 2014, financed his campaign partly with the help of a dense network of volunteers and received donations from 60,000 individuals. This is a new development in Indonesian politics. Likewise, the new president of the Philippines, Rodrigo Duterte, issued scratch cards that allowed people to donate money via SMS to a gateway number. Crowdfunding can be complemented by crowdsourcing when citizens observe elections and inform state supervisory bodies on incidences of votebuying, overspending, illegal use of state resources, and others. In the 2014 Indonesian presidential election, even the voting tabulation from polling stations was controlled with the mobile phone application Kawal Pemilu (“Guard the Elections”). Moreover, despite major structural hindrances, there are still ways to better regulate political finance (Ufen, 2014). In the “New DelhiDeclaration on Political Finance Regulation in South Asia” (2015), for example, clear and realistic standards for regulatory frameworks are defined. These should not allow loopholes and be sensitive to local contexts. They should incorporate limits on private donations, limits or even bans on anonymous and foreign donations, and public funding in connection with demands for more transparency and/or intraparty democracy. On the basis of a meticulous disclosure of incomes and spending by candidates and political parties, independent supervisory and enforcement bodies must be able to detect fraud and to meet out clearly defined and proportionate sanctions. In this way, it is possible that campaigning will be radically transformed in some Southeast Asian countries with more positive repercussions on the linkages between political parties and voters, on accountability, and on reducing political corruption.

32

The Changing Face of Corruption in the Asia Pacific

References Abjorensen, N. (2015). Philippines takes a long and winding road dealing with corruption. Inside Story, 1.7.2015. hhttp://insidestory.org.au/philippines-takes-a-long-and-windingroad-dealing-with-corruptioni Accessed 22.7.16. ANFREL (The Asian Network for Free Elections) (2011). Report of the International Election Observation Mission: THAILAND General Election, 3rd July 2011. hhttp://anfrel.org/ wp-content/uploads/2012/10/ThaiEOMReport_Edit_4-final_edit.pdfi Accessed 3.4.16. Aspinall, E., & Sukmajati, M. (Eds.), (2016). Electoral dynamics in Indonesia. Money politics, patronage and clientelism at the grassroots Singapore: NUS Press. Balgos, C. C. A., Mangahas, M., & Casiple, R. (Eds.), (2010). Campaign finance reader: Money politics and the May 2010 elections. Quezon City: Philippine Center for Investigative Journalism (PCIJ) and the Pera at Pulitika 2010 Consortium. Brands, H. W. (1992). Bound to Empire: The United States and the Philippines. New York: Oxford University Press. Campbell, N., & Saha, S. (2013). Corruption, democracy and Asia-Pacific countries. Journal of the Asia Pacific Economy, 18(2), 290303. Committee For Free and Fair Elections in Cambodia (COMFREL) (2013). 2013 National Assembly Elections Final Assessment and Report. hhttp://www.comfrel.org/eng/ components/com_mypublications/files/781389Final_Report_and_Assessment_National_ Assembly_Elections_Final_ 24_12_2013.pdfi Accessed 11.8.14. Gomez, E. T. (2012). Monetizing politics: Financing parties and elections in Malaysia. Modern Asian Studies, 46(5), 13701397. Hopkin, J., & Paolucci, C. (1999). The business firm model of party organisation: Cases from Spain and Italy. European Journal of Political Research, 35(3), 307339. International IDEA (2016), Political finance data base. hwww.idea.int/political-financei Accessed 10.5.15. Kramer, E. (2014). A Fall From Grace? “Beef-gate” and the Case of Indonesia’s Prosperous Justice Party. Asian Politics & Policy, 6(4), 555576. Mietzner, M. (2015). Dysfunction by design: Political finance and corruption in Indonesia. Critical Asian Studies, 47(4), 587610. Min-Wie, L., & Yu, C. (2014). Can corruption be measured? Comparing global versus local perceptions of corruption in East and Southeast Asia. Journal of Comparative Policy Analysis, 16(2), 140157. New DelhiDeclaration on Political Finance Regulation in South Asia (2015). hhttp://www. idea.int/asia_pacific/upload/PN68_17122015.pdfi Accessed 1.6.16. Perron, L. (2008). Election campaigns in the Philippines. In D. W. Johnson (Ed.), The Routledge handbook of political management (pp. 360369). London: Routledge. Pinto-Duschinsky, M. (2002). Financing politics: A global view. Journal of Democracy, 13(4), 6986. Plasser, F., & Plasser, G. (2002). ), Global political campaigning. A worldwide analysis of campaign professionals and their practices. Westport CT: Praeger. Qodari, M. (2010). The professionalisation of politics: The growing role of polling organisations and political consultants. In E. Aspinall, & M. Mietzner (Eds.), Problems of democratisation in Indonesia: Elections, institutions and society (pp. 122140). Singapore: ISEAS. Quah, J. S. T. (2003). Causes and consequences of corruption in Southeast Asia: A comparative analysis of Indonesia, the Philippines and Thailand. Asian Journal of Public Administration, 25(2), 235266.

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Scarrow, S. E. (2007). Political finance in comparative perspective. Annual Review of Political Science, 10, 193210. Schafferer, C. (Ed.), (2006). Election campaigning in East and Southeast Asia: Globalization of political marketing Aldershot & Burlington: Ashgate. Sidel, J. (1997). Philippine politics in town, district, and province: Bossism in Cavite and Cebu. The Journal of Asian Studies, 57(4), 947966. The International Herald Tribune, Plague of Corruption Rises Anew in Indonesia, 31.5.2013. The Jakarta Globe, Andi Bought Democratic Chairmanship, Anas’s Lawyer Claims, 1.8.2013. The Jakarta Post, Jokowi outspends Prabowo in campaign, 19.7.2014. The Jakarta Post, Setya Novanto takes helm of Golkar, 17.5.2016. The Straits Times, GE2015 spending: PAP candidates spent $5.3m while the eight opposition parties’ expenses totalled $1.8m, 29.10.2015. The Wall Street Journal, Investigators Believe Money Flowed to Malaysian Leader Najib’s Accounts Amid 1MDB Probe, 2.7.2015. The Wall Street Journal, Malaysia Says Saudis Gave Prime Minister Najib Razak a $681 Million ‘Donation’, 26.1.2016. Transparency International (2013). Global corruption barometer 2013. hhttps://www.transparency.org/gcb2013/country/?country 5 indonesiai Accessed 23.5.16. ¨ hman (Eds.), Ufen, A. (2014). Political finance in Asia. In E. Falguera, S. Johns, & M. O Funding of political parties and election campaigns: A handbook on political finance (pp. 82127). Stockholm: International Institute for Democracy and Electoral Assistance. Ufen, A. (2015). Laissezfaire versus strict control of political finance: hegemonic parties and developmental states in Malaysia and Singapore. Critical Asian Studies, 47(4), 564586. Waitoolkiat, N., & Chambers, P. (2015). Political party finance in Thailand today: Evolution, reform and control. Critical Asian Studies, 47(4), 611640.

The effect of corruption on foreign direct investment inflows: evidence from a panel of Asia-Pacific countries

3

Tristan Canare Asian Institute of Management, Makati, Philippines

3.1

Introduction

There is a rich body of literature on how corruption negatively, and sometimes positively, affects economic growth and development. Although it is a common belief that corruption restricts growth, there are arguments that it can help promote development by getting around inefficiencies in the bureaucracy (Huntington, 1968; Leff, 1964; Leys, 1965). Flatters and Macleod (1995) also proposed the concept of an optimal amount of corruption that minimizes the social cost of taxation in countries that cannot perfectly monitor its tax collectors. Beck and Maher (1986) and Lien (1986) showed that bribery can produce the same results as competitive bidding in terms of efficiency. On the other hand, there are also literature that explains how corruption limits growth. Rose-Ackerman (1997) argues that while small levels of corruption can promote efficiency on an inefficient bureaucracy, nothing would stop corrupt officials from extracting bribes higher than the optimal, thus imposing social costs. Shleifer and Vishny (1993) identify two reasons why corruption is detrimental to growth. The first is corruption imposes additional, sometimes prohibitively higher, cost to investors. Second, because corruption is necessarily a secret, it can drive investments toward less productive projects if this will offer more secrecy for corruption to take place. Kurer (1993) argues that corrupt policy-makers may deliberately implement suboptimal policies if this will keep corruption opportunities present. An example is excessive regulation to allow the extraction of bribe from the regulated private enterprises. It appears though that empirically, at the macrolevel, most studies find evidence that corruption does have an adverse effect on growth and development, and this effect is larger among lower income countries (Ehrlich & Lui, 1999). Mauro (1995) wrote one of the pioneering empirical works on the effect of corruption on growth and found evidence that the former affects the latter by lowering investments. Studies by Brunetti and Weder (1998), Mo (2001), Pellegrini and Gerlagh (2004), The Changing Face of Corruption in the Asia Pacific. DOI: http://dx.doi.org/10.1016/B978-0-08-101109-6.00003-4 Copyright © 2017 Tristan Canare. Published by Elsevier Ltd. All rights reserved.

36

The Changing Face of Corruption in the Asia Pacific

and more recently, Johnson, LaFountain, and Yamarick (2011) have similar results on the negative effect of corruption on growth through investment. Other papers (Pellegrini & Gerlagh, 2004; Dutt & Traca, 2010; Bjornskov, 2012) show that corruption’s adverse effect on trade is another transmission mechanism by which corruption affects growth. Mauro (1998) found evidence that corruption reduces government spending on education, which, according to the author is a cause for concern because education is one of the determinants of development. In slight distinction from other empirical studies, Meon and Sekkat (2005) and Swaleheen (2011) concluded that corruption does affect both investment and growth, but the effect is independent of each other. That is, aside from corruption’s indirect effect on growth through investment, corruption also adversely affects growth directly. The growing number of literature on the adverse effect of corruption helped prompt multilateral organizations to prioritize fighting corruption, including taking initiatives and urging members to criminalize corrupt practices (Meon & Sekkat, 2005). Aside from corruption, foreign direct investment (FDI) is another oft-studied variable in terms of its effect on growth and development. In a comprehensive review of literature, Almfraji and Almsafir (2014) found that majority of empirical studies found evidence that FDI has positive effect on growth. Borensztein, De Gregorio, and Lee (1998) demonstrated and empirically tested that FDIs have positive effect on growth through technology transfer. Aside from technology transfer, the infusion of capital, especially for developing countries, also contribute to FDI’s positive effect on growth (Busse & Groizard, 2008). Alfaro (2003) also found evidence of positive effect of manufacturing sector FDI on growth, albeit a negative effect for primary sector FDI. In the model developed by Alfaro, Chanda, Kalemli-Ozcan, and Sayek (2010), they showed how FDI positively affects economic growth, and the effect is larger for countries with better local conditions such as more developed financial institutions and more human capital. In a similar empirical paper, Alfaro, Kalemli-Ozcan, and Sayek (2009) concluded that countries with developed financial institutions benefit from FDI through increases in total factor productivity. This is akin to the results of Busse and Groizard (2008), which shows that better regulated countries are more able to take advantage of the positive effect of FDI on growth. Similarly, Jalilian and Weiss (2002) found a positive relationship between FDI and economic growth, and the relationship is stronger in countries with better education. Bode and Nunnenkamp (2011) and Li and Liu (2005) also concluded that FDI positively affects growth. Moreover, some studies go beyond the effect of FDI on growth and found evidence of a positive effect on welfare and human development indicators. Mahmoud (2010) empirically showed that FDI is positively associated with employment, whereas Gohou and Soumare (2012) found evidence that FDI reduced poverty using a sample of African countries. As discussed earlier, there are studies that find evidence of corruption adversely affecting investments in general. Given this finding, an interesting question is what about FDIs? It is intuitive that domestic and foreign investments could have different sets of determinants as domestic and foreign investors could be considering

The effect of corruption on foreign direct investment inflows

37

different sets of factors in deciding whether to invest in a country or not. This chapter attempts to determine the effect of corruption on FDI inflows using countries from Asia and the Pacific region. Two analyses will be performed in this study— one using all countries in the sample; and the other using only low- and middleincome nations. This will allow us to determine whether corruption has a different effect on FDIs for developing nations and all countries in general. This chapter is outlined as follows: following this introduction, the next section reviews related literature on corruptionFDI relationship. The next section discusses FDI and corruption trends in Asia and the Pacific region. This is followed by methodology, results, discussions, and implications. A brief summary concludes the chapter.

3.2

Corruption and FDI: a brief literature review

A body of literature exists on the relationship between FDI and corruption, but this chapter is unique in terms of countries studied and methodology used. In some studies, the level of data analysis is FDI sourcerecipient pair. Habib and Zurawicki (2002) studied seven developed country sources of FDIs and 89 country recipients across 3 years. The authors tested corruption level in the recipient country, and the difference in level of corruption between the source and recipient country. Using Ordinary Least Squares (OLS) and Probit regression analysis, the authors found evidence that both have negative impact on FDI. Egger and Winner (2006) did a similar study of bilateral FDI panel data from 21 Organisation for Economic Co-operation and Development (OECD) country sources and 59 recipients and similarly found evidence of negative effect of corruption on FDI. In another similar study, Wei (2000a) used data from 12 FDI source countries and 45 recipient countries and also found negative effect of corruption on FDI. Similar to this paper, most related studies use data at the recipient level, rather than data at the sourcerecipient pair level. That is, observation points are the total inward FDIs received by a particular country at a particular year. This is in contrast to the three studies discussed above, where observation points are FDIs received by country A from country B for a particular year. Two of these studies are done by Busse and Hefeker (2008) and Gastanaga, Nugent, and Pashamova (1989), which tested the effects of various institutional quality indicators on FDI using panel data from, respectively, 83 developing countries, and 49 less developed countries. The former found no significant relationship between FDI and corruption, whereas the latter found evidence of a positive relationship. Zhao, Kim, and Du (2003) also found evidence of a negative relationship between corruption and FDI using data from 40 countries for 7 years. Some studies on the subject focus on specific geographic groups. Using a 12-year panel of Eastern and Central European states, Amarandei (2013) found a negative relationship between corruption and FDI. Voyer and Beamish (2004) utilized data on almost 30,000 Japanese investments in 59 countries and concluded

38

The Changing Face of Corruption in the Asia Pacific

that higher corruption reduces FDI. This chapter focuses on countries from the Asia and the Pacific region. Focusing on a particular geographical group of countries makes an important contribution to the literature because certain variables may affect different regions differently. For instance, Asiedu (2002) found evidence that better infrastructure and higher returns to investment increases FDIs in non-subSaharan African (SSA) countries; but there is no significant relationship for SSA nations. Different regions exhibit different interplay among institutions and macroeconomic variables; thus, a relationship may hold in one area but does not in another. This chapter also attempts to determine if corruption and FDIs have different relationship between all countries in general, and developing nations.

3.3

Corruption and FDI trends in Asia and the Pacific

Asia and the Pacific countries are experiencing a surge in FDI inflows over the last decade. In 2014, the region collectively received nearly USD700 billion on FDI inflows, more than three times the level in 2004 of USD241 billion, for an average annual growth rate of 12.1% (see Fig. 3.1). In comparison, FDI inflows to the rest of the world grew by only 5.8% annually on average during this period. During these 10 years, yearly FDI inflows to the Asia and the Pacific region increased eight times and decreased only twice—in 2009 after the 2008 financial crisis, and in 2012. Impressive increases were registered in 2006 (60.3%) and 2007 (29.9%). FDI inflows increased by 45.3% in 2010, but this was mostly due to base effects as the region is coming from the 2009 decline of 23.2%. Not only is the region experiencing an increase in FDI inflows, it is also becoming a relatively more important FDI destination. In 2014, Asia and the Pacific countries account for nearly 45% of total

800

70%

700

60% 50%

600

40%

500

30%

400

20%

300

10% 0%

200

–10%

100

–20% –30%

0 2005

2006

2007

2008

2009

2010

Inward FDI in billions USD

2011

2012

2013

2014

Growth rate

Figure 3.1 FDI inflows, level (in billions USD) and growth rate, Asia and the Pacific countries, 2005 to 2014. Source: Computations using data from the World Development Indicators.

The effect of corruption on foreign direct investment inflows

39

50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Figure 3.2 Share of Asia and the Pacific countries in world FDI inflows, 2005 to 2014. Source: Computations using data from the World Development Indicators.

inward FDIs in the world, a significant increase from as low as 16% in 2005 (see Fig. 3.2). Although Asia and the Pacific as a whole have been posting robust FDI inflow figures, the distribution is uneven across economies. Among countries in the region, China continues to attract the most FDI inflows. In the 10 years from 2005 to 2014, it posted an annual average FDI inflow of USD204.1 billion, more than the next five countries combined. It is followed by Hong Kong (USD71.6 billion), Singapore (USD43.1 billion), Australia (USD38.3 billion), and India (USD28.1 billion). Among non-high-income countries, following China and India at the top are Indonesia (USD14.1 billion), Kazakhstan (USD10.6 billion), and Thailand (USD9.0 billion). At the other end of the spectrum are Pacific island states. Tuvalu received the least average annual FDI inflows at USD600 thousand, followed by Kiribati (USD816 thousand), Micronesia (USD1.6 million), Northern Mariana Islands (USD7.1 million), and Marshall Islands (USD 8.2 million). Tables 3.1 and 3.2 show the Asia and the Pacific countries with the largest and smallest FDI inflows. The distribution of FDI is also highly uneven even across subregions. For the same 10 years, East Asia received the most FDI inflows with an annual average of USD299.1 billion, although most of which are accounted for by China. Southeast Asia comes next with USD87.3 billion, with Singapore receiving almost half of it. Next is West Asia with USD56.8 billion led by Saudi Arabia, United Arab Emirates, and Israel. The Pacific and South Asia subregions follow with USD42.5 billion and USD33.2 billion, respectively. These two subregions did not rank high in FDI inflows even if they have Australia and India, two of the largest FDI destinations in the Asia-Pacific region. This indicates that most other countries in these two subregions are not attracting much FDI. As shown in Table 3.2, the nine countries that received the least FDI inflows are all in the Pacific.

40

The Changing Face of Corruption in the Asia Pacific

Countries with the largest FDI inflows, Asia and the Pacific, 2005 to 2014 annual average, in billions USD

Table 3.1

All countries

Non-high-income countries

Country

FDI inflow

Country

FDI inflow

China Hong Kong SAR and China Singapore Australia India Saudi Arabia Indonesia Kazakhstan Korea, Rep. United Arab Emirates

204.1 71.6 43.1 38.3 28.1 20.5 14.1 10.6 10.3 9.9

China India Indonesia Kazakhstan Thailand Malaysia Vietnam Lebanon Iran, Islamic Rep. Pakistan

204.1 28.1 14.1 10.6 9.0 8.5 7.0 3.5 3.0 2.7

Source: Computations using data from World Development Indicators.

Countries with the smallest FDI inflows, Asia and the Pacific, 2005 to 2014 annual average, in millions USD Table 3.2

Country

FDI inflow

Bhutan Papua New Guinea Samoa Palau Tonga Marshall Islands Northern Mariana Islands Micronesia, Fed. Sts. Kiribati Tuvalu

29.7 16.9 15.7 14.0 13.2 8.2 7.1 1.6 0.8 0.6

Source: Computations using data from World Development Indicators.

Turning to corruption, this chapter uses the Control of Corruption Index of the World Bank’s Worldwide Governance Indicators (WGI). The WGI is an annual data set of governance indicators for over 200 countries consisting of six dimensions: voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law, and control of corruption. These six indicators are derived from several hundred variables using 31 data sources and are based on perceptions from nongovernmental groups, business practitioners, and public sector organizations worldwide. The score for each of the six indicators range from approximately 22.5 to 2.5, with higher scores implying

The effect of corruption on foreign direct investment inflows

41

0.050 –1.5E-09 –8.5E-10 –1.6E-10 –1.9E-09 –8.2E-10 –2.3E-09 2.4E-09 –3.4E-09 –1.6E-10 –2.5E-09

0.000 2005

2006

2007

2008

2009

2010

2011

2012

2013

–0.050

2014 –0.03

–0.100 –0.150

–0.14 –0.16

–0.200

–0.17 –0.20

–0.20

–0.19

–0.20

–0.20 –0.22

–0.250

Asia and the pacific

World

Figure 3.3 Average WGI control of corruption score, Asia and the Pacific countries and all countries, 2005 to 2014. Source: Computations using data from the World Bank World Governance Indicators database.

better governance. Thus, for the control of corruption indicator, scores close to 2.5 indicate less corruption and scores close to 22.5 indicate more corruption (Kaufmann, Kraay, & Mastruzzi, 2010). Similar to FDI, Asia and the Pacific countries have mixed performance on corruption. Overall, it appears that the region as a whole is improving over the last 10 years. In 2005, the average score of countries in the region was 20.1729. This increased to 20.0348 in 2014 for an improvement of 0.1381. In comparison, the average control of corruption score for all countries included in the WGI hardly changed during this period.a Thus, as shown in Fig. 3.3, the average control of corruption score in Asia and the Pacific region is fast approaching the world average. As in FDI, Asia and the Pacific outperformed the world in resolving corruption. Leading the Asia and the Pacific countries in average corruption control score from 2005 to 2014 is New Zealand, followed by Singapore, Australia, Hong Kong, and Japan (Tables 3.3). Among non-high-income countries, the top five are Bhutan, American Samoa, Vanuatu, Malaysia, and Jordan. The five countries with the lowest score are Afghanistan, North Korea, Myanmar, Turkmenistan, and Iraq. In terms of improvements from 2005 to 2014, the country with the highest change in score is Micronesia, followed by Tonga, Myanmar, Fiji, and Laos (Table 3.4). Thus, although Myanmar is among those with lowest average scores during this period, it is also among those that posted the biggest improvements. In contrast, the countries whose score deteriorated the most during this period are Kuwait, Yemen, Lebanon, Solomon Islands, and Thailand. Looking at the subregions, East Asia is the least corrupt region with the highest average control of a

It even declined by 9.4E 2 10.

42

The Changing Face of Corruption in the Asia Pacific

Countries with the highest and smallest WGI control of corruption score, Asia and the Pacific, 2005 to 2014 average

Table 3.3

Highest scores

Lowest scores

Country

Score

Country

Score

New Zealand Singapore Australia Hong Kong Japan

2.34 2.18 1.99 1.82 1.45

Afghanistan North Korea Myanmar Turkmenistan Iraq

2 1.50 2 1.48 2 1.46 2 1.41 2 1.39

Source: World Bank World Governance Indicators database.

Countries with the largest improvement in WGI control of corruption score, 2005 to 2014, Asia and the Pacific

Table 3.4

Country

Change in score

Micronesia Tonga Myanmar Fiji Lao PDR

1.05 1.00 0.64 0.58 0.56

Source: Computations using data from the World Bank World Governance Indicators database.

corruption score from 2005 to 2014. It is followed by the Pacific, West Asia, Southeast Asia, and South Asia. Central Asia is the most corrupt subregion during this period.

3.4

Data, methodology, and estimation strategy

3.4.1 The econometric equation This study used a panel data set of 46 countries from the Asia and the Pacific region for the years 2006 to 2013. The following basic structural equation was estimated using the methodology described in the succeeding sections: fdii;t 5 β 1 3 corri;t 1 β 0 2 3 X 0 i;t 1 μi 1 vi;t

(3.1)

where fdii,t is the net FDI inflow received by country i at time t, corri,t is a measure of corruption, X 0i;t is a vector of control variables that affect FDI inflows, μi is the unobserved country-fixed effect, and vi,t is the error term. To ensure that the observed effect of corruption on FDI is not due to other factors that simultaneously

The effect of corruption on foreign direct investment inflows

43

affect these two variables, the appropriate controls should be used. Following Jayasuriya (2011), institutional and macroeconomic variables were used as controls. Most studies on determinants of FDI use Gross Domestic Product (GDP), GDP growth, and/or GDP per capita (Blonigen, 2005; Head & Rise, 2008). Exchange rate and currency depreciation/appreciation were also shown to influence FDI inflows (Blonigen, 2005; Froot & Stein, 1991). Walsh and Yu (2010) used inflation in a study of FDI inflows. Another important macroeconomic factor to control for is openness of an economy. Several studies (Masron & Abdullah, 2010; Walsh & Yu, 2010) tested for the effect of openness, as measured by the share of exports and imports to GDP, on FDI inflows and found varying results. Some studies (Scholes & Wolfson, 1990; Desai, Foley, & Hines, 2001) have also shown that taxes can have effects on FDI inflows. Measures of quality of institutions were also used as controls in this study, similar to Jayasuriya (2011) who studied the effect of ease of doing business on FDI. Moreover, some studies (Knack & Keefer, 1997; Masron & Abdullah, 2010) found evidence that quality of institutions—particularly legal and property rights—affect FDI inflows. In this study, several indicators from the World Bank WGI were used as control variables, including Absence of Violence (AOV), Voice and Accountability (VAA), Regulatory Quality (RQ), Rule of Law (ROL), and Government Effectiveness (GE). Another institutional quality control variable included is the Starting a Business Distance-to-Frontier score from the World Bank’s Ease of Doing Business Report. This is an indicator of how easy it is to start a business in different countries. Jayasuriya (2011) concluded that ease of doing business positively affects FDI inflows. To ensure robustness of results, this chapter used different combinations of macroeconomic and institutional control variables.

3.4.2 Data and data source The indicator of corruption utilized was the Control of Corruption score of the World Bank’s WGI. Its value ranges from about 22.5 to 2.5, with higher scores indicating lower levels of corruption. The main source of data for FDI inflows was the World Development Indicators (WDI). Also sourced from the WDI are GDP per capita and GDP growth. Exports and imports as share of GDP was computed using data from the United Nations Commission on Trade and Development. Inflation rate was from the United Nations Statistics Database. The Real Exchange Rate used was an exchange rate index (2004 5 100) computed using actual exchange rate data from WDI. Data on Taxes as percent of profit was from the World Bank Ease of Doing Business Report. Summary statistics are reported in Table 3.5.

3.4.3 Estimation strategy The ArellanoBond First Difference GMM estimator (Arellano & Bond, 1991; Holtz-Eakin, Newey, & Rosen, 1988) was used to estimate Eq. (3.1). It is

Table 3.5

Summary statistics

Variable

Number of observations

Mean

Std. dev.

Min

Max

Net FDI inflow per capita (in millions USD) Control of corruption Absence of violence Voice and accountability Regulatory quality Rule of law Government effectiveness Starting a business distance to frontier Total tax as percent of profit Inflation rate GDP per capita (USD) GDP growth Real exchange rate index Openness (exports and imports as percent of GDP)

368 368 368 368 368 368 368 366 366 366 368 368 368 365

777.224 2 0.088 2 0.185 2 0.367 2 0.081 2 0.028 0.024 76.734 34.357 6.643 10,173.100 5.012 98.981 146.588

2010.254 0.985 1.121 0.843 0.902 0.906 0.901 13.649 17.013 7.912 13,777.800 4.372 16.974 90.377

2 399.938 2 1.637 2 2.826 2 1.862 2 1.731 2 1.956 2 1.770 28.110 8.400 2 25.128 263.012 2 7.076 64.659 29.600

13,594.530 2.462 1.480 1.636 1.989 1.936 2.430 99.960 112.900 39.178 62,138.660 26.170 213.774 552.684

The effect of corruption on foreign direct investment inflows

45

appropriate for panel data sets with large cross-sections and short time period. It is also appropriate when there are time-invariant cross-section-specific effects. The existence of time-invariant country-specific effects in FDI studies is reasonable given that such factors as political regime and distance between source and recipient countries may affect FDI inflows (Walsh & Yu, 2010). The ArellanoBond difference GMM is a dynamic panel estimation method that uses differenced data and includes lagged values of the dependent variable as a covariate. Including lagged values of the dependent variable as a covariate allows us to control for time trend effects that are difficult to control for using other means. Including lagged dependent variable on the right-hand side of Eq. (3.1) will make it fdiit 5 β 1 3 fdii;t21 1 β 2 3 corri;t 1 β 03 3 X 0i;t 1 εi;t

(3.2)

where εi;t 5 μi 1 vi;t

(3.3)

As explained by Roodman (2009), the main problem with Eq. (3.2) is that when there are few time periods, the lagged dependent variable is correlated with the fixed effects, creating what Nickell (1981) described as dynamic panel bias. One solution to this is using first-differencing. First difference is used to eliminate the unobserved country fixed effect, μi. Using this approach, Eq. (3.2) becomes fdii;t 2 fdii;t21 5 β 1 3 ðfdii;t1 2 fdii;t2 Þ 1 β 2 3 ðcorri;t 2 corri;t1 Þ 1 β 03 3 ðX 0i;t  X 0i;t1 Þ 1 ðvi;t 2 vi;t21 Þ

(3.4)

Although the country fixed effects has been removed in Eq.(3.4), the lagged dependent variable, fdii;t1 2 fdii;t2 could still be endogenous because fdii,t21 is correlated with vi,t21 (Roodman, 2009). There would be similar problems if the vector of control variables X0 also contains endogenous variables. The ArellanoBond difference GMM method solves this problem by using lagged levels as instruments for endogenous differenced covariates. A similar methodology is the “system GMM” estimator, based on Arellano and Bover (1995) and Blundell and Bond (1998). This calls for instrumenting level variables with their differences. However, in this study, system GMM gave a Hansen test showing that there are too many instruments, even if only one lag period was utilized. Thus, difference GMM was used. As argued by Jayasuriya (2011), when FDI inflows is the dependent variable with GDP per capita, GDP growth, exchange rate, and openness among the covariates, these independent variables should be treated as endogenous because of potential reverse causality. That is, FDI inflows affect GDP per capita, GDP growth, exchange rate, and openness; and at the same time, GDP per capita, GDP growth, exchange rate, and openness affect FDI inflows. Thus, these control variables were treated as endogenous in the model specification for this paper. The instruments were limited to one time period lag because including more was causing the number of instruments to shoot up beyond the efficient level, as shown by a high Hansen test P value. Hansen test P values greater than 0.25 is an indication that there are

46

The Changing Face of Corruption in the Asia Pacific

too many instruments (Roodman, 2009). The lag period used for instruments was the third lag because tests for AR(1) and AR(2) turns out significant. For robustness, two representations of FDI inflows and corruption indicator were used in this study—level and change from the previous year. This would allow us to determine not only whether less (or more) corrupt countries receive more FDI inflows; but also if improvements (or declines) in corruption affect FDI. Thus, we looked at four relationships: (1) effect of level of corruption on level of FDI inflows, (2) effect of change in level of corruption on level of FDI inflows, (3) effect of level of corruption on change in FDI inflows, and (4) effect of change in level of corruption on change in FDI inflows. The same methodology was also applied using only middle- and low-income countries to determine if corruption has a different effect on FDI inflows for developing countries.

3.5

Results and discussions

Results are reported in Tables 3.63.9. Table 3.6 reports the results where the dependent variable is level of FDI inflows, whereas Table 3.7 contains the results in which the dependent variable is change in FDI inflows from the previous year. Tables 3.8 and 3.9 show the results using only low- and middle-income countries. Both the level of corruption and the change in level of corruption have significant effects on the level of FDI inflows. According to columns 4 and 5 of Table 3.6, a one-unit increase in the control of corruption score increases FDI inflows by USD1.03 to USD1.04 million. Control of corruption score also has positive and statistically significant coefficients in the specifications reported in columns 2 and 3; however, the P values of the Hansen test are outside the 0.10.25 comfortable level described by Roodman (2009). Thus, it appears that the specifications in columns 4 and 5 are better. The general interpretation of this is that countries with less corruption receive more FDI inflows. Another result from Table 3.6 is that countries that decreased its level of corruption (i.e., control of corruption score increased) also received more FDI inflows. According to column 9 of Table 3.6, a one-unit higher improvement in the control of corruption score from the previous year is associated with about USD955 million more FDI inflows. Change in corruption also has positive and statistically significant coefficients in the specifications reported in columns 68; however, the P values of the Hansen test are greater than 0.25 in these specifications; thus, it is difficult to make conclusions using these columns. Because the differences in the interpretation between level of corruption and change in level of corruption can be confusing, clarifying them is in order. The former means that countries with less corruption receive more FDI inflows; the latter means that countries that improved their level of corruption also receive more FDI inflows. Thus, country A, which is not corrupt, and has stayed that way for many years, tends to receive more FDI inflows. Similarly, country B, which is relatively more corrupt, but has made significant improvements in the past years, also tends

Table 3.6

Regression results (dependent variable is level of FDI inflows)

1

2

3

4

5

Corr_control Change in Corr_control Lag of FDIperCap AOV VAA RQ ROL GE Start_business Tax_rate Inflation GDP per capita GDP growth Exchange rate XMGDP No. of obsns No. of groups No. of instruments Hansen Test P value

731.1a (388.2)

733.9a (401.6)

1030a (548.5)

1042a (582.9)

0.243c (0.0875)

0.242c (0.0852)

0.234c (0.0833)

0.215b (0.0905)

2 13.52 (8.877) 0.211 (0.393) 105.7a (55.45) 2 9.107 (12.90) 2 1.814 (5.792) 272 46 22

0.0785 (10.32) 2 1.164 (7.691) 2 13.31 (9.048) 0.223 (0.411) 105.1a (56.40) 2 7.193 (13.01) 2 1.986 (6.698) 272 46 24

2 1362 (868.1) 1.595 (11.18) 2 0.754 (7.359) 2 15.50 (10.25) 0.180 (0.381) 106.2a (55.40) 2 16.53 (16.27) 2 1.095 (6.461) 272 46 26

2 426.7 (346.9) 500.6 (697.7) 2 190.4 (495.2) 242.4 (493.3) 2 1313 (866.1) 0.937 (10.65) 1.763 (6.909) 2 14.95 (9.984) 0.162 (0.375) 100.1a (52.22) 2 15.57 (15.77) 2 0.397 (6.073) 272 46 29

0.547

0.512

0.239

0.127

2 205.5 (512.7)

Standard errors in ( ): aSignificant at 10%, bsignificant at 5%, csignificant at 1%.

6

7

8

9

866.9a (437.5)

867.1a (441.0)

1035a (541.1)

955.4a (519.3)

0.275c (0.0975)

0.274c (0.0964)

0.273c (0.0949)

0.249b (0.101)

2 14.80 (9.140) 0.224 (0.353) 124.0b (57.88) 2 5.126 (12.33) 2 2.923 (5.351) 272 46 22

0.154 (9.887) 2 2.870 (7.783) 2 14.60 (9.126) 0.232 (0.366) 122.9b (58.74) 2 3.692 (12.80) 2 3.050 (6.116) 272 46 24

2 1339 (863.2) 1.016 (10.15) 2 3.055 (7.526) 2 17.30 (10.60) 0.178 (0.330) 128.0b (59.26) 2 11.25 (14.99) 2 2.074 (5.897) 272 46 26

2 316.3 (339.2) 780.1 (764.7) 2 129.0 (482.0) 125.5 (456.1) 2 1232 (822.2) 0.217 (9.823) 2 0.710 (6.865) 2 16.61 (10.37) 0.158 (0.333) 122.7b (57.11) 2 9.635 (13.76) 2 1.420 (5.644) 272 46 29

0.442

0.395

0.252

0.197

2 169.7 (506.2)

Table 3.7

Regression results (dependent variable is change in level of FDI inflows)

1

2

3

4

5

Corr_control Change in Corr_control Lag of change in FDIperCap AOV VAA RQ ROL GE Start_business Tax_rate Inflation

1068a (577.1)

1134a (593.1)

1158a (655.1)

1070 (660.8)

GDP per capita GDP growth Exchange rate XMGDP No. of obsns No. of groups No. of instruments Hansen test P value

2 0.314c (0.108)

2 0.305c (0.113)

2 0.303c (0.112)

798.4 (612.8)

2 13.99 (9.830) 0.0757 (0.190)

8.723 (13.45) 5.823 (10.79) 2 12.35 (9.536) 0.0787 (0.206)

2 1038 (1306) 10.20 (14.94) 6.604 (11.18) 2 14.18 (10.11) 0.0288 (0.182)

183.9 (135.9) 10.21 (25.29) 2 7.216 (7.649) 227 46 21

181.7 (137.6) 7.486 (26.31) 2 7.847 (8.123) 227 46 23

193.7 (140.1) 5.506 (23.52) 2 7.859 (7.665) 227 46 25

0.604

0.565

0.615

Standard errors in ( ): aSignificant at 10%, bsignificant at 5%, csignificant at 1%.

2 0.286b (0.107) 2 401.6 (408.7) 1409 (1959) 736.7 (538.7) 2 187.5 (874.9) 2 961.6 (1133) 9.879 (14.21) 6.780 (12.89) 2 12.74 (9.296)

6

7

8

9

1672 (999.7)

1667 (998.5)

1726a (1,026)

1607 (975.6)

2 0.309c (0.114)

2 0.301b (0.117)

2 0.296b (0.119)

2 0.278b (0.116)

670.8 (651.7)

2 16.26 (10.00)

2.542 (15.97) 3.153 (10.19) 2 15.71 (9.968) 0.152 (0.219)

2 1235 (1293) 4.239 (15.97) 3.643 (10.24) 2 17.82a (10.47) 0.0859 (0.222) 220.4a (127.6) 9.495 (23.24) 2 9.408 (7.725) 227 46 25

205.6 (131.1) 8.649 (26.07) 2 8.182 (7.483)

0.475

0.559

2 0.0523 (0.165) 178.4 (142.4) 4.730 (27.57) 2 6.400 (6.830)

211.1a (120.1) 15.85 (23.68) 2 9.784 (7.808)

227 46 28

227 46 21

209.1a (121.9) 13.20 (24.73) 2 9.732 (8.109) 227 46 23

0.659

0.620

0.577

0.164 (0.212)

2 328.2 (435.7) 1767 (1811) 629.7 (646.5) 2 394.5 (889.8) 2 1082 (1147) 4.120 (15.40) 3.774 (12.19) 2 16.13 (9.713) 0.00958 (0.222)

227 46 28

Table 3.8

Regression results, developing countries only (dependent variable is level of FDI inflows)

1

2

3

4

5

Corr_control

2 24.43 (106.2)

2 45.23 (112.8)

2 72.86 (112.5)

2 190.0 (147.8)

Change in Corr_control Lag of FDIperCap AOV VAA RQ ROL GE Start_business Tax_rate Inflation GDP per capita

0.239 (0.169)

0.242 (0.166)

0.263 (0.160)

0.303b (0.137)

78.68 (249.4) 3.590 (4.942) 1.871 (1.620) 0.205 (1.308) 0.0675 (0.123) 17.64a (9.059) 0.363 (2.252)

54.72 (87.03) 338.5b (134.8) 360.5b (146.0) 161.3 (166.9) 12.13 (200.1) 3.883 (5.171) 2.106 (1.904) 0.145 (1.398) 0.0861 (0.140) 18.29a (9.459) 1.151 (2.177)

277.1b (129.0)

6

7

8

9

38.80 (69.48)

37.07 (69.77)

38.51 (57.62)

21.61 (68.23)

0.257a (0.151)

0.257a (0.146)

0.270a (0.137)

0.291b (0.115)

GDP growth Exchange rate

18.05a (9.194) 0.630 (2.086)

XMGDP No. of obsns No. of groups No. of instruments Hansen Test P value

0.882 (0.902) 196 33 22

1.243 (0.939) 196 33 24

1.203 (0.864) 196 33 26

1.305 (0.956) 196 33 29

0.817 (0.829) 196 33 22

3.266 (4.916) 1.825 (1.899) 0.147 (1.323) 0.0799 (0.122) 18.23a (9.027) 0.0653 (2.179) 1.151 (0.838) 196 33 24

0.460

0.426

0.726

0.702

0.350

0.330

Standard errors in ( ): aSignificant at 10%, bsignificant at 5%. No independent variable is significant at 1%.

1.060 (0.766) 196 33 26 0.634

0.579

272.3b (121.2)

3.351 (5.070) 1.742 (1.876) 0.205 (1.389) 0.0750 (0.124) 18.02a (9.156) 0.451 (2.297)

0.857 (1.574) 0.0713 (0.116)

26.90 (76.30) 256.5a (142.8) 347.6b (133.3) 167.5 (177.8) 84.58 (220.9) 3.452 (4.873) 1.838 (1.805) 0.259 (1.293) 0.0786 (0.122) 18.43b (9.048) 0.0309 (2.136) 1.006 (0.803) 196 33 29

0.787 (1.518) 0.0763 (0.116) 18.40a (9.101) 0.295 (1.914)

120.3 (247.6) 3.407 (4.784) 1.851 (1.602) 0.194 (1.265) 0.0689 (0.118) 18.02a (9.152) 0.314 (2.206)

Table 3.9

Regression results, developing countries only (dependent variable is change in level of FDI inflows)

1

2

3

4

5

Corr_control Change in Corr_control Lag of FDIperCap AOV VAA RQ ROL

11.83 (120.7)

41.78 (133.8)

83.26 (132.8)

208.7 (196.6)

0.419b (0.185)

0.419b (0.185)

0.410b (0.187)

0.331a (0.169)

390.7b (190.1)

22.54 (158.0) 486.5 (329.6) 491.8b (205.3) 467.4b (217.9)

18.43 (271.5) 3.251 (5.588) 2.980 (2.326) 1.667 (2.721) 0.349 (0.228)

102.7 (210.8) 5.447 (5.692) 2.817 (2.606) 1.374 (2.754) 0.324 (0.235)

GE Start_business Tax_rate Inflation GDP per capita

2.547 (2.942) 0.357 (0.231)

2.605 (6.044) 2.722 (2.528) 1.926 (2.757) 0.362 (0.242)

GDP growth Exchange rate

17.24 (14.51) 0.611 (1.923)

16.84 (14.24) 0.0869 (1.813)

XMGDP No. of obsns No. of groups No. of instruments Hansen Test P value

1.562 (1.280) 164 33 21

1.895 (1.269) 164 33 23

15.15 (14.04) 2 0.0212 (1.906) 1.905 (1.154) 164 33 25

0.387

0.224

0.106

6

7

8

9

87.43 (94.22)

85.72 (95.71)

68.87 (73.10)

62.33 (82.39)

0.414b (0.179)

0.411b (0.177)

0.394b (0.180)

0.342b (0.152) 13.53 (147.3) 363.6 (283.8) 480.5b (190.8) 467.2b (217.6) 21.74 (231.5) 4.323 (5.462) 2.257 (2.435) 1.519 (2.662) 2 0.326 (0.228) 17.49 (15.97) 0.952 (2.217)

370.4b (176.7)

16.86 (15.12) 1.926 (2.420)

2.370 (2.895) 2 0.361 (0.243) 17.96 (15.07) 0.702 (1.898)

2.398 (5.642) 2.537 (2.419) 1.784 (2.665) 2 0.369 (0.254) 17.96 (14.86) 0.0610 (1.755)

1.893 (1.260) 164 33 28

1.444 (1.285) 164 33 21

1.714 (1.253) 164 33 23

60.17 (269.3) 2.629 (5.287) 2.673 (2.191) 1.644 (2.676) 2 0.358 (0.238) 16.91 (15.06) 2 0.223 (1.888) 1.639 (1.195) 164 33 25

0.201

0.386

0.249

0.086

Standard errors in ( ): aSignificant at 10%, bsignificant at 5%. No independent variable is significant at 1%.

1.504 (1.241) 164 33 28 0.202

The effect of corruption on foreign direct investment inflows

51

to receive more FDI inflows. This could have significant policy implications because it shows that investors are looking to invest not only in countries with low levels of corruption to begin with, but also in countries that have made strides in the fight against corruption. Turning the discussion to the equations wherein the dependent variable is change in level of FDI inflows from the previous year, we look at the results in Table 3.7. Both the level of corruption and the change in level of corruption showed some significant coefficients in Table 3.7, albeit less than in Table 3.6, and with weaker significance levels. Moreover, all P values of the Hansen test are greater than 0.25, indicating that it is difficult to conclude based on the results due to too much instruments. There are several reasons for the observed negative relationship between corruption and FDI inflows. These reasons can generally be categorized into two— economics and ethics. Economically, corruption entails higher costs, more risks, and difficulty in its management. Some investors also avoid corruption because of ethical considerations (Habib & Zurawicki, 2002). Corruption is added cost to businesses. When an investor needs to pay bribes and other informal payments in order to start a business, get permits, and import resources, these would eat up on potential profits. What’s worse is that in some countries, corruption is unpredictable as to how much and when to pay a bribe; and this unpredictability increases the costs associated to corruption. Campos, Lien, and Pradhan (1999) found evidence that the adverse effects of corruption are exacerbated when it is unpredictable. Some country sources of FDI also have a foreign corrupt practices act (FCPA), or its equivalent, deterring potential investors who are willing to pay bribes and other informal payments in the recipient country. Moreover, Wei (2000a) argues that even without a law similar to FCPA, high level of corruption is a signal to investors that contract enforcement in a country is weak. There are still other less obvious ways by which corruption can affect FDI inflows. Wei (2000b) concludes that corruption in countries that imports capital tends to move capital away from FDI toward bank loans because the former are less likely to be affected by corruption. Habib and Zurawicki (2002) also argue that difference in level of corruption between the source and recipient countries can stifle FDI because investors try to avoid a business environment that is different from their own. Next, we discuss the results when runs were made using only low- and middleincome countries. None between the level of corruption and the change in level of corruption variables turned significant, whether the dependent variable is level of FDI inflows or change in level of FDI inflows. This means that in the Asia and the Pacific region in general, less corruption increases FDI inflows (and more corruption decreases FDI inflows); however, for low- and middle-income countries, there is no significant relationship between these two variables. This result is interesting, because given that corruption is perceived to be worse among developing countries, it could be expected that corruption has an even stronger effect on FDIs. But as results show, this does not seem to be the case. It appears that investors look at other institutional variables when selecting low- and middle-income countries to invest in. In Table 3.8 (dependent variable

52

The Changing Face of Corruption in the Asia Pacific

is level of FDI inflows), Voice and Accountability and Regulatory Quality have positive and significant effects. These two variables are insignificant when all countries are included. However, it is difficult to conclude using these results because of the high P values of the Hansen tests in all specifications in Table 3.8. Results of the Hansen test are better in Table 3.9 (dependent variable is change in level of FDI inflows). Here, Regulatory Quality has positive and significant effect on FDI inflows. Regulatory quality is insignificant in the runs using all countries in the data set, but it is positive and significant when the observations are limited to low- and middle-income countries. Regulatory quality and corruption are measures of quality of institutions. This could imply that although quality of institutions is important for investors in choosing where to place their investments, they are looking at different indicators of institutional quality when investing in a low- or middle-income country. For investors, regulatory quality is a more important factor than corruption in choosing a low- and middle-income country to invest in. One possible reason why regulatory quality crowds out corruption in low- and middle-income countries is that unpredictable or poor regulation and implementation of laws could exert higher costs than corruption. This especially holds in countries where corruption is predictable.

3.6

Conclusion

Using panel data of 46 Asia and the Pacific countries from 2006 to 2013, this chapter shows that in general, corruption decreases FDI inflows. Low-corruption countries receive more FDI inflows in general. Moreover, countries that implemented reforms and decreased their level of corruption also receive more FDI inflows. However, when only low- and middle-income countries in the data set were considered, the relationship is insignificant. Corruption tends to decrease FDI because of economic and ethical reasons. It is an added cost to investors, increases risks, and it is difficult to deal with, especially if the investor does not experience it much in his/her home country. Laws such as the FCPA also discourages investors from investing in high-corruption countries.

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The role of multinationals in corruption in the Asia-Pacific region

4

Duane Windsor Rice University, Houston, TX, United States

4.1

Introduction

One should carefully distinguish between bribe paying tendencies of some multinational enterprises (MNEs) operating outside their home countries and levels of domestic corruption in MNE home or host countries. Information from Transparency International (TI), discussed in greater detail later in this chapter, suggests that MNE bribe paying and domestic corruption need not be closely associated empirically. MNEs from relatively corrupt home countries may operate very cleanly at home and abroad. For example, Tata Group of India (founded 1868) (Srivastava, Negi, Mishra, & Pandey, 2012) and Ayala Corporation of the Philippines (tracing to 1834) (Leleux & Glemser, 2014) have strong reputations for corporate social responsibility and noncorruption. India and the Philippines are fairly corrupt domestically, but this condition does not automatically carry into the conduct of all Indian or Filipino MNEs. On the other hand, China and Russia rank poorly on both bribe paying tendencies and domestic corruption. An expectation of Chinese and Russian MNEs behaving corruptly abroad must still be verified empirically for each MNE in case of possible exceptions. Italy is relatively corrupt among other European Union (EU) member countries. MNEs from relatively clean home countries may practice bribery abroad, as suggested by recent antibribery prosecutions. TI (2016) cites recent allegations against Swedish Finnish firm TeliaSonera—37% owned by the Swedish state—that it paid bribes in Uzbekistan, a relatively corrupt country located in formerly Soviet Central Asia. Finland and Sweden are very clean countries in TI reports; and the firm is withdrawing from Central Asia. Previously, the principal Swedish case had been the Bofors alleged efforts to obtain defense contracts in India (Forbes, June 27, 1988, 51 52). There are a number of fairly recent cases—GSK (United Kingdom) in China, Walmart (USA) in India, and presently under investigation Goldman Sachs (USA) in Malaysia for instance—reported publicly. These cases, together with the somewhat older case of the Siemens (Germany) global corruption, are discussed in more detail later in this chapter. TI (2016) finds that half of the OECD countries are not appropriately cracking down on foreign bribery by their companies. Windsor (2000: 137) noted that “attitudes and practices” in various OECD countries facilitated corruption. The Changing Face of Corruption in the Asia Pacific. DOI: http://dx.doi.org/10.1016/B978-0-08-101109-6.00004-6 Copyright © 2017 Duane Windsor. Published by Elsevier Ltd. All rights reserved.

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4.2

The Changing Face of Corruption in the Asia Pacific

Supply-side and demand-side of corruption markets

There are five types of key participants in anticorruption reform efforts, listed alphabetically as follows: anticorruption activist organizations; domestic businesses; governments; MNEs; and multilateral organizations. TI, headquartered in Berlin, Germany, and operating through country chapters, is a leading example of an anticorruption activist organization. Multilateral organizations addressing corruption in various forms may be comprised governments—illustrated by the United Nations, the World Bank, and the World Trade Organization (WTO); or private participants—illustrated by the Wolfsberg AntiMoney Laundering principles adopted by a set of private global banks; or a combination of types of governmental and private participants—illustrated by the UN Global Compact. A country’s citizens can be a very important factor in anticorruption reform effectiveness, but the role is generally one of known opposition to or widespread tolerance for corruption; generally, grassroots citizen anticorruption mobilization occurs through nongovernmental activist organizations. Anticorruption reform is attempted regulation of what would otherwise be a functioning if typically underground (or shadow) market for corrupt payments to government officials (Windsor, 2004: 137). This market has a demand side and a supply side (Windsor, 2000). The demand side (payees) comprises government officials or their agents and intermediaries who are seeking corrupt payments or who are willing to accept such payments without prior solicitation (Moore, 2007). The supply side (payers) comprises domestic businesses and MNEs or their agents and intermediaries willing to make corrupt payments, whether by offer of the payer or in response to solicitation by the payee (Vogl, 1998). Individuals may also be payers, but this chapter focuses on MNEs. Corruption is the misuse of an official position of trust for private gain. The official position can be in a private or governmental organization. The official—whether appointed or elected—has a legal and moral duty to the owners of the organization to act on their behalf and not on selfinterest. Citizens are owners of governmental organizations. Overholt (2015) distinguishes among several types of government corruption. In China, the corruption is largely hidden graft: government projects and activities are completed, but at higher cost. In India, government projects and activities are not always completed, as previously in the Philippines under the Marcos regime. In Japan, there is “structural corruption”: basically certain “interest groups dominate the legislature.” An instance, cited by Overholt (2015), was the influence of the construction lobby on nuclear regulators that permitted the Fukushima nuclear plant disaster to unfold through a combination of factors: inappropriate location, standards, and safety rulesa. a

Quoting Overholt (2015), “More costly still, Japan has what’s termed ‘structural corruption.’ A few major interest groups dominate the legislature to the extent that they can pervert national policy to their benefit. In an economy, the size of California, Japan’s infrastructure spending long exceeded U.S. infrastructure spending. So powerful was the grip of the construction lobby on the nuclear regulators that the operators of the Fukushima nuclear plant were allowed to build in an inappropriate location, to inappropriate standards, ignoring crucial safety rules.”

The role of multinationals in corruption in the Asia-Pacific region

59

At least two actors must be involved in a corrupt transaction: the intended payee (an official) and the intended payer. The participants in corruption are the payers (businesses, other organizations, and individual) and the payees (typically individuals in governments or their agents or intermediaries). Four distinctions are important in the analysis of corruption markets, which are listed as follows: 1. The first distinction is between bribery and extortion, as forms of corruption. A bribe is an offer to or a solicitation by a payee. A bribe has the attribute of a voluntary payment by the payer for a benefit provided by the payee. The clearest instance of bribery is an unsolicited offer of payment. In contrast, extortion is a demand by a payee backed by the explicit or implicit threat of damage to the payer. The clearest instance of extortion is an unexpected demand for payment. 2. The second distinction is between a bribe and a facilitation (or facilitating) payment. A bribe has the attribute of purchase of a discretionary decision by the payee. Assignment of a procurement contract or a business license is such a discretionary action, but under conditions in which the bribe is absent and the benefit will go to a competitor willing to pay a bribe. A facilitation payment has the attribute of a payment to expedite an otherwise required action, but under conditions in which delay can damage the payer and/or benefit a competitor. Usually, facilitation is a relatively minor payment to a minor official such as a police or customs officer or an inspector, whereas bribery is a relatively significant payment to a higher official who makes or recommends a decision. Facilitation is one kind of graft. 3. The third distinction is between a bribe or facilitation payment and a gift. There are societies in which gift giving is customary, whether in building a relationship or as a thank-you after a transaction or celebration of a relationship. However, gift giving may become a basis for designing corrupt payment schemes in disguise. 4. The fourth distinction is between commercial and governmental corruption (Windsor, 2004). The three distinctions above may apply to either sector. However, kickbacks and exchange of favors are likely more common kinds of commercial corruption between businesses than bribes or extortion. This chapter focuses on governmental corruption, but it is important to bear in mind that commercial corruption may also be operating.

Anticorruption efforts can be aimed at the demand side or the supply side of a corruption market. Sikka and Lehman (2015) argue that in government procurement, good internal controls in government departments will be insufficient to deter corruption: the major reason is the supply of corruption by businesses driven by “insatiable appetite for profits.” Anticorruption legislation—such as the U.S. Foreign Corrupt Practices Act (FCPA) of 1977 and the UK Bribery Act 2010, and multilateral agreements—such as the UN Convention against Corruption (UNCAC) of 2005 basically regulate the supply side: businesses should not bribe foreign government officials. Domestic corruption legislation basically regulates the demand side and the supply side: government officials should not accept bribes or gratuities; businesses and individuals should not offer or make such payments. Recently, there has been increasing emphasis on the idea that businesses should collectively agree not to make corrupt payments (Bhattacharya, 2013; Dixit, 2016). The anticorruption principle of the UN Global Compact is such a collective agreement.

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4.3

The Changing Face of Corruption in the Asia Pacific

Patterns of country corruption in the Asia-Pacific region

The incidence of corruption varies markedly across countries even for comparable activities such as direct bribery of government officials (Andvig & Moene, 1990). The Asia-Pacific region shows such marked variation (Plipat, 2016; Quah, 2016a, b), as reported in Tables 4.1 and 4.2. Table 4.1 reports 2011 TI’s bribe payers index (BPI) information and 2015 corruption perceptions index (CPI) information for the 28 largest economies with MNEs. 2011 BPI and 2015 CPI information are the most recent available, at time of writing. The table is arranged by region. Within each region, countries are listed by 2011 BPI rank from cleanest to dirtiest. The right side of the table then provides 2015 CPI information for each country. The first region, at the top of the table, comprises countries of the Asia-Pacific region, as defined by TI. (Table 4.2 provides CPI information for all the other Asia-Pacific countries.) The second region, further down the table, comprises other countries bordering the North Pacific: Canada, USA, and Mexico (comprising NAFTA) and Russia (Siberia). The third region comprises countries of Western Europe: all are members of the EU except Switzerland. The fourth region, at the bottom of the table, groups other emerging economies not in the Asia-Pacific region. The five BRICS (Brazil, Russia, India, China, and South Africa) appear in italics, as these countries are scattered across the regions used in the table. Using BPI of 8.1 as a rough cutoff, Japan, Australia, Singapore, and New Zealand (reported in Table 4.2) can be grouped with Canada, the USA, and much of Western Europe as relatively clean. The rough cutoff corresponds with CPI information: there is a major drop in Table 4.1 from Singapore to South Korea. The USA is the 8.1 cutoff. France and Spain have a BPI score of 8; Italy is lower at the 7.6 level. Italy is at approximately the score of the top half of the other emerging economies not in the Asia-Pacific region; and at the level of Hong Kong, Malaysia, Taiwan, and Indonesia. China (BPI 6.5) and Russia (BPI 6.1) have the most corrupt MNEs as reported by TI information; and they appear to be somewhat worse than Indonesia (BPI 7.1) or Mexico (BPI 7.0). Hong Kong, a special administrative region of China, is reported markedly cleaner than China. Within the BRICS category, Brazil, India, and South Africa appear cleaner than China and Russia: the gap in BPI scores appears relatively large. Table 4.2 reports 2015 CPI information for other Asia-Pacific countries not included in Table 4.1. These countries are not large enough economically to report BPI information for any MNEs. The table is arranged in two different ways. The left side of the table reports countries alphabetically. The right side of the table reports countries by CPI rank, from cleanest to dirtiest. Discussion here focuses on the right side, for CPI rank ordering. New Zealand is one of the cleanest countries in the world, and although having MNEs and some important exporters is not economically large enough for BPI information. Bhutan has a relatively clean ranking. Other Asia-Pacific countries listed in Table 4.2 have relatively dirty rankings. Myanmar (Burma), Cambodia, Afghanistan (an active conflict zone), and

Largest economy entities clustered by region of MNE home country (or other entity) and ranked within region by BPI 2011 for likelihood of MNEs bribing abroad

Table 4.1

Entity

BPI 2011 (10 5 clean, 0 5 dirty)

BPI rank 2011 of 28 entities

CPI 2015 (100 5 clean, 0 5 dirty)

CPI rank 2015 of 168 entities

MNEs of Asia-Pacific region as defined by Transparency International Japan Australia Singapore South Korea Hong Kong 1 Malaysia Taiwan India Indonesia China 1

8.6 8.5 8.3 7.9 7.6 7.6 7.5 7.5 7.1 6.5

4 6 8 13 15 15 19 19 25 27

75 79 85 56 75 50 62 38 36 37

18 13 8 37 18 54 30 76 88 83

MNEs of Canada, United States, and Mexico (NAFTA) and Russia bordering North Pacific Canada USA Mexico Russia

8.5 8.1 7.0 6.1

6 10 26 28

83 76 35 29

9 16 95 119

1 1 3 4 8 11 11 15

87 86 77 81 81 70 58 44

5 7 15 10 10 23 36 61

MNEs of Western European countries Netherlands Switzerland Belgium Germany United Kingdom France Spain Italy

8.8 8.8 8.7 8.6 8.3 8.0 8.0 7.6

MNEs of other emerging economies not in Asia-Pacific region Brazil South Africa Turkey Saudi Arabia Argentina UAE

7.7 7.6 7.5 7.4 7.3 7.3

14 15 19 22 23 23

38 44 42 52 32 70

76 61 66 48 107 23

Notes:1 Hong Kong is a special administrative entity of China, a one-party communist regime. Countries shown in bold are developed economies. All other entities, including the BRICS, are emerging economies. The five BRICS (Brazil Russia India China South Africa) countries are shown in italics. Rank ordered by BPI 2011: 1—Netherlands, Switzerland; 3—Belgium; 4—Germany, Japan; 6—Australia, Canada; 8— Singapore, United Kingdom; 10—USA; 11—France, Spain; 13—South Korea; 14—Brazil; 15—Hong Kong, Italy, Malaysia, South Africa; 19—India, Taiwan, Turkey; 22—Saudi Arabia; 23—Argentina, UAE; 25—Indonesia; 26—Mexico; 27—China; 28—Russia. Sources: http://www.transparency.org/bpi2011, http://www.transparency.org/cpi2015.

Other Asia-Pacific countries as defined by Transparency International not appearing in Table 4.1 for BPI information

Table 4.2

Country alphabetically

CPI 2015 (100 5 clean, 0 5 dirty)

CPI rank 2015 of 168 countries

Country by CPI rank

CPI 2015 (100 5 clean, 0 5 dirty)

CPI rank 2015 of 168 countries

Afghanistana Bangladesh Bhutan Cambodiac Laos Mongoliac Myanmar Nepal New Zealandb North Koread Pakistan Papua New Guinea Philippines Sri Lanka Thailand Vietnamd

11 25 65 21 25 39 22 27 88 8 30 25

166 139 27 150 139 72 147 130 4 167 117 139

88 65 39 38 37 35 31 30 27 25 25 25

4 27 72 76 83 95 112 117 130 139 139 139

35 37 38 31

95 83 76 112

New Zealandb Bhutan Mongoliac Thailand Sri Lanka Philippines Vietnamd Pakistan Nepal Bangladesh Laos Papua New Guinea Myanmar Cambodiab Afghanistana North Koread

22 21 11 8

147 150 166 167

Notes: For Brunei Darussalam, on the west coast of Borneo Island, the last reported CPI was in 2013: 60, ranked 38 of 177. In 2013, Malaysia was 56, ranked 53 of 177; Indonesia was 32, ranked 114 of 177 (see Joseph et al., 2016). a Afghanistan is an active conflict zone (Singh, 2016). b New Zealand is a very clean developed country, but is not a large enough economy to appear in Table 4.1. c Cambodia was once under communist rule: the Pol Pot Khmer Rouge regime (1975 79) was overthrown by Vietnamese military action. Mongolia is a transition economy (formerly communist). d North Korea and Vietnam are communist states. North Korea and Somalia are the two most corrupt countries reported by Transparency International (TI). Source: http://www.transparency.org/bpi2011.

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63

North Korea are the worst. North Korea, a communist dictatorship, ties with Somalia for dirtiest country reported by TI. Information for Brunei is not available after 2013. At that time, Brunei was cleaner than Malaysia, and certainly much cleaner than Indonesia. (Malaysia and Indonesia appear in Table 4.1.)

4.4

Recent instances of MNE misconduct in Asia-Pacific countries

A December 2011 list of the then top 10 recent settlements with companies under FCPA enforcement actions (Fiscal Times, 2011) included: German firm Siemens ($1.6 billion, December 15, 2008—also fined heavily in Germany); KBR/ Halliburton ($579 million, February 11, 2009) concerning bribery of Nigerian officials by a four-firm consortium for construction contracts; BAE Systems ($448 million, February 5, 2010) concerning $2 billion in bribes for a Saudi Arabia arms deal; Johnson & Johnson ($70 million, April 8, 2011) concerning bribes in connection with sales of medical devices in Greece, Poland, and Romania; and Swiss firm Panalpina World Transport ($76 million, November 4, 2010) concerning bribes in at least seven countries (none reported in Asia-Pacific). The KBR/Halliburton case also involved settlements with Dutch firm Snamprogetti ($240 million, February 7, 2010), French firm Technip ($240 million, June 28, 2010), and Japanese firm JCG ($219 million, April 6, 2011). Daimler AG of Germany settled for $195 million (April 1, 2010) for bribes in at least 22 countries. Alcatel-Lucent of France settled for $137 million (March 10, 2011) for bribes concerning telecommunications contracts in various countries including Taiwan and Malaysia. Four key instances of MNE misconduct are reported below: more detail on Siemens; GSK in China; Walmart in India; and Goldman Sachs (allegedly) in Malaysia. Both China and India have launched very different anticorruption campaigns. Siemens operating what amounted to a global strategy of bribery across perhaps 20 countries or so and perhaps partly orchestrated through more than 2700 business consultant agreements (Lo¨scher, 2012; Schubert & Miller, 2008). The German employee, convicted, who orchestrated the scheme for top management has been quoted as saying that, because bribery and corruption are widespread activities, “People will only say about Siemens that they were unlucky and that they broke the 11th Commandment” . . . “The 11th Commandment is: ‘Don’t get caught.’” (Schubert & Miller, 2008). Miller (2009), drawing on the SEC complaint, reported on 16 countries being investigated in connection with Siemens. These countries included Bangladesh, Vietnam, and China. The Bangladesh investigation concerned a bribe of $5.3 million paid in connection with a mobile phone contract (2004 06) of $40.9 million allegedly paid to the son of the then prime minister, the minister of posts and telecommunications, and the director of procurement for the Bangladesh Telegraph & Telephone Board (BTTB). In addition, Siemens Ltd. Bangladesh hired relatives of two BTTB and Ministry of Posts and Telecommunications officials

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(Montero, 2009). The Vietnam investigation concerned a bribe of $383,000 paid in connection with hospital equipment sales (2005 06) of $6 million allegedly paid to government officials; a bribe of $140,000 paid in connection with a mobile network bid (2002) on a contract worth $35 million, in which Siemens while not winning the contract agreed to pay 8% 14% of the project value to government officials likely in the Ministry of Defense and in Vietel (the state-owned mobile phone network). The China investigation concerned a bribe of $22 million allegedly paid to government officials on contracts of $1 billion for metro trains and signaling devices (2002 07); a bribe of $25 million allegedly paid to government officials on a contract of $838 million for high-voltage lines (2002 03); a bribe of $14.4 million allegedly paid on medical equipment sales of $295 million (2003 07); and a bribe of $650,000 allegedly paid to Chinese hospital officials for hospital equipment sales not specified in value (1998 2004). In the medical equipment sales case, the deputy director of the Songyuan City Central Hospital received a sentence of 14 years in prison in China. A subsequent report indicated roughly 20 countries, including Malaysia in connection with power transmission and distribution (ProPublica, nd). The China anticorruption effort appears top down (Jiahong, 2016; Leng & Wertime, 2015; Li, Gong, & Xiao, 2016). In late 2012, Xi Jinping—new President and also General Secretary of the Communist Party—launched an anticorruption campaign focusing on the party, government, military, and state enterprises. There have been large numbers of investigations and prosecutions (South China Morning Post, nd). There are also investigations by other countries, including the USA (Cassin, 2016). J.P. Morgan Chase bank reportedly had a program for hiring children and acquaintances of Chinese officials and clients or potential clients. A Chinese court fined GlaxoSmithKline (GSK), the U.K. pharmaceutical firm, nearly $500 million for bribery of doctors and hospital officials (Bradsher & Buckley, 2014; Lee, 2015; Schipani, Lui, & Xu, 2016). Reports indicate that the bribes occurred as kickbacks channeled through travel agencies and pharmaceutical industry associations. The scheme allegedly generated revenue for GSK of more than $150 million through higher drug prices. Chinese authorities prosecuted the British country manager and four other GSK managers, who all pleaded guilty and received suspended sentences. The British citizen was deported. GSK issued a formal acknowledgment of misconduct and an apology. There have also been fines ($40.5 million) of Audi (a unit of VW) and of a dozen Japanese auto parts and bearing manufacturers ($200 million) for alleged antitrust violations (Bradsher & Buckley, 2014). Bradsher and Buckley (2014) quote as follows: “It’s very hard to do business in the Chinese health care and pharmaceutical sectors without doing payoffs,” said David Zweig, the director of the Center on China’s Transnational Relations at the Hong Kong University of Science and Technology. “Everyone else pays bribes. Glaxo just got caught.” Corruption is endemic in China (Tran, 2016). Corruption is also endemic in India (Borooah, 2016; Gupta & Gupta, 2013; Jaiswal & Awadh, 2016; KPMG India, 2011). India’s anticorruption effort began bottom up in 2011—India Against Corruption movement (De & Kim, 2016; Singh & Sohoni, 2016) resulting in stronger government action

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(Chakravarthy, 2016; Rani, 2016; Riley & Roy, 2016). Walmart operated in India through a 50 50 wholesale retailing joint venture Bharti Walmart with Bharti Enterprises of New Delhi. Bharti is a large retailer in India. In March 2011, Walmart initiated a worldwide review of anticorruption efforts; and it engaged KPMG to conduct due diligence reviews of existing and potential future vendors. Ideally, KPMG would be able to classify vendors into three categories, color coded as red, amber, and green. In India, Walmart will work with greens and not do business with reds. Walmart will leave judgments concerning ambers to Bharti Walmart (Bailay, 2012). This review stemmed from revelations concerning Walmart bribery in Mexico, discussed in the next paragraph. Barstow (2012), The New York Times, published a report in April 2012 that Walmart had failed to report to law enforcement officials information received in 2005 from a former executive alleged bribery by senior executives of its Mexico/ Central America unit. The bribery scheme occurred in connection with obtaining constructions licenses for retail sites in Mexico. The executive making the report had been the lawyer responsible for obtaining those construction permits in Mexico. Walmart is the largest private employer in Mexico, where one in five of its stores (over 2100 stores and restaurants in Mexico) and 209,000 employees are located. It appears that Walmart, only after hearing of The New York Times investigation, had finally informed the U.S. Department of Justice (DOJ) in December 2011 that it had engaged external attorneys and accountants to conduct an investigation. DOJ then opened a criminal investigation. The alleged facts include that: Walmart, conducting an internal investigation in 2005, had received information indicating more than $24 million in suspect payments; the then CEO criticized overly aggressive investigation; and the internal investigation was transferred to the lawyer alleged to have authorized the bribes in Mexico. In addition, there was evidently another $16 million in “contributions” and “donations” to local governments in Mexico. It is also known that Walmart was a participant in a U.S. Chamber of Commerce lobbying campaign to soften FCPA requirements. There were subsequently derivative shareholder suits against Walmart executives and directors (Foroohar, 2012). It appears that during 2006, Walmart received 31 reports of violations in various countries (Foroohar, 2012). Foroohar (2012) quotes an anonymous Mexican fund manager for a large USA financial institution to the effect that most retailers pay bribes in Mexico. The Mexican government subsequently undertook a change in its anticorruption law. In June 2012, there was about a 13% shareholder vote against reelection of the CEO, the Board Chair, and the audit committee chair; and about a 15% shareholder vote against reelection of the former CEO. The Malaysia situation remains uncertain at time of writing. Basically, there are investigations by several countries into corruption involving the state-owned investment and development fund1MDB, chaired by the Prime Minister (Wright & Brown, 2015). The attorney general—appointed by the Prime Minister—cleared the Prime Minister of corruption allegations: it appears that the $681 million appearing in the Prime Minister’s personal accounts was a gift from the Saudi royal family (Holmes, 2016). Goldman Sachs became the top international bank with just over a 20% market share from 2010. The bank’s business approach reportedly involved close

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relationships with business and government elites, including the Prime Minister. There were important merger and acquisition deals. The chairman of Goldman Sachs Southeast Asia operations took a “personal leave” (Goldman Sachs, 2016). When a country attempts to regulate corporate misconduct, there can be constraints. Canada threatened to bar some companies—such as Hewlett-Packard, BAE Systems, and Siemens—from selling to the Canadian government for up to 10 years over crimes committed in other countries. A report for the Canadian Council of Chief Executives cautioned that there could be a WTO challenge and NAFTA investor lawsuits concerning such a practice (McKenna, 2014).

4.5

Conclusion

This chapter focuses on the role of MNEs in both corruption practices and anticorruption efforts in the Asia-Pacific region. These MNEs might come from within or from outside of the region. Table 4.1 provides a list of the 28 major economies with important MNEs: 10 of these major economies are in the Asia-Pacific region; the other 18 are outside the region. The chapter defines the region as a set of 27 countries, together with Hong Kong (a special administrative unit of China). AsiaPacific is a geographically, culturally, economically, and politically diverse region. This region stretches geographically from Afghanistan on the west to the Koreas and Japan on the east; and from China on the north through Indonesia on the south, together with Australia, New Zealand, and Papua New Guinea. This chapter’s definition excludes Central Asia beyond Afghanistan and three major countries ringing the North Pacific: Canada, Russia, and the USA. In Table 4.1, Australia, Hong Kong (part of China), Japan, and Singapore are advanced economies; Malaysia, South Korea, and Taiwan are emerging economies. China, India, and Indonesia are large-population-emerging economies. The 17 other countries of the region, listed in Table 4.2, are not important sources of MNEs presently: Afghanistan, Bangladesh, Bhutan, Brunei, Darussalam, Cambodia, Laos, Mongolia, Myanmar (Burma), Nepal, New Zealand (an advanced economy), North Korea, Pakistan, Papua New Guinea, the Philippines, Sri Lanka, Thailand, and Vietnam. This chapter draws on three sources concerning the role of MNEs in AsiaPacific corruption and anticorruption: relevant literature; corruption information from TI; and reports on recent cases of MNE misconduct in the region. TI provides the 2011 BPI information on MNEs from 28 large economies used in Table 4.1; and the 2015 CPI information on those 28 countries used in Table 4.1 and all other Asia-Pacific countries used in Table 4.2. An MNE can participate in or decline to engage in host country corruption, and then further resist or support national anticorruption campaigns. MNEs should decline to engage in corruption and should support anticorruption campaigns. There is no automatic association between MNE bribe paying conduct and level of domestic corruption in MNE home and host countries. Some MNEs from relatively clean home countries may pay bribes; some MNEs from relatively corrupt home countries

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do not pay bribes. The various companies cited in the chapter illustrate this point. Tata Group (India) and Ayala Corporation (Philippines) are responsible companies, despite relatively corrupt home countries. GSK (United Kingdom), Walmart (USA), and Siemens (Germany) illustrate demonstrated corruption misconduct; the role of Goldman Sachs (USA) in Malaysia is a matter of inquiry. The chapter discusses the relationship of the supply side and the demand side of corruption markets. There are different kinds of corruption across the region. The chapter includes information on bribe paying, domestic corruption, recent enforcement actions, anticorruption reform efforts, and some specific MNE cases occurring in a variety of Asia-Pacific countries. China and India are engaged in anticorruption campaigns. USA and European anticorruption enforcement efforts are increasing. This chapter ends with some recommendations for MNEs operating in the AsiaPacific region. MNEs are likely to separate into two categories: (1) firms, like Tata and Ayala, which foster responsible approaches to business (at home and abroad); (2) firms which may continue to adhere to the “The 11th Commandment is: ‘Don’t get caught.’” cited by a Siemens manager convicted of corruption (Schubert & Miller, 2008). All MNEs must adhere strictly to the UNCAC of 2005 and the anticorruption principle of the UN Global Compact. Strict adherence will eventually result in reduction of facilitation payments and searching for ways around the legal rules regulating corrupt practices in various forms. MNEs have a shared interest in eliminating corruption and in supporting anticorruption efforts of countries such as China and India. An MNE should study the different kinds of corruption across Asia-Pacific countries in order to design compliance standards and systems for its employees. Asia-Pacific is a very important set of countries for MNE activities and for anticorruption efforts. The so-called “11th Commandment” increasingly fails as a tacit standard for corporate behavior concerning corruption. The likelihood of being caught will increase; and the consequences of being caught will increase.

References Andvig, J. C., & Moene, K. O. (1990). How corruption may corrupt. Journal of Economic Behavior & Organization, 13(1), 63 76. Bailay, R. 2012 (June). Beware! Walmart will not do business with corrupt businesses!!! http://www.mxmindia.com/2012/06/beware-walmart-will-not-do-business-with-corruptbusinesses/. Barstow, D. 2012 (April 21). Vast Mexico Bribery Case Hushed Up by Wal-Mart After TopLevel Struggle. http://www.nytimes.com/2012/04/22/business/at-wal-mart-in-mexico-abribe-inquiry-silenced.html?_r 5 1&nl 5 todaysheadlines&emc 5 edit_th_20120422. Bhattacharya, P. 2013 (February 10). Avinash Dixit: A supply-side response to corruption— Corporate entities can help tackle corruption by collectively refusing to pay bribes, says Dixit. http://www.livemint.com/Politics/TgYa3qW64ve8DRqsS8mimN/Licence-raj-may-beover-but-theres-still-lot-of-scope-for.html. Borooah, V. K. (2016). Deconstructing corruption: A study of cash for favours in rural India. Journal of South Asian Development, 11(1), 1 37.

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Singh, M., & Sohoni, R. K. (2016). The anti-corruption movement in India and the Lokpal. Imperial Journal of Interdisciplinary Research, 2(4), 112 114. http://www.imperialjournals.com/index.php/IJIR/article/view/208/203. South China Morning Post. nd. Xi Jingping’s anti-graft campaign. Retrieved June 22, 2016 from http://www.scmp.com/topics/xi-jinpings-anti-graft-campaign. Srivastava, A. M., Negi, G., Mishra, V., & Pandey, S. (2012). Corporate social responsibility: A case study of TATA Group. IOSR Journal of Business and Management, 3(5), 17 27. Retrieved 19 September 2016 from http://iosrjournals.org/iosr-jbm/papers/vol3issue5/D0351727.pdf. Tran, E. (2016). Endemic corruption in the People’s Republic of China. San Diego International Law Journal, 17, 295 328. Transparency International (TI). (2016). Corruption Perceptions Index 2015. Retrieved 19 June 2016 from https://www.transparency.org/cpi2015/#map-container. Vogl, F. (1998). The supply side of global bribery. Finance & Development, 35(2). http:// www.imf.org/external/pubs/ft/fandd/1998/06/vogl.htm. Windsor, D. (2000). Emergence of a Global Anti-Corruption Campaign. Proceedings: Managing in a Turbulent International Business Environment, 460 469, 9th World Business Congress, International Management Development Association (IMDA), San Jose´, Costa Rica (December). Windsor, D. (2004). Corporate and government corruption: International cooperation and domestic regulation In M. A. Rahim, R. T. Golembiewski, & K. D. Mackenzie (Eds.), Current Topics in Management (9, pp. 135 158). Stamford, CT: JAI Press (Elsevier Press). Wright, T., & Brown, K. 2015 (October 23). Malaysia’s 1MDB Scandal: Political intrigue, billions missing and international scrutiny—Investment fund is under investigation in five countries. http://www.wsj.com/articles/malaysias-1mdb-scandal-political-intriguebillions-missing-and-international-scrutiny-1445589961.

Private and public corruption: facilitating payments

5

Antonio Argandon˜a IESE Business School, University of Navarra, Barcelona, Spain

5.1

Introduction

Corruption is the act and effect of giving or receiving something of value so that someone will either do or not do something, sidestepping a formal or implicit rule about what that person should do, to the benefit of the person giving the object of value or of a third partya. In this chapter, we will discuss facilitating payments or petty corruption, a much generalized and deeply rooted form of corruption in many countries. It is often given little attention because it is considered that it has a minor impact and is not worth combating, as the meager success that can be achieved does not compensate the high cost involved. However, the evidence shows that if these payments are excluded from the fight against corruption, this strategy loses effectiveness and credibility. In this chapter, we will start by defining facilitating payments, their causes, and their ethical treatment. This will be followed by a discussion of their place in the anticorruption strategy applied by countries, focusing particularly on the role of companies. We will close with the conclusions.

5.2

Facilitating payments

Facilitating payments take many different and changing forms, depending on the environment and the time. They are usually small payments made to employees of public or private offices to expedite, simplify, or reduce the cost of routine procedures, such as obtaining a passport, renewing a driving license, or entering a document in a registry. They are also given other names, such as grease money (because they “grease” the administrative machinery), expediting payments and petty, administrative, or bureaucratic corruption. They are defined as “bribes paid to public officials [or private employees] to obtain regular, nondiscretionary service from that official” (Nichols, 2009)b.

a b

This definition is based on Argandon˜a (2005, p. 253). The reference to private employees has been added by us.

The Changing Face of Corruption in the Asia Pacific. DOI: http://dx.doi.org/10.1016/B978-0-08-101109-6.00005-8 Copyright © 2017 Antonio Argandon˜a. Published by Elsevier Ltd. All rights reserved.

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Three parties are involved in facilitating payments (Klitgaard, 1988) G

G

G

The “client”: the person or organization requesting the service or procedure and who makes the payment. The “agent”: the official or employee who renders the service and requests or accepts the payment. The “principal,” who is the agent’s superior and responsible for proper functioning of the office or department. This person may try to prevent the payment, allow it or even organize it and share in the distribution of the proceeds.

The purpose of the payment is to motivate the agent to perform a procedure at lower cost, in less time or with fewer complications. It may be money, a goods (a box of chocolates), or a service (a ticket to a concert), including the mere intent, promise, or hope of payment. It may be done for the agent’s benefit or for that of another person (relative or colleague). The agent has no legitimate entitlement to the payment (it is not part of his salary), and it is usually prohibited by law. The payment itself is usually a very small sumc, but what matters is not the amount but its purpose: the client is not seeking to swing a discretionary decision in his favor, which is beyond the agent’s power, but to fully exercise a right requiring performance of a routine procedure in which the agent is involved. The result achieved by the payment does not necessarily have to be any different from the result that the client could obtain without it; it only affects circumstantial aspects of the relationship, such as the procedure’s celerity and cost. Petty corruption is conceptually different from gifts, which are tokens of gratitude or good will to create a cooperative atmosphere; however, the difference between the two practices is somewhat imprecise (Rose-Ackerman, 1998). Neither are these payments an official price for a public good or service or a legitimate surcharge for fast-tracking a matter, which is paid into the department’s or company’s coffers.

5.3

Why is there petty corruption?

At the heart of petty or large-scale corruption is the real, expected, or requested nonfulfillment by the agent of a duty or undertaking. From the agent’s viewpoint, petty corruption is the outcome of four factors: opportunity, benefit, cost, and risk. The agent’s control of the administrative process and the possibility he has of making it slower, more convoluted, or more expensive create the opportunity. The benefit is derived from the income that the corrupt agent may obtain. The cost consists of the consequences of being found out and punished: sanctions, loss of career opportunities, loss of social standing, and others. And the risk depends on the likelihood of being found out and the severity of the punishment. c

Although the aggregate quantity may be high; cf. Trace International (2009a) and Transparency International (2013).

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These factors are also present in the client’s behavior who, it is assumed, compares the benefits obtained from expediting or simplifying the procedure by making the payment with the costs in which he may incur (penalties and reprisals), multiplied by the probability of being found out and punished. The agent can manipulate the procedure, making it more discretionary, complex and opaque, creating costs (e.g., requiring more permits and authorizations), reducing the cost of collecting the extortion (blocking alternative routes for carrying out the procedure or demanding the involvement of new intermediaries, who act as extortion collectors), or reducing the investigation’s possibilities and costs. But individual actions have social consequences. The agent and his principal learn to behave corruptly and develop skills that enable them to behave corruptly with increasing efficiency. Furthermore, their example spreads to others, who find justification for becoming corrupt too and developing their own ways and instruments. When this spreads in society, corruption becomes generalized. Corruption is often an organizational phenomenon not only for the agent and the principal, who convert facilitating payments into a modus vivendi, but also for the client, who prefers not to oppose any resistance (Hess, 2015a; Luo, 2005)d.

5.4

The ethical dimension of facilitating payments

Ethics studies facilitating payments as a problem of justice, and also for the negative learning it elicits in people and organizations; the law applies opportuneness and desirability criteria, but it also needs to be supported on moral argumentse. In petty corruption, the agent acts unfairly and unjustly in the performance of his duties G

G

G

G

d

Toward the government or company in which he works, where he should perform his work promptly and efficientlyf. Toward the client, because he has to make a payment that is not justified by the nature of the relationship and often under the threat of reprisals, such as delaying the procedure even more. The fact that it is the client who takes the initiative does not alter the ethical nature of the agent’s action. Toward other citizens, whose affairs may be unduly delayed as a result of the priority given to those making facilitating payments. Toward his colleagues, whom he “teaches” to behave immorally, and also because of the loss of the organization’s good repute and the deterioration of its culture. These payments are often part of a larger corrupt system, in which agents and principals provide mutual support to optimize payment extraction.

Pinto, Leana, and Pil (2008) analyze the differences between a corrupt organization and an organization of corrupt individuals. e Cf. the reasons of Pinto et al. (2008) and Torsello and Venard (2016) and the effects are discussed in Chene (2013), Trace International (2009b), and Transparency International (2013). f The agent’s lack of training, low wages, organizational disorder or lack of resources may be attenuating circumstances but do not alter the action’s ethical nature.

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And toward society, as the public administration’s or the company’s efficient functioning forms part of the social common good. The fact that these payments are banned by law heightens the agent’s disloyalty even further.

The client’s moral responsibility is less than in bribery, because he is entitled to the service he wishes to receive, but G

G

He cooperates in the agent’s unfair action (and he is an instigator if the initiative originates from the client); and furthermore, he is doing something illegal. And if the payment seeks to obtain something that the client is not entitled to, a further injustice is done. The client also holds some responsibility for other consequences of his action, such as misrepresenting financial statements, concealing the payment from the tax authorities, and the possibility of other clients or their employees mimicking his behavior.

From the societal viewpoint, the consequences of facilitating payments take on new dimensions G

Petty corruption is usually endogenous (it is self-sustaining) and dynamic (it grows and spreads) (Kaufman & Wei, 1999; Rose-Ackerman, 1999)g; it fosters a corruption-friendly culture; it induces agents and principals to increase the complexity of regulations, the rules’ opacity and the need for many personal contacts in order to maximize opportunities for corrupt payments; it makes public administration slow and inefficient and lessens citizens’ trust in the law, procedures, and justice.

5.5

The fight against petty corruption

Corruption has many ethical, political, social, and economic consequences, which explains the growing attention given to it, including facilitating payments, which are not without harmful consequences; in addition, the passive attitudes toward it hamper any effective action against large-scale corruption (Rose, 2015).

5.5.1 The global strategy against corruption Traditionally, the battle against corruption has been based on six pillars: it depended on moral criteria, its scope was national, it focused on public corruption, it left out petty corruption, it highlighted the demand side (the person receiving the payment) and used dissuasive mechanisms (accusations and sanctions). However, the results were not satisfactory and, starting in the 1970s, the strategy started to change G

g

The arguments shifted from ethics to economics, putting the spotlight on corruption’s consequences on countries’ development; this sidestepped the counterarguments of ethical imperialism and opened the door to the involvement of international financial institutions, This contrasts with the claim that the payment reduces the cost of an arbitrary, inefficient regulation; cf. Leff (1964).

Private and public corruption: facilitating payments

G

G

G

G

G

G

G

G

G

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which could block aid if the country receiving the aid did not seriously commit to combating corruption. With the enactment of the US Foreign Corrupt Practices Act (FCPA) in 1977, action became focused on international operations. The fight against public corruption was coordinated with that against private corruption (Argandon˜a, 2003). And it was expanded to other illegal conducts (conflicts of interest, tax fraud, incorrect use of inside information, money laundering), which usually flourish together in organizations, so that bringing one to light usually enables others to be identified. The laws became tougher, more specific, and more detailed (but not necessarily more effective). The emphasis was put on the supply side, with the hope that reducing payments by large companies would also put a stop to other manifestations, such as petty corruption. This strategy uses all the available options to identify and pursue corrupt practices: for example, the requirement that all payments be included in the company’s accounting and the rules on money laundering. This new global strategy replaces international agreements consisting of mechanisms of dialog and forms of soft law. Other players are also involved, such as employers’ associations and representatives from civil society, and, of course, private enterprise (Cleveland, Favo, Frecka, & Owens, 2010). It includes independent mechanisms to monitor and evaluate its implementation, for instance, the OECD Convention (2011). Greater prominence is given to whistle-blowing, investigation, reporting to the authorities, and transparency in action: the anticorruption strategy has become inclusive and continuing over time.

5.5.2 Facilitating payments in the anticorruption strategy The treatment of facilitating payments has varied in different countries and at different times: in some, they are not considered an offense; in others, they are accepted de facto or prosecuted half-heartedly; and they are strictly forbidden in yet others, depending on national cultures, specific interests, and the expected costs and benefits of the effort to eradicate them. Here are some examples G

G

h

The FCPAh criminalized bribes paid to foreign officials but excluded facilitating payments paid to officials performing routine tasks who had no discretionary power to grant unfair advantages (Nichols, 2013)i. However, these payments may be prosecuted by other means, such as the requirement to enter all operations in the accounting records or the rules on money laundering. The OECD’s Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (2011a) took the fight against corruption to other countries j. The convention does not make any direct reference to facilitating payments

See Barta and Chapman (2012), Darrough (2010), and Kaikati, Sullivan, Virgo, Carr, and Virgo (2000). The exception made by the FCPA regarding facilitating payments has been criticized by many authors. Cf. Bunker and Casey (2012), Diamant and Mrdjenovic (2012), and Nichols (2009, 2013). j On the convention, cf. Moran (1999) and Pacini, Swingen and Rogers (2002). i

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but the Commentaries approved in 1997 (OECD, 2011b) specifically exclude them from consideration as offenses. The UN Convention against Corruption (United Nations, 2004) recommended that governments criminalize bribery of national and foreign officials, excluding facilitating payments when they are offered to officials who have no decision power on the core of a matter. The UK Bribery Act (BA), enacted in 2010, was another major milestone in the fight against corruption, for the breadth of its content and its level of demandk. Bribing foreign officials is an offense but facilitating payments are neither criminalized nor explicitly allowed. The BA says that an offense is committed when companies do not perform their obligation to prevent bribes, unless they can prove that they have developed adequate procedures for preventing their employees from carrying out such actions. The British Act assumes that if corruption takes place but the company has developed and implemented adequate means to prevent it, then the blame is invariably to be placed on the employees, whom the company should investigate, report, and punishl. The anticorruption strategy has been developed with the active involvement of employers’ associations and institutions from civil society, which have raised the level of awareness and information within companies and have drafted documents that are often stricter than the legislative measures themselvesm.

5.5.3 The role of companies Combating corruption, on whatever scale, requires the active collaboration of companies, who are expected to foster a culture of integrity at all levels of the organization and in all circumstances. This is achieved mainly by ethics and compliance programs. These programs’ primary goal is to ensure that the company, and all its managers and employees, suppliers and agents comply with all legal and regulatory provisions, including internal codesn. They are preventive and corrective programs that embrace the different aspects (criminal, tax, anticorruption, competition, environment, human rights, and others) and address all stages of the process (education and prevention, detection and investigation, and dissuasion and sanction). However, obeying the law is not enough on its own: these programs must call employees’ attention to the ethical problems raised, help them make the right decision, seek advice when they need it and report any cases of noncompliance that may come to their knowledge. k

UK Ministry of Justice (2011). For a comparison with the FCPA, cf. Hills (2015), Warin, Falconer and Diamant (2010). l However, illegal payments are often the outcome of a culture and incentives that, for example, motivate employees to achieve sales targets even when this means contravening rules on facilitating payments. This is unfair on the employee and reduces trust in the organization (Hess, 2015a). m For example, the Partnering against Corruption Initiative (PACI), launched by the World Economic Forum; the International Chamber of Commerce’s Rules on Combating Corruption; Transparency International’s Business Principles for Countering Bribery; the Framework of the Committee of Sponsoring Organizations (COSO) of the Treadway Commission, and others. n It is becoming increasingly common for regulations and court sentences to legally enforce the voluntary codes that the company has developed.

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These strategies are based on the regulations and practices of certain Englishspeaking countries. In the United States, the FCPA required that companies establish internal controls to ensure that irregular payments were not made and offered more lenient sentences to the companies that voluntarily declared infringements of the law and cooperated with the authorities (US Sentencing Commission, 2015). These practices have spread to other countries that have not only prohibited bribes and facilitating payments in their criminal legislation but also require that companies develop corporate programs to protect themselves from corrupt actions. Consequently, the law places a large part of the responsibility for preventing corruption on companies: since corruption is an organizational phenomenon, the company is responsible for the goals that it sets, the incentives it creates, the rules, and culture it fosters and, therefore, the behavior of its managers and employees (Hess, 2015b; Luo, 2005). This responsibility will be that of an instigator if the company encourages or facilitates its employees’ actions, or that of an accomplice if it allows corruption or does not combat it adequately, or does not protect its employees sufficiently against external riskso. Likewise, employees and managers must feel responsible for eradicating situations of corruption in the company, implementing the program and reporting illicit actions.

5.6

Conclusions

Facilitating payments are not a minor nuisance in the functioning of the public administration and companies but a cancer that has harmful consequences. The burden they create is borne mostly by low-income citizens and small businesses; they lessen efficiency, hamper economic development, disrupt income distribution, create social malaise, and eventually become large-scale corruption. If these payments are left out of the anticorruption strategy, it loses effectiveness and credibility. To ensure their integrity, scope, effectiveness, and precision, these actions require the active cooperation of all social agents, and particularly of companies.

References Argandon˜a, A. (2001). Corruption: The corporate perspective. Business Ethics. A European Review, 10(2), 163 175. Argandon˜a, A. (2003). Private-to-private corruption. Journal of Business Ethics, 47(3), 253 267. Argandon˜a, A. (2005). Corruption and companies: The use of facilitating payments. Journal of Business Ethics, 60(3), 251 264. Barta, J. A., & Chapman, J. (2012). Foreign corrupt practices act. American Criminal Law Review, 49(2), 825 858. o

Concerning the content of an ethics and compliance program, cf. Tenbrunsel, Smith-Crowe and Umphress (2003); also Argandon˜a (2001).

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Bunker, R. B., & Casey, J. M. (2012). Facilitating payments versus bribes: Are we sending conflicting ethical signals in accounting education? [Special issue]. International Journal of Business and Social Science, 3(8), 47 50. Chene, M. (2013). Evidence of the impact of facilitation payments. Transparency International Anti-Corruption Help Desk, 1 9. Retrieved from http://www.transparency.org/whatwedo/answer/evidence_of_the_impact_of_facilitation_payments. Cleveland, M., Favo, C. M., Frecka, T. J., & Owens, Ch. L. (2010). Trends in the international fight against bribery and corruption. Journal of Business Ethics, 90(S2), 199 244. Available from http://dx.doi.org/10.1007/s10551-010-0383-7. Darrough, M. N. (2010). The FCPA and the OECD Convention: Some lessons from the U.S. experience. Journal of Business Ethics, 93(2), 255 276. Available from http://dx.doi. org/10.1007/s10551-009-0219-5. Diamant, M. S., & Mrdjenovic, J. (2012). Don’t you forget about me: The continuing viability of the FCPA’s facilitating payments exception. Ohio Stale Law Journal Furthermore, 73, 19 26. Hess, D. (2015a). Combating corruption in international business: The big questions. Ohio Northern Law Review, 41(3), 676 696. Hess, D. (2015b). Ethical infrastructures and evidence-based corporate compliance and ethics programs: Policy implications from the empirical evidence. Ross School of Business Working Paper No. 1293. Hills, L. (2015). Universal anti-bribery legislation can save international business: A comparison of the FCP and the UKBA in an attempt to create universal legislation to combat bribery around the globe. Richmond Journal of Global Law and Business, 13(3), 469 492. Kaikati, J. G., Sullivan, G. M., Virgo, J. M., Carr, T. R., & Virgo, K. S. (2000). The price of international business morality: Twenty years under the Foreign Corrupt Practices Act. Journal of Business Ethics, 26(3), 213 222. Kaufman, D. & Wei, S-J. (1999). Does ‘grease money’ speed up the wheels of commerce? World Bank Policy Research, Working Paper No. 2254. Klitgaard, R. (1988). Controlling corruption. Berkeley, CA: University of California Press. Leff, N. H. (1964). Economic development through bureaucratic corruption. American Behavioral Scientist, 8(3), 8 14. Luo, Y. (2005). An organizational perspective of corruption. Management and Organization Review, 1(1), 119 154. Moran, J. (1999). Bribery and corruption: The OECD Convention on Combating the Bribery of Foreign Public Officials in International Business Transactions. Business Ethics. A European Review, 8(3), 141 150. Nichols, P. M. (2009). Who allows facilitating payments? Agora Without Frontiers, 14(4), 303 323. Nichols, P. M. (2013). Are facilitating payments legal? Virginia Journal of International Law, 54(1), 1 29. OECD (2011a). Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and related documents. Paris: OECD. OECD (2011b). Commentaries on the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, in OECD (2011a). Pacini, C., Swingen, J. A., & Rogers, H. (2002). The role of the OECD and EU conventions in combating bribery of foreign public officials. Journal of Business Ethics, 37(4), 385 405.

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Pinto, J., Leana, C. R., & Pil, F. K. (2008). Corrupt organizations or organizations of corrupt individuals? Two types of organization-level corruption. Academy of Management Review, 33(3), 685 709. Rose, C. (2015). International anti-corruption norms. Their creation and influence on domestic legal systems. Oxford, UK: Oxford University Press. Rose-Ackerman, S. (1998). Bribes and gifts. In A. Ben-Ner, & I. Putterman (Eds.), Economics, values, and organization (pp. 296 328). Cambridge, UK: Cambridge University Press. Rose-Ackerman, S. (1999). Corruption and government: Causes, consequences and reform. Cambridge, UK: Cambridge University Press. Tenbrunsel, A. E., Smith-Crowe, K., & Umphress, E. E. (2003). Building houses on rocks: The role of the ethical infrastructure in organizations. Social Justice Research, 16(3), 285 307. Torsello, D., & Venard, B. (2016). The anthropology of corruption. Journal of Management Inquiry, 25(1), 34 54. Trace International (2009a). Facilitation payments benchmarking survey. Annapolis, MD: Trace International. Trace International (2009b). The high cost of small bribes. Annapolis, MD: Trace International. Transparency International (2013). Business principles for countering bribery. Berlin: Transparency International. UK Ministry of Justice (2011). The Bribery Act 2010. Guidance. London, UK: Ministry of Justice. United Nations (2004). United Nations Convention against Corruption. New York, NY: United Nations Office on Drugs and Crime. US Sentencing Commission (2015). Guidelines manual, 2015 version. Retrieved from ,http://www.ussc.gov/guidelines-manual/guidelines-manual.. Warin, J., Falconer, Ch, & Diamant, M. S. (2010). The British are coming: Britain changes its law on foreign bribery and joins the international fight against corruption. Texas International Law Journal, 46(1), 1 72.

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Janet Dine University of London, London, United Kingdom

6.1

Introduction

It takes two (or more) to be corrupt: “Corruption is often discussed in the kinds of language and symbolism reserved for life-threatening diseases” (Johnson, 2016). The World Bank insists that it “has identified corruption as the single greatest obstacle to economic and social development” (O’Donnell, 2016). This is problematic as no one seems to have arrived at a universally accepted definition. This chapter argues for a broad definition of “corruption.” For too long, corruption has been equated to illegal activities. For example, aggressive tax avoidance is often condoned, although many believe it is morally corrupt (Bowers and Syal, 2012). It is therefore necessary to consider much more carefully the definitions of corruption that we use. The World Bank definition is simplistic, “the abuse of public office for private gain” (World Bank, 2016), focusing more on public corruption. In this definition the emphasis is clearly on the public officers rather than the corrupt bribes sent to the public officer. Often private sector actors are invisible, although bribery is inevitably a transaction between parties. One definition of corruption was put forward by Edward Banfield in 1975. He described corruption as a relationship between three parties: the public as principal, the public official as agent obligated to fulfill the wishes of the principal, and a third party seeking to have the agent work on their behalf instead (Banfield, 1975). This is a simple description of corruption, but it raises a number of issues. Kleinig and Heffernan explain that “it is not the predominant understanding of the term in the Oxford English Dictionary; it leases out much of what has historically been deemed corrupt; and it relies on the superficial clarity of a private/public distinction and an unexamined view of what counts as improper use. Corruption is not the exclusive failing of public officers: there may also be personal corruption, corrupt institutions, and corrupt cultures” (Heffernan, 2004). Heidenheimer distinguishes between black, white, and gray corruption, with corruption being perceived by elites and ordinary people as fundamentally detrimental to society, white acts seen by both groups as of some benefit to society, and gray acts those about which both groups differed (Heidenheimer, 1970). Holmes debates the definition in researching the ex-communist regimes, but because the definition of corruption is culturally The Changing Face of Corruption in the Asia Pacific. DOI: http://dx.doi.org/10.1016/B978-0-08-101109-6.00006-X Copyright © 2017 Janet Dine. Published by Elsevier Ltd. All rights reserved.

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sensitive, it is “impossible to produce a universal acceptable” one. Holmes argues that “something considered a bribe in one society might be seen as not merely acceptable but even appropriate business etiquette in another. For example, anyone familiar with Chinese customs will know that gift giving is expected virtually required in a number of contexts in which doing so would not be normal in most western cultures” (Holmes, 2006a). Holmes also realizes that views can also change in time. Holmes believes that the “most important variables to consider are; 1. 2. 3. 4. 5. 6.

the intention of the person giving the apple (the donor); The expectation of the person receiving the apple (the recipient); The timing of the giving; The value of what is offered; The perceived social acceptability; The perceived social acceptability of the transaction” (Holmes, 2006b).

Thus, although the “World Bank has produced its own typology of [ex-communist states], based on its racking of just two variables the level of state capture and the level of administrative corruption,” this is strongly debated (Holmes, 2006c). While all these issues cannot be explored here, this chapter challenges the narrow definition of corruption and examines the concept of institutional corruption. It also raises the further issue of cross-border corruption. Interestingly, the Banfield definition is most apt in describing corruption that takes place within a single jurisdiction. It contains an assumption that the public official is being bribed to act against the interests of the public. If we widen the description to take account of behavior in (for simplicity) two jurisdictions, we may have an instance where the definition does not bite. If the condemned behavior is approved of by the public in both jurisdictions, does the corruption disappear? Although there is much immoral behavior, which can be condemned, the difficulty lies in drafting a law to catch immoral dodges while allowing commercial trading. An example of this problem is encapsulated by tax havens. As a moral and legal issue, the use of tax havens is problematic and exemplifies the complexity of institutionalized corruption, since it is clearly contrary to the public interest of the home state. Incorporating a company and using offshoring activities to profit from arbitrage between tax rates is problematic because the home company does not pay taxes to the home tax authorities. Of course, tax liabilities are minimized for the company; if the shareholders receive bigger dividends, the shareholders will receive greater amount of money as profits and the share prices will rise. (However the profits will not rise, because a profit is predicated on profit after paying proper taxes, not taxes immorally avoided or evaded.) The money will be to the shareholders financial benefit. It is not clear where the benefit for any particular state lies, since shareholders are not bound jurisdictionally. The neoliberal economic system uses this argument to debate that all people will benefit economically, and the money will all “trickle-down” (Dine and Koutsias, 2013). However, there is significant evidence to show that this is not working; in fact the opposite is happening (Picketty, 2014). Of course, there are many other ways in which the arbitrage system advantages large companies, such as using transfer pricing, particularly in pricing intellectual

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property assets. The Joy of Tax (2015) Indeed, there are other loopholes in international law that can advantage multinational enterprises (Dine et al., 2015). However, leaving the example of tax havens for the minute, the crucial point is the dichotomy rejecting the orthodox definition of corruption. Kleinig and Heffernan agree with Holmes; they argue that corruption is by nature “essentially contestable.” (Heffernan, Kleinig) It is suggested here that the culture that is prevalent in some of our largest and most powerful multinationals is a corrupt culture that merits as much attention as “public” corruption and may often be a contributory factor in the development of other corruptions, including illegal, or marginally legal, offshore financing. Euben argues on the basis of the Oxford English Dictionary, which associates corruption with a cluster of words decay, degeneration, disintegration, and debasement.” (Euben et al.) This much wider definition opens up an investigation into the different sorts of corruption. Furthermore, a narrow definition allows powerful institutions to run the risk of being accused of “capture” of the concept to their advantage, that is, using it selectively to condemn behavior in order to achieve particular policy outcomes. It misses altogether the institutional corruption, which is to be found in the aggressive, deregulated corporate world. Such as the Enron, Bhopal, Libor scandals; see S. Baughen (2015) Shore and Haller are clear that such financial scandals “remind us that Europeans and Americans cannot assume that grand corruption is something that belongs primarily to the non-western “Other” or to public-sector officials in defective state bureaucracies: corruption (both massive and systemic) we should not be surprised to learn, can also be found in the very heart of the regulated world capitalist system” (Saviano et al., 2015). In 2008, Professor John Ruggie opined that “[t]he root cause of the business and human right predicament today lies in the governance gaps creating by globalization between the scope and impact of economic forces and actors, and the capacity of societies to manage their adverse consequences. These governance gaps provide the permissive environment for wrongful acts by companies of all kinds without adequate sanctioning or reparation” (A/HRC/8/50/ 7 April, 2008). Considering the problem of “capture by corruption actors,” Johnson, however, argues that in some respects there is “too much consensus. The new wave of concern has been driven primarily by business and by international aid and lending institutions. While there is nothing inherently wrong with that, their vision of corruption, like any other, is partial.” (Johnson et al.) Johnson points out that the major anticorruption players (USAID, World Bank, OECD, UNDP, and TI) (United States Agency for International Development et al.) rarely address differences in the societies whose corruption they seek to cure. Noting the way in which corruption and anticorruption has emerged onto the international agenda, Samson notes that “[i]n the last five or six years, anti-corruption practices have diffused transnationally and have become organized globally. We have seen the emergence of a world of anticorruption with its own actors, strategies, resources and practices, with its heroes, victims and villains.” (Samson et al.). Samson moots two possible explanations for this powerful recent emergence of the anticorruption movement. Firstly, “[t]he fight against corruption is virtuous,

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and those who form part of the anti-corruption community” are, thus, “integrity warriors.” The second explanation focuses on the need to increase system rationality; fighting corruption, it is “argued, will make market economies more efficient, state administration more effective, and development resources more accessible.” (Samson et al.) Pointing out that when anticorruption norms are applied to projects “‘global morality’ [becomes]. . . a social process. It is a process by which virtue is transformed into a specific activity called a project one which includes formulating a funding strategy, approaching donors, analyzing stakeholders, hiring consultants, developing NGOs, conducting project appraisals, making evaluations. . . Anti-corruptionism. . . is a stage in which moral projects are intertwined with money and power.” (Samson et al.) Because of this “[a]nti-corruption. . . is not innocent. It can be manipulated to serve the interest of even the most unscrupulous actors.” (Samson et al.).

6.2

Corruption as a moral deflection device?

Thomas Pogge explains the ability of rational humans to shape their thinking to suit their interests; “moral norms, designed to protect the livelihood and dignity of the vulnerable, place burdens on the strong. If such norms are compelling enough, the strong make an effort to comply. But they also, consciously or unconsciously, try to get around the norms by arranging their social world so as to minimize their burdens of compliance.” (Pogge World Poverty et al.) Pogge labels such avoidance techniques “moral deflection devices.” There are strong reasons for believing that “corruption” is a “moral deflection device.” It is certainly used as a “persuader” by lobby groups with a particular agenda: “Most corruption involves agents seeking favors from public officials. The larger the realm of government, the greater the opportunity for such favors to be granted. If the government regulates trade, corruption can play a part in allocating export or import quotas. If the government does not regulate trade there are no such opportunities for preferment. . . But. . . certain enduring values seem to be more important than the amount of government intervention in determining the level of corruption (most notably personal honesty). What are we to make of the fact that there are some relatively uncorrupt countries with very intrusive governments, such as in Scandinavia?. . . Can we create a virtuous chain of events with less government leading to less corruption and then to a better functioning of the expanded domain of the market economy?” (Booth, 2006). It comes as no surprise that in the United Kingdom, the right-wing, free-market Institute of Economic Affairs would argue for the deregulation of companies and a smaller state only if the inconvenient evidence of the Scandinavians did not impede the argument. Neild takes a more balanced approach while examining the emergence of “clean government” in north-western Europe (Although even these societies are subject to corruption, see et al., 2003) in the eighteenth and nineteenth centuries which, by no means, went hand in hand with less government intervention and thus

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also pointing out to the dangers of less government regulation: “a policy of trying in a heavily governed country to reduce the scope of government, and hence the number of rules that have to be enforced, may be accompanied by denigration of the public service and by cuts in its pay and conditions of such severity that, in combination with an idealization of private gain, it may produce an increase rather than a decrease in the rate of corruption. Russia today is an example” (Neild, 2002). However, at least corruption can be used by such lobbyists as an argument to restrict aid: “The most effective way of putting international pressure on corrupt, pauper nations is for aid to be available only to those that are demonstrably rooting out corruption. Countries with corrupt governments should be excluded from all aid programmes and soft loans. Their international debts should not be cancelled” (Senior, 2006). As Haller and Shore note, the main structural approaches to corruption have colonialist overtones, either by perceiving corruption as a social pathology of “primitive” nations or by measuring corruption against concepts of “good governance.” (For example, by Transparency International et al.) “While advocates of this approach claim that the concept of “good governance” is based on neutral, objective and a-cultural values, critics argue that it reinforces the hegemonic values of the West as universal precisely by defining them as “above” the realm of politics and culture.” (Haller, Shore) A similar problem lies with the Banfield approach noted earlier the concept of harm to the public interest being a notably slippery concept. In particular, Haller and Shore point to the complex nature of the public private distinction that is fundamental to many approaches to corruption: “In the conventional political science approach, as in neoliberal ideology and in Transparency International initiatives, it is the violation of this public/private distinction by individuals that fundamentally defines corrupt behavior. Corruption is thus viewed as a measure of how well a society distinguishes between public and private spheres.” (Haller, Shore). Further, the distinction between gifts and bribes is an incoherent one in some cultures. Overall, “[n]eoliberalism has set the frame for analytical models of corruption, particularly in its restrictive World Bank definition of corruption as the abuse of “public” office. Stripped to its basics, the neoliberal thesis holds that since corruption is primarily a pathology of the public sector, the solution lies in reducing public spending and rolling back the frontiers of the state. Shrinking the public sector, so the argument goes, reduces the scope for public officials to engage in malfeasance. It also subjects public officials to the regulatory disciplines of the market, to cost-consciousness, and to entrepreneurial business ethics. To focus on corporate crimes and corruption within the private sector is simply not on the current agenda of the US government or the IMF.” (Haller, Shore). However, it is, in a limited sense, on the agenda of TI, which, following the Enron scandal, expanded its operations and definition of corruption from “abuse by public officials for private gain” to “abuse of entrusted power for private gain.” The limitations of this latter definition restrict the discussion to the “bad apple” theory of corporate corruption, much favored in the Barings and Enron cases, which argued that it was identifiable, corrupt individuals that caused the problem rather than an underlying corrupt culture. (MacLennan et al.).

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As Thomas Pogge points out, the belief that corruption is a “pathology of primitive nations” is common to “many citizens of the affluent countries” who hold that the global economic order is not to be blamed for severe poverty and increasing global inequality; rather “poverty is substantially caused not by global, systemic factors, but in the countries where it occurs by their flawed national economic regimes and by their corrupt and incompetent elites, both of which impede national economic growth and a fairer distribution of the national product.” (Pogge World Poverty et al.). This comforting belief is accompanied by demands that poor countries must first help themselves by giving themselves respectable political regimes. Since (until imposition of regime change in Iraq), it is not the responsibility of rich nations to impose regimes on others, nothing can be done. Aid, if given, would only be lost to corrupt elites. However, these comfortable beliefs “are nevertheless ultimately unsatisfactory, because it portrays the corrupt social institutions and corrupt elites prevalent in the poor countries as an exogenous fact: as a fact that explains, but does not itself stand in need of explanation.” (Pogge World Poverty et al.) The prevalence of bad regimes itself requires an explanation. By way of providing an explanation, Pogge focuses on the extraordinary double standards applied to a gang of thieves overpowering the guards at a warehouse and stealing the contents as opposed to a group overpowering an elected government. The latter (but not the former) become owners of the contents, are able to dispose of the natural resources of the country, transfer ownership to the buyers, and are able to borrow freely (international resource privilege). (Pogge World Poverty et al.) Thus, “[i]ndifferent to how governmental power is acquired, the international resource privilege provides powerful incentives toward coup attempts and civil wars in the resource-rich countries. Consider Nigeria, for instance, where oil exports of $6 $10 billion annually constitute roughly a quarter of GDP. Whoever takes power there, by whatever means, can count on this revenue stream to enrich himself and to cement his rule. This is quite a temptation for military officers, and during 28 of the past 32 years Nigeria has indeed been ruled by military strongmen who took power and ruled by force. Able to buy means of repression abroad and support from other officers at home, such rulers were not dependent on popular support and thus made few productive investments towards stimulating poverty eradication or even economic growth.” (Pogge World Poverty et al.) The failure to alter the prevalence of corruption under Olusegun Obasanjo “provoked surprise. But it makes sense against the background of the international resource privilege: Nigeria’s military officers know well that they can capture the oil revenues by overthrowing Obasanjo.” (Pogge World Poverty et al.) Although this regime is history, the story encapsulates the neoliberal system and shows how immoral it is. Precisely the same happens in resource-rich countries now (Auty et al., 1997).

6.3

Neoliberal orthodoxy

The rest of this chapter will contest the narrow definition of corruption and argue that the neoliberal orthodoxy itself is corrupt and that Pogge’s analysis is now

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extended to Europe. The recent divisive Brexit referendum held in 2016 in the United Kingdom is a clear indication that the neoliberal agenda has reached into “theoretical” developed states. (See et al.) As I wrote in my book “Companies, International Trade and Human Rights” in 2005 (Dine, 2005): This book is written from a perspective shared with Thomas Pogge; We, the affluent countries and their citizens, continue to impose a global economic order under which millions avoidably die each year from poverty-related causes. We would regard it as a grave injustice if such an economic order were imposed within a national society. We must regard our imposition of the present global order as a grave injustice unless we have a plausible rationale for a suitable double standard. We do not have such a plausible rationale. (Pogge et al.)

Ha-Joon Chang powerfully illustrates the way that rich nations are bullying less advantaged countries by a web of legal treaties that assumes that the only way that countries can develop is by opening their markets, which is the neoliberal orthodoxy. This posits a free-market, deregulation, a small state, and privatization (HaJoon, 2007). Although Chang does not believe that there is a deliberate conspiracy to stop poorer countries develop, this is what is happening because of the rhetoric and implementation of the neoliberal experiment aided by the international financial institutions, the “Unholy Trinity” (Bad Samarians, 2007) of the IMF, the WB, and the WTO. Chang’s thesis is that all of the developed nations historically used a set of instruments, which promoted “infant industries” either by protecting those industries or by subjecting other countries by means of wars, colonization, and unfair trade practices. When the victorious, developed countries are ready, they will open their borders because they are able to trade with other parties using their advanced technology (Ha-Joon, 2014). Since the International Financial Institutions (IFIs) are dominated by rich nations other less advantaged countries are cowed and aided by asymmetric treaties. (Bilateral treaties et al.) It is necessary to dissect the dominant “free-trade” rhetoric and realize that the “freedoms” are tilted to powerful and rich interests. “The free market” doesn’t exist. Every market has rules and boundaries that restrict freedom of choice. A market looks free only because we so unconditionally accept its underlying restrictions that we fail to see them (Ha-Joon, 2010). Laissez-faire doctrines disguise power relations between individuals and countries. Free-market economists, while claiming moral neutrality for their theories, (Campbell, 1986) use a discourse, which has the effect of disguising power differences causing a sliding slope of perception from actual equality to formal equality. Formal equality is not real; economic theories positing equality rest on the concept of equal bargaining power (including equality of information) and the resultant “efficiency.” The result of assuming equality of bargaining power means that there is no justification in intervening in the resultant property distribution. Such an intervention is an interference in the “freedom to choose” to carry out a particular transaction. The defense of freedom may thus be prayed in aid of a market system, which is then

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free to create enormous inequalities. This concept of freedom of choice has considerable resonance both at national and international levels, applying to individuals, corporations, and states. Assertions of freedom and equality disguise the real power relations. According to Collins: Every stable social system possesses an order of power and wealth, but unlike historically prior distributive schemes, the market order avoids the imposition of a detailed pattern. Instead of a structure of rank and privilege fixing entitlements to wealth and power, the distributive mechanism of the market allocates resources to those persons able and willing to pay the highest price for them. . . The market order avows blindness to claims of privilege or force, so it recognises no claims of an inherent right to govern or to possess superior wealth. . . The market order lets fly the centrifugal forces of radical individualism, permitting philosophers to celebrate the relative fluidity of its distributive outcome and to legitimate it by appeals to the impervious mask of market forces. No other order so successfully disguises the fact that it constitutes an order at all (Collins, 1986).

Campbell agrees with this assertion: (Campbell op cit et al.). Laissez faire is a social structure facilitating economic exchange, but one which, by virtue of its radical individualism, paradoxically denies that it is a social structure. . . laissez faire is a framework so characterised by unconscious asymmetries of power as to make choice ‘a very poor joke’ for most citizens.” (Campbell, op cit, citing I. R., 1984) Weber wrote; “pure economics is a theory which is apolitical”, which asserts “no moral evaluations” and which is “individualistic” in its orientation. . . The extreme free traders, however, conceived of it as an adequate picture of “natural” reality, i.e., reality not distorted by human stupidity, and they proceeded to set it up as a moral imperative as a valid normative ideal whereas it is only a convenient ideal type to be used in empirical analysis. Weber (1917)

These extreme “moral deflection devices” used by the neoliberal or free-trade moralists are supported by “extreme economics,” which is elevated into a “science” (Pickitty, 2013). This exacerbates the lack of transparency effect and cloaks political discourse: “unlike the natural sciences, economics involves value judgments, even though many Neoclassical (In this chapter I use “neoliberal”economics et al.) economists would tell you that what they do is value-free science” (Ha-Joon, 2014). Exploding the myth is crucial because it means that everyone should explore any “common-sense” notions that have been propagated by the economists and used by powerful, rich special interests. This chapter therefore argues that the neoliberal economic order is itself corrupt, erodes equality, and sows dissent and dangerous racist propaganda (Heather Steward and Rowena Mason, 2016). Owen Jones’s analysis is persuasive; before the Brexit referendum he wrote that “unless a working-class Britain that feels betrayed by the political elite can be persuaded, then Britain will vote to leave the European Union in less than two weeks” (Jones, 2016). Jones argues that it was a revolt triggered by the working class, who were “furious, [and] alienated” because of government

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neoliberal policies. It is clear from the breakdown of the figures between councils that the government threats of losing economic opportunities or wealth did not deter “communities that have been defined by economic turmoil and insecurity for a generation. Threats that you will lose everything mean little if you already feel you have little to lose. These threats may well have deepened the resolve of many leavers, rather than undermined it. A Conservative prime minister lined up corporate titans and the US president to warn them not to do something: they responded with the biggest up-yours in modern British history” (Jones, 2016). Jones opines that it was not about the EU but “[a]bove all else, it was about immigration, which has become the prism through which millions of people see everyday problems: the lack of affordable housing; the lack of secure jobs; stagnating living standards; strained public . . .But while much of the blame must be attributed to [former UK Prime Minister David] Cameron, far greater social forces are at play. From Donald Trump to Bernie Sanders, from Syriza in Greece to Podemos in Spain, from the Austrian far-right to the rise of the Scottish independence movement, this is an era of seething resentment against elites. That frustration is spilling out in all sorts of directions: new left movements, civic nationalism, anti-immigrant populism” (Jones, 2016). This is the new reality that has emerged from neoliberal economics.

6.4

Conclusion

This chapter has argued for a broad definition of corruption rather than the World Bank definition: “the abuse of public office for private gain” which can be used to beat public sector actors and governments. The hidden agenda in the definition is to compare the efficient private sector with a corrupt public sector. The chapter prefers a definition that includes words like “degeneration, disintegration, and debasement” and argues that the orthodox economic system in the West, neoliberalism, is based on that definition is corrupt. Holmes’s variants on corruption numbers 5 and 6 are particularly apposite: (Holmes, 2006d) “[t]he perceived social acceptability; the perceived social acceptability of the transaction.” Neoliberalism is predicated on selfishness, so inevitably the acceptability of transactions is loose. However, as the inequality in income, capital, and services to the extent of 1% and 99% is gaining acceptance, Oxfam et al.) neoliberalism will also gain ground, and with this the corrupt practices of turbo-capitalism, including tax havens. With this comprehension, “perceived acceptability” will shift to “perceived unacceptability.” From this base, a revival of a fairer economic system can proceed.

References A/HRC/8/50/ 7 April 2008 also cited in S. Baughen, Human Rights and Corporate Wrongs: closing the Governance Gap, Edward Elgar, 2015, Introduction, p1.

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Auty, R. (2001). Resource Abundance and Economic Development. Oxford University Press., Collier, P., & Venables, A. (2011). Plunded Nationals? Palgrave Macmillan, Ross, M. (2012). The Oil Curse. Princeton University Press., Shaxson, N. (2007). Poisoned Wells, Palgrave Macmillan. In Karl (Ed.), The Paradox of Plenty. University of California Press, 1997. Bad Samarians, Random House, 2007, page 36. Banfield, E. (1975). Corruption as a Feature of Governmental Organisation. Journal of Law and Economics, 18(3), 567 605. Bilateral treaties, Multilateral treaties and Regional Treaties and Dispute mechanisms such as International Centre for Settlement of Investment Disputes (ICSID). Booth, P. (2006). Foreword in I. Senior Corruption- The World’s Big C Institute of Economic Affairs, London. Bowers, S., & Syal, R. (2012) “MP on Google tax avoidance schemes; ‘I think that you do evil’, Guardian https://www.theguardian.com/technology/2013/may/16/google-told-bymp-you-do-do-evil, accessed on 23rd June 2016 and European Commission of the EU C460; State Aid SA.38374(20014/C Alleged aid to Starbucks, 2014/C460/03, Nicholas Shaxson Treasure Islands Tax Havens and the Men who Stole the World, Vintage Books. Although even these societies are subject to corruption, see (2003). In M. Bull, & J. Newell (Eds.), Corruption in Contemporary Politics. Basingstoke: Palgrave. According toCampbell, D. (1986) “Reflexivity and Welfarism in the Modern Law of Contract” (2000) Oxford Journal of Legal Studies 477, a claim most powerfully made by F. Hayek in The Road to Surfdom. Campbell op cit, n32 at 490. Campbell, op cit, citing I. R. “Bureaucracy and Contracts of Adhesion” (1984) 22 Osgoode Hall Law Journal 5 at 6. Collins, H. The Law of Contract (1986), cited in D. Campbell “Reflexivity and Welfarism in the Modern Law of Contract” (2000) Oxford Journal of Legal Studies 477. Dine, J. (2005). Companies, International Trade and Human Rights. Cambridge University Press. Dine, J. (2012). Jurisdictional Arbitrage by multinational companies: a national law solution. Journal of Human Rights and the Environment, vol. 3(No 3)., Zerk, J. (2006). Multinationals and Corporate Social Responsibility. Cambridge University Press., Baughen, S. (2015). Human Rights and Corporate Wrongs: closing the Governance Gap. Edward Elgar. Dine, J., & Koutsias, M. (2013). The Nature of Corporate Governance (p. 5). Edward Elgar, et seq. Euben, J. in Heffernan and Kleinig (Eds)Private and Public Corruption, p 54. For example, by Transparency International. Ha-Joon, C. (2007). Kicking Away the Ladder, Anthem Press, 2003 and Bad Samarians, Random House. Ha-Joon, C. (2010). 23 Things They Don’t Tell You about Capitalism. Penguin, page 1. Ha-Joon, C. (2014) Kicking Away the Ladder, Anthem Press, 2003 and Bad Samarians, Random House, 2007 and see also Chang’s Economics; The User’s Guide, Pelican. Ha-Joon, C. (2014) Economics: The User’s Guide, Pelican, page112. Haller, D., & Shore, C. (Eds.), (2005). Corruption London: Pluto Press., Saviano, Roberto (2016). The real threat to Britain’s borders is a flow of dirty money. Guardian, Thurs 23rd, Brooks, R. (2013). The Great Tax Robbery: How Britain Became a Tax Haven for Fat Cats and Big business, One world, Murphy, R. (2015). The Joy of Tax. Transworld/ Random House, Whyte, D. (2015). How Corrupt is Britain, Pluto.

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Haller, D. & Shore, C., Corruption, p 18. Haller, D. & Shore, C., Corruption p 5. Haller, D. & Shore, C., Corruption, p 4. Heather Steward and Rowena Mason, “Nigel Farage’s anti-migrant Posters reported to the police’ Guardian, Thurs 16 June, 2016, http://www.theguardian.com/politics/2016/jun/ 16/nigel-farage-defends-ukip-breaking-point-poster-queue-of-migrants, accessed on 26th 2016. Heffernan and Kleinig Private and Public Corruption, p 3. Heffernan, W. (2004). Private and Public Corruption, Rowman and Littlefield, emphasis in original. Heidenheimer, A. (1970). Political Corruption, Holt, Reinhart and Wilson. Holmes, L. (2006a). Rotten States (p. 17). Duke University: Duke University Press. Holmes, L. (2006b). Rotten States (p. 19). Duke University: Duke University Press. Holmes, L. (2006c). Rotten States (p. 42). Duke University: Duke University Press. Holmes, L. (2006d). Rotten States (p. 17). Duke University: Duke University Press. In this chapter I use ‘neoliberal’ economics, whereas other studies use ‘neoclassical’ economics. I believe that there is little difference between these two terms. Johnson, M. Comparing corruption. In Heffernan and Kleinig (Eds.), Private and Public Corruption, p 276. Johnson, M. (2016). Political Corruption’, Colgate University 2003, World Bank, “AntiCorruption; Corruption is deadly”, 10 May 2016, http://www.worldbank.org/en/topic/ governance/brief/anti-corruption, accessed on 23rd June. Jones, O. “Grieve now if you must But Prepare for the great challengers ahead”, Guardian, Friday 24th June 2016, https://www.theguardian.com/commentisfree/2016/jun/24/eu-referendum-working-class-revolt-grieve, accessed on 26th June 2016, Rob Ford, “The ‘Left-behind’ White, older, socially conservative voters turned against a political lass with values opposed to theirs on identity, EU and immigration” Observer Sunday 26th June 2015 “The sheer magnitude of the fraction between the globalized middle class and the anxious majority is clear”. MacLennan, C. “Corruption in Corporate America: Enron-Before and After” in D. Haller and C. shore (eds) Corruption, p 156. Neild, R. (2002). Public Corruption (p. 6). London: Anthem Press. O’Donnell, M. “Trying to Understand the links between Corruption, World Bank”, 1999 worldbank.org/.../1740479.../corruption_conflict_and_rule_of_law.pd, and World Bank; “Helping Countries Combat Corruption: the Role of the Work Bank, http://www1.worldbank.org/publicsector/anticorrupt/corruptn/cor02.htm, both accessed on 23rd June 2016. Oxfam, http://www.oxfam.org.uk/media-centre/press-releases/2016/01/62-people-own-sameas-half-world-says-oxfam-inequality-report-davos-world-economic-forum, 18th Jan 2016 and see T. Pickitty, Capital, Harvard University Press, 2013, R. Wilkinson and K. Pickett, The Spirit Level, Penguin, 2010. Picketty, T. (2014). In U. Beck (Ed.), Capital: in the Twenty-First Century. Harvard University Press, Power in the Global Age, Polity, 2005. Pickitty, T. Capital, Harvard University Press, 2013 “Economic science’. . . stricks. . . terrible arrogant because it suggests that economics has attained a higher scientific status that the other social sciences’, pages 573-4. Pogge, T. World Poverty, p 109. Pogge, T. World Poverty, p 5. Pogge, T. World Poverty, p 110. Pogge, T. World Poverty, p 112.

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Pogge, T. World Poverty, p 113. Pogge, T. World Poverty, p 114. Such as the Enron, Bhopal, Libor scandals; see S. Baughen (2015). Human Rights and Corporate Wrongs: closing the Governance Gap. Edward Elgar. Samson, S. “Integrity Warriors: Global Morality and the Anti-Corruption Movement in the Balkans” in D. Haller and C. Shore (eds) Corruption, p 106 Italics in original. Samson, S. “Integrity Warriors: Global Morality and the Anti-Corruption Movement in the Balkans” in D. Haller and C. Shore (eds) Corruption, p 107. Samson, S. “Integrity Warriors: Global Morality and the Anti-Corruption Movement in the Balkans” in D. Haller and C. Shore (eds) Corruption, p 109 10. Samson, S. “Integrity Warriors: Global Morality and the Anti-Corruption Movement in the Balkans” in D. Haller and C. Shore (eds) Corruption, p 129. Seelater for some analysis on the inequality exposed. Senior, I. (2006). Corruption, !EA, 189. The Joy of Tax (2015). How a fair system can create a better society. Penguen: Transworld Publishers. United States Agency for International Development, Organisation for Economic Development and cooperation, United Nations Development Programme, Transparency International. Weber, M. (1917). The Meaning of ‘Ethical Neutrality’ in Sociology and Economics. In E. Shils, & H. Finch (Eds.), Max Weber on the Methodology of the Social Sciences (p. 44). Glencoe, 1949. World Bank; “Helping Countries Combat Corruption: the Role of the Work Bank, http:// www1.worldbank.org/publicsector/anticorrupt/corruptn/cor02.htm, 10 May 2016, accessed on 23rd June 2016.

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Marie dela Rama Management Discipline Group, UTS Business School, Sydney, NSW, Australia

7.1

Corruption

Corruption is defined by Nye (1967) as behaviour which deviates from the formal duties of a public role because of private-regarding (personal close family, private clique) pecuniary or status gains; or violates rules against the exercise of certain types of private-regarding influence. This includes such behaviour as bribery (use of a reward to pervert the judgment of a person in a position of trust); nepotism (bestowal of patronage by reason of ascriptive relationship rather than merit) and misappropriation (illegal appropriation of public resources for private-regarding uses). (1967: 419)

For Rose-Ackerman, “corruption occurs where private wealth and public power overlap. It represents the illicit use of willingness-to-pay as a decision-making criterion” (2008: 330). Gupta and colleagues looked into the contribution of corruption toward income inequality and poverty (2002), while Xin and Rudel noted corruption emerges where “market economies are small or economic exploitation is great, governments collect few taxes and pay their public servants little. Under these circumstances, officials use their power to supplement their incomes through corrupt transactions.” Coupled with the lack of trust present in corrupt environments, this “mistrust probably elevates the amount of corruption that citizens perceive among their public officials” (2004: 298).

7.2

Unpredictable corruption

While corruption is prevalent in East Asia (Gill and Kharas 2007: 313), there is increasing focus on the degree of its predictability or unpredictability to affect the effective functioning of governments and economies. Lee and Oh (2007) classified the variances of corruption in 12 Asian countries according to its pervasiveness and arbitrariness. They noted two countries in 

The author wishes to thank Andrew Proctor for his comments on this chapter.

The Changing Face of Corruption in the Asia Pacific. DOI: http://dx.doi.org/10.1016/B978-0-08-101109-6.00007-1 Copyright © 2017 Elsevier Ltd. All rights reserved.

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particular Indonesia and the Philippines were affected by political corruption that occurred during their dictatorships. Their study lends support to the belief that while these two dictators (Suharto and Marcos) were in power, blame could be centralized as corruption itself was centralized. In effect, corruption perversely was predictable during this period (2007: 100 101). However, once the dictators lost office, unpredictable corruption reigned supreme; this had a detrimental effect on these countries in the new democratic era. The power vacuum that these dictators left saw successive multiple tyrants with a plurality of nests to feather. Hutchcroft’s 1998 work, which looked at the applicability of Weberian bureaucracy in Philippine institutions and its limitations, noted that it was the “great variability of corruption” and less its prevalence that has a more serious effect on economies. He argues: [C]orruption per se is not incompatible with advanced capitalism; indeed one can think of myriad examples where the two thrive simultaneously. Rather, it is the highly variable corruption that most impedes “the development of rational economic activity. (1998: 41)

Arbitrariness is also linked to undermined investor confidence (both local and foreign) as it creates uncertainty that is detrimental to long-term planning and economic development (Hutchcroft 1998: 253). The next section describes the Rose-Ackerman model of petty and grand corruption.

7.3

Low-level opportunistic payoffs or petty corruption

According to Rose-Ackerman, low-level opportunistic payoffs or petty corruption “lead to the inefficient and unfair distribution of scarce benefits, undermine the purposes of public programs, encourage officials to create red tape, increase the cost of doing business and lower state legitimacy” (2008: 330 331). Not so dissimilar from the traditional principal agent problem present in agency theory, RoseAckerman adapts this to describe the problems inherent in the activity of bribing where the principal is the secretary or minister and the agent is the official who is the subordinate (and independent) of the principal: Frequently, bribes induce official to take actions that are against the interests of their principals, who may be bureaucratic superiors, politically appointed ministers or multiple principals such as the general public. Pathologies in the agency/ principal relation are at the heart of the corrupt transaction. (Rose-Ackerman 2008: 330)

The four different categories of low-level opportunistic payoffs occur in the following generic situations and are summarized in Fig. 7.1. The first category that allows opportunistic payoffs is when there is a “scarce public benefit’” that allows officials the discretion to “assign” this benefit to the

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Figure 7.1 Summary of low-level opportunistic payoffs. adapted from Rose-Ackerman 2008.

one “with the highest willingness to pay and the fewest scruples will get the benefit in a corrupt system” (Rose-Ackerman 2008: 330). The second category allows officials to render benefits to those who are qualified (such as those who are recipients of disaster relief), but monitoring of the officials is imperfect, hence officials may be able to collect bribes and kickbacks from those who are both qualified and unqualified. Lack of monitoring or controls gives the officials a tremendous amount of discretion to be exercised (RoseAckerman 2008: 330). The third category, delays in the bureaucratic process, is manifested in long queues that deal with administrative matters such as procuring or buying a license (driver’s, business, etc.). These administrative hurdles or barriers provide “[i]ncentives for corruption (to) arise as applicants try to get to the head of the queue or maneuver through a complex set of requirements. To exploit their corrupt opportunities, officials may create or threaten to create more delays as means of extracting bribes” (Rose-Ackerman 2008: 330 331). The last category is nominally to do with government programs that by their mandate provide a source of revenue: “. . .some government programs impose costs e.g. tax collection or possibility of arrest by the police. Officials can then extract pay-offs in return for overlooking the illegal underpayment of taxes or for tolerating illegal activities such as smuggling of both contraband and ordinary goods that are subject to rationing. Even if people are not evading the rules, officials demand payoffs in exchange for refraining from arresting them on trumped-up charges” (RoseAckerman 2008: 331). Other contributors to this book provide examples of common forms of petty corruption.

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Grand or systemic corruption

Grand or systemic corruption is corruption on the systemic level affecting the whole of government. In grand corruption, accumulated corruption of low-level opportunistic payoffs has become institutionalized. Instead of being seen as an anomaly, it is part of life: [Systemic corruption] implicates an entire bureaucratic hierarchy, electoral system, or governmental structure from top to bottom. . .when corruption reaches the highest levels; it is also likely to prevail lower down as a way of buying the support of petty officials. Rose-Ackerman 2008: 330.

There are three features of grand corruption. This form of high-level corruption is characterized by a branch of government being a mere bribe-generation machine; having a corrupt electoral system; and government contracts being politicized and highly influenced by certain groups (be they businesspeople or politicians). While low-level corruption is an irritant and a cause of resentment, grand corruption is an indication of a profound malaise and “can be more deeply destructive of state functioning, bringing the state to the edge of outright failure and undermining the economy.” This is true especially for “a post-conflict state that is already fragile [which] can be a breeding ground for high-level malfeasance” (Rose-Ackerman 2008: 331). Fig. 7.2 categorizes this systemic corruption and shows the resultant detrimental effects on the public sector and the country’s citizens.

Figure 7.2 Grand or systemic corruption. adapted from Rose-Ackerman 2008.

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Breaking the above model into three distinct stages, the first type of grand corruption is where the branch of the public sector has become a bribe-generating machine; this leads to arms of the public service degenerating into corrupt systems. The second type of grand or systemic corruption is manifested in the electoral system with a democracy in form, but undemocratic practices in substance. In this instance, a great deal of discretionary power is given to electoral officials whether through political capture or endemic patronage. Opaque transactions during election spending may be a source of illegal funds and poor resource management. The third type of grand or systemic corruption is bidding for government contracts. Out of all the three types of systemic corruption, this type of corruption actively engages the private sector. Grand corruption brings “the state to the edge of outright failure and undermining the economy” (Rose-Ackerman 2008: 331). In the case of procurement contracts in sensitive areas such as defense, opaque decision-making results in contentious awards. Not only does corrupt conduct from both sectors undermine the legitimacy of such contracts, but this type of behavior also threatens long-term good governance, economic development, and democracy. In infrastructure projects, where corruption is rife, the cost of reconstruction and development becomes unsustainable.a It is in the areas of government contracts where grand corruption reveals the dysfunctional relationship between the state and the private sector again, at the expense of the populace.

7.5

Corruption and poverty

Where corruption is rife, there is nominally a large presence of the informal sector in a country. Where a predatory state “squeezes the formal sector without pity and without limit,” an informal economy follows (Marcouiller & Young 1995: 630). The high presence of the informal economy in a country is only matched by corruption’s poignant effects on a country’s poor. Endemic corruption and endemic poverty are intricately linked. Poverty increases corrupt activities while corruption contributes to poverty. Xin and Rudel showed poverty creates opportunities for corruption and engenders such a culture: When market economies are small or economic exploitation is great, governments collect few taxes and pay their public servants little. Under these circumstances, officials use their power to supplement their incomes through corrupt transactions. A culture of corruption emerges from these impoverished settings. (2004: 298)

Corruption’s vicious cycle is well documented in various studies (Heidenheimer & Johnston 2008) that show how it limits growth, inefficiently allocates public resources, and deters foreign investment (Gupta et al 2002: 24). In an extensive a

See two reports from Transparency International (2005, 2009) in these areas. (2009) Global Corruption Report Corruption and the Private Sector and (2005) Global Corruption Report Corruption in Construction and Post-Conflict Reconstruction.

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quantitative study on how corruption affects income inequality and poverty, Gupta et al note its effect on the whole of society: Corruption can affect income inequality and poverty through various channels including overall growth, biased tax systems, and poor targeting of social programs as well as through its impact on asset ownership, human capital formation, education inequalities and uncertainty in factor accumulation. (2002: 25)

Gupta et al. study also supports business group theories of market failure and resource dependence as high ownership concentration in the private sector is symptomatic of endemic public sector corruption (2002: 26). Their study also indicates how a small increase in corrupt activity has a significant negative effect on the poor (2002: 37). Corruption’s effect on poverty cannot be understated: Policies that reduce corruption will most likely reduce income inequality and poverty. The evidence gives support to political economy considerations that benefits of corruption and bribing public officials are captured primarily by the rich and better-connected individuals. Gupta et al 2002: 38, 40.

Corruption and poverty go hand in hand. Several contributors to this book also provide examples of the intricate link between poverty and corruption and how elites in a country can, and do, minimize the impact of corruption by exercising their political influence. The next section looks at how the practice of good corporate governance and building robust institutions can address corruption in a country.

7.6

Corporate governance

The Organization for Economic Cooperation and Development (OECD) is a multilateral body representing the interests of its members: the developed countries of the world. A Business Sector Advisory Group in the OECD was set up in 1996, charged with setting up “minimum standards on corporate governance which should be followed by OECD countries” (Dignam & Galanis 1999).b In 1999, the first issue of the Principles of Corporate Governance was published. A revised version appeared in 2004, to reflect the changes that occurred in the corporate governance landscape, especially after the corporate collapses b

By 1998, they were ready to deliver their standards. Coincidentally, the East Asian crisis was emerging and so their deliberations gained importance as “the massive exit of global capital from the East Asian economies was a vote against corporate and financial malpractices in that region. . .[and] the Asian crisis may increase awareness of the dangers of an increased global economy and thus give initiatives designed to promote higher standards in that global economy more significance” (Dignam & Galanis 1999: 396).

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of Enron and WorldCom in America (OECD 1999, 2004). In 2015, the third revision of these principles was published following on from the global financial crisis of 2007 2008 and subsequent regulatory reforms adopted by G20 countries (OECD 2015). The OECD principles are the most influential standards of corporate governance and are based on the following six core notions: I. II. III. IV. V. VI.

Ensuring the basis for an effective corporate governance framework The rights and equitable treatment of shareholders and key ownership functions Institutional investors, stock markets, and other intermediaries The role of stakeholders in corporate governance Disclosure and transparency and The responsibilities of the board. (OECD 2015)

These principles continue to reflect “a global consensus regarding the critical importance of good corporate governance in contributing to the vitality and stability of our economies” (Jesover & Kirkpatrick 2005: 127). Fairness, transparency, accountability, disclosure, and responsibility are the measures by which governance practice can be assessed. The initial set of principles was designed to be relevant for any organized entity, be it private, public, stateowned, or subject to other different forms of control and ownership. The principles also provide a benchmark for the monitoring of corporations’ behavior and their resultant improvement and development by interested parties such as investors and regulators (Jesover & Kirkpatrick 2005: 172, Iu & Batten 2001: 48). The OECD principles act as “soft law” and are the default normative framework (Abbott & Snidal 2000, Branson 1999). The principles’ influence can be seen in the reformulation of numerous countries’ corporate governance principles and unabashed reference to how the renewed principles adhere to, or are patterned after, the OECD principles. Reforms involving binding and enforceable corporations’ law that can be applied to any business entity worldwide are the subject of Jane Ellis’ chapter in this book. In developed countries, most corporate governance principles are issued by stock exchanges and/or regulators and closely follow the elements outlined in the OECD document. These principles act as “an aide memoire that emphasizes and reinforces best practice,” while in developing countries “the principles can act as a blueprint for the establishment of a modern, outward-looking confident economy” (Reid 2003: 237). In developing countries, the principles have been used extensively by the major international financial institutions, such as the World Bank, as a framework for policy dialogue to promote regional corporate governance reforms and as a focus for roundtables in Asia, Latin America, Eurasia, South East Europe, and Russia that is, in non-OECD member countries.c For example, an annual Asian Corporate Governance Roundtable has been held since 1999 of which the Asian Development c

A list of corporate governance roundtables can be accessed through the OECD website: http://www. oecd.org

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Bank (ADB) is cosponsor. The mandate behind the promotion of these principles to the nonmember OECD countries involved came from the G-7, which hoped that the roundtable would “improv[e] corporate governance in non-OECD member countries of the Asian region” while the participation of most Asian countries in the Roundtable “confirms the adaptability of the [OECD] principles as a reference in varying legal, economic and cultural contexts” (Jesover & Kirkpatrick 2005: 128). Thus, the OECD principles have been promoted with powerful institutional backing to countries around the world regardless of their economic situation and cultural and/or legal system. As a general corporate governance guide, the OECD principles are seen as a way of linking investor confidence with good corporate governance. Good corporate governance practices help to bring in investors, and adherence to the OECD principles is a way to ensure acceptable practices are maintained. Financial crises expose the defects of corporate governance practices in countries affected. Increasing global financial transactions ensures that no country can long remain immune to the vagaries of global capital. During the years immediately prior to the East Asian Crisis, the high growth rates achieved by certain countries in the region in a relatively short period of time exposed the institutional weaknesses of the countries the institutions of the countries had not caught up with the needs of foreign investors and sophisticated domestic investors. In Western countries, the development of corporate governance institutions occurred over a long period of time, and indeed most developed countries have not even established such practices. In most East Asian countries, corporate governance institutions are new, and in some cases, unformed (Grindle 2004, Chang 2005). Whereas crises in corporate America showed systemic problems within industries and that regulatory oversight was insufficient due to regulatory capture, in East Asia, the 1997 crisis showed the regulatory institutions were wholly ineffective and were bypassed by financial institutions or didn’t have the capability or resources to deal with the initial outflow of liquidity and its macroeconomic effects.

7.7

Building corporate governance institutions

While corporate governance institutions in Western countries are well developed and entrenched (Roe 2008), the defects of the East Asian regulatory institutions, in light of the 1997 East Asian Crisis, provoked major capacity-building efforts by multilateral development banks to address institutional weaknesses in developing countries. As Lazonick (1993) aptly put it: History shows, that the driving force of successful capitalist development is not the perfection of the market mechanism but the building of organisational capacities. (1993: 8)

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Similarly, the importance of the institutions of law and regulation in studies of societies was also expounded by Edelman and Stryker (2005). Laws and enforcement thereof provide institutional legitimacy to the state but also certainty to society. Laws, regulations, government policies, and official edicts oil the wheels of commerce by providing boundaries in the field of business operations. The absence of these tools is an obstacle to a well-functioning society as social norms are poor substitutes for legitimate social actions. Supporting the importance of the law in economic development also comes from La Porta et al. (1998) study on Law and Finance which tracked the historical evolution of legal development across different jurisdictions. On September 11, 2001, the same date that prominent institutions in the USA were attacked, the World Bank’s Annual World Development Report (WDR) for 2002 entitled Building Institutions for Markets (World Bank 2001) was launched. This report is a treatise on the importance of building institutions to serve the three components of developing markets: firms, government, and society. Building institutions for firms include institutions for farmers, corporate governance institutions, and financial system development. Building institutions for government include political institutions, judicial reform efforts, promoting competition, and regulations for infrastructure. Building institutions for society include integrating informal and formal “norms and networks” institutions and ensuring the independence of the media. Table 7.1 summarizes the different issues for institutions in each sector: The importance of corporate governance institutions for firms or the private sector was articulated in this report. The report defines what corporate governance institutions are and why they are necessary for a country’s economy: Corporate governance institutions are...the organisations and rules that affect expectations about the exercise of control of resources in firms. Well-functioning governance institutions allow entrepreneurs to invest resources and create value that is shared among the investors in a firm, the managers, and employees, as well as with the entrepreneur/manager. These institutions therefore determine the expected returns to committing resources in firms. Where governance institutions are weak, the emergence and growth of firms are discouraged. Governance institutions include traditional corporate governance mechanisms, such as the board of directors and corporate and bankruptcy laws; product market institutions such as regulators responsible for competition; labour market institutions; capital market institutions, such as financial intermediaries; and the judiciary. (2001: 55)

Corporate governance institutions encourage investment, enforce contracts, promote transparent and timely information, mitigate uncertainty, and provide longterm benefits. Conversely, economic crises tend to intensify the weakness of a country’s corporate governance system: “weak governance in these firms has been associated with financial and economic crises, which can have severe consequences for poor people” (2001: 73).

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Table 7.1

Institutions for Building Markets (World Bank 2001)

Firms G

G

G

G

Secure and transferable rural land institutions; accessible rural financial institutions; institutions for agricultural technology and innovation Corporate governance institutions, laws, and formal intermediaries Financial regulation for bank-based or marketbased financial systems, foreign investment, efinance, and financial services Business associations, rating agencies, and foreign financial institutions

Government G

G

G

G

Political institutions dealing with corruption and taxation Judicial systems over efficiency and cost; judicial reforms over corruption Encouragement of domestic and international competition Designing and regulation of infrastructure to deliver services to the poor

Society G

G

G

Norms and networks; building and adapting formal institutions, integrating informal and formal institutions Respect for the media’s independence, quality, and reach Civil society organizations for freedom, transparency, and anticorruption

A criticism of the institutional-building efforts of the World Bank is its perspective that institutions are created solely to protect property rights (Bardhan 2005, Sindzingre 2005). Such “property rights reductionism” is problematic when “the relationship between property rights and economic development suffers from a number of conceptual, theoretical and empirical weaknesses” (Chang 2005: 7). Chang argues property rights are “not something good in itself.” In practice, developing countries must choose which property rights to protect and under which conditions because it is impossible for them “to protect all existing property rights at all costs” (2005: 11). While protection and recognition of property rights form the basis of Western law and commerce, property rights are more malleable, especially in some countries in the region where there is a high incidence of poverty and income inequality. This uncertainty over property rights malleability does reduce a country’s ability to attract both inter- and intraregional investment. According to Chang, institutions serve and promote economic development through their administrative function, learning and innovation, and income redistribution and social cohesion (2005: 3). Chang’s last point on income redistribution recognizes some cultures that favor social cohesion and harmony of the collective over that of individual freedoms and protection of property rights at any cost.

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103

Institutions and economic development

A more expanded view of the role institutions play in economic development can be found in Lin and Nugent’s Institutions and Economic Development (2005). Lin and Nugent look at the reality and struggles of institutions in developing countries. More often than not, developing countries are politically unstable and institutions have to work around this instability. Text box 7.1 is my personal observation of an event that showed the importance of a working bureaucracy despite political turmoil. Institutions influence the pace and level of economic development, while economic development can trigger institutional changes (Lin & Nugent 1995: 2303). Institutions in economic development are divided into two types: market and nonmarket. Market institutions deal directly with contracts, commodity, and factor markets. Usually, they are government institutions such as courts, securities commission, stock exchanges, and economic ministries. Nonmarket institutions are the firms and communities. Both market and nonmarket institutions complement each other due to their interconnectedness and interdependency with each other (Lin & Nugent 1995: 2312). Where there is underdevelopment, the most important institutions are “the family, the tribe and the kin group” (Lin & Nugent 1995: 2313). When rich countries undergo economic crises or economically regress, these familiar institutions are rediscovered because they are innate. In developing countries, strong family or kin ties are a safeguard for mutual survival and provide insurance against hunger or starvation (Lin & Nugent 1995: 2317). In the absence of a strong welfare state, citizens rely on social welfare that may be provided by their employer, but, most importantly, by the family. This may well explain why the family is at the center of institutional life in several countries of the Asia-Pacific (see chapters in Part 2 in this book).

Box 7.1 A foreign investment forum. At a World Bank foreign investment roundtable, the head bureaucrats from India, Pakistan, and six other South Asian nations were discussing ways to tackle the problems of corruption, rent-seeking, and politics that made bureaucracies inefficient, timely, costly, and unresponsive to people’s needs. As the conference was held during a period when tensions between India and Pakistan were high, the Pakistani delegate addressed the roundtable: “We all face similar problems. We know what they are. We know there are also many political problems that prevent us from instituting reforms. Despite wars and health epidemics, here we are sitting and sharing our experiences. Our politicians may disagree with each other but we have a job to do and we are all members of this region. Other sectors of the society may not function well, but we have to ensure our sector does.” Personal observation.

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Concurrently, when an individual achieves monopolistic political and economic power, the country’s institutions suffer in this individual’s pursuit of self-interest: The weaker the linkage between the ruler’s wealth and the growth of national income, the more likely a myopic wealth-maximising ruler bestowed with absolute personal power (e.g. Marcos in the Philippines) might be tempted to eschew property rights in favour of maximum surplus extraction. Rulers may be especially inclined to predatory taxation and other conditions unfavourable to economic growth when threatened. Lin & Nugent 1995: 2337.

Thus, institutional reforms in developing countries with absolute rulers are difficult to verify due to the power struggle that can exist between a president and the bureaucracy (Lin & Nugent 2005: 2338). Typically, the former usually prevails over the latter and a heavily politicized bureaucracy is the result. Indeed, government institutions are far more responsive to changes in the political field than the socioeconomic environment: When organisations are regulated by the state, the economic environment diminishes in importance as the importance of the political and administrative environment increases. Both attention and behaviour shift accordingly. The decisions of consumers become less important than the decisions of lawmakers and government agents. Pfeffer & Salancik 1978: 203.

The next section discusses the problems of politicized institutions in the region.

7.9

Politicized institutions

According to Kay (1980), politicization refers to “. . .the reaching of decisions on matters within an agency’s or program’s functional competence through a process that is essentially political and that does not reflect technical and scientific factors in the decision process; and... the taking of specific actions on issues within an agency’s or program’s competence for the sole purpose of expressing a partisan [or self-interested] political position rather than attempting to reach an objective determination of the issues” (1980:7 in Momani 2004: 900). Politicization of government institutions in developing countries is a common and challenging phenomenon. Where a working bureaucracy exists, the institutions will have to work around the whims of the incumbent government and vice versa. Such a scenario can end up in a catch-22 situation, where institutional reforms cannot be initiated at all due to the fear and uncertainty changes might bring to the preexisting power-political structure (Lin & Nugent 2005: 2340). The impact of a politicized bureaucracy results in “primarily, loss of confidence in the fairness of government institutions” (Peters & Pierre 2004: 8). In the context

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of the Philippines, there is a history of politicization in the civil service which was compounded under the tenure of Marcos. In an appraisal of the performance of the civil service in Singapore, Thailand, and the Philippines, Vallance found the Philippine bureaucracy to be highly politicized, fundamentally traumatized, and debilitated by a culture of patronage: Under Marcos, the distinction between politics and administration became increasingly blurred as the president appointed undersecretaries from the ranks of elected legislators. Patronage in the civil service became entrenched during the Marcos regime and notions of civil service neutrality were irreparably damaged. Despite President Aquino’s vow to “de-Marcosify” the Philippine civil service (Carino 1989:214), the trend of politicisation has continued. Under President Ramos it is estimated that slightly more than half of all senior civil servants in the Philippines are political appointees. (Santa Tomas 1995: 272 in Vallance 1999: 82)

To be effective, institutional development requires political will and a depoliticized bureaucracy. Politicization of the organs of government hinders a country’s performance and frustrates meaningful economic development. Political corruption is extensively looked at by the other contributors to this book.

7.10

Corporate governance and corruption

Finally, the impact of corporate governance and corruption in developing countries has been well documented. In a 2005 paper, Xun Wu suggests that improved corporate governance contributes to addressing and even reducing corruption. Wu states that increased transparent practices may provide a catalyst to corruption’s stranglehold and break up the vicious cycle of bribery and corruption: At the country level, improvement in corporate governance may help a country with high level of corruption to partially offset the negative impacts of the perception of corruption on the flow of capital (both financial and human), and the additional capital induced by good corporate government serves as catalyst for further improvement in both corporate governance and the governance of the public sector.(2005:168 169)

Wu’s point that practicing good corporate governance rewards the practitioners is also supported by Durnev and Kim in their survey of 859 companies in 27 countries. There is a strong financial link between well-governed companies and not so well-governed countries: [A]n individual company’s reputation for effective governance and transparency scores is more important than the surrounding legal environment in determining its value; or to put it another way, companies can rise above their legal settings.. . . [C]ompanies with higher governance and transparency scores command higher

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values and that this governance valuation effect is more pronounced in countries with weaker legal systems. These results send a powerful message of hope to companies, investors, and policymakers in emerging economies with limited institutional protection of minority shareholders. Companies that establish and maintain reputations for good governance and transparency are likely to be rewarded by investors with higher valuations. Durnev & Kim 2007.

dela Rama (2012) research on family-owned business groups, their corporate governance practices, and their attitudes toward corruption empirically supports that of previous authors. This research showed the emergence of a two-tiered system of practitioners and nonpractitioners of corporate governance in developing countries. In this system, blue-chip companies from developing countries are more inclined to be guided by best practice corporate governance as they try to compete for foreign investors on a global stage, regardless of the reputation of their home country. These companies rise above their political environment in order to attract foreign capital, and, subsequently, their practice of good corporate governance encourages them to make the reciprocal leap by investing overseas in countries where such practice is common. These results should encourage public policymakers and reformers to concentrate on encouraging private sector participants that are willing to embrace transparency, greater accountability, and good corporate citizenship rather than appeasing firms that use their political connections in order to game the field for their myopic gains.

7.11

Conclusion

This chapter has looked at corruption, corporate governance, and institutionbuilding in the Asia-Pacific. For countries in the region, strong institutions are required to address the challenges brought on by corruption, which flourishes when institutions are weak. Lack of effective enforcement of laws, underresourced capabilities, or self-interested elites makes reforming corrupt practices challenging. Nevertheless, in a world marked by financial and technological globalization, campaigns for increased transparency, improved corporate governance, and building stronger public, depoliticized institutions are ever present, so that regardless of existing power structures, someone will now be held accountable. Countries in the region that are more adept at addressing these pressures brought on by globalization will be in a better position to seize the opportunities that present themselves in this century. The impact of corruption may be moderated by how corporate governance is practiced in a country and the robustness of its corporate governance institutions. The presence of strong institutions helps the wider socioeconomic environment and improves national, and even regional, well-being.

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References Abbott, K. W., & Snidal, D. (2000). Hard and Soft Law in International Governance. International Organization, 54(3), 421 456. Bardhan, P. (2005). Institutions Matter, But Which Ones? Economics of Transition, 13(3), 499 532. Branson, D. M. (1999). Teaching Comparative Corporate Governance: The Significance of ‘Soft Law’ and International Institutions, Georgia Law Review, 34, 669 698. Chang, H.-J. (2005) Understanding the Relationship between Institutions and Economic Development Some Key Theoretical Issues, Paper presented at the WIDER Jubilee Conference, 17 18 June, Wider: Helsinki. dela Rama, M. J. (2012). Corporate Governance and Corruption: Ethical Dilemmas of Asian Business Groups. Journal of Business Ethics, 109(4), 501 519. Dignam, A., & Galanis, M. (1999). Governing the World: The Development of the OECD’s Corporate Governance Principles, European Business Law Review, 10(9/10), 396 407. Durnev, A., & Kim, E. H. (2007). Explaining differences in the quality of governance among companies: evidence from emerging markets. Journal of Applied Corporate Finance, Winter, 19(1), 16 24. Edelman, L. B., & Stryker, R. (2005). A Sociological Approach to Law and the Economy. In N. J. Smelser, & Swedberg (Eds.), The Handbook of Economic Sociology (2nd Edition). Princeton University Press, Chapter 23. Gill, I., & Kharas, H. (2007). An East Asian Renaissance: Ideas for Economic Growth. Washington DC: World Bank Group. Grindle, M. S. (2004). Good Enough Governance: Poverty Reduction and Reform in Developing Countries, Governance, 17(4), 525 548. Gupta, S., Davoodi, H., & Alonso-Terme, R. (2002). Does corruption affect income inequality and poverty? Economics of Governance, 3, 23 45. Heidenheimer, A. J., & Johnston, M. (Eds.), (2008). Political Corruption: Concepts and Contexts (3rd edition). New Jersey: Transaction Publishers. Hutchcroft, P. D. (1998). Booty Capitalism: The Politics of Banking in the Philippines. Cornell University Press. Iu, J., & Batten, J. (2001). The Implementation of OECD Corporate Governance Principles in Post-Crisis Asia. Journal of Corporate Citizenship, Winter, 4, 47 62. Jesover, F., & Kirkpatrick, G. (2005). The Revised OECD Principles of Corporate Governance and Their Relevance to Non-OECD Countries. Corporate Governance, 13 (2), 127 136. Kay, D. (1980). The Functioning and Effectiveness of Selected United Nations System Programs. St. Paul, MN: West Publisher Company in p. 900 in Momani, Bessma (2004) American Politicization of the International Monetary Fund. Review of International Political Economy, 11(5), 880 904. La Porta, R., Lopez de Silanes, F., Shleifer, A., & Vishny, R. W. (1998). Law and Finance. Journal of Political Economy, 106(61), 1113 1155. Lazonick, W. (1993). Business Organisation and the Myth of the Market Economy. Cambridge: Cambridge University Press. Lee, S.-H., & Oh, K. K. (2007). Corruption in Asia: Pervasiveness and Arbitrariness. Asia Pacific Journal of Management, 24, 97 114.

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Lin, J. Y., & Nugent, J. B. (1995). Institutions and Economic DevelopmentIn J. Behrman, & T. N. Srinivasan (Eds.), Handbook of Development Economics (Volume 3A, pp. 2303 2370). Amsterdam: Elsevier Sciences. Marcouiller, D., & Young, L. (1995). The Black Hole of Graft: The Predatory State and the Informal Economy. American Economic Review, 85(3), 630 646. Nye, J. S. (1967). Corruption and Political Development: A Cost-Benefit Analysis. American Political Science Review, 61(2), 417 427. OECD (1999). Principles of Corporate Governance. Paris: OECD. OECD (2004). Revised Principles of Corporate Governance. Paris: OECD. OECD (2015) G20/OECD Principles of Corporate Governance, Paris: OECD http://www. oecd-ilibrary.org/governance/g20-oecd-principles-of-corporate-governance2015_9789264236882-en accessed 28th July 2016. Peters, B. Guy, & Pierre, J. (Eds.), (2004). Politicization of the Civil Service in Comparative Perspective: The Quest for Control London: Routledge. Pfeffer, J., & Salancik, G. R. (1978). The External Control of Organizations: A Resource Dependence Perspective. New York: Harper & Row Publishers. Reid, A. S. (2003). The Internationalisation of Corporate Governance Codes of Conduct, Business Law Review, 233 238, October. Rose-Ackerman, S. (2008). Corruption and Government. International Peacekeeping, 15(3), 328 343. Santa Tomas, P. (1995). The Philippine Bureaucracy: A Question of Numbers. In L. Carino (Ed.), Conquering Politico-Administrative Frontiers: Essays in Honor of Raul P. De Guzman, College of Public Administration. Manila: University of the Philippines Press. Sindzingre, A. (2005). Reforms, Structure or Institutions? Assessing the Determinants of Growth in Low-Income Countries. Third World Quarterly, 26(2), 281 305. Transparency International (2005) Global Corruption Report Corruption in Construction and Post-Conflict Reconstruction https://www.transparency.org/whatwedo/publication/ global_corruption_report_2005_corruption_in_construction_and_post_conflict accessed 18th August 2016. Transparency International (2009) Global Corruption Report Corruption and the Private Sector https://www.transparency.org/whatwedo/publication/global_corruption_report_2009 accessed 18th August 2016. Vallance, S. (1999). Performance Appraisal in Singapore, Thailand and the Philippines: A Cultural Perspective. Australian Journal of Public Administration, 58(3), 78 95. World Bank (2001). World Development Report 2002: Building Institutions for Markets. Washington DC: World Bank.

27 Years of fraud control in the New South Wales public sector: 1989 2016

8

Stephen Horne Checks Balances & Integrity, Sydney, Australia

8.1

Introduction

Like many of the good things in life, my journey into fraud control was an accidental one. Who knew where it would lead and what would happen? This is a personal tale of just that.

8.2

Public management 101

In the late 1980s, a body called the Office of Public Management (OPM) was created within the New South Wales (NSW) Premier’s Department, with some staff (such as myself) parachuted in from the discontinued Public Service Board. OPM was an initiative of the incoming (Nicholas) Greiner Government (1988 1992). Under the leadership of luminary figures such as Richard Humphry (Director-General), Ken Baxter, and Col Gellatly, the Premier’s Department and OPM adopted a “public management” approach. This was a shift in style within the NSW sector. As a long-standing member of the Institute of Public Administration Australia,a I have read about “public administration,” “public management,” and the “new public management” (emphasis added), especially with regard to the Australian Public Service (APS), over a period of decades. Like all sectors, NSW had undergone periods of reform before. As an undergraduate student of business studies at the University of Technology, I chose the Public Administration major, and we had studied the reforms of the Wilenski Reviewb period for NSW (among others). Periods of rapid reform can be exciting, and the creation of OPM hailed another such period. It was exciting to be working there at that time, and to embrace the different style of public administration that a “public management” approach entailed. a b

http://www.ipaa.org.au The Wilenski Review looked at “framing specific legislative and administrative changes” within the NSW Public Sector in the late 1970s under the auspices of the Neville Wran Government (1976 1986). See Parker, R.S. (1979) The Wilenski Review, Australian Journal of Public Administration, 38 (2): 168-175

The Changing Face of Corruption in the Asia Pacific. DOI: http://dx.doi.org/10.1016/B978-0-08-101109-6.00008-3 Copyright © 2017 Stephen Horne. Published by Elsevier Ltd. All rights reserved.

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Readers can readily source elsewhere a wealth of material on that topic, so I will not dwell on it here. Suffice to say that at its core, the approach entailed adopting a more managerial style to running the public service. This would require guidance to agency management. It would also require collaboration with the Cabinet Office on material going to, and coming from, Cabinet with a view to assessing the managerial aspects and issues that may require attention in connection with policy and strategy development and implementation. This was also a significant change for the Cabinet Office, and I pause to mention the admirable work of people such as the Director-General Roger Wilkins and Robyn Kruk among many others in the Cabinet Office at that time. Against this background, a file appeared on my desk: “Implementing Fraud Control.” My mission had begun.

8.3

Establishing a policy on fraud prevention first origins

Even at that time, various responsibilities for fraud prevention (either direct or implied) had been provided or defined for many years by instruments such as the (then) Public Finance and Audit Act 1983c (and its predecessor legislation), the Treasurer’s Directions issued under that act, and other pronouncements such as the (then) Treasury Internal Audit Guidelines. Relevant formal standards had also existed for many years in the accounting profession generally, and particularly in both the internal and external auditing professions. Internal audit and/or inspection and/or investigation mechanisms already existed in varying forms within most public agencies or were provided through contract arrangements. All agencies were of course subject to independent external audit requirements. Codes of conduct had been part of public sector practice for many years. The introduction at that time of the Independent Commission Against Corruption (ICAC) in 1988 was also a major change in the environment. The ICAC had launched some highprofile investigations, but had also initiated a corruption prevention capability. However, in both the public and private sectors the indications were then (as they are now) that despite such measures, fraud continues to exist. It is exceptionally resilient. In September 1988, the Audit Office commented that “taxpayers tolerate fewer frauds and errors in the public sector than would be the case with shareholders in the private sector. Accordingly . . . greater effort needs to be made to achieve a higher level of accountability in this area”d (1988 Report to Parliament, Volume 2, page 110). With this stimulus, moves toward instituting a specific policy on fraud control across the NSW public sector were initiated in November 1988. Developments at the Commonwealth level were widely circulated for examination and comment during 1989. c

NSW Public Finance and Audit Act 1983 No. 152 http://www.legislation.nsw.gov.au/inforce/b3008bc254a7-421e-a806-b5ab40180130/1983-152.pdf d 1998 Report to Parliament, volume 2 page 110 in NSW Audit Office (1994) Fraud Control: Developing an Effective Strategy http://www.audit.nsw.gov.au/ArticleDocuments/197/Fraud_Control_Vol_1_Executive_ Summary.pdf.aspx

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Volume 2 of the Auditor-General’s 1989 Report to Parliament set out a number of factors or steps toward fraud control that agencies should address (pages 113 114), including “establishing a policy on fraud prevention.” In December 1989, a Draft Fraud Control Plan Relating to Internal Fraud for the State was released by the Minister for Police and Emergency Services as a starting point. In March 1990, the Treasury issued a circular directing agencies to ensure that the fraud control factors identified in the Audit Office’s 1989 report were being closely observed. Embracing its new public management role, OPM was given responsibility to finalize the matter. And the file hit my desk. On June 7, 1990, the Premier’s Department advised all agencies of a new policy requirement for each agency to establish a strategy for the prevention of both internal and external fraud. The directive emphasized “the need to ensure that appropriate measures were in place to combat the level and nature of fraud risk relevant to each organisation.” Under this policy, “responsibility for determining appropriate controls against internal and external fraud would rest with chief executives, in preference to more formal and centralised arrangements such as are used in the Commonwealth.”e A highly devolved approach was adopted, in line with the approach to public management at that time. captures the spirit of this directive:

Copyright: The Audit Office of NSW. Used with permission.

e

NSW Audit Office (1998) Performance Audit Report: Fraud Control Status Report on the Implementation of Fraud Control Strategies http://www.audit.nsw.gov.au/ArticleDocuments/130/ 48_Fraud_Control.pdf.aspx?Embed 5 Y

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8.4

The Changing Face of Corruption in the Asia Pacific

First attempts at implementation

When I drafted the policy directive issued by Premier’s Department, further detailed guidance was intended once this had been further researched. As it happened, I was drawn to the Audit Office where they were establishing a performance audit function. For me, this was an alluring combination of the efficiency audit work I had been doing at the Public Service Board with the public management feel of the work at OPM. As I departed, other pressing matters at OPM meant that the file left behind on my desk was closed. The policy had been established. Work on further guidance was not commissioned. However, my passion for the topic had been ignited. Given the Audit Office’s initiating role in having a fraud prevention policy established, it was logical that they would follow up in due course. The new performance audit function was an ideal channel for this purpose, and given my previous role in drafting the policy, I was assigned to lead the audit. The primary objective of the performance audit was to make an assessment of the extent to which effective implementation of the policy directive had occurred. The nature of a performance audit is to establish a construct of what an “ideal state” might look like for the subject matter or function being examined. The actual state is then examined against this normative model, and variations explored. Forty agencies were surveyed during the audit. A variety of agencies were selected, ranging across both the inner and outer budget sectors and all major portfolio areas of the NSW public sector. Of the Audit Office’s 30 largest and most complex audit clients, 25 were included within the sample. Of the agencies surveyed, 55% percent were statutory authorities, while 45% were departments. Results were reported within Volume 1 of the Auditor-General’s 1993 Report (presented to Parliament on June, 15, 1993).

8.4.1 A model emerges Unsurprisingly, the audit confirmed disconnected and reactive actions occurring across the sector in attempting to implement the policy requirement. The originally mooted further guidance was needed if any consistency was to be achieved. In developing criteria for the audit, we undertook extensive research on fraud control, thought leadership, and practice. It was thus logical to take the normative model created for the audit and present it to agencies in the form of guidance material. Developing guidance was a new activity for the Audit Office, and one not without some difficulty given that the Auditor-General is a highly independent body. However, it was a natural corollary to conducting performance audits, and precedents had been set in other jurisdictions, so we proceeded. Given the history of the policy, I approached the Premier’s Department to cobadge the better practice guide that we developed. This was a highly successful joint initiative, albeit one that has never been repeated. The model that we developed featured “10 attributes of best practice” that all agencies needed to address. This would provide sector-wide consistency to a

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sector-wide problem. However, a one-size-fits-all approach was not advocated. The extent to which each attribute would be an issue for each agency would vary according to the nature of the business and risk profile of the agency. The ten attributes of a fraud control strategy were defined at the time as. Integrated Macro Policy Responsibility Structures Fraud Risk Assessment Employee Awareness Customer and Community Awareness

Fraud Reporting systems Protected Disclosures External Notification Investigation Standards Conduct and Disciplinary Standards

Source: Fraud Control Developing an Effective Strategy, Vol 1 Conceptual Framework, Audit Office of NSW and NSW Premier’s Department, Sydney, 1994, page 13.

Detailed guidance material on applying the model was published jointly by the Audit Office and Premier’s Department in 1994. The guidance material was presented in a three-volume set: G

G

G

Executive Guide Detailed Implementation Guide Review Checklists.

Over three thousand sets of the three-volume guidance material were initially distributed, with requests for copies continuing for many years. As the Internet grew to become a key channel for information distribution (ok, so now I feel old), this material was provided online through the Audit Office’s website. captures the challenges after publication:

Copyright The Audit Office of NSW. Used with permission.

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8.4.2 A community of practice emerges Having got the passion for this topic, I could not leave it alone. Policy, audit, guidance material: what next? In speaking to my colleagues in the ICAC and in agencies, it became clear that while guidance was helpful, the real secret to successful implementation would be in practitioners sharing their experience and learning from one another. During one of those conversations, four of us decided to establish a practitioner’s network for that purpose. Cofounders with me were Shane Boyd, Warwick Smith, and Marie O’Brien. Reflecting this early emphasis on fraud control, the “NSW Public Sector Fraud Prevention Committee” was formed in late 1994 as a collective of practitioners and interested parties to serve as a networking and self-help group, and to share information and experiences in dealing with the challenges of fraud control. In June 1996, the ICAC published its Practical Guide to Corruption Prevention. The Committee embraced this expanded focus and remodeled itself, through various name changes over a number of years, into the Corruption Prevention Network (CPN) that exists today 22 years later. The CPN became an incorporated body in 1998 and operates through an organizing committee of elected volunteer public officials and nonvoting nominees from central and watchdog agencies. I am still a member of its Executive Committee so clearly I can’t let go! Please visit the website to see what a mature community of practice can do: www.corruptionprevention.net.

8.4.3 Monitoring progress over the long term The Audit Office’s first performance audit (1993) examined progress in implementing the 1990 policy directive, and led to the development of the detailed guidance material (1994). The Audit Office followed this up with subsequent audits in 1998, 2004, 2009, and 2012 that provided further status reports on the effectiveness of implementation. The results of the effectiveness of performance audit implementation over the first 11-year period 1993 2004 are shown in.

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1993 audit results

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Effective 13% Highly effective 20%

Fairly effective 17%

Partly effective 15%

Ineffective 25% Generally Ineffective 10%

1998 audit results

Highly effective 8%

Effective 23%

Ineffective 16%

Fairly effective 18% Generally Ineffective 16% Partly effective 19%

2004 audit results

Highly effective 13% Effective 37%

Ineffective 2% Generally Ineffective 6%

Partly effective 16% Fairly effective 26%

Fraud Control: Current Progress and Future Directions, Audit Office of NSW, Sydney, February 2005, p13.

Progressively, the audit effectiveness has increased from 13 percent in 1993 to 37 percent effective by 2004.

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In 2012, the Audit Office took the view that as policies had been in place for the sector since 1990, all agencies should have reached the stage of having at least an “effective,” if not “highly effective,” fraud control strategy in place. For many years, the Audit Office has argued that if standards are not set at this level, fraud will not be controlled. Judged in this way, the 2012 results were presented against 2004 and 2009 as following. Per cent highly effective or effective

NSW public sector agencies responses (91 respondents in 2012) 1

2

3

4

5

6

2012

2009

2004

Fraud control policy Responsibility structures Fraud risk assessment Employee awareness Consumer and community awareness

2

0

5

13

59

12

78

79

57

0

2

1

12

65

11

84

82

57

0

3

8

19

55

6

67

61

43

0

2

7

17

59

6

71

61

39

4

4

12

13

55

3

64

32

32

Notification systems Detection systems External notification

0

0

0

8

62

21

91

84

63

0

2

4

21

59

5

70

60

34

0

0

1

3

67

20

96

88

59

Investigation standards Conduct and disciplinary standards

1

0

3

8

65

14

87

82

50

0

0

0

4

71

16

96

77

66

80

71

50

Prevention 1 2 3 4 5

Detection 6 7 8 Investigation 9 10

Total response average

2012 Fraud Survey, NSW Auditor-General’s Report to Parliament, Volume 7 2012, Audit Office of NSW, Sydney, 2005, p40.

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The Followings cartoons are.

Copyright The Audit Office of NSW. Used with permission.

8.5

Embedding a testing methodology

A particularly significant new mandatory requirement was applied from December 2004 for all organizations subject to external audit, regardless of sector. Australian Auditing Standard 210 (AUS 210) requires the external auditor to obtain a written representation from management that the organization has systems to deal effectively with fraud risks. Was this introduced in the wake of Enron? As the external auditor for the NSW public sector, the Audit Office suggested that signoffs by chief executives about fraud control (both for the purposes of AUS210 and to meet legislative requirements) should be supported by G

G

G

regular testing of the organization’s control framework (such as that undertaken via internal audit and other compliance and assurance functions); the existence of a comprehensive fraud control strategy (such as one based on our tenattribute model); and a process by which effective ongoing implementation of all aspects of the fraud control strategy is reviewed and monitored for all work areas across the organization.

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After reporting the results of the 2005 audit, I was particularly concerned that still more assistance was needed to address the latter point. It was apparent that many organizations experience two chief problems: G

G

effectively implementing its fraud control strategy in all of the work areas across the organization; and maintaining long-term awareness by staff in all work areas of the fraud control environment that the strategy is designed to generate.

To this end, I conceived the idea of a Fraud Control Improvement Kit to directly tackle those implementation and maintenance issues. The Kit was released in 2006 to assist agencies to G

G

G

assess whether, and where, the implementation of its fraud control strategy needs to improve; develop a targeted plan for improving the implementation of its fraud control strategy; and monitor the ongoing extent of implementation of its fraud control strategy across all work areas within the organization.

The Kit comprised two new tools: G

G

a Fraud Control Health Check; and a Fraud Control Improvement Workshop.

The Health Check consists of ten short and simple questions directed to staff. It should take an employee no more than five minutes to complete, and responses are anonymous. Using a spreadsheet (available from the Audit Office websitef), responses can be summarized and reported to the audit committee in a dashboard-indicator format that clearly shows staff perceptions about the fraud control environment for each work area surveyed. The Fraud Control Improvement Workshop is a facilitated workshop for work areas that were identified in the Fraud Control Health Check as needing some attention. Work areas flagged for attention by the Health Check may have systemic problems (as in control gaps, for example), or staff awareness of the fraud control environment may simply need refreshing. The Kit suggests that Audit Committees should initiate use of the Fraud Control Health Check on a regular basis. The frequency of use will depend on the nature of the fraud risks that the organization faces in its internal and external environments. If the organization is exposed to significant levels of fraud risk overall, or if risk is high in particular work areas or functions, support for the annual signoff under AUS 210 may require annual use of the Health Check for areas presenting the greatest risks. In other circumstances, the Audit Office recommended that the Health Check be used at least once in all work areas across the organization every 2 3 years. The Fraud Control Improvement Workshop would be used only when and where this is suggested by the results shown in the management report generated from the Health Check. f

See documents listed under the NSW Audit Office http://www.audit.nsw.gov.au/publications/betterpractice-guides

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In addition, for organizations exposed to moderate levels of fraud risk or greater, improving fraud control should be a standing item on the Audit Committee’s agenda. The Kit was my last product before leaving the Audit Office for another role. Happily, the Audit Office refreshed and significantly expanded the Kit in 2015.

8.6

Light on the hill

In 2011 and 2015, the Audit Office published its “public sector governance lighthouse” model, proposing that “governance is about shining a light on what agencies and government are doing and leads to agencies better meeting their obligations to taxpayers and the public.”g Fraud control was built in as one of the essential components for the public sector model. shows the governance lighthouse structure with No.7 showing the necessity of a fraud and corruption control framework:

Copyright The Audit Office of NSW. Used with permission.

8.7

Ethical framework

The Government Sector Employment Act 2013 establishes a new legal requirement for all people employed in the government sector to act ethically and in the g

NSW Audit Office (2016) Governance Lighthouse https://www.audit.nsw.gov.au/ArticleDocuments/ 197/Governance_Lighthouse_2016.pdf.aspx

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public interest.h Details of the four government sector core values (integrity, trust, service, and accountability) and 18 principles that guide their implementation can be found in Part 2 of the Act: Ethical framework for the government sector. In addition, Sections 25 and 30 of the Act make department secretaries and heads of agencies responsible for the ethical conduct and management of their agencies. The NSW Public Service Commission has produced Behaving Ethically: A guide for NSW government sector employeesi to assist employees to better understand the obligation to act ethically. So after 27 years, what can we conclude? We rise and fall in our commitment to preventing and detecting fraud. Our efforts are worthwhile, but fraud is here to stay. The practice of fraud modifies itself as circumstances and opportunities evolve. It is organic. So must our responses be. The Audit Office reported in 2012 as follows. 2012 Fraud Survey, NSW Auditor-General’s Report to Parliament, Volume 7 2012, Audit Office of NSW, Sydney, 2005, p40.

h

NSW Government Sector Employment Act 2013 No. 40 http://www.legislation.nsw.gov.au/#/view/act/ 2013/40 i http://www.psc.nsw.gov.au/employmentportal/ethics-conduct/ethics-conduct

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The Audit Office concluded that fraud continues to be an important issue for the NSW public sector, with 48 per cent of agencies identifying a fraud in the 2009 2012 period. The Audit Office survey suggests fraud control in agencies is improving. However, it also indicates the incidence and magnitude of fraud may be growing. The Auditor-General stated (page 31) that “I am concerned some agencies simply ‘tick the box‘ and put their commitment to fraud control in the bottom drawer.”

8.8

Future directions and expectations

The Auditor-General now suggests a move away from the public management model that was issued in 1990. In his 2012 report, the Auditor-General stated (page 31): I do not believe the current decentralised approach to fraud control adequately protects agencies against fraud. I believe fraud control would be significantly improved if New South Wales adopted a whole-of-government fraud control policy framework which establishes mandatory minimum standards. The framework needs to be flexible enough so its application meets individual agency needs and gives responsibility for developing policy and monitoring results to key agencies.

This reflects the Commonwealth Government’s approach. By 2016, this recommendation has not been adopted in NSW, and the current approach to legislation and guidance does not appear to align with such an approach. However, at the more detailed level, the Auditor-General also identified specific concerns, such as G

G

G

more than two out of five agencies do not require staff to take at least two weeks continuous leave each year; there is a growing trend in frauds identified in outsourced functions and contracted nongovernment organizations; and one in ten agencies do not routinely conduct pre-employment checks of criminal records, work histories, and qualifications.

The Auditor-General has recommended that agencies and their audit and risk committees should consider these issues when assessing the effectiveness of their approach to fraud control. In 2015, the Audit Office released a refreshed and expanded version of the Fraud Control Improvement Kit, so it represents their current view on what is expected of NSW public sector agencies.

8.9

Responsibility structures

When the policy was written (1990) and the original guidance issued (1994), the sector was a different place. One of the ten attributes addressed the issue

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of “responsibility structures,” and included a suggestion to develop a fraud control committee. Fraud control is fundamentally a line management responsibility. However, this suggestion was to provide for a “champion” to keep the issue on the risk management agenda, and to improve arrangements over time as shows:

Copyright The Audit Office of NSW. Used with permission.

Since that time, the introduction of a robust approach to governance and risk management and the advent of Audit and Risk Committees have in my view, provided a viable framework through which the issue of fraud control can be responsibly governed. NSW has adopted a strong approach to the role and capability of Audit and Risk Committees (TPP15 03 Internal Audit and Risk Management Policy for the NSW Public Sector, July 2015).

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The reforms continue. At the time of writing, the NSW Auditor-General released two more reports on Finance Services and Innovationj and the results of a fraud survey within the NSW public sector and benchmarked their controls against the Audit Office Fraud Control Improvement.k

8.10

Conclusion

My 27-year journey in the fraud control space leaves me with four conclusions: 1. Fraud is here to stay. However, fraud control is both possible and a worthwhile pursuit. 2. The value in a community of practice is a significant ingredient in sharing knowledge and building capability. 3. Fraud control should be embedded within a governance and risk context. 4. To be sustainable, fraud control needs an internal champion, and the Audit and Risk Committee represents the natural hearth in which to keep the fire burning.

That suggests the next stage in my journey, and I look forward to continuing the adventure.

Further reading Audit Office of NSW and NSW Premier’s Department (1994). Fraud Control Developing an Effective Strategy. Conceptual Framework., Volume 1, Sydney. Audit Office of NSW (1988). Report to Parliament (pp. 110 114). Volume 2, Sydney. Audit Office of NSW (1993). Performance Audit: Auditor-General’s Report to Parliament. 15 Volume 1 Sydney: Audit Office of NSW. Audit Office of NSW (2005). Fraud Control: Current Progress and Future Directions. Sydney: Audit Office of NSW, February. Audit Office of NSW (2012). 2012 Fraud Survey Volume 7 Sydney: NSW AuditorGeneral’s Report to Parliament. Audit Office of NSW (2015). Fraud Control Improvement Kit. Sydney: Audit Office of NSW. ICAC (1996). Practical Guide to Corruption Prevention. Sydney: ICAC.

j k

http://www.audit.nsw.gov.au/publications/latest-reports/volume-five-2016-report-dfsi-and-insurance http://www.audit.nsw.gov.au/publications/latest-reports/special-report-fraud-survey

Money laundering activities in Australia—an examination of the push and pull factors driving money flows

9

Christopher Bajada University of Technology Sydney, Ultimo, NSW, Australia

9.1

Introduction

Money laundering is the process by which the proceeds of crime, including earnings from the cash economy, are given the appearance of being earned through legitimate means by having them pass through a series of financial transactions that distance them from their source of origin. These criminal activities can range from those more commonly reported by the media such as bribery, fraud, drug trafficking, and prostitution, to the more sophisticated and complex including illegal arms sales, embezzlement, senior government and terrorism-related activities. This general definition of money laundering has its origins from the Vienna Convention (Article 3b) of 1988, which states that money laundering is [t]he conversion or transfer of property, knowing that such property is derived from any offence or offences or from an act of participation in such offence or offences, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in the commission of such an offence or offences to evade the legal consequences of his actions. Source UN, 1988.

At this convention, the predicate offense included only drug trafficking but money laundering has many sources of funds. The adoption of this definition has since taken on the broader context of criminal activities such that it now encapsulates all other forms of crimes, from the commonly known to the more complex crimes alluded to earlier. Predicate offenses in the Australian context include drug trafficking, white-collar crimes, blue-collar crimes, bribery, corruption, and terrorism (CMC, 2005). In response to growing international criminal syndicates and evidence of money laundering through the global financial system, the G7 countries in 1989 met and constituted the Financial Action Task Force (FATF), which since then has grown to include a total of 35 member jurisdictions. The primary objective of the FATF is to The Changing Face of Corruption in the Asia Pacific. DOI: http://dx.doi.org/10.1016/B978-0-08-101109-6.00009-5 Copyright © 2017 Christopher Bajada. Published by Elsevier Ltd. All rights reserved.

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develop standards that its member countries will implement and adhere to in order to curb the incidence of money laundering activities. These developments (in the form of recommendations) require member countries to introduce laws and legislations to ensure ongoing compliance, which in many cases requires the political will to undertake the necessary reforms. Countries with lax banking requirements, heightened levels of corporate corruption, fraud, and crime, particularly drug trafficking, require a more concerted effort on the part of governments to bring about the necessary changes (socially and culturally) to uphold the recommendations and contribute to tackling crime at the local level. Money laundering has significant socioeconomic consequences that make it imperative to confront. The consequences of significant money laundering include the prospect of cultivating continual growth in criminal activities, generating inherent risks to the stability of the financial system, particularly in less developed economies, and distorting the quality of economic data used in public policy and commercial decision-making. Very briefly, these socioeconomic consequences can be grouped as follows:  Impact on key economic variables: If money laundering occurs on a sufficiently large scale, it may impact on the demand for cash and result in significant pressures on interest rates, exchange rates, and the rate of inflation (see Bartlett, 2002; McDowell, 2001; CMC, 2005; Tanzi, 1997). Significant money laundering also poses a risk on the stability and solvency of the financial sector, particularly in less developed economies with less sophisticated financial systems (McCarth et al., 2013; Aninat et. al., 2002; Camdessus, 1998).  Lessening competition and tax revenue: Significant money laundering activities may place undue competitive pressures on legitimate businesses when money launderers use their proceeds of crime to drive activity in their businesses to safely hide these legitimate earnings. A legitimate business may therefore find it impossible to compete and remain in business (McDowell, 2001; Mackrell, 1996). The direct consequences of this are the potential for declining tax revenues (Alldridge, 2002; Quirk, 1997), and risks to economic growth (Ferwerda and Bosma, 2005; CMC, 2005) and employment growth (Boorman and Ingves, 2001; Bartlett, 2002).  Increases in policing costs: Money laundering activities that lead to increases in the incidence of crime add significantly to society’s costs when attempting to rein them in. These include increases in policing costs, increases in the costs of national and border security measures, and additional costs for the courts and other law enforcement agencies in accommodating additional prosecutions (Bartlett, 2002; Levi, 2002; Tanzi, 1997; Keh, 1996). There is also a risk that some legitimate businesses may fall victim to corrupt behavior, particularly if doing so ensures their long-run survival (FATF, 2002; Levi; 2002; Quirk, 1997).  Distortions in economic data: Just as the cash economy has been shown to distort the measure of economic activity (see Bajada and Schneider, 2005), money laundering activities produce similar distortionary effects on the levels of consumption (Mackrell, 1996; and Walker, 1995) and investment data (Aninat et. al., 2002; Mackrell, 1996; McDonell, 1998), and therefore distortions on the overall measure of national domestic output (GDP).  Supporting acts of terrorism: Significant money laundering activities increase the pool of funds that may be available to support terrorist activities both at a local and an international level (Masciandaro, 2004; Krieger and Meierrieks, 2013; Dawe, 2013). The case in point here is the ongoing financial support given to the terrorists who plotted the events in the United States on September 11, 2001.

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It is estimated that global money laundering amounts to somewhere between US $800 billion and $2 trillion (UNODC, 2016), although these estimates do vary—for example, Baker (2005) finds that the size of global money laundering is between US$1 and 1.6 trillion (estimates that have been adopted by the World Bank). For the OECD, Buehn and Schneider (2013) estimate the size of money laundering to be US$603 billion during 2006, while for Australia it has been estimated to be approximately AUD$4.5 billion (Walker 2004). With recent profile cases on money laundering (see, e.g., Whittell (2016) on the release of the Panama papers), those Australian organizations charged with the responsibility of reporting suspicious transactions have increased their vigilance, particularly over the last four years, although it should also be noted that the volume of financial transactions has also increased during this time. Suspicious matter reporting (SMR) between 201213 and 201314 increased by approximately 14% (AUSTRAC 2014a), and over the period 201314 to 201415, by 21% (AUSTRAC 2015). Despite these concerted efforts to report suspicious transactions, AUSTRAC still regards financial crime to be on the rise (See, Wilkins, 2016). This increase in financial crimes is also supported by a recent global economic survey conducted by accounting firm PricewaterhouseCoopers (PWC, 2016). The estimates on money laundering vary depending on the methodology used. The literature presents various methods that have been applied to estimate the size of global money laundering activities, and they include (1) the use of case studies (see Nordstrom, 2004); (2) interviews (see Walker, 1995); (3) using estimates of currency demand (see Tanzi, 1996); (4) using a latent variable estimation approach (see Schneider, 2008); (5) use of the gravity model (see Walker, 1995; Unger et al., 2006; Walker and Unger, 2009); (6) analysis of financial data, focusing on suspicious transactions (Levi and Gold, 1994); and (7) use of dynamic economic models (Bagella and Argentiero, 2013). Although the methodologies used to estimate the size of money laundering have broad coverage, the literature falls short of providing an economic analysis of the country-specific ‘push factors’ (acting as deterrents to money laundering activities) and ‘pull factors’ (acting as draw cards for money launderers). Examples of ‘pull factors’ include high rates of crime and corruption and bank secrecy provisions, while examples of ‘push factors’ include anti-money laundering legislation, effective police services, and information-gathering powers by the relevant authorities. Figure 9.1 provides an illustration of how the net effect of the quantum and effectiveness of the pull and push factors in any one country may have a collective impact on the extent of money laundering activities. In Figure 9.1 the push factors dominate, suggesting a likely decline in money laundering activities. Changes in regulation and legislation will impact on the scale and potency of these push and pull factors and therefore on the extent of money laundering. A desirable outcome is one where a country has more potent push factors than it has pull factors. Figure 9.1 illustrates such a scenario, suggesting that the balance of probability is one where the risks of money laundering in this country are mitigated by the dominance of the push factors.

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Figure 9.1 The net effects of the various national push and pull factors on money laundering activities.

On the other hand, when the pull factors dominate the push factors, the risks associated with a greater volume of laundered money increase. The literature however has not examined how legislative and regulatory reforms alter the risks of money laundering activities by altering the distribution of these push and pull factors. The evaluation of regulatory and legislative changes is typically undertaken by examining trends in money laundering activities and determining whether they have improved or worsened since their introduction. This approach has its own problems given that estimates of money laundering vary so widely. In this analysis we do not depend on estimates of money laundering activities but instead on the relative intensities of the push and pull factors. The caveat here is that there are potentially more variables (push and pull) that can be included in this analysis but their availability requires additional survey data that are not immediately available. In this regard, the estimates presented in this chapter, although likely to be reasonably reliable, should be treated as preliminary. In this analysis we use data from the Global Competitiveness Report (201415) on 144 countries in order to gauge the intensities of the push and pull factors in each country (see Appendix A for the list of countries). The results of this analysis are then used to examine the extent to which changes to Australia’s push and pull factors (impacted by changes in the regulatory and legislative environment) affect the likelihood of increasing or decreasing the level of money laundering activities. The remainder of this chapter is organized as follows. Our discussion begins with a review of the stages and typology of money laundering activities and how these specifically relate to the various push and pull factors that determine the magnitude of illegal financial flows into and out of a country. Next, we look at the various push and pull factors and describe the methodology employed to examine the risks of money laundering flows into and out of Australia. Finally, we consider how changes to the potencies of Australia’s push and pull factors impact on the risks of money laundering flows. We end the chapter with our conclusion.

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131

A typology of money laundering

To improve our understanding of the dynamics influencing the financial flows of the proceeds of crime within and across national boundaries, it is important to draw the connections between the stages and typology of money laundering with the various pull and push factors that attract and hinder (respectively) the illicit flow of money into the financial system. The volume of illicit money that may be laundered in any one country is the consequence of the net effect of these push and pull factors, which themselves are predisposed to a country’s legal and regulatory policies (or lack thereof). The more effective these policies are in stemming criminal activity, the less likely are the risks for money laundering  that is, the weaker the pull factors and the stronger the push factors, less money will be laundered in a given country. The extent of illegal money flows into and out of a country is determined by whichever effect (push or pull) dominates. If the pull factors dominate, the likelihood of money laundering is high, whereas if push factors dominate, they greatly reduce the risk of illicit money being placed into the local financial system. In this section we will examine the three broad stages of money laundering, including the various techniques used by money launderers to ‘wash’ the proceeds of crime and how they relate to these push and pull factors. A typical money laundering scheme will generally involve three stages for legitimizing illicit money, namely, placement of the illegal proceeds of crime into the financial system, layering the proceeds to distance them from their source of origin, and integrating them with legitimate funds to make them impossible to detect.

9.2.1 Stages of money laundering 1. Placement—This first stage of legitimizing the proceeds of crime involves the consignment of illicit funds into the financial system. Typically, this illicit money is in the form of cash and so placing this money into the financial system makes it easier for these funds to be moved around  an important requirement if it is eventually to be distanced from its source of origin. The financial system makes it relatively easy for these proceeds of crime to be channeled abroad, particularly if the goods manufactured (e.g., drugs) have originated overseas. The ease by which this money can be moved into the financial system acts as a draw card for criminal syndicates as they search for relatively easy ways of legitimizing their illegal earnings. The ease by which cash can be placed into the financial system ensures the country’s financial system acts as a “pull” factor drawing in money launderers and their illegal proceeds of crime. 2. Layering—Once the proceeds of crime have made their way into the financial system, the layering process involves the movement of these funds through various financial channels to ensure that these proceeds of crime are distanced from their source of origin. This process may either simply involve money transfers between bank accounts under different names or more complex financial transactions through a system of trusts and off-shore shell companies. Money placed into trust accounts, parked into various corporations, and channeled through a series of complex financial transactions are typical of this layering stage and can prove effective in distancing the money from the money launderers and criminal syndicates. The level of sophistication of the financial system provides additional opportunities to disguise these funds through the myriad of financial instruments and

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accounts and in so doing acts as a draw card (or ‘“pull” factor) for illegal proceeds of crime into the country. 3. Integration—This final stage of laundering money involves the process of legitimizing the money by mixing it with legitimate funds. At this point the money has completely distanced itself from the crime that generated it. Also, the funds become available to the criminals and are used to purchase assets in the same way any ordinary citizen may purchase financial and nonfinancial assets. The laundered money is ultimately made ‘clean’ in this final stage and will give the appearance that the money used has been generated though legitimate activities. The effectiveness of authorities to identify, seize, and prosecute those who appear to have generated wealth well beyond their means is the last resort for authorities to curb the growth in money laundering and their effectiveness would constitute a “push” factor in so far as it hinders opportunities for money laundering.

In Figure 9.2, we illustrate these three stages of money laundering and the associated push and pull factors at each stage of the money laundering process. These push and pull factors will differ at each stage of the money laundering process, highlighting the need for legislation and regulation to target these factors at each and every stage of the money laundering cycle. The effect (push or pull) that dominates each stage of the money laundering cycle will determine whether the money launderers are successful or not. For example, if the push factors dominate the pull factors at the placement stage, it is quite likely that a smaller amount of the proceeds of crime will make its way into the financial system. This in turn will have an effect on the layering and integration stages, ensuring that the quantum of money laundered is significantly reduced. On the other hand, if the pull factors significantly dominate the push factors at the placement stage, the opposite will be true  more illicit money will enter the financial system and the extent of money laundered in that country will be substantially higher.

9.2.2 Typologies Money launderers have employed a range of techniques to place, layer, and integrate the proceeds of illegal activities into the financial system. The list below provides a summary of the means by which laundered money is legitimized. Wire transfers/telegraphic transfers/international money transfers (see FATF, 2004). These electronic means of transferring funds are common avenues (if not essential) for money launderers attempting to place their proceeds of crime through the financial system. Threshold reporting requirements for transactions of $10,000 or more (or foreign currency equivalent) are in place in Australia. Service providers are required to submit a threshold transaction report to AUSTRAC within 10 business days of an electronic transfer. The reporting requirement states that both the details of the customer and the recipient of the funds have to be disclosed. This provides authorities the capacity to establish criminal links and networks to uncover and circumvent (often with foreign authorities) the underlying criminal activities. 1. Account and deposit-taking services (see AUSTRAC, 2014)—Use of smurfing. This is a process of engaging a large number of agents (smurfs) whose task it is to deposit small amounts of the proceeds of crime into bank accounts to avoid detection. These deposits may take place over a long period of time and across multiple bank accounts, although

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PLACEMENT

133

LAYERING

INTEGRATION

METHODS

METHODS

METHODS

• Cash smuggling • Bank deposits • Alternative remittance schemes (e.g. Hawala) • Purchase of insurance policies • Purchase foreign currency • Deposit into cash intensive businesses • Use of gambling activities

• Wire transfers • Loans and letters of credit • Use of complex financial transactions • Cash withdrawals and deposits in other bank accounts • Fraudulent insurance claims • Use of trusts and shell companies • Off-shore banks and investment houses

• Purchase of gold, jewelry and other assets • Over invoicing (trade based placement) • Reporting higher cash sales and revenue for tax purposes • Corporate financing of legitimate businesses by fraudulent offshore companies

PULL FACTORS

PULL FACTORS

PULL FACTORS

• Significant levels corruption and bribery • High incidence of drug trafficking • Unregulated casinos • Poor security screening at ports.

• Lax auditing by banks for suspected money laundering • Bank secrecy provisions • Poor ethical behaviour of firms

• Lax tax office audit activities • Limited national regulations and inspections • Weak forfeiture laws and ability to seize property

PUSH FACTORS

PUSH FACTORS

PUSH FACTORS

• Cash deposit reporting requirements • Stringent customer identification processes • Effectiveness of police services

• Suspicious transaction reporting requirements • Register of remittance service providers • Record keeping requirements

• Information gathering powers • Stringent auditing requirement (tax office, corporations) • Data integration and third party information sharing

Figure 9.2 Stages of money Laundering and associated push and pull factors. this is not necessarily always the case. In such instances, however, there is a heightened risk of detection. Luo Juncheng, a Chinese resident, opened a bank account in Hong Kong in 2009. Over a period of 8 months he made over 5000 deposits and 3500 withdrawals, moving a total of US$1.7 billion.a 2. Remittance services (see AUSTRAC, 2014). Remittances are simply transfer of funds, typically by electronic means to persons abroad. Those businesses that offer money remittance services vary from country to country and include banks, credit unions, currency a

See http://www.reuters.com/article/us-hongkong-laundering-idUSBRE9360CH20130407 accessed 25 June 2016.

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exchanges, financial houses, travel agencies, hotels, newsagents, and post offices. The World Bank estimates that worldwide annual money remittances for 2014 are approximately $US420 billion. In Australia, money remittance providers are required to be registered with AUSTRAC and must submit details of the international money transfer instructions under the legislated remittance agreement. Remitting money without registration is an offense under the Australian Anti-Money Laundering and Counter-Terrorism Financing Act (2006). There are money remittance service providers that operate informally. Hawalas are an example of such informal remittance service providers. These services typically operate without the need for bank accounts and can quite easily go undetected. Such remittances can harbor significant proceeds of crime from money launderers. An Australian resident wanting to send money back home to his family in the Philippines can make use of these informal remittance services. To transfer this money, the Australian resident locates a Filipino store providing remittance services and for a commission can send money to his/her family. The Australian provider organizes their Filipino contact to pay the amount sent by the Australian resident (less commission) and a credit is recorded against the Filipino remittance provider. The Australian remittance provider now owes the Filipino remittance provider an amount equal to the money transferred overseas (less the commission). When the Filipino provider requires the services of the Australian remittance provider, the original settlement amount is reduced accordingly. Regulating these services and requiring them to report suspicious transactions weaken the “pull” factor emanating from these services. 3. Nonprofit organizations. Nonprofit organizations pose a creditable risk for elevated money laundering activities and in particular the financing of terrorism activities (see FATF, 2004, AIC 2011). Proceeds of crime can make their way to nonprofit organizations in the form of donations for charitable causes. The services provided by these nonprofit organizations can also facilitate the actual transfer of illicit money abroad in the form of foreign aid or through foreign operations undertaken by the nonprofit organization. 4. Insurance companies. Insurance companies pose a particular risk for money laundering activities (see FATF, 2004, AIC 2011, FATF, 2014). The nature of the business, its range of insurance products, and its business structure (e.g., its use of brokers) may provide opportunities for money launderers to seek insurance companies to place their criminal proceeds. By purchasing insurance on bogus assets, money launderers are able to make fraudulent claims in order to legitimize their criminal proceeds that were used to purchase the insurance policy. In order to distance the money launderer from the origin of the funds, a third party may hold the insurance policy and make the fraudulent claim. Legislation requiring reporting of suspicious claims limits this avenue for money launderers (i.e., the pull factor in the insurance industry). 5. Third-party cash couriers. Cash couriers are typically recruited by the criminal syndicate to handle cash and deposit the funds into nominated bank accounts, often first through a series of alternative bank accounts to make it more difficult for authorities to track its origin. The cash courier may be given the impression that they are employed by the criminal syndicate through a bogus company appearing to be operating legitimately (see AUSTRAC, 2014). One such example is where money launderers attempted to recruit smurfs through offers of ‘legitimate’ employment, in this case using a government employment website (Job Active) to recruit. Those who accept employment in these bogus schemes are asked to transfer money deposited into their account to other accounts.b b

See http://www.abc.net.au/news/2016-06-20/employment-website-exposes-job-seekers-to-money-laundering-scam/7525616 accessed 25 June 2016.

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6. Casinos, gambling, and e-gaming (see AUSTRAC, 2013). Money launderers take the proceeds of crime to an obliging casino agent who will convert cash into casino chips (quite likely they and the casino will receive a cut from the takings). These chips are ultimately cashed and disguised as winnings. Macau, the casino capital, has an international reputation of harboring money launderers. More recently, the Chinese government has been taking steps to crack down on corruption in Macau. With revenues from online gaming (e-gaming) significantly increasing over the last few years, the risks of money laundering through this channel of gambling activities have also increased (Levi, 2013). 7. Other methods. There are several other methods used by money launderers to place their money into the financial system. These include (i) the use of over- and under-invoicing in the context of international trade transactions (see Zdanowicz, 2013; AUSTRAC, 2013); (ii) the use of digital currencies such as Bitcoin (see AUSTRAC, 2012); (iii) the use of voucher systems (AUSTRAC, 2012); (iv) currency exchange and loan services (AUSTRAC, 2010); (v) the purchase of financial assets on security and investment markets (Biggins, 2013; AUSTRAC 2010); (vi) the use of traveler’s checks (AUSTRAC 2010) and stored values cards (AUSTRAC, 2008); (vii) the use of shell corporations; and (viii) fraudulent activities through the Professional Services sector, which includes lawyers, accountants, financial advisors, and real-estate agents (see Ferwerda and Unger, 2013; AUSTRAC, 2008).

Any unregulated typologies act as a strong pull factor for money laundering activities. Although legislation may be introduced to minimize the risk of money laundering through these various avenues, thereby diminishing the potency of the pull factors, the risks of money laundering may still exist if loopholes or other opportunities not covered by the legislation make it possible for money launderers to legitimize their proceeds of crime. Later in this chapter we will return to this point when we examine the impact of legislative and regulatory requirement on the potency of the push and pull factors and therefore on the extent of money laundering activities, specifically for Australia.

9.3

Calibrating the effects of the push and pull factors on money laundering activities

How do these push and pull factors, present in varying degrees across different countries, influence the risk of money laundering activities? In Figure 9.2 we identified a series of push and pull factors associated with each of the three stages of money laundering. In this section we attempt to calibrate the net effect from changes in policy affecting these push and pull factors on the likelihood of change in money laundering activities. In particular, we will examine the effects of specific factors on the likelihood of money laundering in Australia when these factors become more potent (either positively for push factors and negatively for pull factors). We commence our analysis by describing the variables used in this modeling exercise. We begin by defining the independent variables used in the estimation and then outline the construction of the dependent variable that approximates the

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relative intensities of determine the extent selected independent laundering legislation

9.4

the pull and push factors. We use an ordered logit model to of changes to money laundering activities from changes in variables that are influenced by the change to anti-money and other related laws and regulations.

Methodology

9.4.1 Dependent variables Table 9.1 lists the independent variables used in the estimation. The data for these variables are sourced from the Global Competitiveness Report (201415) (see GCR, 2015, for definitions of these variables). With the exception of the variables ‘Total tax rate’ and ‘GDP per capita,’ each of the variables is measured on a Likert scale from 1 to 7, where 7 is a measure of the best outcome. The general hypothesis is that the independent Likert scale variables that are close to or are equal to 7 will help stem the growth and level of money laundering activities, while the closer they are to one the more likely they are to pull money laundering activities into that country. The only exception here is the measure of financial market development, where it is expected that a sophisticated financial system (Likert scale closer to 7) will provide money launderers a greater opportunity to channel funds into various financial instruments as they distance the money from its illegal source. GDP per capita provides a proxy for the relative size of the market (across countries) and the total tax rate as a percentage of profits provides an indicator of the tax burden on Table 9.1

Independent variables

Independent variable G

G

G

G

G

G

G

G

G

Irregular payments and bribes, 1-7 (best) (Irreg) - Defined as a PULL factor when value is , 3.5; otherwise defined as PUSH factor. Organized crime, 1-7 (best) (Orgcrime) - Defined as a PULL factor when value is , 3.5; otherwise defined as PUSH factor. Reliability of police services, 1-7 (best) (Police) - Defined as a PULL factor when value is , 3.5; otherwise defined as PUSH factor. Ethical behavior of firms, 1-7 (best) (Ethics) - Defined as a PULL factor when value is , 3.5; otherwise defined as PUSH factor. Strength of auditing and reporting standards, 1-7 (best) (Auditing) - Defined as a PULL factor when value is , 3.5; otherwise defined as PUSH factor. Total tax rate, % profits (Taxrate)  variable transformed using natural logarithm; Financial market development 1-7 (best) (Findev) - Defined as a PULL factor when value is . 3.5; otherwise defined as PUSH factor. Burden of government regulation, 1-7 (best) (Regulation) - Defined as a PULL factor when value is . 3.5; otherwise defined as PUSH factor. GDP per capita (US$) (GDPPC)  variable transformed using natural logarithm.

Source: (2014-15) Global Competitiveness Report.

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business profits. The tax burden has two opposing effects, namely that (i) a higher tax burden acts as a deterrent to would-be money launderers who want to extract as much ‘legitimate money’ as possible from the proceeds of their crimes, and (ii) a higher tax burden helps drive out competing businesses from the market, leaving the money launderers with the appearance of a more credible business operation into which to channel their proceeds of crime. Therefore, the net effect of the tax burden on the extent of money laundering becomes a statistical question. In Table 9.1 we also define each independent variable as a pull factor according to its Likert score. For example, when the Likert score for irregular payments and bribes (Irreg) is less than 3.5 (i.e., there are more frequent observations of these activities occurring in a country), these activities are likely to shelter the activities of money launderers, making their legitimization of illegal funds much more easier. In this case, this variable for the given country acts as a pull factor. If however the Likert value is great than 3.5, the variable for the same country acts as a push factor. The same can be said for the other independent variables: Orgcrime, Police, Ethics, and Auditing, where a Likert value less than 3.5 defines the variable as a pull factor. For the variables Findev and Regulation, we define a pull factor to be present when the Likert value is greater than 3.5. That is, the more sophisticated the financial system (i.e, a Likert value closer to 7), the more opportunities money launderers have to disguise their funds (as discussed earlier), while a less regulated economic environment (as measured by Regulation) makes it easier for money launderers to go undetected.

9.4.2 Dependent Variable Construction As we noted earlier, our approach to estimating the influence of pull and push factors on money laundering activities is not dependent on dollar estimates of money laundering. Therefore, the objective function to understand these influences requires a different dependent variable. The dependent variable used in this study was constructed using a two-step process as follows. Step 1: For each of the 144 countries in the sample, a count of the number of push and pull factors of the Likert scale variables listed in Table 9.1 included three other Likert scale variables: ‘domestic market size’ to substitute for GDP per capita; ‘property rights’ for defining the legal status of assets in each country; and ‘ethics and corruption’ as a complement to the variable ‘irregular payments and bribes.’ Therefore, a total of 10 Likert scale variables were used in the construction of the dependent variable. To provide a measure of the relative number of pull to push factors, we first estimated the following ratio: Dependent variable ðstep 1Þ 5

PULL ðPULL 1 PUSHÞ

(9.1)

Step 2: Given the results in step 1, an ordinal variable was constructed in order to differentiate between those countries with relatively few push factors targeting money laundering activities to those with many more. Since the ratio of values in equation (9.1)

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lie between 0 and 1, increments of 0.1 were used to determine the ordinal values. These were constructed as follows: 8 1; if 0 , Y # 0:1 > > < 1; if 0 , Y # 0:1  Y 5 (9.2) ? > > : 10; if 0:9 , Y # 1 where Y is the dependent variable used in the modeling exercise. The ordinal values for Y ranged between 1 and 7 (or 0.1 and 0.7) as there were no countries that had fewer than three push factors.

9.4.3 Ordered logit model estimation How does a country’s pull factors influence change with changes in organized crime? This needs to be considered at the various levels and potencies of push and pull factors  that is, does a country have more push than pull factors or vice versa? If it has more push factors, are they effective enough to significantly discourage money laundering activities? The approach we use to model the effects of changes on the variables influencing money laundering activities (as in Table 9.1) through anti-money laundering and other legal means is by an ordered logit model estimation. The advantage of using an ordered logit model is that it allows us to take into account the ordinality in the data and to make predictions on the likelihood (or probability) of changes to money laundering activities when policy influences the Likert scale value of particular independent variables. Y  , as defined by (9.2), is the dependent variable used in the ordered logit model. It has a total of q (for q 5 1,2,..,7) categories. PrðY  # qÞ is defined as the probability that Y  lies between category q or the one below. It equals the sum of the probabilities in category q and below: PrðY  # qÞ 5 prðY  # 1Þ 1 prðY  # 2Þ 1 prðY  # 3Þ 1 . . . 1 prðY  # 7Þ

(9.3)

Therefore, the probability of being in the jth response category is: PrðCj21 , b1 X1;q 1 b2 X2;q 1 b3 X3;q 1 . . . 1 b7 X7;q 1 u # Cj Þ

(9.4)

where Cj are the cut points. The probability that a given country will fall into a particular grouping (from low pull factor to high pull factor scores) can therefore be modeled using an ordered logit model as follows: 0

0

Piq 5 PðY  5 qÞ 5 Fðαq 2 χi βÞ 2 Fðαq-1 2 χi βÞ where Piq 5 the probability for country i to fall in grouping q; αq 5 the threshold at q (q 5 1. . .7); and F is the logistic cumulative density function (cdf)

(9.5)

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Table 9.2

139

Results from the ordered logit model estimation

Orgcrime Irreg Police Auditing Findev Loggdppc Logtaxrate Regulation Ethics

Coef.

Std. Err.

z

P.z

-0.929 -1.106 -0.920 -1.001 1.555 0.464 0.803 1.119 0.795

0.278 0.528 0.369 0.492 0.525 0.196 0.407 0.385 0.562

-3.34 -2.1 -2.49 -2.04 2.96 2.37 1.97 2.9 1.41

0.001 0.036 0.013 0.042 0.003 0.018 0.048 0.004 0.157

Notes: Number of obs 5 143; LR chi2(9) 5 97.37 and Prob . chi2 5 0.0000; Pseudo R2 5 0.2223. Brant test: Prob . chi2 0.388. Sample size 5 144.

9.5

Results

Table 9.2 presents the results from the estimated ordered logit model. The estimated model (see notes to table) suggests an overall good fit and that the proportional odds assumption holds (see table note on Brant test). Given that the interpretation of the coefficients from the ordered logit model is not so straightforward, we are only able to interpret the sign and significance of the coefficients as they are presented in Table 9.2. Nevertheless, the results in Table 9.2 suggest that the variables are each significant (except the variable ethics) at the 5% level and have the correct sign. Keeping in mind that an increase in the Likert value implies an improvement in the level of the variable, the signs of the coefficients are as expected. For example, a worsening of organized crime (a decrease in the Likert value for Orgcrime) would result in an increase in the risk of money laundering. For the dependent variable, this implies an increase in the potency of the overall pull factors relative to the push factors (i.e, an increase in the ordinal size of the dependent variable). Therefore, the increase in crime and an increase in the strength of the pull factors imply a negative coefficient on the Orgcrime variable. The same is true for the variables Irreg, Police, and Auditing. Findev and Regulation are found to have a positive coefficient, consistent with the explanations provided earlier. Given that the coefficients in the ordered logit model contain limited practical meaning, we follow Greene (2008) and calculate the marginal effect of the control variables on the probability that a country falls into one of the seven categories. Specifically, the marginal effect of an increase in χγ on the probability of falling into group q is as follows: @Piq [email protected]χri fF 0 ðαq-1 2 χ0i βÞ-Fðαq 2 χ0i βÞgβr

(9.6)

Estimates of the marginal effects from the ordered logit model are presented in Table 9.3. The results in Table 9.3 are presented for two specific scenarios  the first when Y 5 2, where the number of push factors dominate the pull factors, and

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Table 9.3 Marginal effects on tendency for money to leave (push) and be drawn in (pull) Variable

Y 5 2

Y 5 6

dy/dx (z) (sig) Orgcrime Irreg Police Auditing Findev Loggdppc Logtaxrate Regulation Ethics

a

0.020 (2.24) 0.023 (1.75) c 0.020 (1.86) c 0.021 (1.69) c -0.033 (-2.12) a -0.010 (-1.88) c -0.017 (-1.65) c -0.024(-2.11) a -0.017 (-1.28)

dy/dx (z) (sig) -0.044 (-2.57) b -0.053 (-1.88) c -0.044 (-2.16) a -0.048 (-1.86) c 0.074 (2.44) a 0.022 (2.06) a 0.038 (1.79) c 0.053 (2.35) a 0.038 (1.34)

Notes: b 1% sig-level a 5% sig-level c 10% sig-level

the second when Y 5 6, where the quantum of pull factors dominate the push factors. We have chosen Y 5 2 and Y 5 6 so as to be close but not at the end points of the distribution where the sample size of these events falls. In the interpretation of the results that follow, we consider these two scenarios in sequence. We begin with the results in the second column of Table 9.3, where the push factors dominate (i.e. Y 5 2).

9.5.1 When push factors dominate Each Likert point increase in the variable Orgcrime (i.e., a decline in the overall levels of organized crime) increases the chance of illegal money leaving (or external money entering) the country by two percentage points. This effect is small (ceteris paribus) because the dominance of push factors has ensured that the risks of money laundering in the country are low. Similarly, each Likert point increase in the variable Irreg (i.e., a decline in the overall level of irregular payments and bribes) increases, ceteris paribus, the chance of illegal money leaving (or external money entering) the country by 2.3 percentage points. For the variables Findev and Regulation, a similar magnitude of change is found, but in this case, in the opposite direction. For example, each Likert point increase in Regulation (i.e., governments becoming less burdensome) decreases the chance of illegal money leaving the country by 2.4 percentage points, while for the variable Findev, the estimated probability is 3.3 percentage points. Next, we first consider the results in the final column of Table 9.3, where the pull factors dominate (i.e., Y 5 6).

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9.5.2 When pull factors dominate When the pull factors dominate, each Likert point increase in organized crime (i.e., a decline in overall levels of organized crime) decreases the chance of illegal money entering (or staying within) the country by 4.4 percentage points. Compared to our previous results for the same one unit increase in the Likert value for Orgcrime, the magnitude of the change has more than doubled. This magnitude difference  that is, a higher probability of illegal money entering (or staying within) the country when Y 5 6 compared to Y 5 2  is expected and is the result of higher levels of crime associated with Y 5 6. The impact on money laundering activities when reducing crime rates from a high level is naturally expected to be larger when compared to reducing crime rate when crime rates are at very low levels. This finding is reassuring and is confirmed through changes in the Likert scale value of the other independent variables. An increase in the Likert point for the variable Bribes (i.e., decline in the overall level of irregular payments and bribes) decreases the chance of illegal money entering the country by 5.3 percentage points, again more than double than when Y 5 2. A similar one unit increase in the Likert value for the variable Regulation (i.e., governments becoming less burdensome) increases the chance of illegal money entering the country by 5.3 percentage points, while for Findev, it increases the chance of illegal money entering the country by 7.4 percentage points. The caveat on these results is that they have been estimated holding all other variables constant, so it is quite likely that the magnitude of these numbers may vary when simultaneous changes in the independent variable occur as a result of multiple legislative and legal statues changing in response to growing threats of crime and money laundering activities. In Figures 9.3 and 9.4, we illustrate the marginal effects of changes to selected variables  specifically organized crime, reliability of police service, irregular payments and bribes, and auditing  resulting from changes in legislation (which we don’t enumerate here). The focus here is on illegal money in Australia. For each of these selected variables, a higher Likert score when Australia’s push factors dominate (or Y 5 2) increases the probability of money leaving Australia (see Figures 9.3), while the same increase in the Likert score when the pull factors dominate (or Y 5 6) reduces the probability of illegal money entering Australia (see Figure 9.4). In Figures 9.3, we illustrate the marginal effects on the probability that Australia has more push factors at different levels of organized crime, irregular payments and bribes, reliability of police services, and auditing requirements, holding all other variables constant at their 201415 levels. We can see that reductions in the level of organized crime when more push factors are present on the Australian scene increases the probability of illegal money leaving the country (i.e, being pushed out). When crime rates are high (Likert values closer to 1), the probability of money being pushed out is quite low, but as crime rates reduce (Likert values for Orgcrime increases), the probability is that push factors dominate and drive out money laundering activities. A similar story can be told for improvements in irregular payments and bribes, reliability of police services, and auditing requirements.

The Changing Face of Corruption in the Asia Pacific

AUS

.4

.3

142

0

0

.1

.1

Pr(dep=2) .2

Pr(dep=2) .2

.3

AUS

0

2

4 organized crime

6

2

4

6

8

Irregular payments and bribes AUS

0

0

.05

.1

Pr(dep=2) .1 .15

Pr(dep=2) .2

.2

.3

AUS

.25

0

8

0

2

4

6

8

0

Reliability of police service

2

4

6

8

auditing

Figure 9.3 Scenarios when less pull factors are present.

In Figure 9.4 we illustrate the marginal effects on the probability that Australia has more pull factors at different levels of organized crime, irregular payments and bribes, reliability of police services, and auditing requirements, holding all other variables constant at their 201415 levels. Under this scenario, we see that reductions in the level of organized crime when more pull factors are present reduce the probability of illegal money entering the country. That is, when crime rates are high (Likert values closer to 1) the probability of money being pulled in is quite high, but as crime rates reduce (Likert values for Orgcrime increases), the probability that the pull factors draw in illicit money reduces. A similar result is found for improvements to irregular payments and bribes, reliability of police services, and auditing requirements. In both Figures 9.3 and 9.4 we illustrate the Likert value for each of the four independent variables for Australia. The two figures provide two scenarios (Y 5 2 and Y 5 6) on the relative strengths of the push and pull factors. If we assume that the push factors dominate in the Australian context as represented in Figures 9.3, a policy to reduce the current levels of crime will have a significant increase in the probability of illegal money leaving the country (i.e, being pushed out of Australia)  the likelihood increasing from 14% to 28% if the Likert value increases from its current value to 7. Although the values differ slightly for the three other independent variables, the conclusion that improvement in these variables increases the probability of illicit money being pushed out is consistent with the conclusion for organized crime.

143

.5

.4

Money laundering activities in Australia

pr(dep=6) .2 .3

.3 .2

0

0

.1

.1

pr(dep=6)

AUS

.4

AUS

2

4 organized crime

.4

0

6

8

8

AUS

pr(dep=6) .2 .3

.3 .2

0

0

.1

.1

pr(dep=6)

2 4 6 Irregular payments and bribes

.4

AUS

0

0

2

4

6

8

0

reliability of police service

2

4

6

8

auditing

Figure 9.4 Scenarios when more pull factors are present.

When we consider an alternative situation where the pull factors dominate, as represented by Figure 9.4, a policy to reduce the current levels of crime, which for Australia are already relatively low compared to the rest of the world, will have a negligible effect on the probability of illegal money entering the country. The reason for this is that if the scenario is such that the pull factors dominate even when the level of crime is low, reducing crime further is unlikely to alter the extent of money laundering. Tackling money laundering in this situation requires addressing the other causes contributing to the overwhelming number of pull factors. However, our preliminary data for Australia suggest that the push factors dominate, such that Figures 9.3 much better represents the scenario for Australia than does Figure 9.4.

9.6

Conclusion

The objective of this chapter has been to introduce the concepts of push and pull factors to the money laundering literature in order to demonstrate that money laundering flows are affected by each country’s relative balance of these factors. These factors in turn are affected by their respective drivers and the laws that impact directly on them. Although our results do not quantify the extent by which changes to antimoney laundering legislation impact on the levels of crime, irregular payments, and

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bribes, they do highlight that improvement to legislation that impacts on the drivers of money laundering can significantly reduce illegal money flows into and out of the country. Australia, as a member of FATF, has instituted a number of laws and regulations to tackle money laundering activities. Such changes increase the number and potency of the push factors required to deter these activities. The magnitude of change on money laundering activities from a one unit change in the Likert value of several drivers may also suggest that the benefits from reducing money laundering could very well outweigh the costs associated with implementing changes to these rules and regulations. It is imperative that the focus is on increasing the number and potency of push factors (relative to pull) to effectively deal with the threat money laundering brings to the economic and social well-being of society.

Appendix A

 144 countries

Albania, Algeria, Angola, Argentina, Armenia, Australia, Austria, Azerbaijan, Bahrain, Bangladesh, Barbados, Belgium, Bhutan, Bolivia, Botswana, Brazil, Bulgaria, Burkina Faso, Burundi, Cambodia, Cameroon, Canada, Cape Verde, Chad, Chile, China, Colombia, Costa Rica, Cˆote d’Ivoire, Croatia Cyprus, Czech Republic, Denmark, Dominican Republic, Egypt, El Salvador, Estonia, Ethiopia, Finland, France, Gabon, Gambia, Georgia, Germany, Ghana, Greece, Guatemala, Guinea, Guyana, Haiti, Honduras, Hong Kong SAR, Hungary, Iceland, India, Indonesia, Iran, Islamic Rep., Ireland, Israel, Italy, Jamaica, Japan, Jordan, Kazakhstan, Kenya, Korea, Rep., Kuwait, Kyrgyz Republic, Lao PDR, Latvia, Lebanon, Lesotho, Libya, Lithuania, Luxembourg, Macedonia FYR, Madagascar, Malawi, Malaysia, Mali, Malta, Mauritania, Mauritius, Mexico, Moldova, Mongolia, Montenegro, Morocco, Mozambique, Myanmar, Namibia, Nepal, Netherlands, New Zealand, Nicaragua, Nigeria, Norway, Oman, Pakistan, Panama, Paraguay, Peru, Philippines, Poland, Portugal, Puerto Rico, Qatar, Romania, Russian Federation, Rwanda, Saudi Arabia, Senegal, Serbia, Seychelles, Sierra Leone, Singapore, Slovak Republic, Slovenia, South Africa, Spain, Sri Lanka, Suriname, Swaziland, Sweden, Switzerland, TaiwanChina, Tajikistan, Tanzania, Thailand, Timor-Leste, Trinidad and Tobago, Tunisia, Turkey, Uganda, Ukraine, United Arab Emirates, United Kingdom, United States, Uruguay, Venezuela, Vietnam, Yemen, Zambia, Zimbabwe.

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Greene, W.H. (2008). Econometric analysis (Pearson/Prentice Hall, Upper Saddle River, N.J). Keh, D.I., (1996), Drug money in a changing world: economic reform and criminal finance, UNODC (https://www.unodc.org/pdf/technical_series_1996-01-01_2.pdf) (accessed 30 June 2016). Krieger, T., & Meierrieks, D. (2013). Terrorism : causes effects and the role laundering. In B. Unger, & D. van der Linde (Eds.), Research Handbook on Money Laundering. Cheltenham, UK: Edward Elgar Publishing, (2013). Levi, M., & Gold, M. (1994). Money Laundering in the UK: An appraisal of suspicion based reporting. London: Police Foundation. Levi, M. (2002). Money laundering and its regulation. Annals of the American Academy of Political and Social Science, vol 582, 181194. Levi, M. (2013). E-gaming, money laundering and the problem of risk assessment. In B. Unger, & D. van der Linde (Eds.), Research Handbook on Money Laundering. Cheltenham, UK: Edward Elgar Publishing, (2013). Mackrell, N. (1996). Economic consequence of money laundering. In A. Graycar, & P. Brabosky (Eds.), Money Laundering in the 21st Century: Risks and Countermeasures, Australian Institute of Criminology Research and Public Policy Series. Australia: Canberra, (1996). Masciandaro, D., (2004), Global Financial Crime: Terrorism, Money Laundering and Offshore Centres, Global Financial Series, Canberra, Australia. McCarth (2013). Why do some states tolerate money laundering: on the competition for illegal money. In B. Unger, & D. van der Linde (Eds.), Research Handbook on Money Laundering. Cheltenham, UK: Edward Elgar Publishing, (2013). McDonell, R. (1998), Money laundering methodologies and international and regional counter-measures, paper presented at the conference on gambling, technology and society, Rex Hotel Sydney, 7-8 May. McDowell, J. (2001). The consequences of money laundering and financial crime, economic perspectives. Electronic Journal of the US Department of State, vol. 62(no. 2). Nordstrom, C. (2004). Shadows of War: Violence, Power, and International Profiteering in the Twenty-First Century. California Series in Public Anthropology. Berkeley, CA: University of California Press. PWC (2016), Adjusting the Lens on Economic Crime  preparation brings opportunity back to focus, Global Economic Crime Survey 2016, PricewaterhouseCoopers (www.pwc. com/crimesurvey) (accessed 24 June 2016). Quirk, P. J. (1997). Money laundering: muddying the macroeconomy. Finance and Development, vol. 34(no. 1), 79. Schneider, F. (2008). Money Laundering and financial means of organised crime: some preliminary empirical findings. Global Business and Economics Review, vol.10 (no.3), 309330. Tanzi, V. (1996), Money Laundering and the International Financial System, IMF Working Paper (96/55), International Monetary Fund. Tanzi, V. (1997). Macroeconomic implications of money laundering. In E. U. Savona (Ed.), Responding to money laundering: International Perspectives. Amsterdam: Harwood Academic Publishers. UN. (1988), United Nations Convention Against Illegal Traffic in Narcotic Drugs and Psychotropic substances, https://www.unodc.org/pdf/convention_1988_en.pdf (accessed 24 May 2016). Unger, B., Ferwerda, J., de Kruijf, W., Rawlings, G., Siegel, M., and Wokke, K., (2006). “The Amounts and the Effects of Money Laundering,” report for Dutch Ministry of

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Finance, Feb. 2006, https://www.rijksoverheid.nl/documenten/rapporten/2006/02/16/ onderzoeksrapport-the-amounts-and-the-effects-of-money-laundering (access 25 May 2016). UNODC. (2016) Money Laundering and Globalization, United Nations Office of Drugs and Crime (webpage) https://www.unodc.org/unodc/en/money-laundering/globalization.html (accessed 30 June 2016). Walker, J. (1995). Estimates of the Extent of Money Laundering in and through Australia paper prepared for the Australian Transactions Report and Analysis Centre. Queanbeyan: John Walker Consulting Services, September 1995. Walker, J. (2004), The Extent of Money Laundering in and through Australia in 2004, John Walker Crime Trends Analysis, Report for AUSTRAC, Canberra, Australia. Walker, J., & Unger, B. (2009). Measuring Global Money Laundering: The Walker Gravity Model,’. Review of Law and Economics, vol. 5(no. 2). Whittell, G. (2016), 11 million documents, 200K shell companies, 2 journalists, The Australian newspaper, 2 July 2016, p. 24. Wilkins, G. (2016) Financial Crime on the rise, says Australian Officials, Canberra Times, June 27, 2016. Zdanowicz, J. S. (2013). International Trade mispricing: trade-based money laundering and tax evasion. In B. Unger, & D. van der Linde (Eds.), Research Handbook on Money Laundering. Cheltenham, UK: Edward Elgar Publishing, (2013).

Corruption in New Zealand: a case of reputational erosion?

10

Robert Gregory1 and Daniel Zirker2 1 Victoria University of Wellington, Wellington, New Zealand, 2University of Waikato, Hamilton, New Zealand

10.1

Introduction

New Zealand has long been characterized as a clean, green country with a vibrant democracy, a relatively fair income differential, and little or no corruption. Aspects of this characterization are, or at least have been in the past, largely valid and a source of national pride, as reflected in Tourism New Zealand’s ‘100 % Pure New Zealand’ marketing campaign, which was launched in 1999. Magnificent land and seascapes attract over two million tourists annually. A measured and civil, if changing, political culture and a traditionally creative and energetic population remain significant attractions of a country ‘the last bus stop on the planet’—that is distant from most of the world’s population, where daily survival historically required vigorous physical engagement, inventiveness, and compromise, and where liberal parliamentary democracy was inherited from the British Westminster system, developing deep roots. In the late nineteenth century and throughout the twentieth, governmental corruption in New Zealand was by no means unknown, but it was generally considered to be a rare phenomenon, confined to the odd miscreant among predominantly well-disciplined, dutiful, and ethically observant politicians and bureaucrats. The authors have elsewhere discussed in some detail the reasons for New Zealand’s tradition of noncorrupt government, while recognizing at the same time that the rapacious abrogation of the Treaty of Waitangi, the country’s founding document with the native M¯aori, by successive governments during the nineteenth century and well into the twentieth tells a different story about governmental corruption in New Zealand than the one that is commonly accepted, and constitutes a myth in its own right (Gregory, 2002; Gregory et al., 2012; Gregory and Zirker, 2013). Chief among the factors that explain the country’s low levels of governmental corruption from at least the second half of the twentieth century have been its small size, its strong egalitarian—and Calvinist—tradition (now significantly eroded), its unitary governmental system, and its strong rules-based and integritybased systems of control in its public organizations. In addition, until the significant level of urban migration of M¯aori from the 1950s onward, and the rapid growth of Pasifika peoples’ immigration a decade later, with high levels of East Asian immigration following in more recent decades, urban New Zealand had been largely The Changing Face of Corruption in the Asia Pacific. DOI: http://dx.doi.org/10.1016/B978-0-08-101109-6.00010-1 Copyright © 2017 Robert Gregory and Daniel Zirker. Published by Elsevier Ltd. All rights reserved.

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ethnically homogeneous, and its political and governmental institutions were almost exclusively run by European New Zealanders. Nevertheless, New Zealand sustains a profoundly bicultural society, with fundamental constitutional and other legal considerations given to M¯aori after the growing reassertion and official recognition of M¯aori rights under the Treaty of Waitangi, especially from the mid-1970s.

10.2

New Zealand, the Corruption Perceptions Index, and changing national perceptions

Transparency International’s (TI) Corruption Perceptions Index (CPI) has consistently rated New Zealand as one of the six least corrupt countries in the world, and when rated over the 20 years since the inception of the CPI in 1995, New Zealand, a country today of 4.4 million people, could be seen to have had the lowest perceived levels of corruption among every country in the world prior to 2014. It was rated first, or joint first in 2006, 2007, 2008, 2009, and 2010; it sat alone atop the rankings in 2009 and 2011, and shared the number one position again with Denmark and Finland in 2012; it was first equal with Denmark in 2013, and was second behind Denmark the following year. It is rated as the perceived least corrupt country in the Asia-Pacific region, ranking much higher than its neighbor, Australia, which in 2015 was listed in 13th place on the CPI. However, New Zealand suddenly dropped to second place in 2014, and to fourth place in the 2015 CPI rankings, behind Denmark, Finland, and Sweden, in that order. New Zealand had taken only two years to fall in its CPI rankings from first to fourth, a serious and potentially problematic fall, given that the CPI algorithm is designed to prevent rapid movements of this sort.1 The CPI is based primarily upon the perceptions of business people in their home countries of the level of corruption to which they are exposed; the central assumption underlying this measure is that traders are the first to experience corrupt practices and are the most vulnerable to them. The algorithm upon which the raw country scores are based is adjusted every few years, and so the raw scores do not have lasting comparative longitudinal value. The rank orderings of the countries, however, are widely regarded as among the best and most valid indicators of comparative levels of corruption, as Lambsdorff (1999) demonstrated in an exhaustive macro-analytical study.2 Opinion surveys conducted in New Zealand over the past several years have reinforced the view that New Zealanders perceive themselves as victims of a growing tendency toward corrupt behavior. The Global Corruption Barometer (GCB) of 2013, a random sample survey of all New Zealanders, showed that 65% of respondents believed that corruption had increased in the country over the previous three years, and four percent said that they had been asked for a bribe in the previous year, with 29% of these saying that they had not refused to pay it. Three percent, then, reported that they had paid a bribe to a public official in the previous year, with about a third of these saying that paying the bribe was the only way to obtain service.3 Respondents said that the bribes were paid to a variety of public agents, including the police, medical and health, tax, revenue, and customs officials. At least 25% of all New Zealand respondents believed that public officials in general

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were corrupt. It is worth noting here that New Zealand was considerably less affected by the global financial crisis beginning in 2008 than were most developed countries, and certainly much less so than was Iceland, where major financial scandals—widely, if incorrectly, perceived as the product of corruption—saw an even more dramatic drop in the CPI, from first equal place in 2006 to 13th place in 2011.4 The percentages of GCB respondents who reported having paid bribes, however, put New Zealand below several developed countries that, at the time, ranked much lower than New Zealand on the CPI rankings, including Australia, at one percent, and Canada, Malaysia, the Maldives, Portugal, South Korea, Spain, and Uruguay, all at three percent.

10.3

A challenge to complacency? policing, transparency, and international trusts

New Zealanders have been relatively blase´ in their attitudes to corruption, attitudes which have been reflected in the country’s underdeveloped legal and organizational barriers to such malfeasance. The people have long held a rather benevolent view of the state—‘the homely state,’ as one former prime minister described it (Gregory, 2004)—and apparently because of this there has been little concern that anything very serious might occur in the management of a supreme political authority that embodied and gave expression to the collective will of an ostensibly egalitarian and fair-minded citizenry (Lipson, 2011). New Zealand has lacked, for example, a single, inclusive, and clear definition of ‘corrupt practices,’ as a former director of the Serious Fraud Office (SFO), Adam Feeley, noted in several addresses during his term in office.5 Moreover, while the SFO itself, only established in the late 1980s, is commonly regarded as New Zealand’s anticorruption agency, in fact it has no legal mandate to that effect. No single agency with requisite independence, impartiality, and resourcing has been assigned the responsibility of policing corrupt practices (Gregory, 2015). Instead, more than a dozen agencies vie for such policing powers, sometimes engaging in turf struggles among themselves, especially in high-profile cases. Moreover, while New Zealand’s criminal statutes have focused on bribery as a nearly exhaustive definition of corruption, other forms, including legal limitations on the actions of New Zealand corporations interacting with foreign governments abroad, have only recently, and somewhat haphazardly, been subsumed within more explicitly focused anticorruption legislation. There are signs, however, that New Zealanders are becoming more exposed to, and familiar with, public discourse about alternative forms and incidents of corruption in their own country. Immediately after the 2015 CPI results were published by TI, a New Zealand political scientist, Bryce Edwards, who is also a member of the board of TI New Zealand (TINZ), observed that ‘never before has the word “corruption” been used so much in New Zealand politics. But this doesn’t necessarily mean that there is more of it actually occurring’ (Edwards 2016). What it may

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mean, however, is that New Zealanders are becoming more aware of the wider forms—influence peddling, nepotism, official fraud, facilitation payments, election tampering, and so on—that corruption commonly takes in many other countries. At the heart of the matter in New Zealand has been the state of government transparency and its diametric opposite, financial secrecy. As lawmakers in Iceland discovered, much to their chagrin after 2008, a recent history of opaque government negotiations and deal-making can create the conditions that foster the perception, if not the reality, of corrupt practices. A relationship between popular perceptions of a corrupt system and the willingness of many people to engage in corrupt practices is well established. As the author of an International Monetary Fund (IMF) Working Paper observed in 1998: When the top political leaders do not provide the right example, either because they engage in acts of corruption or, as is more often the case, because they condone such acts on the part of relatives, friends, or political associates, it cannot be expected that the employees in the public administration will behave differently. The same argument applies within particular institutions such as tax administration, customs, public enterprises, and so on. These institutions cannot be expected to be corruption-free if their heads do not provide the best examples of honesty. Tanzi, 1998: 576.

It is worth noting, therefore, that New Zealand’s government in recent years has engaged in several less-than-transparent, though eventually well-publicized, business and international negotiations. Foremost among these have been a statesponsored partnership with a gambling establishment, Sky City, in the planning of a large convention center in Auckland; a foreign trade deal with Saudi Arabia that seems to have included a substantial payoff at public expense of a private Saudi businessman; and the extensive and secret negotiations over the multinational Trans-Pacific Partnership Agreement. In addition, a former cabinet minister visiting China was perceived to have used her office to entertain Chinese officials involved in business dealings with a company run by her husband; sensitive government information, some of which was pointedly inaccurate, was released to a progovernment blogger; and a journalist seen to be hostile to the government was subjected to what was later found by the courts to be an illegal search of his home by the police. A New Zealand businessman who in September 2014 donated more than $NZ100,000 to the cogoverning National Party was a month later awarded a contract to run a resort in Niue that was heavily funded by the New Zealand government, and which a year later received $NZ7.5 million of aid funding to expand the resort.6 This last episode also refocused attention on the lack of transparency surrounding the work of political lobbyists in New Zealand, where attempts by Green Party MPs to promote lobbying registration and disclosure legislation have been unsuccessful. In fact, political lobbyists in New Zealand are not subject to the kind of formal transparency and behavioral constraints that exist in Australia, Britain, the European Union, and the United States. Another major controversy, in May 2016, raised questions about influence peddling, particularly after it became known that the personal lawyer of Prime Minister

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John Key was part of a group representing five firms that had, in 2014, successfully lobbied the minister of New Zealand’s tax collection agency, Inland Revenue, to stop a review of the laws covering private, tax-free trusts for foreigners. The lawyer claimed that Key, who has been prime minister since late 2008, had subsequently told him that there would be no such review, although Key has since denied having said this. Four of the five firms that lobbied against prospective changes to the foreign trust laws had also done business with Mossack Fonseca, the law firm at the center of the ‘Panama Papers’ revelations in early 2016, and which had formally opened its New Zealand business operations in 2013. Regarding these trusts, and according to the Financial Secrecy Index 2015, it is reported that ‘New Zealand accounts for slightly over 0.1 percent of the global market for offshore financial services, making it a small player compared with other secrecy jurisdictions.’ Nevertheless, legislation passed by the New Zealand Parliament in 2010, and which came into force the following year, created a new tax entity known as a ‘look-through company’ (LTC). Overseas clients could be offered a foreign trust and an LTC, and provided that neither the trust nor the LTC had income or beneficiaries in New Zealand, they paid no tax. There are virtually no disclosure requirements for foreign trusts, provided that the country of origin has no Tax Information Exchange Agreement with New Zealand. (New Zealand and Australia, for example, have automatic disclosure, although there are relatively few other similar agreements.) The means of establishing these trusts were first put in place under the Fourth Labor government, 1984 1990, which drove through the New Zealand Parliament a battery of neoliberal economic reforms. However, since 2008, and the election of the current National Party government, there has been a 300% increase in the number of tax-free foreign trusts set up in New Zealand, with a total of 10,700 existing by May 2016. The implications of institutionalized financial secrecy in the context of the other factors mentioned above (e.g., lack of a single agency to combat corruption, and growing popular perceptions that government transparency is eroding while corruption is increasing) are potentially detrimental to New Zealand’s international reputation as a corruption-free country. The issue of whether or not New Zealand can be seen to be a tax haven, alongside other jurisdictions, such as the Cayman Islands, Monaco, and the Bahamas, has become central to this controversy in the national news media. The prime minister denied that New Zealand was a tax haven. However, according to one promotional source for such trusts: New Zealand has evolved one of the best and most comprehensive asset protection and offshore tax minimisation systems in the world whilst at the same time avoiding any issues of blacklisting as an offshore destination by the OECD countries. . .New Zealand is not a tax haven. Nevertheless, it is considered by many international investors and businessmen [sic] as the best jurisdiction to form asset protection structures and tax regimes for non-resident shareholders and/or beneficiaries. So the country can provide all the advantages of traditional ‘offshore’ jurisdictions and even more because it is not blacklisted by any jurisdiction or authority in the world and has no connotations as a tax haven. Trust New Zealand, 2011.

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According to another online source, ‘[a]lthough New Zealand is said not to be a tax haven there are certain features which make people associate the jurisdiction with tax havens. The fact that the country has offshore services which include offshore business entities and offshore trust formation tend to qualify New Zealand as a tax haven’ (TaxHavens.Biz, 2016). The director of Mossack Fonseca’s subsidiary in New Zealand, Roger Thompson, preferred not to see the country as a tax haven but rather as ‘a high quality jurisdiction for trusts with a benign tax system in certain circumstances’ (Radio New Zealand, 2016a). Whatever the case, much of the public debate has turned on New Zealand’s reputation as a ‘clean, green,’ transparent, and noncorrupt jurisdiction. Those people, including the leader of New Zealand’s parliamentary opposition, who wish to see these foreign trusts abolished or at least made more transparent in order to discourage corrupt beneficiaries from using them have emphasized the irony of a situation where New Zealand’s strongly transparent and corruption-free reputation is used to attract foreigners who wish to set up trusts, the very nature of which tends to erode this reputation. An editorial in one of the country’s leading daily newspapers summarized this concern: The longer New Zealand is clearly linked to the Panama Papers, the worse its international reputation will become. Do we really want to be mentioned in the same breath as Luxembourg, Monaco and Switzerland as a haven for wealthy overseas investors’ money, thanks to our generous and permissive rules around foreign trusts?...This all matters because there is global concern about the megarich, who are taxed at a fraction of the rate of ordinary people—partly by parking their money overseas. . .why has New Zealand allowed itself to stand out from countries like Australia and Britain, enabling and encouraging this kind of behaviour? (The Dominion Post, 10 May 2016).

Similarly, a former Inland Revenue minister and informal government coalition member, MP Peter Dunne, has argued that if New Zealand were to be labeled as a tax haven then in transparency and reputational terms this would have the same impact that an outbreak of foot-and-mouth disease would have on the country’s reputation as a viable primary beef and dairy producer.7 TINZ has also expressed alarm at the prospect, declaring that ‘[t]he transparency of all corporate vehicles, including foreign trusts, is essential to prevent and detect serious crime potentially involving billions of dollars such as money laundering and ill-gotten asset transfers and other forms of international corruption.’8 It has called for New Zealand’s Anti-Money Laundering and Counter-Financing of Terrorism Act (AMLCFT) 2009 to be extended to cover all professionals, including lawyers and accountants engaged in setting up and managing New Zealand’s corporate vehicles. It seeks the establishment of a corporate registry that includes beneficial ownership of relevant business structures to enable review and audit by law enforcement and compliance bodies, consistent with international efforts; it wants the entity operating the corporate registry to be adequately resourced and funded

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for effectiveness; and it calls for the setting up of a similar registry for New Zealand trusts. There has been no suggestion that those people administering these secret trusts in New Zealand have themselves been engaged in any form of corrupt practice. Rather, public concern relates to the integrity of some of the anonymous beneficiaries of the trusts, and whether their funds may have been corruptly acquired and/or are being used for nefarious purposes. For example, the ‘Panama Papers’ have disclosed links between a former and allegedly corrupt Kazakhstan prime minister, Akezhan Kazhegeldin, who fled his country in 1997, and an Auckland law firm that was among the five companies that lobbied the minister of Inland Revenue regarding the review of the foreign trust laws (Radio New Zealand, 2016b). Whether or not New Zealand should continue to allow secret tax-free trusts for foreigners was couched as a matter of the legitimacy of the law that permits their creation, since the operation of these trusts is completely legal under existing New Zealand law. In the end, however, the government decided that the reputational risks were not worth sustaining. It commissioned a tax expert’s inquiry into foreign trusts and subsequently determined to adopt his recommendations that a register of such trusts be maintained, containing information that could be searched by relevant New Zealand authorities in response to inquiries from foreign counterparts, such as those responsible for investigating money laundering (see Prebble, 2016). The argument that New Zealand’s good reputation is at risk because of the international company it has been keeping was bolstered by at least three other controversies. First, there have been strong claims that the country has been cheating in regard to its climate change obligations. A research report argued that New Zealand used fraudulent foreign carbon credits in appearing to meet, while avoiding meeting, its climate targets under the Kyoto Protocol. As the world’s major buyer of corrupt Russian and Ukrainian credits, New Zealand was actually buying ‘hot air’ because the credits did not represent actual emissions reductions. The National Party-led government continued to use these and other foreign credits for as long as the international community allowed, and did not stop doing so until 2014. According to the author of the report, ‘[w]e have been party to a fraud that has potential to damage our international reputation as a clean, green and corruptionfree country’ (Simmons and Young, 2016). In a second controversy, the Overseas Investment Office, which checks the character of potential foreign buyers of New Zealand land, in order to block money launderers and beneficiaries of corruption, has been seen to have let a number of such people through its net. These have included two Argentinean brothers, allowed to purchase environmentally sensitive farmlands in New Zealand, who were subsequently found to have been held criminally liable in 2011 for polluting Argentina’s Lujan River, on which they have a tannery (they were apparently also clients of Mossack Fonseca); the convicted ‘Megaupload’ tycoon, Kim Dotcom, said to have been previously convicted of felony copyright violation abroad, who was granted approval to buy an extensive Auckland property before the deal was stopped by the

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then minister of justice; and Tommy Suharto, the notoriously corrupt son of the corrupt former Indonesian president, the late General Suharto. The third case involved perhaps the most important multilateral anticorruption legislation ever proposed. When New Zealand finally got around to ratifying the UNCAC in December 2015, 12 years after it had been adopted by the General Assembly, the country sat alongside only Barbados, Bhutan, Japan, and Syria in having signed but not ratified the UNCAC. This awkward delay suggests at least a degree of complacency on the part of the country’s lawmakers and warrants some additional comment.

10.4

Ratifying the UNCAC: why so long?

The passage through Parliament in 2015 of the Organized Crime and AntiCorruption Legislation Bill (OCACL) was said to enable New Zealand to ratify the UNCAC by introducing changes to more than a dozen Acts of Parliament, in particular those relating to bribery and corruption. However, while article 52 of the UNCAC does not specifically use the term ‘politically exposed persons’ (PEPs), it implies that ratification of the convention depends, in part, on a state’s willingness to implement ‘enhanced scrutiny’ of the financial transactions of PEPs, and makes no distinction between foreign PEPs, that is, officials working for their government overseas, and domestic PEPs, that is, officials working within their own country. Although many countries have ratified the UNCAC without having satisfied all formal requirements of the convention, including those relating to domestic PEPs, the depth of New Zealand’s ratification appears to be less than convincing when measured against other developed countries. While the statutory changes that have now been adopted provide enhanced financial scrutiny of foreign PEPs, Parliament has not seen fit to include domestic PEPs—New Zealand’s own public officials—in this regime. The New Zealand Parliament took the same stance a few years ago when considering the proposed legislation that was enacted in 2009 as the AMLCFT. Although the select committee dealing with the matter had earlier recommended that judges, the prime minister and cabinet ministers, departmental heads, and the governor of the Reserve Bank should be subject to enhanced financial scrutiny, this provision was later dropped from the enacted legislation. It was argued by the select committee that New Zealand already had sufficient safeguards within its banking and financial institutions to cover any corrupt practices that domestic PEPs might engage in. This argument requires further examination, however, one that is well beyond the scope of the present discussion. Suffice it to say that for their part all New Zealand MPs are required to publicly and regularly declare their assets, although this requirement, necessary but probably insufficient in itself, does not apply to other leading public officials who would normally be classified as domestic PEPs. At the time the select committee was considering the inclusion of domestic PEPs in the AMLCFT Act, New Zealand’s chief justice reportedly met privately with

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ministry of justice officials to object to the inclusion of judges among prospective PEPs on the grounds that any supervision of the judiciary by the police was not compatible with the respective functions of both parties under New Zealand’s legal system (Hubbard, 2012). The chief justice’s intervention was of dubious constitutional propriety in itself, clouding the separation of the judiciary from the executive—especially as she did not make a public submission to the select committee. In the view of the late Jeremy Pope, a New Zealand lawyer who was one of the founders of TI, enhanced financial scrutiny of judges would strengthen rather than weaken the independence of the judiciary: ‘Are they saying that the judges are immune from police investigation? They’re not. They operate under the law and they’re accountable’ (Hubbard, 2012). The passage of the OCACL brought substantial increases in penalties under the Crimes Act 1961, which prohibits the bribery of public officials, and under the Secret Commissions Act 1910, which deals with corruption in the private sector. It also made New Zealand companies indirectly liable for bribery of foreign public officials committed by their employees, who—along with public officials—must comply with the provisions of the US Foreign Corrupt Practices Act and the UK Bribery Act. However, despite strong opposition from TINZ and other parties, Parliament saw fit to retain the legality of ‘facilitation payments’ under the Crimes Act, while narrowing their scope. In this legalistic sense, a bribe is not considered to be a bribe when it is classified as a ‘facilitation payment’—or ‘grease money’— that is, ‘a small payment made to a foreign public official that is paid to ensure or expedite performance of a “routine government action” to which the payer is already entitled’ (Mead and King, 2016). The delayed ratification of the UNCAC, the exclusion of domestic PEPs, and the continued legality of ‘facilitation payments’ led two commentators to observe that ‘there still seems to be a disconcerting attitude that offenses in other jurisdictions are not the same as in New Zealand itself’ (Macaulay and Gregory, 2016). Be that as it may, the legislative changes that were introduced under the umbrella of the OCACL did include a major innovation that was strongly consistent with New Zealand’s UNCAC obligations. The Crimes Act (s. 105F) now includes the new offense of Trading in Influence.9 According to Macaulay and Gregory (2016: 24 25): The creation of this new law is really quite remarkable. There is no equivalent in, for example, the UK legislation, which is oft-touted as the world’s most comprehensive and punitive anti-corruption legislation. . .Not only is the new offence admirably succinct but it also refuses to distinguish between domestic and overseas jurisdictions.

The introduction of this new offense sits well with one of Johnston’s (2005, 2014) four ‘syndromes of corruption,’ which are all derived from underlying ‘patterns of participation and the strength of institutions in, and linking, the political and economic arenas’ (p. 7: italics in original). He includes New Zealand in his ‘Influence Markets’ category—that is, mature market democracies that are usually

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ranked among the least corrupt countries on indexes such as the CPI, since they experience little high-level bribery. Although they are characterized by strong and legitimate state institutions, countries in this category are vulnerable to systemic corruption problems that revolve around ‘access to, and advantages within, established institutions, rather than deals and connections circumventing them. . .[and] given the affluence of most societies in this category wealthy interests seeking political influence will dominate Influence Markets’ (2005: 42 43). Moreover, such countries are often vulnerable to global corruption, where banks and investment markets are the repositories, or take part in the laundering of corrupt gains from elsewhere, while their multinational businesses have made illicit deals in many other countries. Johnston suggests that influence marketing is found in most Western countries, and that activities associated with this syndrome are not only firmly entrenched but are frequently legal, if widely considered to be ethically or morally dubious. The relevance of Johnston’s argument to New Zealand is clearly apparent in the controversy over tax-free foreign trusts, as well as other cases mentioned above.

10.5

How does change for the worse occur?

These and other events sit uneasily with a national political culture that has long stressed the values of manifest honesty and transparency. It is noteworthy that in her 2012 review of New Zealand’s Official Information Act (OIA), the chief ombudsman found ‘suspicion and distrust amongst those working with the OIA, both inside and outside government,’ and that while she found no direct evidence of political censorship in OIA responses, she had identified occasions where ‘ministerial officials tried to limit the scope of information or tried to change an agency’s decision about what to release.’ Notwithstanding his argument that the incidence of alleged corruption scandals does not equate to a higher incidence of actual corruption, Edwards concluded that ‘the myth of a clean politics and public service in New Zealand can no longer be sustained’ (2016). If this is the case, it raises a question that has so far received little attention in the study of governmental corruption internationally: that is, if an anticorruption ‘tipping point’ can be reached relatively quickly in places like Singapore and Hong Kong (Quah, 2011, 2013, 2015), might it not be possible for the converse to be true in places such as New Zealand, Sweden, Denmark, and Finland, where the incidence of governmental corruption has for a long time been very low? And how might this occur? If there is a causal relationship between corruption scandals, on the one hand (regardless of whether actual corrupt practices are involved), and a tendency to engage in corrupt practices, on the other, then might it also be the case that damage to a country’s reputation, whether or not it is objectively justified, might occur and in turn foster government corruption of various kinds within that jurisdiction? This is too complex a question to examine adequately here, although several points can be made.

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First, when one takes a closer look at New Zealand and Sweden, for example, it is not difficult to find evidence that more corruption can be found in these countries than might be concluded from their high rankings on the CPI. Regarding New Zealand, the authors identified a substantial list of major dishonesty offenses committed by government officials between 2001 and 2005 alone (Gregory and Zirker, 2013). In their survey of Swedish attitudes toward corruption, Bauhr and Oscarsson (2011: 14) found, inter alia, ‘systematic differences in the acceptance of corruption among different age groups in Sweden—younger people tend to find corruption somewhat more acceptable than older people.’ They point to what is in fact a problem of collective action of the second order, but in reverse: whereas Persson et al. (2013) argue that anticorruption strategies based on principal agent assumptions are unlikely to succeed in countries where most people believe that ‘everyone’s doing it,’ in places where people have long since believed that ‘few people are doing it’ norms and expectations can change over time, so that ‘[e]ven countries like Sweden are far from immune from ending up in a vicious spiral that is difficult to break’ (Bauhr and Oscarrson, 2011: 14).10 Second, the principal agent ideas of the New Public Management (NPM) movement of the 1980s and 1990s, which were central to the state sector ‘reforms’ that occurred in New Zealand, for example, may have attenuated a principal safeguard that has traditionally kept in check such corruption—that is, the ‘normative model,’ which over time has reinforced commitment to generally high standards of ethical probity (Moynihan, 2008; Gregory, 1995, 1999; Gregory and Hicks, 1999). An entire ‘Public Service’ edifice was built in New Zealand during that time of change, and remains in place, founded on a body of theory that assumed that all ‘public servants’ were essentially individual self-seeking opportunists. A shrewd observation by James Q. Wilson (1993: x) comes to mind: ‘We must be careful of what we think we are, because we may become that.’ Third, an important factor in such rapid increases in corruption may be a growing gap between rich and poor. In New Zealand, radical neoliberal economic and social policy shifts in the 1980s and early 1990s saw a marked increase in the Gini coefficient, and an erosion of the long-standing ethos of fairness and egalitarianism (Fischer, 2012; Gregory, 2003; Gregory and Eichbaum, 2014). It seems plausible, on the face of it, to see this period of New Zealand’s history as a turning point, and this may well lead to a shift away from a society largely free of governmental and business sector corruption. More generally, what may be emerging in Western democracies is not so much ‘greed corruption,’ in the form of ‘state capture’ (though there may be evidence of this too), but rather corruption induced by conflicts of interest, or the failure, unwillingness, or inability to manage them effectively. In other words, conditions may exacerbate the propensity for ‘influence markets’ that Johnston ascribes to stable, Western democracies. Macaulay and Gregory (2016: 25) cite evidence from the 2013 TINZ National Integrity System Report on New Zealand in arguing that there are now problems around ‘gray areas,’ such as political party funding, patronage, perceived nepotism and/or cronyism, unresolved conflicts of interest, and the misuse of political lobbying. The potential for conflicts of interest has

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arguably arisen in large part because of the contractualist approach to public service delivery that lies at the heart of NPM, and the increasing use of semi- or quasi-markets for that purpose. There is a good prima facie case in favor of New Zealand instituting the common law of Misconduct in Public Office, as exists in both Britain and Hong Kong, since many of the above indiscretions can best be dealt with under such a law, without in any way subverting the force of the Crimes Act. The distinction drawn by Bauhr and Nasiritousi (2011) between ‘greed’ and ‘need corruption,’ as the basic motivation for paying a bribe, is instructive. In the case of ‘greed corruption,’ a bribe is offered to and accepted by a public official in return for an advantage (say, to win a contract) to the bribe-payer, an advantage which is provided at the expense of taxpayers. In such cases the bribe-payer is not entitled to such an illegal advantage. Conversely, in the case of ‘need corruption,’ a bribe-payer may be required by a public official to pay an extra charge in order to receive a service or product that the bribe-payer is in fact legally entitled to without having to pay such an extra fee. The former is also commonly known as ‘grand corruption,’ or ‘state capture’; the latter as ‘petty corruption.’ The difference between the two types is measured in monetary terms, and by the level of public authority exercised by the respective participants. Those political and bureaucratic grandees who greedily capture state assets by virtue of their high positions in government, the kleptocrats, contrast with middle- and lower-level officials who pettily seek to enhance their income by exploiting the discretionary authority they are able to exercise over citizens with whom they directly transact. Loosely speaking, the former is venal; the latter venial. Bauhr and Nasiritousi suggest that a virtual absence in a country (such as New Zealand) of need corruption can foster a public belief that any kind of corruption is absent, or at worst, rare. In their research into public perceptions of corruption in Sweden, Bauhr and Oscarsson (2011) found that while an overwhelming majority of Swedes found neither form of corruption as being acceptable, they were significantly more opposed to need rather than to greed corruption. Bauhr and Nasiritousi (2011) argue that greed corruption is built on collusion rather than extortion, can be largely invisible, and can coexist with high levels of institutional trust. This runs counter to the commonly accepted belief that there is an inverse relationship between corruption and institutional trust. In this connection, a recent New Zealand survey has found ‘serious concerns with levels of public trust. . .Not only is trust in our government, politicians and media low but it has declined over the last three years’ (Macaulay, 2016: 2). While government ministers, the news media, members of parliament, and bloggers are largely trusted by no more than 10% of respondents, medical practitioners, the police, schools and colleges, and the judiciary are now the most trusted. Yet according to Bauhr and Nasiritousi’s analysis, this may tell us little if anything about the actual incidence of corruption. It is possible, for example, that those least trusted are actually the least corrupt, while the converse may also be the case. They argue that the balance between greed and need corruption in a society will determine the effectiveness of anticorruption policy measures that are based on

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principal agent logic, since such measures may be more effective in combating need rather than greed corruption. In their words, ‘[g]reed corruption can produce moral indignation, but it may not motivate collective action. The influence of greed corruption on everyday life can remain almost invisible for extended periods of time, since costs are divided and democratic institutions erode very slowly’ (Bauhr and Nasiritousi, 2011: 19). On the other hand, they suggest that increased transparency and exposure of corruption can adversely affect the levels of corruption in places where there is little need corruption, and where people have little direct experience of corruption. Exposure of instances of corruption (greed or need) can disproportionately influence public perceptions of the extent of corruption. In other words, transparent evidence of a few proverbial rotten apples in a big barrel of good apples can lead to more rotten ones. The cliche´ that ‘sunlight is the best disinfectant’ may be paradoxical. It seems self-evident that the less citizens know about instances of greed corruption involving highly trusted institutions, trust will be less likely to diminish. However, if there is some politically dramatic expose´ of greed corruption in high public office, then trust may erode quickly, even if the case is not in fact representative of more widespread greed corruption, since suspicion will be aroused as to the extent of the wrongdoing. If trust is lost then it will most likely be difficult to regain. A strictly utilitarian suggestion that it serves society’s interests for greed corruption to be kept under wraps when it is detected by the authorities, lest it lead to public cynicism toward politicians and/or bureaucrats and even weakens system legitimacy, is implausible, however. The news media in a democratic country are unlikely to accept censorship of such news on the grounds that it constitutes a threat to the public interest. In a similar vein, the over-zealousness of anticorruption agencies is much more likely to lead to their demise in countries where those who may be threatened by the agencies’ investigations have the authority to ‘knee-cap’ them without having to pay the price of generating vociferous public opposition, because they enjoy highly centralized political power exercised largely beyond media scrutiny (Maor, 2004). The ‘broken windows’ theory of crime prevention, proffered by Wilson and Kelling (1982), argued that the ongoing maintenance of urban environments in good physical condition can deter further vandalism and ultimately reduce the incidence of more serious forms of crime.11 By analogy, therefore, some critical institutional, attitudinal, and social changes in a society may coalesce to have a significant, even dramatic, impact on both greed and need corruption. In Singapore’s case, for example, the benefits of reducing corruption became obvious after a few years when citizens no longer had to pay bribes for basic services, and when foreign investment increased hugely because of the government’s policy of zero tolerance for corruption. The trick is to know what such a coalescence of forces might be in any particular society, what together might produce a tipping point—in one direction or the other. What may seem almost unimaginable at one point in time may come to fruition much sooner than most would expect. Antismoking laws have recently and rapidly become the norm in many countries; only a few years ago it was virtually

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impossible to imagine that people would not be able to light up at will in restaurants, bars, offices, and especially in outdoor public places.

10.6

Conclusion: a need for more scrutiny and less complacency

This discussion has raised some daunting questions rather than providing easy answers. Foremost among the questions is whether New Zealand’s reputation as a country with minimal levels of what might be called ‘hard-core’ corruption—especially bribery—is seriously at risk. This seems unlikely, despite the survey evidence showing that increasing numbers of New Zealanders claim to have experienced bribery. Instead, more evidence is coming to light suggesting that New Zealand’s pristine image needs to be examined much more carefully and critically than the previously complacent acceptance of the country’s CPI rankings would suggest. The issues that appear to challenge New Zealand’s reputation relate much less, if at all, to evidence of either politicians or government officials being more involved in various forms of either ‘greed’ or ‘need corruption,’ and much more to apparent conflicts of interest, perhaps inadvertent but nonetheless real influence trading, and perceptions of continuing disingenuousness and lack of transparency in regard to transactions undertaken by members of the political executive. It is also apparent that the neoliberal ideology that has underpinned so many of the economic and social policy changes during the last quarter of a century in New Zealand might have attenuated the norms and values of ethical probity that traditionally reinforced the New Zealand governmental system. The controversy over the ‘Panama Papers’ and the status of New Zealand as a secretive tax haven for potentially corrupt beneficiaries should be seen in this broader ideological context. It is almost inconceivable that such trusts would ever have been seriously contemplated by a New Zealand government during the Keynesian era of public policymaking in the three decades after World War II. The other question that requires much more scholarly attention, and perhaps not only in New Zealand, is the relationship between perceptions of increased forms of corruption, on the one hand, and the actual incidence of corruption, on the other. This is not just, or primarily, a question as to what extent perceptions do or do not accord with reality, but it is about the role of perceptions in contributing to the creation of a ‘tipping point’ that might escalate both those perceptions and actual incidents of corruption. In short, could New Zealand become an example of a country in which corruption increases from low or even insignificant levels, in contradistinction to those countries—as few as they might be—in which the fight against endemic corruption has proven to be quite successful?. The case of New Zealand as a Westminster parliamentary system also suggests that more research be carried out on the relationship between the ethical probity of politicians, as one group, and bureaucrats, as another. Much has been written about the symbiotic relationship between politicians and bureaucrats in Westminster systems, with particular reference to questions of collective and individual

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responsibility (e.g., Polidano, 2002; Rhodes et al., 2009). Latterly, more attention has been focused on the growth in the number of political advisers in ministerial offices (Shaw and Eichbaum, 2014). However, little has been said about the relationship between politicians and bureaucrats insofar as it might be affected by issues of corruption and ethical probity in general, and how these factors in turn may have arisen from the growing numbers of political advisers who are often not constrained by the rules and ethical obligations that guide the behavior of career officials. Some questions arise from this. Is it possible that in a Westminster system increasing levels of dubious activity by the political executive can adversely affect the ethical probity of bureaucrats? Does the fish always rot from the head down? Can bureaucratic standards degrade independently of the activities—corrupt or noncorrupt—of the political executive? Can an essentially noncorrupt bureaucracy act as a bulwark against corrupt tendencies on the part of the political executive?. In sum, a more in-depth study of the dynamics of corruption in New Zealand, rather than being seen as unnecessary, given the country’s hitherto glowing reputation, could in fact be invaluable precisely because of its fading luster.

Endnotes 1. The full CPI methodology can be found on the TI website at: http://www.transparency. org/cpi2015. 2. Lamsdorff is one of the original authors of the CPI algorithm. 3. TI’s Global Corruption Barometer results for New Zealand can be found at: http://www. transparenc.org/gcb2013/country/?country 5 new_zealand. 4. The collapse of a number of lending agencies in New Zealand occurred over several years, and by 2013 was just beginning to have a significant effect on public opinion. While financial fraud took place in Iceland, there were no indictments for corruption, per se, as a result of the global financial collapse of 2008. 5. For example, see Vaughan, G. (2012). 6. The donor has taken legal action against the Parliamentary Leader of the Opposition, Andrew Little, for refusing to apologize for his statement that the situation ‘stunk to high heaven.’ 7. See Stuff, 9 May 2016. http://www.stuff.co.nz/national/politics/79774048/Peter-Dunnequestions-explosion-in-foreign-trusts-lack-of-Inland-Revenue-concern. Accessed 13/06/16. 8. Transparency International New Zealand, news release, 5 May 2016. http://www. transparency.org.nz/docs/2016//Mr-TImeliness-of-Panama-Papers-inquiry-need-not-limitscope.pdf. Accessed 13/06/16. 9. ‘Every person is liable to imprisonment for a term not exceeding 7 years who corruptly accepts or obtains, or agrees or offers to accept or attempts to obtain, a bribe for that person or another person with intent to influence an official in respect of any act or omission by that official in the official’s official capacity (whether or not the act or omission is within the scope of the official’s authority).’ 10. The Swedish Saab Gripen Fighter Jet multibillion dollar contract with Brazil, for example, has been caught up in corruption charges such that the Swedish company is again being investigated for serious kickback and bribery allegations (Jelmayer, 2016). 11. The pros and cons of Wilson’s and Kelling’s ‘broken windows’ theory and its real effects, or lack of them, are set aside here.

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References Bauhr, M., & Nasiritousi, N. (2011). Why Pay Bribes? Collective Action and Anti Corruption Efforts, Working Paper Series (2011, p. 18). Gothenburg: Quality of Government Institute. Bauhr, M., & Oscarsson, H. (2011). Public Perceptions of Corruption: The Prevalence and Moral Rejection of Corruption in Sweden, Working Paper Series (2011, p. 11). Gothenburg: Quality of Government Institute. Edwards, B. (2016). New Zealand Tumbles down the Political Corruption Table, New Zealand Herald, 27 January. http://www.nzherald.co.nz/news/print.cfm?objectid511580598. Accessed 13/06/16. Fischer, D. (2012). Fairness and Freedom: A History of Two Open Societies, New Zealand and the United States. New York: Oxford University Press. Gregory, R. (1995). Accountability, Responsibility and Corruption: Managing the ‘Public Production Process’. In J. Boston (Ed.), The State Under Contract. Wellington: Bridget Williams Books. Gregory, R. (1999). Social Capital Theory and Administrative Reform: Maintaining Ethical Probity in Public Service. Public Administration Review, 59(1), 63 75. Gregory, R. (2002). Governmental Corruption in New Zealand: A View Through Nelson’s Telescope? Asian Journal of Political Science, 10(1), 7 38. Gregory, R. (2003). New Zealand—The End of Egalitarianism? In C. Hood, B. G. Peters, & G. Lee (Eds.), Reward for High Public Office: Asian and Pacific Rim States. London: Routledge. Gregory, R. (2004). Hollowing and Hardening New Zealand’s Homely State. In P. Dibben, G. Wood, & I. Roper (Eds.), Contesting Public Sector Reforms: Critical Perspectives; International Debates. Basingstoke UK: Palgrave Macmillan. Gregory, R. (2015). Political Independence, Operational Impartiality, and the Effectiveness of Anti-Corruption Agencies. Asian Education and Development Studies, 4(1), 125 142. Gregory, R., & Eichbaum, C. (2014). Carpe Diem! New Zealand’s Fiscal Crisis, 1990 1993 —Economic Aims, Welfare Reform and Political Consequences. In C. Hood, D. Heald, & R. Himaz (Eds.), When the Party’s Over: The Politics of Fiscal Squeeze in Perspective, Proceedings of The British Academy 197. Oxford: Oxford University Press for the British Academy. Gregory, R., & Hicks, C. (1999). Promoting Public Service Integrity: A Case for Responsible Accountability. Australian Journal of Public Administration, 58(4), 3 15. Gregory, R., & Zirker, D. (2013). Clean and Green with Deepening Shadows? A NonComplacent View of Corruption in New Zealand. In J. J. Quah (Ed.), Different Paths to Curbing Corruption. Singapore: Emerald Group Publishing. Gregory, R., Zirker, D., & Scrimgeour, F. (2012). A Kiwi Halo? Defining and Assessing Corruption in a ‘Non-Corrupt’ System. The Asia Pacific Journal of Public Administration, 34(1), 1 29. Hubbard, A. (2012). Judges Can’t Be a Special Case. The Sunday Star-Times, 3, June. Jelmayer, R. (2016). Brazil’s Prosecutor Reopens Probe of Saab Fighter Jet Purchase. Wall Street Journal (February 5): http://www.wsj.com/articles/brazils-prosecutorreopens-probe-of-saab-fighter-jet-purchase-1454677147. Accessed 16/06/16. Johnston, M. (2005). Syndromes of Corruption: Wealth, Power, and Democracy. New York: Cambridge University Press.

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Johnston, M. (2014). Corruption, Contention and Reform: The Power of Deep Democratization. New York: Cambridge University Press. Lambsdorff, J. (1999). Corruption in Empirical Research: A Review, Transparency International Working Paper. November. http://gwdu05.gwdg.de/Buwvw/downloads/ contribution05_lambsdorff.pdf. Accessed 13/06/16. Lipson, L. (2011). The Politics of Equality: New Zealand’s Adventures in Democracy, introduction by Jon Johansson. Wellington: Victoria University Press. Macaulay, M. (2016). Who Do We Trust? Wellington: Institute for Governance and Policy Studies and Colmar Brunton. Macaulay, M., & Gregory, R. (2016). So Near Yet So Far: Implications of the Organised Crime and Anti-Corruption Legislation Bill. The Journal of Criminal Law, 80(1), 17 27, Also published in Policy Quarterly, 11(3): 48 55. Maor, M. (2004). Feeling the Heat? Anticorruption Mechanisms in Comparative Perspective. Governance, 17(1), 1 28. Mead, S. and King, D. (2016). Organised Crime and Anti-Corruption Legislation, ADLSI: Independent Voice of Law, 12 February. http://www.adls.org.nz/for-the-profession/ news-and-opinion/2016/2/12/organised-crime-and-anti-corruption-legislation. Accessed 13/06/16. Moynihan, D. (2008). The Normative Model in Decline? Public Service Motivation in the Age of Governance, La Follette School Working Paper 2007 021, Madison, Wisconsin: Robert M. La Follette School of Public Affairs, University of WisconsinMadison. Persson, A., Rothstein, B., & Teorell, J. (2013). Why Anticorruption Reforms Fail—Systemic Corruption as a Collective Action Problem. Governance, 26(3), 449 471. Polidano, C. (2002). The Bureaucrat Who Fell Under a Bus: Ministerial Responsibility, Executive Agencies, and the Derek Lewis Affair in Britain. Governance, 12(2), 201 229. Prebble, J. (2016). The Panama Papers and Foreign Trusts: What Should Be Done? Policy Quarterly, 12(3), 82 91. Quah, J. (2011). Curbing Corruption in Asian Countries: An Impossible Dream? Bingley, UK: Emerald Group Publishing. Quah, J. (2013). Different Paths to Curbing Corruption: Lessons from Denmark, Finland, Hong Kong, New Zealand and Singapore. Bingley UK: Emerald Group Publishing. Quah, J. (2015). The Normalisation of Corruption: Why it Occurs and What Can Be Done to Minimise It. Department of Economic and Social Affairs. New York: United Nations. Radio New Zealand (2016a). NZ at Heart of Panama Money-Go-Round, 9 May. http://gwdu05. gwdg.de/Buwvw/downloads/contribution05_lambsdorff.pdf. Accessed 13/06/16. Radio New Zealand (2016b). Panama Papers: The NZ-Kazakhstan Connection, 30 May. http://www.radionz.co.nz/news/national/305138/panama-papers-the-nz-kazakhstan-connection. Accessed 16/06/16. Rhodes, R., Wanna, J., & Weller, P. (2009). Comparing Westminster. Oxford UK: Oxford University Press. Shaw, R., & Eichbaum, C. (2014). Ministers, Minders and the Core Executive: Why Ministers Appoint Political Advisers in Westminster Contexts. Parliamentary Affairs, 67 (3), 584 616. Simmons, G., & Young, P. (2016). Climate Cheats: How New Zealand is Cheating on Our Climate Change Commitments, and What We Can Do to Set it Right. Wellington: The Morgan Foundation.

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Tanzi, V. (1998). Corruption Around the World: Causes, Consequences, Scope, and Cures. IMF Staff Papers, 45(4), 559 594. https://www.imf.org/external/Pubs/FT/staffp/1998/ 12-98/pdf/tanzi.pdf. Accessed August 18, 2016. TaxHavens.Biz (2016). Tax Haven New Zealand. http://www.taxhavens.biz/other_tax_ havens/tax_haven_new_zealand/. Accessed 13 June 2016. Trust New Zealand (2011). New Zealand as an Offshore Centre. http://www.trust-nz.com/ennz-as-offshore.html. Accessed 13 June 2016. Vaughan, G. (2012). Departing SFO boss Adam Feeley says his successor ought to keep an eye out for trans-national fraud and financial crime in Christchurch, Interest.co.nz, 26 September. http://www.interest.co.nz/business/61275/departing-sfo-boss-adam-feeleysays-his-successor-ought-keep-eye-out-trans-national-f. Accessed 13/06/16. Wilson, J. Q. (1993). The Moral Sense. New York: Free Press. Wilson, J. Q., & Kelling, G. (1982). Broken Windows: The Police and Neighborhood Safety. The Atlantic (pp. 29 38), March.

The limits of anticorruption in China

11

ˆ Hugo Winckler1 and Je´rome Doyon2,3 1 Attorney at law, Paris Bar Association, 2Columbia University, New York, NY, United States, 3Sciences Po, Paris, France

11.1

Introduction

Since the economic reforms of the 1980s, corruption in the People’s Republic of China (PRC) has been on the rise. In 2015, China ranked 83rd among 168 countries in terms of its level of corruption.a It ranked 80th in 2012b and 40th in 1995 (He, 2000). While some scholars see corruption as a deeply rooted cultural phenomenon in China, we mainly see it as the result of a specific political and institutional configuration.c The policy of “reform and opening” has brought a variety of new avenues for personal enrichment, including corrupt practices.d The liberalization of the economy in a system of one-party rule, in which the judiciary lacks independence and press freedom is very limited, has fueled the spread of corruption. We understand corruption here in very broad terms as the “use of public authority for personal gain” (Wedeman, 2004). While some scholars have focused on a more narrowly defined definition of corruption, a wider understanding better fits the point of view of the Chinese Party-State, which, as we will see, tends to apply such a broad definition in order to use anticorruption struggle as a political tool.e Overall, corruption can encompass a variety of behaviors that can be found at any level of society. In the current Chinese system, maintaining preferential relationships with government officials, sometimes through bribery, is obviously key for the economic actors—be they public or private firms—as their business activities are highly dependent on the central and/or local governments’ regulatory and executive power. In addition, corruption also impacts the ways in which the Party-State operates, either through the selling of official positions or through the opaque processes for government contracting or selling state assets, which provides opportunities for local officials to enrich themselves.f The increasing gap between the a

Website of Transparency International: http://www.transparency.org/country/#CHN_DataResearch (consulted on April 4th 2016). b Website of Transparency International: http://www.transparency.org/cpi2012/results (consulted on April 4th 2016). c Regarding the debate over the cultural aspects of corruption, see: (Wedeman, 2012). d See in particular: (Manion, 2004; Wedeman, 2012). e Regarding the debate over definitions, see: (Lu¨, 2000). f For a variety of examples, see: (Leung, 2015). The Changing Face of Corruption in the Asia Pacific. DOI: http://dx.doi.org/10.1016/B978-0-08-101109-6.00011-3 Copyright © 2017 Hugo Winckler and Je´rˆome Doyon. Published by Elsevier Ltd. All rights reserved.

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salary of officials and their private counterparts in a globalized economy is also an incentive for corrupt practices (Huang, 2015). As shown by Wedeman, these behaviors are not always negative for the economy as they can bring flexibility in a rigid system (Wedeman, 2012). Still, corruption has been a major catalyst of public outrage since the 1980s. It was one of the main themes put forward by the Tiananmen Square protesters in 1989. The popular demand has not weakened in the age of the Internet. Such pressure forced the Chinese leaders to prioritize efforts against corruption (He, 2000). The anticorruption campaign, launched by Xi Jinping after he took power in late 2012 and which we will develop in the core of this chapter, is the latest in this trend. But the campaigns seem to not reverse the trend. The situation keeps deteriorating according to Transparency International.g Focusing first on the overall institutional and legal framework, and second on the political logic and implementation, we will try to understand the selective nature and the limited effect of anticorruption in China.

11.2

Institutional and legal frameworks

11.2.1 The legal framework China does not have a dedicated anticorruption law. Most provisions are to be found in the “criminal law” under its Chapter VIII entitled “Graft and Bribery.”h In addition, a variety of administrative regulations, interpretations (mostly issued by the State Council or the Supreme Court), and laws contain provisions regarding the prevention of corruption.

11.2.1.1 Indictments regarding officials Graft is defined in article 382 of the criminal law in the following words: “state personnel who takes advantage of their office to misappropriate, steal, swindle or use other illegal means to acquire state properties constitute the crime of graft.” This indictment is extended to “those who are entrusted by state organs, state companies, state enterprises, state undertakings and mass organisation to administer and operate state properties.” Accepting a bribe is indicted pursuant to article 386 of the criminal law. Article 383 of the law provides the quantum of punishment for an individual depending on the amount of money involved. A corrupt official for a case of a value of more than 100,000 yuan (c. USD15,000 or EUR13,500) risks a sentence of g

Website of Transparency International: http://www.transparency.org/country/#CHN_DataResearch (consulted on April 4th 2016). h This chapter discusses only the main provisions of the Chapter VII of the Criminal law to provide the reader with a general idea of its content, but does not provide its detailed review. For a more comprehensive analysis, see Munro (2014). An online version of the law can be found at: http://www.cecc.gov/ resources/legal-provisions/criminal-law-of-the-peoples-republic-of-china (consulted on April 4th 2016).

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10 years of detention to life imprisonment. On the other side of the spectrum, even a case involving an amount of 5,000 yuan, if the situation is serious, can lead to two years of criminal detention.

11.2.1.2 Indictments regarding the briber 11.2.1.2.1 Giving a bribe to an official Article 389 of the criminal law states that for an individual, the “act of giving State functionaries articles of property in order to seek illegitimate gain shall be considered a crime of bribing.” The sentence is no more than five years of fixed-term imprisonment. The bribe has to be relatively large to be punishable, that is to say pursuant to the “Regulation of the Supreme People’s Procuratorate on Standards for filing Cases of Bribery Crimes” (2000), of a value exceeding 10,000 yuan. Article 393 of the criminal law similarly prohibits corporate entities from offering a bribe, as well as paying a kickback or a commission to a public official for the purpose of seeking illegitimate benefits. Under the above-mentioned standards, the threshold is set at 200,000 yuan but can be reduced to 100,000 yuan under certain circumstances. Additionally, article 391 of the criminal law prohibits paying a bride to a state-owned company or enterprise, public institution, or people’s organization in the course of a business transaction in violation of state regulations to obtain illegal benefits.

11.2.1.2.2 Giving a bribe to induce a sale Within the context of business relationships, giving a gift to a business partner, working or not for a state enterprise, can be considered as the crime of giving a gift to induce a sale, against the economic principle of competition, indicted pursuant to article 164 of the criminal law and under the PRC’s “Anti-Unfair Competition Law” (1993). According to the “Provisions of the Supreme People’s Procuratorate and the Ministry of Public Security on Standards for Filing cases for Prosecution in respect of Criminal Cases under the Jurisdiction of Public Security Organ”, for the gift to qualify as a bribe it shall be of a relatively large value of more than 10,000 yuan if given to an individual, or of 200,000 yuan if given to an entity.

11.2.1.2.3 Preventing corruption in the party-state In addition to legal provisions, other regulations have been enacted to deter corruption within the administration, the Chinese Communist Party (CCP), and stateowned enterprises. For instance, the “Regulation on the Work of Selecting and Appointing Leading Party and Government Cadres” (2014) determines the rules regarding the appointment of Party cadres and high-level cadres so as to limit risks of corruption and nepotism within the Party and the administration. Additionally, regulations exist to force cadres from higher administrative levels to report on their revenue and assets (An, 2014). Similarly, the Central Commission Discipline Inspection, the CCP’s Organization Department, the Ministry of Supervision, and the State-owned Assets Supervision and Administration Commission issued the “Regulation on Honestly Conducting Business by Leaders of the State-Run Enterprises” in 2005.

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The Supreme Court has issued numerous decisions to deter corruption within the judiciary. For instance, in order to limit corruption in the judiciary, the Supreme Court has enacted, in the form of Supreme Court regulations, on January 8th, 2009 the “five prohibitions, seventeen improprieties and the five principles” that strive to limit the cases of “invisible intermediation.” These five prohibitions tackle behaviors that lawyers and judges cannot indulge in, such as accepting gifts from a party in a lawsuit, or working a case involving family members, among others.

11.2.2 The anticorruption state institutions The Ministry of Supervision was reestablished by the State Council in 1987 and is responsible for monitoring state organs, government departments, and public officials. It is officially in charge of implementing the “Administrative Supervision Law of the People’s Republic of China” (enacted in 1997). The Ministry of Supervision is organized in specialized bureaus dedicated to particular industries (bank, finance, education, and health). Provincial governments followed suit and created their own supervisory bureaus in the following years, with offices extending down to the county level (Wedeman, 2004). Pursuant to article 18 of this law, the supervisory bureaus should, among others, “investigate and handle violations of rules of administrative discipline committed by administrative organs and public servants of the State or other persons appointed by such organs.” To perform its duty, the supervisory bureaus are vested with investigatory prerogatives. They can decide on administrative sanctions (administrative warning, recording of demerit, demotion, dismissal from office) if appropriate. In practice, the Ministry of Supervision’s investigative role is limited by the Central Commission of Discipline Inspection, which claims jurisdiction over cases involving a Party member (Wedeman, 2004). In addition to the Ministry of Supervision, the National Corruption Prevention Bureau was created in 2007 and is directly under the authority of the State Council: this Bureau has a policy role and works on government transparency and on promoting anticorruption activities within China. It is set up within the framework of the United Nations Convention against corruption (Xinhua, 2007), If a criminal investigation is launched, the file is transmitted to the People’s Procuratorate. The People’s Procuratorate was reestablished in 1978 after being dismantled during the Cultural Revolution (Wedeman, 2004). It belongs to the judicial branch of government and is vested with investigatory and prosecution functions.i The Procuratorate is in charge of pressing criminal charges and investigating cases of alleged corruption. The People’s Procuratorate’s decision to pursue a case is discretionary and a case can be discarded for nonlegal reasons.j i j

See section 10 of the Criminal Procedure Law of the People’s Republic of China. The victim or the public security bureau in charge of the case, pursuant to the provisions of the Chapter III of the Criminal Procedure Law of the People’s Republic of China, can challenge the Procuratorate’s decision.

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11.2.3 The party discipline organs The Central Commission for Discipline Inspection (CCDI) (originally created in 1949 and took its current form in 1978) is a Party organ tasked with enforcing internal rules and regulations. At the local level, as well as in the military, are established commissions for discipline inspection, in charge of ensuring that Party rules are enforced at all levels of the organization. Since most officials are Party members, these bodies are, in practice, the core of anticorruption in China. Nonetheless, the CCDI lacks judicial and administrative authority, hence it cannot judge nor convict, neither can it pronounce administrative sanctions. While it can pronounce certain disciplinary sanctions internal to the Party, the CCDI is supposed to defer cases to the People’s Procuratorate for criminal prosecution (Wedeman, 2004). In actual practice, the jurisdiction of the CCDI and supervisory bureaus cannot be neatly segregated, as most officials are Party members. In most cases, the CCDI and the Ministry of Supervision can claim jurisdiction. In practice, the CCDI managed to gradually impose its jurisdiction over politically sensitive cases involving key Party members. In order to avoid overlapping jurisdiction in investigating corruption cases, most of the operational departments of the Ministry of Supervision merged with the CCDI in 1993, meaning that the two institutions operate mostly as a single entity with overlapping staff. In 2009, the Central Leading Group for Inspection Work was established to supplement the role of the CCDI. It is a coordination body set up under the Central Committee of the CCP. The leading group can dispatch inspection teams to provinces and local governments as well as to state-owned enterprises to ensure Party members act in conformity with the rules of the Party (Zhao, 2013). The CCDI investigations are known for using the shuanggui procedure, which entails that corruption investigations and the disciplinary sanctioning process of corrupt Party members are conducted outside the Chinese legal system and in an opaque manner. Shuanggui means double standards, and is also known as “double designation” (liangzhi), since the procedure starts with the issue of summons to a Party Official stating a place and a time for interrogation. Following the shuanggui procedure, a Party member can be retained for an undetermined duration outside of the legal system (Liu, 2013). The shuanggui system is mostly constituted to prevent the member under investigation from contacting his/her allies seeking protection or from destroying the proofs of corruption before the legal investigation starts. The PRC’s “Regulation Regarding the Supervision of the Administration” published by the State Council on December 9, 1990, and the “Regulation regarding the investigation process of the disciplinary inspection bodies of the CCP” published on May 1, 1994, formalized the shuanggui procedure. Overall, the anticorruption efforts within the Party-State are mainly in the hands of the Party itself. There is no independent agency in charge of investigating and prosecuting corruption. As we will now see, such an institutional configuration leads by design to a selective struggle against corruption, mixing governancerelated objectives with political ones.k k

Due to this institutional configuration, Manion speaks of “corruption by design” in the PRC (Manion 2004).

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Selective anticorruption

11.3.1 Corruption and popular pressure During the Mao era, several political campaigns were launched by the Party-State to fight against corruption, in particular the ones against the “three evils” (corruption, waste, and bureaucratization) and the “five poisons” (bribery, tax evasion, stealing state property or obtaining it by fraud, cheating in workmanship and materials, and stealing state economic intelligence) (Cohen, 1968). Political campaigns and the criminal law were used as political tools to instill confidence into the leadership and the capacity of the Communist Party to control its officials and to maintain social order (Lewis, 2014). Until today, the struggle against corruption remains highly selective and political. Yongshun Cai underlined that anticorruption is highly costly from the PartyState’s point of view, both in terms of allowing means to the task but also maintaining the loyalty of the potentially targeted officials. It therefore selectively targets the corrupt agents, taking into account the political costs and benefits (Cai, 2015). As we have seen, the administrations in charge of this task are not autonomous from the State and can be therefore used in power struggles. Concerned with its legitimacy, the Chinese State must also take into account the impact of corruption cases on public opinion. Chinese leaders have in fact repeatedly presented corruption as a matter of life and death for the Party (Wedeman, 2014). While the limitations of freedom of press in China make it hard to put pressure on the State, citizens still find ways to bring corruption cases to the political agenda. In particular, it takes the form of manhunts on the Internet, as well as collective protests. In recent years, cases followed by human flesh search engines (renrou sousuo) have become increasingly numerous. It implies the collective hunt of corrupt officials by Internet users. They search for information to build cases against them. The research is conducted simultaneously by a multitude of netizens posting their results on social media websites (Hatton, 2014). One of the most famous cases is the “Li Gang case.” It started when a young man Li Qiming hit and killed two students on the campus of the Hebei University in October 2010. When apprehended by the police, Li Qiming reportedly said: “My Dad is Li Gang,” thinking that his father’s position as the deputy director of the local Public Security Bureau would protect him from judicial pursuits. This sentence was directly posted on the Internet and numerous netizens investigated the case. It eventually forced the official media and the central authorities to focus on this case, which ended with the sentencing of Li Qiming to imprisonment (Winckler, 2014a). In addition to the manhunts on the Internet, corruption-related collective actions are frequent in China. The number of “mass incidents” has been steadily growing: there were 87,000 cases in 2005, and between 150,000 and 180,000 in 2012 (Lam, 2012). Around 65% of these protests are connected to cases of land grab of countryside property without proper compensation (Winckler, 2013). One of the landmark cases was the uprising in the Wukan village. The Wukan protests started in September 2011 as a response to the confiscation of land by local officials, for

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commercial purposes, without proper compensation for the villagers. After the contentious death of the villagers’ leader, they expulsed the local cadres from the village and the protests gained wide media coverage. The provincial authorities were pressured to intervene and a settlement was found with the villagers, including new elections for local authorities (Cohen, 2012). For a long time, the authorities have tried to channel these popular demands for accountability to prevent them from getting out of control and escalading into collective protests. In addition to the fact that its legitimacy is at stake, the State can use popular scrutiny over corrupt officials to gather information and better control its own agents. In fact, citizens can relay information to the State authorities regarding corrupt officials through a multiplicity of ways. In addition to the traditional system of petitioning,l citizens can file reports to different institutions by phone or e-mail. More recently, the CCDI has set up a website dedicated to such tips in 2005, as well as a mobile app in 2015 (Guo, 2014). While these tips are key in the struggle against corruption—such cases officially amounted to 70% of the prosecuted cases in 2001, responsiveness remains very low, and only a minority of these complaints is followed by action (Cai, 2015, p. 107). As we will now see in the case of Xi Jinping’s anticorruption campaign, political motivations remain a key factor explaining the selection of targets.

11.3.2 Xi’s anticorruption campaign In 2013, Xi Jinping launched a major anticorruption campaign that has not stopped since. The campaign is exceptional in its length and its magnitude. At the beginning of 2015, 414,000 officials had been punished under corruption charges, with around 200,000 of them actually being prosecuted in court (Wu & Keliher, 2015). In addition to its intensity, the anticorruption campaign goes beyond any precedent in attacking very high-level Party-State officials and People’s Liberation Army (PLA) officers. Up to early 2016, 151 “tigers”, or high-level officials, have been under investigation (The Economist, 2016). The campaign is led by the CCDI and its equivalents at the local level and in the PLA. Also the Party, at the central and local levels, sends inspection teams in various administrations to investigate potential corruption cases. These teams have doubled their staff in recent years for the needs of the campaign (Lu, 2016). The Party therefore remains in control of the process. Among the numerous high-level officials targeted, the case of Zhou Yongkang, the former secretary of the Central Political and Legal Affairs Commission, is emblematic. Going after Zhou Yongkang, Xi Jinping denied the traditional immunity of Politburo Standing Committee members—the highest institution in the CCP. It was the first time since the establishment of the PRC that one of its current or former members was accused of corruption. By doing so, Xi removed a potential threat to his power. Zhou Yongkang was allegedly conspiring with Bo Xilai, the l

Regarding this administrative hearing of citizens’ complaints and grievances, see: (Minzner, 2006).

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former Party secretary of Chongqing purged in 2013 (Lim and Blanchard, 2014). Zhou was finally sentenced to life in prison for corruption (Bo, 2015). In the midst of his anticorruption campaign, Xi Jinping also targeted high-level military officers. In particular, he went after Xu Caihou and Guo Boxiong, two former vice chairmen of the Central Military Commission. They were the highestranked officers accused of corruption since the Cultural Revolution. While Xi’s targets were retired officers, the symbolic significance of these acts is important, and it goes together with the fall of massive clientelistic networks Reuters (2015, March). After being mostly concentrated on Party-State and PLA cadres, the anticorruption campaign’s focus has moved to the corporate world since 2015. Numerous managers from the public and private sectors have also since been investigated (Lam, 2015), including major Chinese companies such as China Unicom, China Shipping, and Sinopec (Fang, 2015). Overall, this campaign is a political tool for Xi Jinping in order to get rid of troublesome Party members, PLA officers, as well as SOE leaders, and to dismantle their respective fiefdoms. The selective nature of this campaign should not be forgotten. In fact, no princeling has been targeted so far. Princelings are the sons and daughters of Party-State and military leaders from the Mao era who have now risen to leadership positions, and they constitute an aristocratic elite of which Xi Jinping is a key member (Lam, 2015). While selective, the campaign has so far been a success in terms of public image, boosting Xi’s popular approval. In 2014, 92% of the Chinese citizens surveyed by the Pew research centre said they had high confidence in the president, 10 points above the confidence in his predecessor, Hu Jintao, in 2012.m Beyond the political struggle, the anticorruption campaign is an important tool for strengthening the legitimacy of the Chinese Party-State and its leadership. As we will now see, this is also underlined by the moralistic discourse that goes along with it.

11.3.3 Morality in the political discourse Instead of putting forward its potential negative effects on economic growth, it is the amorality of corruption that is emphasized in the current campaign (Huang, 2015). The political discourse underlines the need for officials to stay in touch with society and to remain exemplary in their morality. This is particularly clear in the mass-line campaign launched by Xi Jinping in parallel to the anticorruption one, and which officially ended in October 2015 (Doyon, 2014). Following the adoption of the “Opinion Regarding the In-Depth Party-Wide Implementation of the Party’s Mass Line Education and Practice Campaign” in May 2013, the mass-line campaign officially started on June 18, 2013. Its official goal was to remind cadres of their fundamental tie to the “masses.” In his statement marking the beginning of the campaign, Xi Jinping explained that its main goals were to make the government more accessible to the public and to eradicate the “four undesirable work styles”: formalism, bureaucracy, hedonism, and m

Website of Pew Global: http://www.pewglobal.org/database/indicator/69/ (consulted on April 4th 2016).

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extravagance. The official results of the campaign have been impressive in terms of administrative simplification and the comprehensive crackdown on cadres’ extravagance. According to the CCDI, public expenditures on official receptions as well as cadres’ vehicles and overseas trips were cut by 25.5 percent, or RMB 53 billion ($8.7 billion) (Xinhua 2014). While the mass-line campaign itself ended in October 2015, the Party-State’s tendency to moralize means the cadres’ actions remain clear in the recent provisions it developed to better control the training and promotion of officials. In January 2014, the Party issued a revised version of the “Work Regulation for the Promotion and Appointment of Leading Party and Government Cadres,” dating from 2002. This text included a variety of new rules and underlined that leading cadres have “put virtue first” in order to rise in the ranks and to fight against corruption in the promotion system. Interestingly, this moralization of the political discourse tends to be increasingly framed in Confucian terms. In an instructional meeting with Politburo members in late 2014, Xi Jinping quoted Confucius saying: “Govern with virtue and keep order through punishments” (Xi, 2014). Also, the CCDI developed its own website dedicated to the promotion of Chinese traditional culture as a way to tackle corruption and to enhance public and private morality.n Interestingly, such emphasis put on traditional moral concepts has a strong appeal also in the business world, as social corporate responsibility tends to be framed in these terms. The reliance on Chinese classical references to put forward a certain moral order is presented as a way to prevent corrupt behaviors. This underlines the effects of the political discourse and of Beijing’s campaigns in shaping the broader understanding of what is recognized as virtuous behavior or not.o

11.4

Conclusion

If the cause of corruption is elusive, the impact of the anticorruption campaigns is also complex to assess. Some observers have pointed out some positive consequences on the economy, as it provides a business environment with more reliable information (Li & McElveen, 2014). Nonetheless, anticorruption remains mostly the Party’s internal affair. In fact, the anticorruption campaigns are not correlated with a retreat of the State from the economy nor with the liberalization of civil society, which would allow the emergence of checks and balances and possibly a structural decrease in corruption (Huang, 2015). As He Weifang, a law professor at Beijing University, underlined: “a newspaper that is not controlled by the party is more effective [against corruption] than ten CCDIs.”p n

Website of the CCDI: http://v.ccdi.gov.cn/ctjg/zgctzdjgfjsmys/index.shtml (consulted on April 4th 2016). o On this tendency in the business sector, see: (Winckler, 2014b). p Blogpost by He Weifang: http://blog.sina.com.cn/s/blog_4ef36bd40102uzmr.html (consulted on April 4th 2016).

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It seems that political anticorruption campaigns cannot have a transformative effect for they remain tightly connected to the internal workings of the Party-State.

References An, B. (2014). Officials must disclose assets before promotion. China Daily. Bo, Z. (2015). The Trial of Zhou Yongkang and China’s Rule of Law. The Diplomat. Cai, Y. (2015). State and agents in China: Disciplining government officials. Stanford, California: Stanford University Press. Cohen, D. (2012, January 1). What Wukan Really Meant. Retrieved April 4th, 2016, from http://thediplomat.com/2012/01/what-wukan-really-meant/. Cohen, J.A. (1968). The criminal process in the People’s Republic of China, 1949 1963: an introduction. Cambridge: Harvard University Press. Doyon, J. (2014). The End of the Road for Xi’s Mass Line Campaign: An Assessment. China Brief, 14, 20. Fang, F. (2015). Anti-Corruption Campaign Targets China’s State-Owned Enterprises. Epoch Times. Guo, X. (2014). Controlling Corruption in the Party: China’s Central Discipline Inspection Commission. The China Quarterly, 219, 597 624. Hatton, C. (2014, January 28). China’s Internet vigilantes and the “human flesh search engine.” BBC News. Retrieved from http://www.bbc.com/news/magazine-25913472. He, Z. (2000). Corruption and anti-corruption in reform China. Communist and PostCommunist Studies, 33(2), 243 270. Huang, Y. (2015). Arresting Corruption in China. The Diplomat. Lam, W. W.-L. (2012). Beijing Plays Up the Carrot While Still Wielding the Stick. China Brief, 12, 14. Lam, W. W.-L. (2015). China’s Anti-Graft Campaign in Review. China Brief, 15, 23. Leung, J. (2015). Xi’s Corruption Crackdown. Foreign Affairs, 32 38. Lewis, M. K. (2014). Criminal Law Pays: Penal Law’s Contribution to China’s Economic Development. Vanderbilt Journal of Transnational Law, 47(2), 371 450. Li, C., & McElveen, R. (2014, July 17). Debunking Misconceptions About Xi Jinping’s AntiCorruption Campaign. Retrieved April 4th, 2016, from http://www.brookings.edu/ research/opinions/2014/07/17-xi-jinping-anticorruption-misconceptions-li-mcelveen. Lim, B.K., & Blanchard, B. (2014, December 30). Exclusive: Former China president Hu approved probe against aide - sources. Reuters. Beijing. Retrieved from http://www. reuters.com/article/2014/12/30/us-china-politics-probe-idUSKBN0K80KA20141230. Liu, Linlin (2013, May 19). Is intra-Party interrogation a shield or a trap? Global Times. Lu¨, X. (2000). Cadres and corruption: The organizational involution of the Chinese Communist Party. Stanford, Calif: Stanford University Press. Lu, Y. (2016, February 29). Don’t Expect China’s Corruption Inspectors to Work Miracles [The Wall street Journal]. Manion, M. (2004). Corruption by design: building clean government in Mainland China and Hong Kong. Cambridge, MA: Harvard University Press. Minzner, C. F. (2006). Xinfang: An Alternative to the Formal Chinese Legal System. Stanford Journal of International Law, 42(1), 103. Munro, S. (2014). China. In M. F. Mendelsohn (Ed.), The Anti-bribery and Anti-corruption review (pp. 50 62). London, UK: Law Business Research.

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Reuters (2015). China investigates second top soldier in corruption probe into armed forces. The Guardian. The Economist, Portrait of a purge. (2016, February 13). The Economist. Retrieved from http://www.economist.com/news/china/21692928-who-being-investigated-corruptionand-why-portrait-purge. Wedeman, A. (2004). The intensification of corruption in China. China Quarterly, 180, 895 921. Wedeman, A. (2012). Double paradox rapid growth and rising corruption in China. Ithaca: Cornell University Press. Wedeman, A. (2014). Xi Jinping’s Tiger Hunt and the Politics of Corruption. China Currents, 13(2). Winckler, H. (2013). Inadequacies of the Chinese political system towards collective protests (Les inade´quations du syste`me politico-judiciaire chinois face aux protestations collectives). China Analysis, 43. Winckler, H. (2014a). The Chinese judiciary and the public space (Le pouvoir judiciaire chinois et l’espace public e´ve´nementiel). Droit et socie´te´, 86, 175 197. Winckler, H. (2014b). Using the Dizi Gui to break away from a deteriorated business environment—a case study. Asian Journal of Business Ethics, 3(2), 111 125. Wu, H., & Keliher, M. (2015). How to Discipline 90 Million People. The Atlantic. Xi, J. (2014). Xi Jinping’s speech at the Politburo’s 18th studying session. Xinhua. Xinhua (2007, September 13) National Corruption Prevention Bureau Established. Xinhua. Xinhua (2014) Facts & Figures: CPC’s “mass line” campaign wraps up with achievements. (2014, October 7th). Xinhua. Retrieved from http://news.xinhuanet.com/english/china/ 2014 10/07/c_127069864.htm. Zhao, C. (2013). The centre is responsible for the Central Leading Group for Inspection Work (zhongyang xunshi gongzuo lingdao xiaozu xiang zhongyang fuze). Xinhua.

Governance gridlocks and ubiquitous corruption: charting causes, costs, and consequences of corruption in India

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Roopinder Oberoi University of Delhi, New Delhi, India

The fight against corruption has been declared a high priority in India by the current National Democratic Alliance (NDAa) government. Indian Prime Minister Narendra Modi systematically showed his commitment to fight against corruption on the campaign trail, telling huge crowds that the Congress government, and particularly the United Progressive Alliance (UPAb), has symbolized systemic corruption by listing numerous scams in which the party and family members of the Nehru Gandhi dynasty were implicated. According to the 2014 National Election Study undertaken by the Centre for the Study of Developing Societies (CSDS), anticorruption opinion was a key contributor to the BJP’s winning an outright majority in parliament. However, corruption doggedly remains rampant in the country and the frequent occurrences of political and bureaucratic corruption, public funds embezzlement, fraudulent procurement practices, and judicial corruption mar the country’s image globally. No sector of Indian society is uninfected by this malaise. Nevertheless, the most severely affected include sectors such as public procurement, tax and customs administration, infrastructure, public utilities, and the police, to name a few. The loss of the UPA is, in part, symptomatic of a string of high-profile “scams” that has beleaguered the country. The disquiet toward corruption has ratcheted up currently. In 2011, India saw an upsurge of popular dissent in anticorruption demonstrations after a series of scandals implicated ruling politicians and their cronies in billions of dollars of graft—from the Commonwealth Games to 2 G scandals, and from “Coalgate” to Adarsh Housing Societyc.

a

National Democratic Alliance is a political coalition of various parties led by the Bhartiya Janata Party (BJP). United Progressive Alliance is a political coalition of various parties led by the Indian National Congress (INC). c This is symbolized by the massive public support of Anna Hazare, a noted Gandhian social worker received in his recent campaign against corruption. Never before, in the history of independent India, was anticorruption sentiment so high. Hazare’s crusade appears to have emboldened even the weakest and the most voiceless groups of the society. His appeal to raise his voice against the petty corruption of the lower bureaucracy has particularly resonated with the ordinary people. b

The Changing Face of Corruption in the Asia Pacific. DOI: http://dx.doi.org/10.1016/B978-0-08-101109-6.00012-5 Copyright © 2017 Roopinder Oberoi. Published by Elsevier Ltd. All rights reserved.

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Undoubtedly, the country’s anticorruption strategy is analogous to destroying the Gordian knot. In the case of India, the foundational assertion is that corruption cannot be understood in silos. Any anticorruption step needs to be contextualized on the grounding of the ‘quality of governance’ and the ‘patterns of corruption’ in a particular country. Approaching corruption from both an institutional economic perspective and governance perspective can deepen our understanding of the causes and patterns of corruption and the capacity and appetite for reform. The impact of good governance on corruption networks is, therefore, an engaging and appealing theme that has not received sufficient attention. Challenging and highly inspirational anticorruption programs in many countries are staggered at the implementation point. Therefore, the comprehensive approach taken in this chapter makes a convincing case for tackling corruption. Understanding the underlying principles of corrupt transactions and their embeddedness in webs of relationships can facilitate to develop an innovation program to tackle it. Therefore, rather than applying an incremental approach, intensively developed diagnostic tools, technical assistance, training programs, and lending instruments targeted toward reducing corruption in countries with ingrained corruption need to be espoused. Entrenched corruption arises where societies function largely with particularistic forms of (mis)trust disregarding universalistic standards of good governance and behavior. Thus, the assessment of corruption in India from this standpoint must begin with the analysis of ‘institutional pre-conditionalities’ that shape and determine and facilitate the contours of corrupt transactions in the country. This recognition will allow greater focus on broader structural relationships, together with the internal organization of the political system. The critical relationships in the country are state institutions, the interactions between the state and firms, and the rapport between the state and civil society. To combat corruption, in that case, all these apparent (and not so apparent) liaisons need scrutiny and restructuring.

12.1

Low governance and high corruption inextricably interlinked

The nature of governance and the drivers of corruption are multifaceted, allowing for exchanges among them that are not easily detectable, since corruption is always veiled and there is nexus between politicians, bureaucrats, and corporates that is not easily publicly detected. A characterization of corruption is frequently derived from a principal-agent model. Based on this, “corruption is deemed to take place when an agent trespasses on the rules set up by the principal by colluding with third parties and promoting his own benefit. Negative welfare effects can be assumed if the principal strives to maximise public welfare while the agent does not” (Lambsdorff, 2002). In the 1960 s and 1970 s, two foremost events stirred up awareness in the need for understanding corruption, particularly in transitional countries. First was the theory of development and modernization (Huntington, 1968, 1990) and the identification of bureaucratic corruption alongside the character of laws and institutions in economic growth and development as shaping developing economies

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(Riggs, 1964, Leff 1964, Huntington 1990, Myrdal 1990). All these major academic and empirical research brought the focus on the causes and implications of corruption. Second, the economy and market of the newly sovereign countries of Asia and Africa were beleaguered by unbridled corruption, bureaucratic inefficiency, and incompetence. Since then researchers have dedicated noteworthy efforts in examination of this phenomenon (Heidenheimer, Johnston, and LeVine 1990). Corruption has now become a “normal” phenomenon, i.e., normalization of corruption all over the world judging from its apparent size amongst the 175 countries included in Transparency International’s Corruption Perceptions Index (CPI) in 2014” (Quah, 2015). In exploring the ‘normalization of corruption,’ it is significant to differentiate between corruption as ‘a fact of life’ and corruption as ‘a way of life.’ This characteristic was mentioned by Caiden (2001), who explained corruption ‘as a way of life’ in countries where it is unchecked and universal. This was the standard way of doing things rather than being an omission. Conversely, corruption is a ‘fact of life’ in countries when bribery/embezzlement crimes are the omission rather than the tenet, and are instances of individual cases in point rather than general corruption. When corruption becomes normalized and is established as a way of life in a country, it is most advantageous for individuals to be dishonest and the “corrupt behavior becomes the equilibrium behavior or the social norm” (Mishra, 2006). Quah explains that “[c]orruption is normalized when it is a way of life rather than a fact of life, and includes both petty or “survival” corrupt practices by poorly paid lowranking civil servants as well as grand corruption offences involving huge amounts of money and assets committed by “politically exposed persons” including political leaders, senior bureaucrats, business persons and community leaders” (Quah, 2015). India’s ex-Central Vigilance Commissioner N. Vittal illustrated that corruption has unfortunately become so normalized in India that it has become “a persistent disease” that has infected all sectors and led to “a multiple organ failure in governance”(Vittal, 2012). In developing countries such as India, it is now established that a number of social and economic factors such as authority relations, greasing of system, peer pressure, and cultural normalization toward corrupt practices propel or entice otherwise law-abiding citizens to engage in financial malfeasance, fraud, and bribery. Predominantly, a citizen’s interface with bureaucracy repeatedly compels them to indulge in inducement: Bureaucratic corruption provides civil servants with the opportunity to raise their compensation above what the law prescribes. Through the practice of corruption, private entrepreneurs are able to capture and maintain monopoly positions in the economy. Politicians, who serve as wealth brokers, obtain the resources they need to purchase security and continue to monopolize the supply of legislation. The biggest loser from corruption is society as a whole. Mbaku (1996).

Therefore, the predicament and challenge of corruption control are intimately related to the institutional and cultural setting of a country. One of the fundamental roles of robust institutions is to uphold transactions that guard against any opportunistic misbehavior. There is strong evidence to show that these institutional

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apparatuses can function in binary ways: they can guard legal transactions and reduce transaction costs, or/and they can carry out transactions that run counter to the formalized canon of legal activities corrupt transaction is one of its manifestations. Anwar Shah (2006) highlights this perspective and argues that because corruption is itself an indicator of essential governance failure, the higher the incidence of corruption, the less an anticorruption strategy should consist of tactics and strategy that are narrowly focused on corrupt behaviors. So, policies have to draw attention to the causal features of the country’s weak governance and consequent corruption. The bifurcated and incremental approach to tackle the phenomena has so far shown little success. Poor governance is well embedded in a culture of impunity, where public officials feel no duress or pressure to be accountable to citizens, and citizens have no hope that their chosen leaders are liable to them. In countries with poorly constructed, inefficient, and non self-enforcing constitutional rules, opportunistic behaviors (including rent seeking) are usually pervasive. In such countries, the rules that regulate socio-political interaction have failed to adequately constrain the government. As a result, state intervention in private exchange is equally pervasive. Excessive regulation of economic activities creates many opportunities for rent seeking, including bureaucratic corruption” Mbaku (1996).

This buttresses the cartelization of power that undercuts the operations of institutional checks and balances, and fosters the environment of leniency for corrupt practices and corrupt persons equally. Against such a backdrop, citizen representatives and civil servants face diminutive demands and difficulties in amending irresponsible behavior to a responsible one. These well-embedded social malstructures and malpractices also play a vital role in further lubricating corrupt transactions (Rose-Ackerman 1999; Cartier-Bresson 1997). This is compounded with poor governance, which further constrains the emergence of a robust and vigilant civil society while simultaneously disempowering (and even punishing the death of many Right to Information (RTI)d activists and whistleblowers establishes this point) citizens who want to be campaigners and advocates for effective anticorruption policies and programs. Thus, the political will to address corruption and its associated ills depends upon an enabling governance environment that provides incentives, authority, and operating space to aggregate the demand for accountability. While this statement may sound tautological anticorruption essentially necessitates good governance it highlights the need for sufficient space to initiate some form of action, whether through a public dialogue on corruption or with a d

For the first time after independence, the RTI Act of 2005 gave some teeth to anticorruption activists and empowered the public to probe the activities of government officials and expose corruption. In 2003, Satyendra Dubey was murdered for exposing the National Highway Authority corruption scandal. In Bhopal, a prominent RTI activist Shehla Masood was murdered on 16 August, the day when Anna Hazare was to start his second round of “hunger strike.” Harassment and killing of people raising their voice against corruption has been going on for a long time.

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more ambitious reform agenda. Because the relationships between the enabling environment and political will and capacity are not one-way or unidirectional, any successful reform effort can contribute to better governance, a more empowered civil society, and the break-up of nexus between vested interests and coagulated patronage networks in the country. Oskar (2015) in the chapter ‘Definitions of Corruption’ states that “[p]olitical systems, for example, that are corrupt in Aristotelian terms ‘in that they systematically serve the interests of special groups or sectors” (Scott 1972: 5). Corruption, it is argued, “is best under stood in terms of transactions that subvert the impersonal processes of democracy (Kleinig and Heffernan 2004: 9); or, in a somewhat different version, “one of the most sinister forms of political corruption in a democracy is when the “democratic transcript” is betrayed: that is, when members of the political class act in such a way as to prevent or circumvent the exercise of account ability” (Heywood 1997: 423). The public interest is identified with an ideal form of democracy where corruption damages this ‘democratic transcript.’ According to Carl Friedrich (1990: 15), “individuals are said to be engaging in corruption when they are granted power by society to perform certain public duties but, as a result of the expectation of a personal reward or gain (be it monetary or otherwise), undertake actions that reduce the welfare of society or damage the public interest.” Bayley (1966) argues that “corruption, while being tied particularly to the act of bribery, is a general term covering the misuse of authority as a result of considerations of personal gain, which need not be monetary.” Linking corruption to lack of democratic political procedures and processes, Kurer (2015) says that “[c]orruption is always a form of duplicitous and harmful exclusion of those who have a claim to inclusion in collective decisions and actions. Corruption involves a specific kind of unjustifiable disempowerment” (Warren 2004: 329). He then concludes that “through the democratic norm of empowered inclusion, we can identify the harms to democracy quite precisely, domain by domain’: in government administration, judiciary, legislatures, media, civil society associations and markets” (Warren 2004: 340). Nye defines corruption as “behavior which deviates from the formal duties of a public role because of private-regarding pecuniary (personal, close family, private clique) or status gains: or violates rules against the exercise of certain types of private-regarding influence” (Nye, 1967: 419). Kaufmann, Kraay, and Mastruzzi examined the issue of causation and recognize, with Lambsdorff’s (1999) study of this issue econometrically, and claim that the overriding causation is weak governance, including high corruption, which produces slow growth. Establishing this linkage, Kaufmann et al. (2009) report high levels of correlation (0.65 or over) between governance indicators in general and corruption indicators in particular.

12.2

State capture

Equally detrimental to society is what Kaufmann et al. (2000) defines as “state capture,” particularly in the framework of transition economies. “In a decade of

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transition, fear of a leviathan state is giving way to increased focus on oligarchs who ‘capture the state.’ In the capture economy, the policy and legal environment is shaped to the captor firm’s huge advantage, at the expense of the rest of the enterprise sector” Hellman, Kaufmann (2000). In these economies, corruption takes on a novel avatar. Here we see the emergence of policy oligarchs not only maneuvering rule formation but even shaping the new rules of the game to their own very substantial advantage. The captured state and economy coalesce and reflect imperfect processes of liberalization and are characterized by uncertainty of property rights and largely weaker performance of economy. In a liberal and privatized economy, de nova firms play an important role in driving growth and propel further structural reforms; however, in the case of a captured state and economy, they have a strong rationale to indulge with the captured state in order to contend with influential incumbent economic players. Yet all forms of state capture are intended for extracting rents from state apparatuses for a constricted set of individuals, firms, or sectors in the course of distorting the fundamental legal and regulatory framework that potentially causes enormous losses to the society at large. These oligarchs thrive where economic power is highly concentrated and countervailing social interests are weak. Where the formal channels of political influence and interest intermediation are underdeveloped, they can reign supreme. In effect, state capture includes the sale of parliamentary votes and presidential and executive decrees to private interests; the sale of civil and criminal court decisions to private interests; corrupt mishandling of central bank funds; and illegal contributions by private actors to political parties. While state capture codifies advantages for particular individuals or groups within the existing legal or regulatory framework, administrative corruption refers to the intentional imposition of distortions in the implementation of existing laws, rules, and regulations to provide significant advantages to either state or nonstate actors through the illicit and nontransparent provision of private gains to public officials. Beyond these forms of endemic extortion, administrative corruption also includes ‘grease payments’ as bribes to gain licenses, to smooth customs procedures, to win public procurement contracts, or to be given priority in the provision of a variety of other government services. Civil servants are attracted “by opportunities to sell their official discretion and information” and “by the opportunities to extort payments,” because “permits can be delayed, licences held up, deliberations protracted, proceedings prolonged, unless rewards are offered” Kaufman, Tape (1977). Red tape provides civil servants with the opportunity to extract kickback from the community, to give “speed money” to “cut” red tape, and ease impediments by accelerating their request for licenses or permits. Finally, state officials can also simply misdirect public funds under their control for their own or their family’s direct financial benefit. At the heart of this type of corruption is the excessive and unchecked discretion available to public officials to grant selective exemptions, to prioritize the delivery of public services, or to discriminate the application of rules and regulations. Here, the captured economy also gets trapped in a vicious circle in which the policy and institutional reforms mandatory toward development are undermined by collusion

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between powerful vested interests and state officials who reap substantial private gains from the prolongation of weak governance. The ill effects of weak governance and state capture are well documented in the literature. Hellman, Kaufmann (2000) in the World Bank paper titled ‘Seize the state, seize the day: State capture, corruption and influence in transition’ show that state capture in transitional societies is frequently embedded in conniving affiliations among the big business organizations and infirm political establishments. At other times, it is the consequence of a transitional model: the disassembling of former inhibitory structures or patterns provides chances to actors to expend networks and capacities perfected throughout overbearing rule to establish ascendancy of state resources. They are especially successful when fledgling transitional governments are attempting economic liberalization measures in weak rule of law contexts. State capture is more detrimental as compared to ordinary corruption, which is seen as individual bad incidents of bribes being asked from citizens for providing basic services. In the systemically driven process of state capture, state establishment falls under the de facto dominance of individuals or webbed groups that exercise state power for their individual pursuits. Thus, the complex web of variables account for the detrimental effects on i) undermining property rights, ii) weakening the rule of law, iii) limiting private sector growth, iv) eliminating incentives to invest, v) debilitating institutional capacity, and vi) delaying economic and political development. When corruption begins to erode the legitimacy of the state, it can “become a pervasive phenomenon, multiplying its perverse effects and leading a country to a serious political, institutional, and economic crisis.” Laffont (2006) points out that one is expected to uncover maximum corruption in countries standing at the unfortunate juncture of a heavily regulated economy that does not yet boast of adequate enforcement capacity and market competition. David Osterfeld (1992: 204—18) has also argued that in a “heavily regulated economy, one can find two distinct types of corruption: “expansive corruption,” which involves activities that improve the competitiveness and flexibility of the market; and “restrictive corruption,” which limits opportunities for productive and socially beneficial exchange.” The firms that survived under-institutionalized corruption were those that had become efficient at rent-seeking, not at properly and effectively servicing their markets. The expertise that improved their ability to survive was their knowledge of the political process, who to bribe, and how to effectively manipulate the political system to their advantage.

12.3

Culture

There are two reasons that are often provided as an explanation of the occurrence of high level of corruption in developing states. La Porta et al (1999) examine historical, cultural, and economic determinants of a variety of indicators of government quality, including corruption. Conceptions of the social role of law and the relative importance of law in preserving social order differ across countries. By

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contrast, in many other cultures social order is associated not so much with adherence to procedures as with respect to hierarchy and the authority of offices (Treisman, 2000). Seleim, Bontis. (2009) state that we can anticipate that nations with dissimilar colonial background have special legal cultures and unusual degrees of propensity to corruption regardless of whether they have universal law or civil law systems. “There is an understanding among various scholars in different fields that distinctive societal cultures influence a wide variety of social phenomena” (House et al., 2002; Hofstede, 1983). Thus, cultural characteristics persuade the citizen’s precepts on moral subjects (Scott et al., 1993). Becoming aware of and acknowledging of this cultural departure that contours the scale of corruption is imperative for a perspective on the country’s competitiveness (Davis and Ruhe, 2003) and for venturing in for global commerce (Park, 2003). These researches have exemplified that culture is an important constituent that can help explicate the phenomena of corruption and its unique attributes. This presents a cultural approach, suggestive that corruption is rooted in social norms like gift-giving and allegiance to family or clan, rather than the rule of law, which is very common in a transition economy. These inclinations are referred to as primordial loyalties, which were extensively explained in Riggs’ prismatic societye (Riggs, 1964). Riggs’ theory of prismatic society can be understood as an analysis of drivers of corruption. Riggs uses the word ‘corruption’ not so frequently; nevertheless, it is coherent with his insistency that administrative concepts that are applicable for modern, differentiated societies are misinforming when used to understand a less differentiated or developing society. Riggs uses the term “Bazar-Canteen” to refer to the economic scene in a transitional society. The sala administration in a prismatic society is essentially uneconomical, prodigal, corrupt, and ineffective. From the perspective of prismatic administration, corruption, patronage, clientelism, and favoritism are not flaws in the system that can be corrected by proper procedure and law. The very rules and procedures devised to promote modern bureaucracy have been made functional for a different normative order they ‘perform unusual social or political functions’ (Riggs 1964: 12). In India networks of personal relationships are commonly associated with (and often equated to) ‘corruption.’ Indeed, the standard reply officials give to the question why frequent personnel transfers are necessary is that they ‘prevent corruption.’ Zwart (2010) states that ‘[c]orruption can be common and routine lacking the approval by the masses who bears its costs’; Susan Rose-Ackerman (1999: 177)writes that India’s transfer-trade example corroborates this connection. The explanation lies in the transfer system serving political interests in amassing cash and in providing patronage equally vital for political endurance in Indian democracy. There is a contrarian view on corruption and not all agree to its debilitating impact on society, economy, and polity. Some justifications of corruption e

‘Prismatic’ metaphorically conveys the idea that in the societies Riggs talks about, social structures are functionally fused and functionally differentiated at the same time, like light inside a prism (Riggs 1964).

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that lie within the revisionist school argue that corruption is efficiencyenhancing or works like ‘grease’ in helping to alleviate problems of capital formation and administrative inflexibility characteristic of modernizing economies (Montinola and Jackman, 2002). Another approach originates from the public choice school, which associates corruption with a lack of choices, and they observe that government officials can restrict market choices through their legislative and regulatory powers, which allow the officials the power to distribute highly lucrative government contracts. Such state-controlled economies provide the wherewithal for officials to create extra-normal profits or rents for private economic actors, or to distribute rents from one set of actors to another. This ability to intervene in markets gives officials a distinctive opportunity to extract bribes from those affected by laws and regulations. So, divergent diagnosis and cure for corruption continue to exist. Caiden (2001: 21 26) mentions the following ‘sources’ of corruption as psychological, ideological, external, economic, political, sociocultural, and technological. Factors that contribute to corruption, however, are of course not the same as causes of corruption. “In sum, corruption can be attributed to almost anything . . . But while the opportunities exist everywhere, the degree of corruption varies widely among individuals, public agencies, administrative cultures, and geographic regions” (Caiden 2001: 26). Andersson (2013) also believes that “without further operationalization to be empirically applicable, the lack of capacity to distinguish between different types of corruption as opposed to the overall aggregate, the implication would be that all corruption is treated as having similar incentives” (Andersson and Heywood 2009). Syed Hussein Alatas further locates exactly the same point that “[f]ailure to make the distinction between the different types of corruption and to place them in their proper evaluative context only leads to confusion and time wasting” (Alatas 1990:3).

12.4

Unbridled corruption in India

Corruption is by no means a new phenomenon in India. Kautiliya’s well-known statement in the Arthasastraf centuries ago testifies to the durability of this phenomenon. He said, “just as it is impossible to know when a fish moving in water is drinking it, so it is impossible to find out when government servants in charge of undertakings misappropriate money.” Kautiliya lists that there are 40 ways of embezzlement and then goes on to enumerate these ways. Gunnar Myrdal, while discerning the causes and effects of corruption in India, said, “the folklore of corruption is slowing down the wheels of administration. which is an impediment to speed and efficiency” (Myrdal, 1968). Identical analysis was articulated by the Santhanam Committee f

The Arthasastra is an ancient Indian treatise on statecraft, economic policy, and military strategy, written in Sanskrit. It identifies its author by the names ’Kautilya’ and ’Vishnugupta,’ both names that are _ traditionally identified with Chanakya (c. 350 283 BC), who was a scholar at Takshashila and the teacher and guardian of Emperor Chandragupta Maurya.

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(1964), which stated corruption in India is highly multidimensional in nature. T.N. Seshan alleged there is almost universalization of corruption in India. “Not even a square inch of the country is free from corruption,” said the former Chief Election Commissioner T.N. Seshan. He said that “the country was in a mess as everyone from politicians, civil servants and judges were all corrupt. Corruption has gripped not just India, but the entire world. The list of corrupt places in the country today is unending.” Jain (1994), while trying to understand corruption, believes that corruption in India has moved through three different stages: “gaining legitimacy, widespread indulgence and shameless defence” (Jain, 1994). Corruption has today permeated deep into the very sinews of Indian society. Offering bribes and accepting them have become a predictable, tolerable, and brazen societal norm. This has led to general public skepticism and the feeling that those indicted in corruption consistently go scot-free and in the process accumulate more power, status, and wealth. This has led to a condition where even the most determined efforts to fight the venality have failed miserably. It has given credence to Voltaire’s dictum that corruption is an evil that grows respectively with age (Jain, 1994). The Indian market, particularly before liberalization in the 1990 s, was saddled with excessive regulations and protectionist government policies that limited foreign investment and largely stifled competition. The Santhanam Committee the first one to examine the issue presented its report in 1964: “There is widespread impression that failure of integrity is not uncommon among ministers and that some ministers, who have held office during the last sixteen years have enriched themselves illegitimately, obtained good jobs for their sons and relations through nepotism and have reaped other advantages inconsistent with any notion of purity in public life.” Later on, corruption steadily became almost institutionalized when control got concentrated with few top political leaders. Corrupt incentives became an inevitable consequence of government attempts to control market forces even in the “minimal” state (Nozick, 1974). Large investment projects particularly have the propensity to lend themselves to recurrent acts of high-level corruption. The discretion that high-level bureaucrats or babus had over assessments regarding public investment projects caused alterations in public spending, both in size and in composition. Public projects were facilitated to grant opportunities to a few individuals or political groups in order to receive “commissions” or kickbacks from those who were granted the projects. This has greatly compromised the efficiency of public expenditure and resulted in projects that would not have been vindicated on objective cost-benefit criteria of investment. The overall prevalent business culture in this context was one in which corruption was ubiquitous, and in many cases, it had became a standard pricing mechanism in the Indian economy. Post-liberalization and privatization, India is faced with a different kind of challenge. It is not about petty bribes (bakshish) anymore, but scams to the tune of thousands of crores that highlight a political industry nexus, which, if not checked, could have a far reaching impact (Oberoi, 2014). From what started as petty payments demanded by babus during the license-permit raj days, corruption has taken a much larger form and scale today (Oberoi, 2014). In recent years, many major scandals involving politicians and high-level public officials have shaken India.

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These scandals suggest corruption has become a pervasive aspect of the Indian political and bureaucratic system. Some of the major scams in the last decade involved humongous funds, such as the 2 G Spectrum scamg (cost Rs 176000 crores), Commonwealth Gamesh (CWG) scam (cost Rs 70000 crores), Mega Black Money Laundering scami (cost Rs 70000 crores), Adarsh Housing Society scam (cost Rs 18978 crores),j Bofors scamk (cost Rs 400 million), Fodder scaml (cost Rs 950 crores), Hawala scamm (cost Rs 8000 crores), and Satyam scamn (cost Rs 14000 crores). Systematic attempts by the investigative agencies to expose corruption are often scuttled by political pressure, and are muzzled by protracted, contentious, legal wrangling. Most of these scams have been concluded and are pending with investigative agencies; these scams are termed as ‘caged’ and few culprits have been punished. Often, only small fish get caught and influential politicians are shielded. Rapacious politicians, often in collusion with ravenous bureaucrats, are, usually, the culprits to the initiation, prevalence, perpetuation, and proliferation of corruption. Zuliani (2011) in Economy Watch quotes Dev Kar, a former IMF economist, stating that the illegal money that drains India’s economy is stacked in foreign lands and in foreign banks. According to him, “India’s underground economy is believed to comprise 50 percent of the country’s GDP of US$640 billion at the end of 2008.” According to another BBC report (2010), “India has lost more than $460bn since Independence because of companies and the rich illegally funnelling their g

Telecoms Minister Andimuthu Raja was sacked after a report by India’s state auditor said his ministry sold licenses and spectrum below market prices, depriving the government of up to USD 39 billion in revenues. The Comptroller and Auditor General of India (CAG) said rules were flouted in spectrum allocation in order to give benefits to several ineligible in 2007 08. h Allegations of corruption over the 2010 Commonwealth Games in Delhi are being investigated by several bodies, including the CBI and a special committee set up by the prime minister. Allegations of corruption spanned a broad spectrum including issuing of contracts and purchase of equipment from treadmills to toilet rolls. i This scam of ultra high magnitude came into limelight when an Indian businessman was arrested on money laundering charges to the tune of Rs. 39,120 crores. The huge sums of money being stashed away in Swiss banks underscored and exposed the problem. j Adarsh Housing Society scam is a typical example of nexus among politicians and bureaucrats for land grabbing. k The Bofors case has been a high-profile and one of the longest-running criminal investigation cases in India. In the 1980 s, the then Prime Minister Rajiv Gandhi and several other officials were accused of receiving kickbacks from Swedish arms manufacturer AB Bofors for winning a bid to supply India with 400 howitzers. l Popularly known as “Chara Ghotala,” this is Bihar’s most famous scam in recent years. For over two decades, the officials and politicians of the state colluded to embezzle funds worth Rs. 950 crores by fabricating vast herds of fictitious livestock for which fodder, medicines, and animal husbandry equipment were acquired. m The Hawala scam was a $18 million bribery scandal and came in the open in 1996. It involved payments allegedly received by the country’s leading politicians through hawala brokers. n Exposure of the biggest corporate scam (at about USD 1 billion) led the founder chairman of Satyam Computers, Ramalinga Raju, to resign in January 2009 after has admission that profits were falsely inflated for years. Raju admitted that about $1 billion or 94 percent of the cash on the company’s books was fictitious.

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wealth overseas. Total capital flight out of India represents some 16.6% of its GDP.” The worst sufferer is the common man (aamadami). A corruption survey published in June 2008 by Transparency International India and the Centre for Media Studies (CMS), India, confirms these findings. The sixth round of the India Corruption Study (ICS) from CMS in 2009 reaffirmed the rampant and omnipresent corruption in the country. One-third of Below Poverty Line (BPL) households across the 31 Indian states covered by the survey paid bribes to access one or more of 11 public services. The percentage of respondents paying bribes to access services was especially high for the police, land registration, and housing. India is marred equally by ‘grand corruption’ and ‘retail corruption’ that affect the lives of common people all over the country. Moody-Stuart describes grand corruption as “the misuse of public power by heads of state, ministers and top officials for private, pecuniary profit.” Put differently, grand corruption is perpetuated by “politically exposed persons” (PEPs), who are “entrusted with a prominent public function,” and involves large funds and assets. On the other hand, petty or “survival” corruption is perpetuated by junior grade civil servants, who insist on kickback from firms and populace to speed up their applications for permits, licenses, etc. Samuel, Shah (1997) established that even the poor living in slum areas in India need to pay bribes or “speed money” to local officials for “getting a service or solving a problem with a public agency.” The typical amount of bribes paid per transaction varied from Rs 850 (US$28) for Bangalore to Rs 350 (US$12) for Pune. Although the sum of bribes in petty corruption is small, the UNDP asserts that to term it as “petty corruption” is a “misnomer” as it affects “the daily lives of a large number of people,” especially a whopping number of poor. According to a Freedom House Report (2008), “[c]orruption is not just the clearly “bad” cases of government officials skimming off money for their own benefit. It also includes cases where the systems don’t work well, and ordinary people are left in a bind, needing to give a bribe to get a work done or the licenses they need.” It is however difficult to statistically assess the existent magnitude and spread of both grand and retail corruption. They are often interlinked and tend to reinforce each other (Paul, 1995). Media stories on financial scams indicate that while petty corruption continues to be an irritant and mostly driven by public officials at lower levels, larger scams could be attributed to the willingness of the private sector to pay politicians and senior public officials to get their work done. The frequency of corruption across all government departments in India is attested to by the Santhanam Committee’s (1964) findings, which substantiates the structured character of corruption in all sectors. The Committee states that “all contracts of construction, purchase, sales and other regular business on behalf of the government, a regular percentage is paid by the parties to the transaction, and this is shared in agreed proportions among the various officials concerned” (Santhanam Committee, 1964). Wade (1985) presented a methodical description of organized corruption in the irrigation system of a South Indian state. He provided evidence of a fairly active internal labor market as a means of channeling corruption revenue upward. Indications of similar illicit internal labor markets are present in the departments of labor, forestry, agriculture, public health, police, revenue, and others. Corruption at the lower echelons of bureaucracy

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takes the form of ‘speed money’ for expediting approvals or providing legitimate services, or bribes for twisting rules. And consequently, speed money has turned into one of the most serious causes of holdup and ineffectiveness.” The extent of integrity among the civil servants has plummeted at all levels. A subject of great alarm is the vertical assimilation of corruption at a range of levels of government, between officials and politicians, and the powerlessness of top functionaries to control the pervasiveness and escalation of corruption (Bhagwan & Bhushan 2007). With corruption rampant everywhere, in 2014, out of 175 countries surveyed, India ranked 85th on Transparency International’s Corruption Perception Index (CPI). India’s record on the Integrity Score is also not very impressive and continues to be awfully low, that is, 3.1 in 2011. India scored 70 (out of 100), reflecting that it is only moderately competent in handling the menace of corruption. It also highlights a large gap (of 31 points) between the legal framework and actual implementation on the ground. Thus, overall government accountability is very frail despite strong oversight and regulatory mechanisms (Oberoi, 2014). Taken together, these three indicators the Corruption Perception Index (CPI), the Bribe Payers Index (BPI), and the Global Corruption Barometer (GCB) provide an overall picture of corruption in a country and the respective rankings offer useful comparative status at the global level. This provides a snapshot of corruption in India (see Table 12.1)

12.5

Diagnostic study of corruption in India

Variations in the institutional and economic legacies across countries often referred to as preliminary or grounding conditions have a significant effect on the political and economic structures of the transitional countries. These political structures and institutions also determine the ‘kind’ and ‘form’ of economic reforms that will be taken up by the government. Corruption in public procurement in India has been there since independence. India has been a corruption-ridden society, as described by Kohli (1975, 67): “Corruption is the single largest element to be found most in India. All roads, from the maternity hospital to the crematorium, smell of corruption. No individual is free from it; no area can be found where corruption is not a ritual.” Besides the concomitant process of establishing new political and economic institutions, another feature of the transitional countries was the extensive rearrangement of assets from social ownership to private ownership. This redeployment provided another inducement for capturing the state. By this process of privatization, private actors were able to convert their de facto political power into de jure ownership, which would then secure them an advantage in the market economy. The next section looks at two prominent sources of corruption the bureaucratic and the political.

12.6

Bureaucratic corruption

Administrative corruption is defined as “the institutionalized personal abuse of public resources by civil servants” (Gould, 1991). The sweep of corruption depends on

Table 12.1

Comparative Status of Corruption in India by Three Indicators

Institution

Index

India

China

Brazil

Russia

USA

UK

Total Countries

World Bank

Worldwide Governance Indicators 2009 Corruption Perception Index 2010 Bribe Payers Index 2008

112

148

91

161

26

20

213

87

78

69

154

22

20

178

19

21

17

22

9

5

22

Transparency International Transparency International

Note: The numbers indicate the rank of the countries in the respective indices.

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how influential a position the particular civil servant holds. The developmental and regulatory functions assumed by governments in developing countries contributed to corruption by increasing the potential value of illicit benefits. Large part of the government interventions is concerned with regulations necessitating licenses and permits; decisions over procurement contracts provide an opportunity for corruption. Besides the power wielded by the bureaucrats, factors such as low public sector wages, corrupt system of recruitment and promotion, and unwieldy size of the bureaucracy establish the readiness of public officials to unnaturally fashion regulations that cause corruption (Alam 1995). “Thus, developmental functions assume forms which lend themselves more easily to corruption; or having once taken such forms, their reform mitigates the government’s interests. Naturally, the same tendencies also afflict the administrative functions of government. All this, however, results in an intermingling of cause and effect” Alam Shahid (1989). While regulatory complexity allows wide scope for rent-seeking and extraction, the capacity to combat misdemeanor and enforce rules and regulations is seriously limited. The government agencies in charge of administration and law and order are overburdened, inadequately staffed, and often poorly equipped. Thus, implementing complex rules and policies, as well as catching and punishing rule-breakers, is a massive challenge. Rose-Ackerman (1978), Shliefer and Vishney (1993), Ades, Tella (1996), and others firmly believe that open-market competition is a promising disincentive to corruption. The argument is that open competition in the marketplace dampens corruption and breaks the cartels. The inducements to corruption by a public official can be defined as consisting of the expected net illicit benefits from corruption: the benefits need not be monetary but may be a monetary equivalent and include benefits received both by the official and by their cronies. According to Myrdal, in his classic book Asian Drama (1968), “in addition to particularist attachments to one’s kinship, ethnic and religious grouping is also most often given as the cause of corruption in developing societies.” The willingness to engage in corruption, especially at the lower levels of bureaucracy, frequently receives an impetus from low and often declining real value of public salaries. The aversion to corruption may be influenced by what Myrdal describes as the folklore of corruption, that is, people’s beliefs about corruption and the government’s policy toward it. He argues, for instance, that beliefs “that known offenders can continue their corrupt practices with little risk of punishment, [and] are apt to reinforce the conviction that this type of cynical asocial behavior is widely practiced” (Myrdal, 1968). An administrative system influenced by such traditional loyalties will tend toward an ascriptive rather than achievement-oriented pattern of recruitment. And that is why a person who asks favors from officers belonging to his caste does not consider his act as unethical. Similarly, when a government official “fixes” applications and licenses in utter disregard to merit but in accordance with family and caste loyalties, he is obeying a law of social conduct more ancient than that of the unknown and distant state. The orientation of officials in India is based not merely upon personal, economic, and social conditions or caste but also on what is often termed “ethno-expansionism.” Most civil servants, though possibly recruited on the

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basis of merit and competition, maintain their traditional ties. As Fred W. Riggs (1964) points out, “given a choice between loyalty and competence, an official (a civil servant in a prismatic society) will choose traditional loyalty.” According to Sukhtankar and Vaishnav (2015), there are two primary reasons why this kind of system induces dysfunctionality. First, bureaucratic recruitment, transfers, and postings are conducted on the basis of bribes rather than merit. Second, the wage and incentive structure does not adequately reward performance and punish malfeasance. Wade (1985) in his aptly titled and seminal article “The Market for Public Office” blames “the corruption-transfer mechanism and its effects on bureaucratic initiatives” (p. 467) for the failure of the Indian development state. At the very least, the consequences of the allocation of public sector posts on the basis of money rather than merit include a multiplier effect on corruption, since officials who paid to obtain these posts must recoup their costs through rent extraction. In one highly publicized recent case, the media reported that an Indian Administrative Service (IAS) officer Ashok Khemka, who earned a reputation for fighting graft (including lodging investigations against dodgy land deals involving Robert Vadra, Sonia Gandhi’s son-in-law), has been transferred no fewer than 46 times in a 22-year career (Siwach, 2015). His honest functioning created hindrance to other officers who were willing to ignore malpractices in their departments. In their analysis of corruption in the public services in India, Samuel, Shah (1997) have identified five major causes. First, the government’s monopoly in the supply of public goods and services has reduced competition and created opportunities for corruption by restricting supply either deliberately or through inefficiency. A second and related cause is that the discretion of public agencies in decision-making provided opportunities and incentives for those involved to be engaged in corruption. Third, corruption exists because of the relative lack of accountability of the service providers to the citizens. Fourth, information barriers also contribute to corruption when service providers have information not available to citizens. Finally, as the average citizen is exposed to corruption in the public sector on an episodic and not daily basis, it is unlikely that he will invest his time and resources in a systemic reform” (1997:149).

This explains “why it is difficult to organize effective collective action against corruption in public services” (Quah 2011: 88). According to Yadav, “[b]ureaucratic corruption pervades the Indian administrative system with widespread practices of bribery, nepotism, and misuse of official positions and resources” (2014: 72). S.R. Maheshwari has pointed that the civil servant has forsaken his truly professional traits and is increasingly inclined to seek personal favors. The civil servants are perceived by society to be arrogant, selfopinionated, inaccessible, career-minded, and power-hungry. The bureaucracy suffers from over-staffing, wastefulness, corruption, politicization, and excessive generalism. It must be made accountable, ethical, and sensitive to the citizens (Maheshwari, 2005). Similarly, Garg (2006), a former senior civil servant in India

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with 35 years of experience, criticized the Indian bureaucracy for “being accountability-free, unapproachable, backward looking and obstructing development. The complaints of the citizens are not heeded a citizen never gets a reply to his complaints. The citizens and the government remain on the opposite side of the fence rather than being friendly and helpful to each other.” According to Kamala Prasad (2006), ‘corruption has become intractable in administration owing to the growing incidence of corruption in high places’ (p. 311). However, what is more distressing is that ‘corruption is such an everyday fact of life in India that its exposure, even in the most rampant forms, often fails to shock’ (Gentleman, 2008). This was clearly demonstrated in January 2008, when a World Bank investigation, which revealed ‘serious incidents of fraud and corruption’ in five Indian healthcare projects financed by US$568 million in loans, had ‘elicited little surprise’ (Gentleman, 2008). In his comparative study of the control of bureaucratic corruption in Hong Kong, India, and Indonesia, Leslie Palmier (1985) has identified three other factors that are important causes of corruption: opportunities (which depend on the extent of involvement of civil servants in the administration or control of lucrative activities), salaries, and policing (the probability of detection and punishment). Palmier (1985) hypothesized that bureaucratic corruption seems to depend not on any one of the (three) factors identified but rather on the balance between them. At one extreme, with few opportunities, good salaries, and effective policing, corruption will be minimal; at the other end, with many opportunities, poor salaries, and weak policing, it will be considerable. This assumption applies to India as its pervasive corruption can also be attributed to the low salaries of the civil servants, their ample opportunities for corruption, and ineffective policing (Quah 2008). Palmier (1985) argued that delays in investigations, prosecutions, and the courts in India have further increased the opportunities for corruption as ‘delay breeds corruption.’ According to Transparency International India (2007), in February 2006, 33,635 cases were pending in the Supreme Court; 3,341,040 cases in the high court; and 25,306,458 cases in 13,204 subordinate courts. The maxim “justice delayed is justice denied” applies here. Hence, it is not surprising that ‘this vast backlog leads to long adjournments and prompts people to pay to speed up the process’ (Transparency International India, 2007). In his analysis of corruption in the Indian Civil Service, P.C. Alexander (1995) identified ‘the ease with which corrupt officials are able to get away without punishment commensurate with their offence’ as a major cause of corruption.

12.7

Political corruption

Where bureaucratic corruption is deep-seated in India, political corruption has likewise swelled in the body politic where a new breed of politicians have become synonymous with ‘the Antulites’ (Jain, 2001). This basically implies that politics in India has developed the characteristics of big business wherein fund raising and

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money of candidates seeking election is at the largest premium. Since elections have an expensive proposition, the emphasis in each party is more on fund-raising capacity rather than integrity. Political corruption is “the behavior of (elected) public officials which diverges from the formal components - the duties and powers, rights and obligations - of a public role to seek private gain” (Kramer, 1997). Political corruption also usually includes activities such as vote rigging, registration of unqualified or nonexistent voters, purchase and sale of votes, and the falsification of election results (Goodman 1990). Politics in India has come to acquire the personality of a big business, where the fund-raising ability of a professional politician attracts the largest premium. With elections becoming a costly affair, the stress is on the capacity of the candidate to raise funds. Mehta (2002) has noted: “The reform, regulation and overhaul of the means by which political parties and candidates finance elections is arguably the single most important institutional challenge facing Indian democracy.” The Economist (2014) summarized the issue in the context of the 2014 general election more poetically: “picture the elections as a dark sea of liquid assets, mostly undocumented cash (and a lot of liquor too), over spilling the dykes that were meant to keep it in check.” Sukhtankar’s paper (2015) captures an important truth characterizing “India’s electoral dynamics: the costs of elections have grown so immensely in recent years that politicians face incentives to recoup some of the financial “investments” made during the campaign by using their political positions to extract rents” (Sukhtankar and Vaishnav, 2015). “Analysing the affidavits of state and national incumbent legislators who won elections in the early 2000 s and then re-contested elections several years later, Sastry (2014) uncovers that the typical assets of sitting MPs and MLAs augmented by 222 percent through their term in office (from an average of Rs. 1.8 crore in the first election to Rs. 5.8 crore at the time of re-election)” (Sukhtankar and Vaishnav, 2015). The study of candidate affidavit data also sheds light on the direct link between the issue of political finance and the criminalization of politics in India. Of the 543 members of the 16th Lok Sabha (Lower House of the Indian Parliament) elected in May 2014, 34 percent face pending criminal cases while 20 percent face charges of a “serious” nature. The situation is broadly similar at the state level, where 31 percent of elected MLAs face pending cases (15 percent fall into the serious category). To compound matters, the share of elected officials with pending criminal cases has been increasing, rather than decreasing, over time. In 2004, 24 percent of MPs faced criminal cases (12 percent faced serious charges). This proportion grew to 30 percent in 2009 (15 percent serious) and 34 percent (21 percent serious) in 2014 (Sukhtankar and Vaishnav, 2015). The public trust in the democratic processes in India is seriously undermined by opaque financing of electoral processes, widespread bribery, and other forms of corrupt practices. Freedom House’s (2008) report titled ‘Understanding Corruption in India: Promoting Transparency’ reveals that the electoral system relies on black money obtained by dubious means, including tax evasion. Although politicians are regularly involved in major corruption scandals, investigations are rare and very few politicians and civil servants have been convicted. Circumstantial evidence confirms that practices

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such as buying votes with bribes or promises, conflicts of interest, and state capture are common in India. The entry of criminals into politics despite laws requiring public disclosure of candidates’ assets, criminal records, and educational backgrounds is another alarming facet of political corruption in India. According to The Economist (2008), more than a fifth of federal parliament members in 2008 faced criminal charges. Of the 522 members of India’s current parliament, 120 are facing criminal charges and around 40 of these are accused of serious crimes, including murder and rape.

12.8

Appraising the impact of corruption on Indian economy

Corruption in India is tearing into the fabric of its governance. N. Vittal observed that ‘[c]orruption totally distorts the machinery of government namely, the executive, and makes a mockery of the human right for good governance” (2003: 132). Baxi (1989) stated that ‘it is conceivable that shattered social expectations, maladministration, and poor governance policies over a period of time, would endanger the rule of law and the social fabric. A corrupt system of government services has the distributional disadvantage of benefiting unscrupulous people at the expense of law-abiding citizens who would be willing to procure the services lawfully.” Corruption is often difficult to delimit to ‘desirable” levels. A skewed system that neglects corruption in “economically justifiable” areas may soon find that corruption has stretched and permeated into other government structures. Significant empirical evidence on the economic and social costs of corruption has been mentioned earlier in this chapter. They demonstrate the deleterious impact of how corruption hinders investment (both domestic and foreign), reduces growth, restricts trade, distorts the size and composition of government expenditure, weakens the financial system, and strengthens the underground economy. Recently, strong interlinkages have been confirmed about corruption and increasing levels of poverty and income inequality. According to Thompson (1993), “[c]orruption is bad not because money and benefits change hands, and not because of the motives of participants, but because it privatizes valuable aspects of public life, bypassing processes of representation, debate, and choice." It is believed that the costs of state capture and administrative corruption are mutually reinforcing; this further has spiraling impact on the economy. It dissuades investment and flow of trade. Where corruption is more entrenched firms are pushed to the underground economy. Critical resources for growth are siphoned to other destinations. These nations then face the danger of becoming entrapped in a cruel cycle where permeating corruption cuts down public revenues, cause trust deficit, and dampens the credibility of the state. Corruption further undermines service delivery of public goods and services, subverts government resources, and arrests the economic development which is requisite to reduce poverty. There are too frequent incidents of pension not being given on time and health benefits being traversed because the beneficiary is not able to pay the required bribe. The quantitative measurement of costs of corruption cannot capture

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the misery of poor people, who depend on public goods and services for their survival. This means that corruption has to be an institutional priority. Corruption escalates transaction costs and risks which encourage entrepreneurs to divert their scarce time and money to bribery rather than investing it in production. Corruption inhibits the development of a healthy marketplace and imbalances economic and social development by distorting the rule of law and weakening the institutional foundation on which economic growth depends. Corruption is like a double jeopardy for the poor, who are hardest hit by economic decline, are most reliant on the provision of public services, and are least capable of paying the extra costs associated with bribery, fraud, and the misappropriation of economic privileges. In 2015, the World Bank’s Doing Business Report placed India at 134 out of 183 countries with a slight improvement in 2016, when India ranked at 130. Furthermore, if corruption is not contained, it will grow exponentially. Though always difficult to put an accurate figure, the probable losses incurred by the Indian economy (according to reported corruption cases in the media from October 2011 to September 2012) stand at nearly INR364 billion (approximately US$ 5000 million). This does not take into account the big scams of 2 G, the Commonwealth Games, and mining (Ernst and Young, 2012). According to the World Economic Forum’s Global Competitiveness Index (2010), “corruption is the foremost barrier in India’s economic growth and impacts business competitiveness. Where corruption invariably increases through transaction costs and insecurity in the market, this leads to inefficiency, restrains the expansion of a strong marketplace, and also alters financial and shared development." In 2014, the Economist attempted at quantifying the profits from rent-seeking in India. They tallied the money made from scams, based on estimates from officials and investigators which are applied more widely in the index of cronyism, and measured the relative performance of billionaires in industries, such as mining and property, that are prone to rent-seeking relative to those in other lines of business They suggest that the gains from rent-seeking over the past decade peaked at about US$80 billion. That is equivalent to 7 percent of the Indian stock market value. “Graft in India is damaging the economy. The country needs to get serious about dealing with it” (The Economist, 2014). Thus, the indiscriminate use of direct interventions in the economy, the persistence and proliferation of discretionary instruments, the sluggishness of bureaucratic procedures hampered by layers of decision-making, the wasteful uncertainties surrounding government policies, the often unchecked expansion of public employment, the interminable delays in administration of justice, and similar pathologies of life in many developing countries must now be seen at least in part as creating corrupt governing elites. In quantitative terms, Mauro’s analysis of 94 countries suggests that a reduction in corruption would increase a country’s annual investment by 4 percent of gross domestic product (GDP), and would increase annual growth of GDP per capita by 0.5 percent (Mauro 1997). The World Bank’s World Development Report 1997 refines the association between corruption and investment by distinguishing between the level of corruption and the predictability of payments and outcomes

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(World Bank, 2000). It suggests that investment drops off most in countries where corruption levels are high. Nevertheless, it is difficult to establish conclusively that the root of the problem is corruption, and it is unrelated to the larger institutional weaknesses that are also closely associated with it. The fact is that probably all of these weaknesses are intrinsically linked, in the sense that they nourish upon each other (e.g., red tape makes corruption possible, and corrupt bureaucrats may increase the extent of red tape so they can extract additional bribes) and that getting rid of corruption helps a country overcome other institutional weaknesses, just as reducing other institutional weaknesses helps it curb corruption. Corruption’s impact on the rest of the economy is substantial. According to Tanzi, Cost-increasing corruption is coercive especially for small and medium enterprises, particularly in emerging enterprises, which are intimidated by bureaucrats and tax inspectors into making substantial payments to continue in business. Pressures on new enterprises often come from local government officials, who impose high pecuniary costs-some legal and some not-for licenses and authorizations. These officials impose high costs in terms of the time that the managers of the enterprises must spend to comply with the many requirements imposed on them. The burden of these costs comes on the small enterprises as they operate in a far more competitive market than large ones, and they have face difficulty in passing the costs on to their customers. Since small enterprises are the engine of growth in most countries, obstacles to their creation and growth cause economies to languish, especially in developing countries. (1998: pp 27 28)

The contemporary literature on rent-seeking has established the clear connection between trade distortions, rent-seeking behavior, and economic inefficiencies (Krueger, 1974). Murphy et al. (1993) have revealed that escalating proceeds in rent-seeking behavior may produce ‘multiple equilibria’ in rent-seeking and income levels. He argues that “there will be a “good” equilibrium characterized by absence of corruption and high rates of investment and growth; and a “bad” equilibrium characterized by pervasive corruption and low investment and growth. Slow growth and low investment in the bad equilibrium result from (i) the waste of labor hours spent on unproductive transfer of resources, in the spirit of the initial literature on rent-seeking, and (ii) a low marginal product of capital, because a lower proportion of government expenditure reaches the production processes of which it is an input” Murphy et al. (1993). The originality of the model exists in its connecting corruption and politicians’ horizons and drawing the implications of this link for economic growth. Putnam (1993) has argued that a tragedy of the commons may explain the institutional and economic failure in various areas. In the political realm, this tragedy. undermines democracy and good governance by subverting formal processes. Corruption in elections and in legislative bodies reduces accountability and representation in policymaking; corruption in the judiciary suspends the rule of law; and corruption in public administration results in the unequal provision of services. Moreover generally, corruption erodes the institutional capacity of government as

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procedures are overlooked, resources are siphoned off, and officials are hired or promoted without regard to performance. (USAID in Richter & Burke 2007: p. 81)

Additionally, according to Alam Shahid (1989): 452), third world countries are seen as divided by primary loyalties to family, clan and ethnic groups. Their demands, therefore, must be particularistic and can only be met by corruption at the enforcement stage of policies.

Material inducements of corruption are seen to be substituting for the missing ideological bond between class interests and national commitment that motivates people to aggregate into political parties or throw their support behind governments engaged in national construction.

12.9

Measures against corruption

There is increasing recognition that the roots of corruption extend far beyond weaknesses in the capacity of government, the repertoire has been gradually expanding to target broader structural relationships, including the internal organization of the political system, relationships among core state institutions, the interactions between the state and firms, and the relationship between the state and civil society. (World Bank, 2000)

Confronting corruption in transition countries therefore involves a composite advancement that acknowledges the various constituents that are fundamental to the doggedness of corruption, and this lays the foundation for tailoring response to the specific configuration of the trouble in various countries. India endorsed the ADB-OECD Anti-Corruption Action Plan in 2001 and ratified the UN Convention Against Corruption (UNCAC) and the UN Convention against Transnational Organized Crime (UNCTOC) in May 2011.o Therefore, India is obligated to bring its legislative framework closer to the international norms. Four essential building blocks for a national agenda for corruption control should involve (a) reform of the political process, (b) restructuring and re-orienting the government machinery, (c) empowerment of citizens, and (d) creating sustained public pressure for change Guhan, Paul (1997). Transparency International TI Source Book (2000) describes the broad necessary framework for a successful anticorruption agency. This includes i) committed political backing at the highest levels of government; ii) adequate resources to undertake its mission; iii) political and operational independence to investigate even the highest levels of government; iv) adequate powers of access to documentation and for the questioning of witnesses; v) “user-friendly” o

UNODC (2006) India: Government ratifies two UN Conventions related to transnational organised crime and corruption https://www.unodc.org/southasia/en/frontpage/2011/may/indian-govt-ratifies-twoun-conventions.html. acessed 7th June.

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laws (including the criminalization of “illicit enrichment”); and vi) leadership, which is seen as being of the highest integrity. Different approaches have been applied to fight corruption in India; however, none of them have been very effective in reducing corruption. In fact, new and murkier stories of corruption are exposed every year. Given the complexities of the multilayered and uncoordinated law enforcement agencies that work in India, it is important to develop a more focused and synchronized approach to combating corruption. The proposal to establish an Independent Commission Against Corruption (ICAC) in India accepts the inbuilt challenges of any institutional approach to reform in India, given the bottlenecks and obstacles for the enforcement of the rule of law. In the past, institutions entrusted with the responsibility of ensuring probity in governance have not been very successful. India has been facing governance challenges at various levels for a long time. Rigid bureaucracy, complex laws, and long-drawn processes of the legal system deter people from considering legal recourse in corruption cases. Moreover, the legal framework around bribery and corruption lacks teeth. All these factors have impacted the power and independence of the judiciary (Oberoi, 2014). Kumar (2011) traces the history of Indian institutions and legislations to combat corruption. Previously, the Indian penal code (IPC) was the foremost instrument to combat corruption during the pre-independence period. The code had a section on offenses by public servants. Sections 161 165 detailed on the legal framework to prosecute corrupt public servants. After independence, the Prevention of Corruption Act (1947) was ratified to fight bribery and corruption. Later on improvements were made and the Prevention of Corruption Act was enacted in 1988. This Act consolidated the provisions of the Prevention of Corruption Act 1947 and the Criminal Law Amendment Act 1952. The prevention of Money Laundering Act 2002 was enacted empowering the Directorate of Enforcement, India, and Financial Intelligence Unit to investigate and prosecute such public servants who hold illgotten wealth in foreign countries and transfer to their homeland through money laundering (Kumar, 2011). But due to a lack of political consensus on issues relating to process, the institutional approach that was adopted failed in controlling corruption. “The legal and institutional approaches to the issue of corruption have vested the power to initiate investigation into allegations of corruption with the very people who are in power and who may themselves be involved in the corrupt governance system.” (Kumar 2015: 748). The Prevention of Corruption Act came into force in 1988 but the amount of convictions under this Act is abysmally low. In contrast, the 2005 Right to Information (RTI) Act symbolizes a critical achievement of India in the fight against corruption. Under the provisions of the Act, any citizen can request information from a “public authority” which is obligated to respond expeditiously or within 30 days. This Act has helped unearth many malpractices in the country, but due to the lack of necessary legal and institutional frameworks for whistleblower protection, this act has not been used to its full potential. Other antibribery and corruption initiatives in India include the presence of the State Lok Ayuktas; the Central Vigilance Commission; a proposed National Anti-Corruption Strategy; Guidelines on Corporate Governance. However,

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enforcement of these legislations continues to be ineffective. Due to tardy procedures and no penalization of culprits, citizens have begun to lose confidence in the capacity and sincerity of institutions and the political process to ensure good and transparent governance. The effort to establish an independent Lokpalp is thus seen as paramount to fight against corruption and more significantly to reinstate the trust of the Indian citizenry in parliamentary set up (Kumar, 2011). In Tackling Corruption, Transforming Lives, the UNDP recommends an agenda for action that coalesce “crushing corruption from the top” with “bottom-up anticorruption initiatives” by citizens, civil society organizations (CSOs), and the media. According to Lawton, Rayner and Lasthuizen (2013), anticorruption approaches espoused by governments are either compliance or integrity approaches, or even an amalgamation of them. The compliance or rule-based approach relies on external controls such as laws and regulations and anticorruption agencies to check unethical behavior. On the one hand, the integrity approach banks on internal mechanisms to instill education and integrity to curb unethical behavior. Ian Scott (2013) believes that a rule-based approach entails administrative processes, set of laws and directives, and a kind of blueprints to ensure ethical conduct of public officials, to fix their discretionary powers, and to enforce penalty if they act immorally. The compliance approach principally trusts on creating sufficient disincentive for illicit behavior by enhancing oversight and ability of institutions and by imposing penalty on offenders. But then, a value-based approach ascertains that public officials assume a comprehensive ethical framework, either by diffusion through enculturation in the establishment or by detailed instruction, which enables one to take morally acceptable decisions (Lawton, Rayner and Lasthuizen, 2013). Paine (1994) suggested the embracing of an integrity strategy as it is all-embracing as compared to a legal compliance initiative. She concludes that the integrity strategy creates “a climate that encourages exemplary conducts” and is “the best way to discourage damaging misconduct.” The effectiveness of anticorruption measures depends on (1) the adequacy of the measures in terms of the comprehensiveness of their scope and powers, and (2) the level of commitment of political leaders to the goal of minimizing corruption. In other words, for anticorruption measures to be effective, they must be properly designed (to attack the causes of corruption), and they must be sponsored and upheld sincerely by political leaders. In short, the most elaborate and well-designed anticorruption measures will be useless if they are not enforced by the political leadership (Quah, 1982). The scale and combination of ‘state capture,’ ‘administrative corruption,’ and ‘corporate lobbyism’ can, in addition, fatally interrupt the capability of officials to put into effect anticorruption agency and practice fruitfully. Specifically, the profundity and depth of corruption is a fine pointer of the expected Achilles’ heel of the opposition to reformers. The stronger the state and economy capture and administrative corruption, the more frightening the vested interests appear in countering reforms. In a nutshell, the fundamentals for added unswerving p

A Lokpal (Sanskrit: lokpala, ¯ “caretaker of people”) is an anticorruption authority or ombudsman who represents the public interest. The concept of an ombudsman is borrowed from Sweden. The Lokpal has jurisdiction over all Members of Parliament and central government employees in cases of corruption.

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anticorruption reforms to accomplish something must include the credibility of reformers and public trust and confidence in the capabilities of the implementers. Experience strongly suggests that combating corruption requires a direct approach that starts with its root causes: The prospects for fighting corruption are more propitious if the state and bureaucracy, on balance, have some capacity to counter corrupt forces. Anticorruption thus needs to focus on insulating and possibly entails breaking into the nexus of the state, the bureaucracy and corporates by reducing opportunities for corruption and increasing the penalties and the risks of being penalized.” Bhargava and Bolongaita (2004: 39)

The challenge of governance and anticorruption confronting the world at present vigorously disagrees with the “business-as-usual” modus operandi. An assumptive approach is crucial, and shared accountability at the global level is called for. Since corruption is a key threat to good governance, democratic processes, and fair business practices, there is a compelling position to emphasize enforcement and accountability mechanisms and ensure their necessary triumph. As not all agencies and institutions in countries have ‘normalized’ corruption, policymakers can tackle corruption by distinguishing the “islands of development” or “pockets of effectiveness” that have overtaken the odds and succeeded in minimizing corruption (Quah, 2015). So far, anticorruption institutions have not been able to acquire autonomous status nor operational liberty. Most investigative agencies, including police and law enforcement, continue to be marred by political interference and influence. This makes their functioning dependent upon the whims and uprightness and objectivity of the heads of these institutions (Kumar, 2011). In his book, The Pathology of Corruption, S.S. Gill (1998) wrote: “Looking to the number of agencies created to tackle corruption, it would appear that the government was in dead earnest to eradicate this malady.” However, he further lamented that “this elaborate and multi-layered apparatus to control administrative corruption has hardly made a dent on the situation.” Indeed, the Central Bureau of Investigation (CBI) has been negatively perceived by the public to be “a pliable tool of the ruling party and its investigations tend to become cover-up operations for the misdeeds of the ministers” (Gill, 1998). The Central Vigilance Commission and the CBI appear to have been given just enough powers and resources to permit some activity, but not enough to make them effective (Palmier, 1985). India’s ineffective anticorruption strategy can also be attributed to the lack of political will of its leaders and its unfavorable policy context, which has hindered the enforcement of the anticorruption laws: The lack of political will in fighting corruption is manifested in the lowest per capita expenditure and least favorable staff population ratio of the CBI when compared to those of its counterparts in Singapore, Hong Kong, South Korea and Thailand. Indeed, political will is “the most important prerequisite as a comprehensive anti-corruption strategy will fail if it is not supported by the political leadership in a country. Quah, 2003.

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Thus, the strong commitment of Indian political leaders is essential to combating corruption. Anti corruption agencies need the allocation of adequate personnel and resources for the impartial enforcement of the anticorruption laws. India needs a multipronged strategy that involves robust legal framework, democratic institutions and effective investigative agencies along with vigilant civil society. It is equally important that there is prompt resolution of cases and penalization of the guilty. The cost of indulging in corruption has to go up. In sum, the rationalizations for anticorruption programs have to be indisputably threefold: (a) it will have to enhance and encourage the attempt of the integrity watchdogs and whistleblowers in bringing out corruption; (b) it will have to subvert the actions of corrupt office bearers and corporates; and (c) it will also have to defend and improve the condition of citizens, who are victims of corrupt officials. The fight against corruption in India will succeed if all the stakeholders see value in applying integrity, transparency, and accountability and demerit in resorting to corrupt practices.

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Osterfeld, D. (1992). Prosperity versus Planning: How Government Stifles Economic Growth. New York: Oxford University Press. Paine, Lynn Sharp (1994). Managing for Organisational Integrity. Harvard Business Review, March-, 72(2), 113. Palmier, L. (1985). The Control of Bureaucratic Corruption: Case Studies in Asia. New Delhi: Allied Publishers. Park, H. (2003). Determinants of corruption: a cross-national analysis, The Multinational Business Review, Vol. 11, 29 48, Fall. Paul, Samuel (1995) A Report Card on Public Services in Three India Cities: A View From Below, Public Affairs Centre, Bangalore, Bangalore. Prasad, K. (2006). Indian Administration: Politics, Policies and Prospects, Dorling Kindersley. Delhi: Pearson Education. Putnam, R. D. (1993). Making democracy work. Civic traditions in modern Italy. Princeton: Princeton University Press. Quah, J. S. T. (1982). Bureaucratic Corruption in the ASEAN Countries: A Comparative Analysis of Their Anti-Corruption Strategies. Journal of Southeast Asian Studies, 13(1), 153 177. Quah, J. S. T. (2003). Curbing Corruption in Asia: A Comparative Study of Six Countries. Singapore: Eastern Universities Press. Quah, J. S. T. (2008). Curbing Corruption in India: An Impossible Dream? Asian Journal of Political Science. December, 240 259. Quah, J.S.T. (2015) The normalization of corruption: why it occurs and what can be done to minimize it December, United Nations. Richter, W. L., & Burke, F. (2007). Combating Corruption: Encouraging Ethics A Practical Guide to Management Ethics (2nded). Lanham, MD: Rowman & Littlefield. Riggs, F. W. (1964). Administration in Developing Countries: The Theory of Prismatic Society. Boston: Houghton Mifflin. Rose-Ackerman, Susan (1978). Corruption: A Study in Political Economy. New York: Academic Press. Rose-Ackerman, Susan (1999). Corruption and Government: Causes, Consequences and Reform. Cambridge, UK: Cambridge University Press. Samuel, Paul, & Shah, Manubhai (1997). Corruption in Public Service Delivery. In S. Guhan, & Samuel Paul (Eds.), Corruption in India: Agenda for Action (pp. 151 152). New Delhi: Vision Books. Santhanam Committee (1964). Report of the Committee on Prevention of Corruption Government of India, New Delhi. Sastry, Trilochan (2014). Towards Decriminalisation of Elections and Politics. Economic and Political Weekly, 49(1), 34 41. Scott, Ian (2013). Institutional Design and Corruption Prevention in Hong Kong. Journal of Contemporary China, 22(79), 77. Scott, J. C. (1972). Comparative Political Corruption. Prentice Hall Englewood Cliffs, NJ. Scott, V., Saviour, N., & James, B. (1993). The effects of culture on ethical decision-making: an application of Hofstede’s typology. Journal of Business Ethics, Vol. 12, 753 760. Seleim, A., & Bontis., N. (2009). The relationship between culture and corruption: a crossnational study Journal of Intellectual Capital, Vol. 10 (No. 1), 165 184. Shah, Anwar (2006). Corruption and decentralized public governance, Policy Research Working Paper Series 3824, Wahsington DC: The World Bank. http://elibrary.worldbank.org/doi/abs/10.1596/1813-9450-3824 accessed 12th June 2016.

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Siwach, Sukhbir (2015) Ashok Khemka, Whistleblower IAS Officer, Transferred Again, Times of India, April 2, http://timesofindia.indiatimes.com/india/Ashok-Khemka-whistleblower-IASofficer-transferred-again/articleshow/46777082.cms. Sukhtankar, Sandip, & Vaishnav, Milan (2015). Corruption in India: Bridging Research Evidence and Policy Options (April 27). India Policy Forum, 11, 193 261. Available at SSRN:http://ssrn.com/abstract52685819. The Economist (2008) Indian Politics is becoming even more labyrinthine, 11th December http://www.economist.com/node/12749771 accessed 7th June 2016. The Economist (2014), Campaign Finance in India: Black Money Power, Banyan weblog (May 14). Thompson, D. F. (1993). Mediated corruption: The case of the Keating five. American Political Science Review, 87, 369 381. Transparency International (TI) Source Book (2000) Confronting Corruption: The Elements of a national integrity system, Transparency International (TI) Berlin Germany. Treisman, Daniel (2000). The causes of corruption: a cross-national study. Journal of Public Economics, 76, 399 457. Vittal, N. (2012). Ending Corruption? How to Clean up India Penguin Books India, New Delhi, 37. Wade, Robert (1985). The Market for Public Office: Why the Indian State Is Not Better at Development. World Development13, 467 497. Warren, M. E. (2004). What Does Corruption Mean in a Democracy? American Journal of Political Science, 48(2), 328 343. World Bank (2000). Helping Countries to Combat Corruption. Progress at the World Bank since 1997.World Bank, Washington DC. Zuliani, Liz (2011) Economy Watch, The Cost of Corruption in India. APRIL 18, 2011 India http://www.economywatch.com/economy-business-and-finance-news/the-cost-of-corruption-in-india.19-04.html.

Competing for public acquaintances: the case of the Reliance group in India

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Paul Caussat Universite´ Paris 1 Panthe´on-Sorbonne, ESCP Europe, Paris, France

13.1

Introduction

Many Asian economies have been experiencing economic liberalization for the last few decades and India is no exception (Denoon, 1998). Following the tenets of neoliberal school, increased transparency in market conditions, hand in hand with reduced government interference, should theoretically lead to the betterment of the economy through a higher economic growth. In practice, does this phenomenon lead to a more transparent competition or rather to an opaque system led by a few business groups that seized opportunities that came with the reforms? Put differently, do economic reforms result in a more market-friendly or a more businessfriendly environment? What is at stake here is the type of governance that economic liberalization enhances from cleaning corrupt practices to fostering them through the constitution of oligopolies. Setting aside the extreme example of Russia (Frye, 2000) (Sinko et al., 2005), I propose here to take a look at India, a country that is undergoing a gradual economic liberalization since the 1980s with a major reform shock in 1991 (Denoon, 1998). The economic structure of India is largely shaped around a limited number of large and powerful business groups (similar to the Korean chaebols or Filipino groups such as the Ayala group), mostly familyowned and managed. These groups are characterized by a high degree of sector diversification in order to respond to uncertainties and institutional voids (dela Rama, 2012; Khanna and Palepu, 2000). In the wake of the 1991 liberalization reforms, some of these business groups gradually declined (e.g., Thapar Group (Kedia et al., 2006)), while others could take advantage of a relaxing regulation and an opening to foreign investments. Were these success stories driven by marketbased strategies?. This chapter draws on the case of a particular business house, Reliance, to highlight how some local business groups (but not all) have taken advantage of the economic opportunities which came up with the reforms, by resorting to various extensive nonmarket strategies (Li et al., 2013). Corruption, defined as the private use of public goods, is here embodied in the implementation of an acquaintance system at every level of the government from petty bureaucrats to the highest political function. These special connections have helped major CEOs receive The Changing Face of Corruption in the Asia Pacific. DOI: http://dx.doi.org/10.1016/B978-0-08-101109-6.00013-7 Copyright © 2017 Paul Caussat. Published by Elsevier Ltd. All rights reserved.

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illegitimate favors in the form of licenses to operate, cheap loans, deregulated product prices, and so on. This is characteristic of a crony capitalist system that allows for stupendous wealth accumulation in the hands of a few, together with rampant poverty. In this respect, Reliance has been portrayed as the quintessential crony capitalism group in India. The aforementioned company has become a major business group operating in petrochemicals, telecommunications, and retails, in fact the leading private company in India within a very limited time span, and its rise has been subject to many controversies. While some Indian business groups have been able to modernize their managerial practices and adopt sophisticated market strategies in the wake of the opening of the economy, other groups such as Reliance have deliberately resorted to nonmarket levers, including political actions and the granting of favors to pivotal actors. Will economic liberalization finally lead to the modernization of the Indian corporate sector? At the time of writing, this is far from certain. This chapter is organized as follows: firstly, I undertake a quick timeline of the business group in the wake of economic reforms; and secondly, I investigate the institutional mechanisms through which Reliance has been able to emerge as a top private company in India. The second part must be read keeping in mind the various milestones of the group’s growth.

13.2

The rise of a conglomerate in a changing environment

13.2.1 1966 91: The birth and growth of Reliance The founder of the Reliance so-called empire, Dhirubhai Ambani, belongs to a Bania caste. Though socially below other communities, the Bania community has come to exert enormous power in India along with a few other communities mobilized in business activities. Dhirubhai established himself in Aden, at that time under British rule, and joined a car sales division of a French company (Besse & Co). He later became a manager for refueling operations at the Aden military base, where he started developing his knowledge about the petroleum industry that would prove to be useful to his company’s future. He fled Aden in the wake of the independence of Yemen in 1967. Back in India, Dhirubhai started a new business of trading in spices and cotton and synthetic yarns that became the major business unit of the company. In the 1960s, the company expanded into the business of textile. It grew so fast that it became the largest textile producer in the country. The company then diversified into polyester by taking over a US chemical firm, which constituted a first step in the process of upstream integration toward petrochemicals. Meanwhile, Dhirubhai started relying massively on capital markets to finance his expansion plans, a new financial model for corporations in India that previously heavily relied on banking loans’ extortionate rates (Nusli Wadia explains his loss to Ambani in polyester war,

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2012) and hence a way to reduce the effective funding cost. Furthermore, by taking a capital market route, Reliance were less reliant on state banks, and therefore the ability of the state to reward or punish the group’s actions was rather limited, unlike the chaebols under South Korean’s Park Cheung-Hee’s tenure (Kang, 2002).

13.2.2 1991 Onward: the shock of economic reforms and the expansion of Reliance In the 1980s, Prime Minister Rajiv Gandhi initiated a gradual economic liberalization process culminating in 1991 with the decisive opening of the economy. New corporate actors who emerged in the 1970s, including Hero MotorCorp (twowheeler manufacturer), Infosys (IT sector), DLF (real estate), Jaypee (real estate, infrastructure, energy), or Reliance, could take advantage of this increasingly conducive environment and the multiplication of business opportunities that came with it. Besides being the result of a balance-of-payment crisis, economic reforms may even have been spurred under the pressures of big industrialists on political parties at that time, highlighting the very biased nature of the reforms toward some actors (neither small industries nor poorer households) (Corbridge and Harriss, 2000). But, more than economic reforms, it is the overall discourse vis-a`-vis the development of the country that evolved. From this time onward, the government clearly assumed a public policy allowing the private sector to become the major driver of economic development in India, hence withdrawing from its traditional duty since independence (Kohli, 2012). This certainly helped India embrace international trade flows and the world economy. Public private partnerships (PPP) became the new motto and, consequently, the private sector became very attractive in the eyes of Indians. The private corporation was and still is looked upon as an efficient and modern workplace devoid of political interests. Hence, this new rhetoric became the harbinger of a wider belief system that started valorizing career paths in the corporate over public administration jobs, entrepreneurs over bureaucrats, profits over tax distribution (Kohli, 2009). The old socialist rhetoric, which was predominant among the ruling elite after independence, lost momentum. New, leading Indian capitalist icons emerged with the shift in rhetoric. This new face of Indian capitalism fosters ambitious “nouveau riche” minded peoplea displaying ostensibly their wealth, in contrast with a traditional economic elite that used to remain somehow discreet. In this context, Reliance continued its skyrocketing expansion, in particular in the polyester production capacity, and became the world’s largest integrated producer of polyester. In the years 1995 96, Reliance ventured into the telecom industry through a joint venture with a US-based company. At the end of a

The most iconic figure is Vijay Mallya, ex-chairman of UB Group (alcoholic beverages and airline businesses), who was notorious for organizing parties at home, gathering the Indian elite, including politicians, businessmen, and even Bollywood stars. Coincidently, he is, at the time of writing, under investigation for nonrepayment of loans and has fled the country to London so he could avoid legal actions against him.

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the 1990s, Reliance commissioned a petrochemical complex in Gujarat, including the world’s largest refinery in the world. By 2001, Reliance Industries Ltd. and Reliance Petroleum Ltd. have become the two largest private companies in India. The textile business is restructured and constitutes no more than 1% of Reliance’s total revenues.

13.2.3 2002 Onward: the death of the founder and the legacy struggle Dhirubhai Ambani died in 2002, leaving a vast business empire to his two sons, Mukesh and Anil. A dispute between the two brothers quickly led to the split of the Reliance group into two separate business entities, one headed by Mukesh Ambani (Reliance Industries Ltd. RIL) and the other one by Anil Ambani (Reliance Anil Dhirubhai Ambani Group Reliance ADAG). This “divorce” involved the demerger of several business units, including energy, financial services, and telecommunications, into Reliance ADAG; while petroleum, petrochemicals, and textile went to RIL. As to the latter, the company shifted its scope from its traditional bases to entertainment (TV, radio, gaming) as well as health businesses. With the 1991 economic crisis in India, the financial as well as infrastructure businesses suffered losses while the telecom business has continued to largely drive the group’s performance. Reliance ADAG is hence heavily indebted, and in the 2010s, Anil lags a bit behind his brother’s arm. Anil Ambani ventured into politics and obtained a seat in the Indian Upper House from 2004 to 2006, when he resigned amid a controversy over holding another paid official position outside. As to RIL, the business group continued its multi-sectorial activities and even expanded into the organized retail business to become the largest retailer in India by 2015. In late 2000s, RIL started the exploitation of offshore oil and gas fields in the Bengal Gulf in partnership with BP Petroleum. For his latest expansion, Mukesh Ambani ventured into the realm of his brother, Anil, by launching wireless broadband 4G services. Today, RIL is one of the top Indian companies ranked 121st on the Forbes Global 2000 list (2016), and derives approximately 75% of its revenue from the refining activities and 20% from petrochemicals (Reliance annual report, 2016). Mukesh Ambani is the group chairman as well as its largest shareholder. Beyond this, he is deemed to be India’s richest man.b Reliance’s companies and brands, either owned by Mukesh or by Anil, have become ubiquitous. Both business houses encompass large organizations with vast related businesses as well as unrelated businesses, that is to say diversification b

As an example of his extravagant wealth, he built for his family the world’s second-most expensive residential property (after Buckingham Palace): a lavish 27-storey tower in the center of Mumbai (Bombay) (Roy, 2012). It is very interesting to see the reaction of Ratan Tata (at that time chairman of Tata Group), and a scion of the old money, regarding the Ambanis’ house, describing this “monument” as an example of rich Indians’ lack of empathy for the poor (2011). Hamish McDonald (2010), who wrote a biography on the Ambani business family, described this house: “It’s a stupendous show of wealth, it’s kind of positioning business tycoons as the new maharajah of India.”

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toward industries that have nothing in common with the group’s “core” business and expertise, which is a major feature of emerging markets (Khanna and Palepu, 2000). How could a company expand to this extent in so limited a time span?

13.3

The levers of Reliance expansion

13.3.1 Making friends with pivotal people As mentioned earlier, the Ambanis belong to the Bania community, a very influential merchant caste throughout the Indian subcontinent’s history. Interestingly, when Dhirubhai (i.e., the founder of Reliance) was in Aden, he widely relied on a network of personal contacts so as to keep jobs within the same community. Back in India, the founding team of Reliance was carefully selected within close family and social circles: Meswami (his nephew), Ramnikbhai (older brother), Nathwarlal (younger brother), Rathibhai Muchhala and Narottambhai Doshi (from the same region in Gujarat). Dhirubhai recruited dozens of Indians to work for Besse & Co in Aden. They stayed within the company all through their working career until they retired from senior management positions. This gives us very interesting insights regarding how tightly controlled operations were around Dhirubhai and the similar background of his key lieutenants in the company until it split. This organizational structure would prove to be very helpful in times of crisis and reputational damage. Another insight this organizational structure reveals to us is the extent to which Dhirubhai understood how important relationships are, especially when it comes to business. He took great care to nurture his relationships, with his close allies but also with key persons. For instance, Dhirubhai became close to Murli Deora, an industrialist in the yarn sector who became mayor of Bombay and, later on, Minister of Petroleum and more recently Minister of Corporate Affairs. During the period preceding economic liberalization, one needed licenses to be allowed to import products. In this respect, Dhirubhai multiplied trips to Delhi to obtain signatures on import licenses from politicians and bureaucrats. He soon hired full-time lobbyists for Reliance in New Delhi. The political strategy did not stop there. Dhirubhai became acquainted with a vast range of politicians across all parties: Chandra Shekhar (prime minister from 1990 to 1991), Atal Bihari Vajpayee (prime minister in 1996 then from 1998 to 2004), but more importantly with Congressrelated leaders, such as the Gandhi family and Narasimha Rao (prime minister from 1991 to 1996), the latter assuming the function of prime minister during the economic reforms from 1991 onward. Furthermore, the CEO of Reliance became very influential when it came to nominating the prime minister. The Indian general elections leading to the nomination of the prime minister invariably led to coalitions of loose parties with weak ideologies that could either ally with a given party or with its rival. Therefore, businessmen have avenues in the prime minister’s selection process by inducing Members of Parliament (MPs)/parties to shift their allegiance to the targeted coalition, or conversely withdraw their support. In other words, financial incentives offered by

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businessmen have weighed significantly on government nomination. In this respect, Dhirubhai developed exceptional skills in mastering the complex political game. As Hamish McDonald says in his book The Polyester Prince (McDonald, 1998): “He (i.e. Dhirubhai) was never simply an industrialist, a trader, a financial juggler or a political manipulator, but all four in one.” His sons have largely followed this line by engaging intensively with pivotal people, as illustrated by the controversy over the fixation of very high gas prices in offshore blocks owned by Mukesh Ambani’s RIL (Reliance and BP in India: Deep Controversy, 2014). Economic liberalization, in a context of relatively weak law enforcement, has brought a variety of new avenues of expansion for Dhirubhai’s sons in sectors that were traditionally under the monopoly of public companies. Both massive resource provisions and ubiquitous political strategies have allowed Reliance’s multiple companies to expand into vast and highly profitable markets, at the expense of its competitors. Reliance, under the leadership of Dhirubhai and before the development of capital markets, used Syndicate Bank (nationalized in the course of Indira Gandhi’s terms of office) to fund its growth, thanks to a good relationship between Dhirubhai and the chairman of the bank, who later took political responsibilities from being a Member of Parliament to becoming Minister for Industries in the 1970s. This example is characteristic of what could be called a friend-based capitalist system where competition occurs for strategic acquaintances. Indian businessmen, in general, have proved to successfully lobby public banks from nomination of chairmen to bribing them to get loans at preferential financial conditions (Are Crony Capitalists Still Laughing All the Way to the Bank?, 2016). All the more so, this is because publicly owned banks’ chairmen receive very low salaries compared to the private sector. Offering a leisure trip abroad for the chairman and his/her family in exchange for a low-interest loan to fund one’s investment has been one of the manipulative levers businessmen could resort to (at least in the past). Today, Indian public banks face deteriorated loan books due to high ratios of nonperforming assets (i.e., nonrepaid loans). Many business groups, especially in the energy, infrastructure, and real-estate sectors, have borrowed money from public banks but failed to reimburse those loans on account of poor return on investments or sometimes deliberately (Are Crony Capitalists Still Laughing All the Way to the Bank?, 2016). Reliance is of course no exception in this regard (McDonald, 1998).

13.3.2 An ordinary Indian business house? In a liberalizing economy, private interests have the capacity to infiltrate and supplement the public sector in many areas. Liberalization leads to better competition only if enforcement agencies are strong enough to remain neutral. In this respect, all business groups in India resort to network-based strategies. Much of the criticisms targeting Reliance’s political manipulations are indeed widespread among the spectrum of business groups. In a bureaucratically led economy with strong state intervention, high tariffs, and systematic licenses, it is necessary to exploit social and political connections to beat the competitors, and all flourishing business groups have gone through such strategies (The Unhappy Prince: how Reliance buried a book, 2016). Yet, what makes Reliance specific is the extent to which it has been infiltrating

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pivotal agencies. The Wadia, Tata, or Mahindra are often revered as legitimate groups in terms of business ethics and overall reputation, although they certainly have also benefited privileged acquaintances during the economic liberalization period to continue their expansion (Kedia et al., 2006). One key milestone in Reliance’s growth occurred around what is called the polyester war opposing the business group to the Wadia Group, itself in the same industry. The latter finally lost the battle when the imported machines to produce polyester were halted in the docks, as the importing license was not granted to the group. He explained it clearly in a recent interview: “I missed the bus because I did not manipulate the system” (Kedia et al., 2006), although it may certainly have clouted the system as well. The strong enmity between Dhirubhai Ambani and Nusli Wadia remains still well known. Reliance has established connections everywhere, making it unique in this regard. For instance, it has been devoting significant resources to the media. Unlike the Tatas, the company purposefully became a major source of revenue for several media in the country. By doing so, the company could better control what was to be published and could threaten to withdraw its financial support in case of unfavorable writing (McDonald, 1998; The Unhappy Prince: how Reliance buried a book, 2016). Influencing the media or publishing houses has also been a means for Reliance to cover its unethical practices out of sight. Reliance actively resorted to intimidating legal actions intimidating yet questionable legal actions to prevent the publishing of books that could jeopardize the organization’s reputation, while in the meantime promoting eulogistic biographies of the founder of Reliance (e.g., the book by Dhirubhai Ambani’s wife, Kokilaben Ambani, Dhirubhai Ambani: The man I knew) (The Unhappy Prince: how Reliance buried a book, 2016). In an extremely rare series of exposes published in the leading Indian Express, Arun Shourie wrote about illegal imports by Reliance and overseas share transactions. Needless to say that the writer had since reviewed his stance as his views became much more sympathetic to the Ambanis (Arun Shourie’s speech at the ‘Remembering Dhirubhai’ event, 2003). Financial analysts and economic editors also received their share of gifts so as to deliver enthusiastic reports regarding the company and hence boost its market valuation. Mukesh Ambani of Reliance Industries Limited used another strategy: taking over media channels. He bought and then took charge of a media company that owns a clutch of regional-language TV news channels before incorporating them into a multimedia company that ran mainstream business and English news, raising serious concerns regarding the independence of the media sector (Roy, 2012). Yet, in spite of these efforts to hide the deeds, Reliance has seen its reputation deteriorate. The company is widely seen as a mafia-like group encompassing unethical business and internal management practices (Reimagining Ambani, 2014; An unloved billionaire, 2014). Why are Reliance and few other business groups so unique in this respect? Political strategies constitute the DNA of Reliance since its foundation (as shown in the short time line of the group), and its very internal management enhances unethical behaviors. In the case the Krishna-Godavari (KG) offshore gas basin, RIL has been legitimately accused of lobbying the concerned administration in order to be allowed to set a higher gas price. This of course increased its profitability without regard for the common man’s purchasing capacity. Labeled under the same name (Aam Aadmi Party the Party of the Common

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Man), one political party seized the issue; also, it could not take it further due to blockade from other parties. By contrast, Tata Group has been able to not only capitalize on its good reputation, stemming from the freedom struggle and their contribution to the nation-building (e.g., funding of universities, charities, hospitals), to advance its business interests, but also modernize its management in the wake of economic liberalization and the opening of the economy to foreign investors (Reimagining Ambani, 2014). Unlike Tata Group, Reliance Industries Ltd. (Mukesh Ambani’s arm) is not synonymous with integrity and honesty, and companies either Indian or foreign are reluctant to partner with one of the related companies due to their poor ethical standards. The number of cases filed against the group rightly highlights the general suspicion concerning Reliance.

13.3.3 Professionalizing the management? Professionalization of business groups in the wake of economic reforms has resulted in mixed evidence. Although corporate governance reforms have been introduced (appointment of independent directors and women directors, protecting minority shareholders against promoters’ personal interests from a third-party view, corporate governance board members appear in the reports), not every business group has honestly endorsed these reforms. In the case of Tata Group, the family has abdicated control to professional managers, although the family retains some shareholding ownership through charity trusts (Tata promoter holding companies’ shareholding pattern, 2016): there was a move from family-driven to family-guided management but independent operation. In the case of Reliance, these corporate governance reforms have been applied with lesser success: the chairman and managing director of Reliance Industries Limited Mukesh Ambani holds 45% stake in the company. Besides, his wife is a nonexecutive director of the company as well as the chairman of Reliance Foundation the corporate social responsibility (CSR) arm of RIL. Their children are working in the group at the head of the telecom arm: Reliance Jio (Reliance annual report, 2016; Reimagining Ambani, 2014). This is not conducive to ethical business practices, including clearly defined checks and balances in strategy making. The opacity behind the group management and who owns what foster this lack of ethics. Overall, there is a conflict between the professionalization logic stemming from modern corporate governance reforms and the traditional management logic (caste-based relations instead of school networks, promoters being both the manager and the owner, lack of disclosure (Chen et al., 2015)). According to their own history, sector of activities, and leadership, each group acts differently, from being paragons (i.e., enjoying professional management practices and good reputation e.g., Tata) to being parasitic (i.e., relying on extensive political strategies and ever-increasing political tactics to continue the growth of the business) (dela Rama, 2012). RIL may presumably stand closer to the parasitic end. More than business strategy, political entrepreneurship may certainly pay off more in the short run. Yet, this may also signal a lack of strategic vision stemming from a lack of professionalization, which may be detrimental in the long run.

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Conclusion

The case of Reliance immerses us in the depths of the Indian economic system. What is at stake here is not so much the precise mechanisms aimed at obtaining favours, but moreover, an overall economic system driven by the quest for acquaintances through informal ties and opaque decisions. This allows private actors to gain undue favors in the pursuit of business affairs and search for profitability, irrespective of the laws. Hence, corruption here is described as a sum of insidious connections that participate in the shaping of a system characterized by acquaintances, a capitalism based on friendships: crony capitalism. As in Korea or Philippines, politicians in India are strong, but the bureaucracy remains weak (Kang, 2002). In this respect, the Indian political economy certainly displays a form of booty capitalism (Hutchcroft, 1998) where an oligarchy of a few business groups retains tremendous power over the public policy decision, although it would be fairer to discuss interstate developmental differences (Kohli, 2012), from truly patrimonial states (e.g., Uttar Pradesh) to social-democratic states (e.g., West Bengal) and developmentalist states (e.g., Gujarat). Even in Gujarat, where the developmentalist agenda has allowed for real industrial successes, the decision behind the economic policy is more the result of a narrow alliance between the parties in office and the business class that has indeed infiltrated the various political parties. In a hostile environment, making politician friends becomes “THE” primary strategy (Holburn and Vanden Bergh, 2014). Successful businessmen are those who have developed exceptional political skills in this regard. Money politics private funding of election campaigns across parties in exchange for business-oriented policies has become plethoric (Kang, 2002). In this respect, Reliance has been able to expand tremendously in the last decades largely due to its leaders’ institutional strategies. It has reaped the benefits of the declustering of the economy resorting to the many connections vis-a`-vis pivotal actors and agencies that were established beforehand and maintained throughout the years. Network strategies constitute the central pillar of Reliance that is to say, its DNA. The failure (if I may call it so) to implement a transparent market system overseen by enforcing regulatory agencies can lead to monopolistic and oligopolistic positions, interfering with the political arena and hence jeopardizing the functioning of a flourishing democratic India.c c

As Hamish McDonald said about Dhirubhai Ambani:

He can make or break prime ministers. In the United States you can build up a super corporation but the political system is still bigger than you. In India the system is weak. If the stock exchange dares to expose Ambani, he tells it: I will pull my company shares out and make you collapse. I am bigger than your exchange. If the newspapers criticize, he can point out they are dependent on his advertising and he has his journalists in every one of their departments. If the political parties take a stand against him, he has his men in every party who can pull down or embarrass the leaders (McDonald, 1998).

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In the future, this will certainly lead to many challenges for Reliance companies. Institutional relatedness (nonmarket strategies) is definitely an important key success factor. Yet, this should be coupled with a smart product/market strategy (Kedia et al., 2006). Therefore, developing a market political ambidexterity (Li et al., 2013) encompassing both types of strategy is necessary for the successful conduct of business in transitional economies. Over time, institutions tend to be more assertive and nonmarket strategies lose their centrality. Reliance may suffer in the end of its increasingly worsening reputation. In this respect, what constituted Reliance’s competitive advantage especially in the wake of economic reforms might well turn against the company, and Reliance, in its entirety, will have to reconsider its core business model and corporate governance (including its disclosure practices). Yet it operates in the more opaque parts of the economy such as infrastructure, which does not help exit the vicious circle (Reimagining Ambani, 2014). Between the new, modern, and shiny face of India promoted by the likes of Reliance and the opacity of their management, the contradiction remains (An unloved billionaire, 2014).

References An unloved billionaire: ,http://www.economist.com/news/leaders/21610267-why-mukeshambani-indias-richest-man-needs-reform-his-empire-unloved-billionaire., 2 August 2014 (accessed 12.09.2016). Are Crony Capitalists Still Laughing All the Way to the Bank?, The Wire. ,http://thewire. in/20084/are-crony-capitalists-still-laughing-all-the-way-to-the-bank/., 25 January 2016 (accessed 12.09.2016). Arun Shourie’s speech at the ‘Remembering Dhirubhai’ event. ,https://www.youtube.com/ watch?v5CoHFdBCjXvg., 2003 (accessed 12.09.2016). Chen, G., Chittoor, R., & Balagopal, V. (2015). Modernizing without Westernizing: Social Structure and Economic Action in the Indian Financial Sector. Academy of Management Journal, 58(2), 511 537. Corbridge, S., & Harriss, J. (2000). The Dialectics of Reform: The State and Economic Liberalization, Ch. 7 in Reinventing India: Liberalization. In S. Corbridge, & J. Harriss (Eds.), Hindu Nationalism and Popular Democracy. Cambridge (UK): Blackwell Publishers. dela Rama, M. (2012). Corporate Governance and Corruption: Ethical Dilemmas of Asian Business Groups. Journal of Business Ethics, 109(4), 501 519. Denoon, D. B. H. (1998). Cycles in Indian Economic Liberalization, 1966 1996. Comparative Politics, 31(1), 43 60. Frye, T. (2000). Brokers and bureaucrats: building market institutions in Russia. Ann Arbor: University of Michigan Press. Holburn, G. L., & Vanden Bergh, R. G. (2014). Integrated Market and Nonmarket Strategies: Political Campaign Contributions Around Merger and Acquisition Events in the Energy Sector. Strategic Management Journal, 35, 450 460. Hutchcroft, P. (1998). Booty Capitalism: The Politics of Banking in the Philippines. Ithaca (NY): Cornell University Press. Kang, D. C. (2002). Crony capitalism: corruption and development in South Korea and the Philippines. New York: Cambridge University press.

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Kohli, A. (2009). Democracy and development in India: from socialism to pro-business. New Delhi: Oxford University Press. Kohli, A. (2012). Poverty amid plenty in the new India. New York: Cambridge University Press. Kedia, B. L., Mukherjee, D., & Lahiri, S. (2006). Indian business groups: Evolution and transformation. Asia Pacific Journal of Management, 23, 559 577. Khanna, T., & Palepu, K. (2000). Is Group Affiliation Profitable in Emerging Markets? An Analysis of Diversified Indian Business Groups. Journal of Finance, 55(2), 867 891. Li, Y., Peng, M. W., & Macaulay, C. D. (2013). Market-political ambidexterity during institutional transitions. Strategic Organization, 11(2), 205 213. McDonald, H. (1998). The Polyester Prince: The Rise of Dhirubhai Ambani. St. Leonards: Allen & Unwin. Mukesh Ambani’s house shows lack of empathy for poor: Ratan Tata, Economic Times. ,http://articles.economictimes.indiatimes.com/2011-05-22/news/29569019_1_noel-tataratan-tata-mukesh-ambani., 22 May 2011 (accessed 12.09.2016). Mumbai billionaire’s home boasts 27 floors, ocean and slum views, LA Times. ,http://articles.latimes.com/2010/oct/24/world/la-fg-india-rich-20101025., 24 October 2010 (accessed 12.09.2016). Nusli Wadia explains his loss to Ambani in polyester war, Firstpost. ,http://www.firstpost. com/business/nusli-wadia-explains-his-loss-to-ambani-in-polyester-war-514427.html., 5 November 2012 (accessed 12.09.2016). Reimagining Ambani, The Economist. ,http://www.economist.com/news/business/ 21610238-mukesh-ambani-indias-most-powerful-tycoon-could-make-his-country-betterplace-he-would., 2 August 2014 (accessed 12.09.2016). Reliance and BP in India: Deep Controversy, The Economist. ,http://www.economist.com/ news/business/21599381-indias-biggest-energy-project-has-produced-more-squabbles-gasdeep-controversy., 20 March 2014 (accessed 12.09.2016). Reliance annual report, 2016. A. Roy, Capitalism: A. Ghost Story, Outlook India, 26 March 2012. Sinko, I., Yakovlev, E., & Zhuravskaya, E. (2005). Laws for sale: evidence from Russia. American Law and Economic Review, 7(1), 284 318. Tata promoter holding companies’ shareholding pattern: ,http://www.tata.com/aboutus/ sub_index/Promoter-holding-companies. (accessed 12.09.2016). The Unhappy Prince: how Reliance buried a book, The Wire. ,http://thewire.in/32479/theunhappy-prince-how-dhirubhai-ambani-buried-a-book/., 30 April 2016 (accessed 12.09.2016).

Corruption in Vietnam: the current situation and proposed solutions

14

Ngo T. Phuong Banking Supervisory Agency, the State Bank of Vietnam

Corruption remains widespread globally. The cost of corruption is huge, varying from great damage to the State and citizens’ property to dramatic decrease in public trust in the State due to the erosion of ethical standards. Corruption is also an obstacle to sustainable economic development. It is generally accepted that corruption is exhibited more in developing economies than developed ones (Segon & Booth, 2010). The Transparency International Corruption Perceptions Index (2015) supports this notion with the five least corrupt economies (Finland, Denmark, Sweden, New Zealand, and the Netherlands) being all developed countries with strong political, legal, and social systems. The same index published the most corrupt countries as North Korea, Somalia, Afghanistan, Sudan, and Angola. Transparency International reported that “68% of countries worldwide have a serious corruption problem. . .not one single country, anywhere in the world, is corruption-free.” (Transparency International, 2015). Therefore, it is necessary that all parties and countries need to work together in fighting against corruption. Vietnam is an emerging market and is an important player in the global marketplace due to the DoiMoi (or Renewal) reform policy introduced in 1986, the WTO accession in 2007, and as a member of the Trans-Pacific Partnership in 2015. GDP growth in Vietnam during 2011 2015 remained steady at 5 7 percent per year and much improvement has been made. However, corruption is widespread throughout Vietnam and remains a substantial issue. Vietnam lags behind other countries in controlling bribery and corruption. Vietnam passed the Law on Anti-corruption in 2005, (Law on Anti-Corruption No. 55/2005/QH11, 2005) with amendments made to the Law in 2007 and 2012. There was also the establishment of the Central Steering Committee on Anti-Corruption under the Vietnamese Communist Party in 2009 which highlighted the importance of anticorruption in the Vietnamese government. As a result, there is growing support for institutions in anticorruption, such as the People’s Procurement body, the Government Inspectorate, and the State Audit body. These activities were made in response to the negative influence corruption has on multiple sectors such as education, health, land management, construction, and other industries. This chapter gives an overview of corruption in Vietnam and recommends solutions to dealing with this problem. The chapter is structured as follows: the first The Changing Face of Corruption in the Asia Pacific. DOI: http://dx.doi.org/10.1016/B978-0-08-101109-6.00014-9 Copyright © 2017 Ngo T. Phuong. Published by Elsevier Ltd. All rights reserved.

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section defines corruption according to Vietnamese law, and then characteristics of corruption are described in the second section. The third lists the acts of corruption and describes the current situation of corruption in Vietnam. The last section proposes recommendations and solutions to prevent corruption in Vietnam.

14.1

Definitions

In a broad sense, corruption is understood as the act of a person who abuses their position and power, or tasks assigned to themselves in order to gain personal profit. According to the dictionary of Vietnam, (Vietnamese Dictionary, 2002) “corruption is abusing power to do harassment and appropriate property.” In Clause 2 from Article 1 on the Law on Anti-Corruption No. 55/2005/QH11 (Law on Anti-Corruption No. 55/2005/QH11, 2005) of the Socialist Republic of Vietnam, corruption is defined as follows: “Corruption is an act committed by a person holding a position with power who has abused his or her position and/or power for personal benefit.” The persons defined here hold these positions and exercise of these powers are limited to those who work in organizations, agencies, and other bodies involved in the political system using government budget funds and state property. This emphasizes the fight against corrupt practices in places where they occur the most. Preventative measures include the formalization of responsibilities of leaders to prevent corruption, asset declaration, publicity, and transparency in the operation of organizations and agencies in the political system.

14.2

The characteristics of corruption

Under the law of Vietnam, anticorruption legislation applies to the following people and their responsibilities:

14.2.1 The subject of corruption is the person who holds the position and power Persons holding the positions and powers include (1) cadres, public officials, and civil servants; (2) officers, professional military personnel, military workers in agencies and/or units of the People’s Army; operational commissioned and noncommissioned officers, technical professional officers, noncommissioned officers in agencies and/or units of the People’s Police; (3) leaders and managers in Stateowned enterprises, and leaders and managers who represent the state’s capital at enterprises; (4) persons who are assigned to perform a task or an official duty with power when performing that task or official duty (Clause 3, Article 1 of the Law on Anti-Corruption). Overall, this group has specific characteristics compared with other groups. They should have more experience, undergo systematic training, are experts in many

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different fields, have extensive ties and social prestige and even certain economic strength. However, this group’s characteristics (social and professional ties) make it difficult for the detection, investigation, and trial of acts of corruption.

14.2.2 The subject of corruption abuses their positions and powers assigned “Taking advantage of their positions and powers” is the second characteristic. When performing acts of corruption, corrupt persons use “their positions and their powers” as a means to benefit themselves, their family, or others. This is the basic factor to define acts of corruption. Equally, a person with position and power but who does not abuse their positional power is not a corrupt person. However, not all persons holding positions and powers have taken advantage of their positional power, which may be considered as acts of corruption. In Vietnam, only the group stated in Section 2.1 is the subject of corrupt acts. Therefore, for the private sector, when cases of corruption occur, the law has made certain adjustments. For example, the acts of members of joint-stock companies with less than 50% state-owned capital are not covered under corruption offenses. There are also cases of people in positions of power in organizations and enterprises in the private sector that collude and this results in the degradation of the public sector as they take advantage of those affected in order to profit. In that case, they become accomplices to acts of corruption and can be prosecuted for criminal liability. Thus, there is a difference between corrupt acts and other criminal acts, so care must be taken to distinguish acts of corruption from violations of other laws.

14.2.3 The purpose of corrupt act is a private gain The act of corruption is an intentional one with the purpose to gain profit. Profit here is understood as material or economic benefits that people in positions of power have achieved or can be achieved through acts of corruption. Thus, when dealing with acts of corruption, the purpose of gaining profit is considered as the main motive; it is not mandatory to have the subject of corruption to achieve the benefits. Vietnam’s current law provisions evaluate the nature and scope of the danger of corruption acts as mainly based on determining the physical benefits that corrupt persons achieve. Current physical benefits of market mechanisms are expressed in many different forms (such as values, money, prestige, reputation, etc.). It is not sufficient to evaluate the benefits that corrupt persons achieve only on the basis of property (gained as a result of corrupt practices) discovered or recovered. Material and emotional interests are taken into account and are very difficult to account for. For example, if a person uses the property of the State to promote their prestige or reputation, or to build relationships to gain illicit profits, then the purpose of the act results in material, professional, and spiritual benefits.

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The acts of corruption under the provisions of the current law

Acts of corruption manifested in reality are very diverse and occur in many different forms. The Penal Code and Law on Anti-Corruption in 2005 stipulated the following acts of corrupt behavior: (1) embezzlement of property; (2) bribe-taking; (3) abuse of position and power to misappropriate assets; (4) abuse of position and power in the performance of a task or an official duty for personal benefit; (5) abuse of power in performing a task or an official duty for personal benefit; (6) abuse of position and power to exert influence on others for personal benefit; (7) fraud in public service for personal benefit; (8) giving bribes or acting as a broker for bribery by persons holding a position with power in order to perform the tasks of their own agency, organization, unit, or locality for personal benefit; (9) abuse of position and power to illegally use state assets for personal benefit; (10) harassment for personal benefit; (11) failure in the performance of tasks and/or public duties as the result of personal benefit; (12) abuse of position and power to cover and conceal persons who commit acts violating the law for personal benefit; or unlawful interference with or creation of barriers for personal benefit to the monitoring, inspection, auditing, investigation, prosecution, adjudication, and enforcement of judicial decisions. More specifically: Embezzlement of property is the abuse of one’s position and power to appropriate property that they are in charge of or manage. Bribe-taking is the act of abusing position and power directly or through intermediaries that have received or will receive property, money, or other interests under different forms; bribery also means to do or not to do work for personal benefit or at others’ request of briberies. Abuse of position and power to misappropriate assets is the act of abusing one’s position and power to misappropriate property which does not belong to them. Abuse of position and power in the performance of a task or an official duty for personal benefit by an individual is the abuse of their position and power to act against the civil service benefits that damages the interests of the State, society, rights. and legal interests of citizens. Abuse of power in performing a task or an official duty for personal benefit is where an individual exceeds their power to act against authorized duties, and by making damages or losses to the State, organizations, or citizens. Abuse of position and power to exert influence on others for personal benefit is where individuals or their intermediaries have received or will receive property, money, or benefits under different forms, resulting in negative consequences. This also covers acts which commit, promote, or encourage people in positions of power to act or refrain from acting responsibly or directly related to their work or to do something that they are not allowed to do. Fraud in public service for personal benefit is where an individual for their own benefit or other personal motives abuses their position and power to implement one of the following acts: Forge papers and documents Falsify the contents of papers and documents Falsify signatures and seals of persons with positions of power.

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Giving bribes or acting as a broker for bribery by persons holding a position with power in order to perform the tasks of their own organization, agency, and unit for private benefit is considered a new form of corruption in Vietnam, including a) to give and broker bribes to have benefits from preferential policies supplied for the organization; b) to give and broker bribes to be given priority in budget allocation; c) to give and broker bribes to have projects given to the organization or have projects approved; d) to give and broker bribes to be awarded honorary titles; e) to give or broker bribes to have targets of organization and personnel approved; f) to give or broker bribes to dodge inspections, investigations, audits, or to falsify their audits; g) to give and broker bribes to have other benefits supplied for the organization. Due to existing “rent-seeking” cases in many areas, there are notable individuals misrepresenting agencies, organizations, and units and localities that seek to bribe people in charge of approving programs, projects, funding, and budgets to achieve personal interests. Abuse of position and power to illegally use state assets for personal benefit is the act of abusing the rights assigned for the management of state assets in order to serve personal interests or the interests of a certain group of people instead of serving the public interest. Specific manifestations of this behavior are usually exemplified with respect to leased assets such as factories, offices, cars, and other physical assets. In order to profit, the value of leased assets is sometimes very large. Another example is using state property for personal affairs or using state property against the set limitations and standards. This behavior occurs quite frequently in Vietnam. Harassment for personal benefit occurs in the operation of several public authorities, especially at the administrative offices, where there is direct handling of affairs of citizens and businesses. Some officials and public servants in the public service act illegally by seeking to take advantage of loopholes or the lack of clarity in administrative procedures. They may even set conditions more difficult for citizens and businesses, such as forcing them to give presents. The essence of this behavior is coercion with concealed bribes, which is very difficult to detect. Behavior that can be considered as acts of harassment or “bribe” indirectly is done at a not very serious level so that they can use administrative remedies. Failure in the performance of tasks and/or public duties as the result of personal benefit is an act commonly committed by “security guards” who are responsible for management in local governments, and have “ignored” or even abetted violations so that they receive benefits from crime. This is a very hazardous phenomenon, and the country needs to fight strongly against the presence of these ‘security guards.’ (Document on anti-corruption for teachers at high school, 2011) Abuse of position and power to cover and conceal persons who commit acts violating the law for personal benefit or unlawful interference with or creation of barriers for personal benefit to the monitoring, inspection, auditing, investigation, prosecution, adjudication, and enforcement of judicial decisions are corrupt acts that are sometimes shielded even with the complicity of those holding positions with higher powers. Therefore, the detection and handling of this type of corruption is extremely difficult. They cover those who commit acts of corruption, and hinder the process of detecting corruption by sometimes concealing them under so many different forms, such as through the post or phone. They avoid the implementation of anticorruption responsibilities through their attitude, and work uncooperatively with the relevant authorities.

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Current situations of corruption in Vietnam

Implementing the comprehensive sociopolitical and economic reforms (DoiMoi) introduced by the Communist Party of Vietnam in 1986, Vietnam officially shifted from a central planning mechanism to a market-oriented economy under a socialist orientation. Tran-Nam and Pham (2003) Along with the economic reform and open-door policy, the Vietnamese cultural-socioeconomic environment has undergone significant changes. Ngo et al., (2014) Apart from undeniable economic achievements, the implementation of the Doi Moi also saw a direct acceleration of corruption. The Vietnamese Communist Party in the 10th Party Congress session in 2006 recognized corruption as the most important factor threatening the Party’s survival. The following index reinforces the notion that corruption remains a serious issue in Vietnam. According to the Corruption Perceptions Index (CPI) of Transparency International, Vietnam ranked 112th out of 186 countries, with a score of 31 in the year 2015. The CPI ranks countries and territories based on how corrupt their public sector is perceived to be. A country or territory’s score indicates the perceived level of public sector corruption on a scale of 0 (highly corrupt) to 100 (very clean). (https://www.transparency.org/cpi) Vietnam’s CPI from 2011 to 2015 is illustrated in Table 14.1. From the table, we can see that the index of Vietnam has remained approximately the same from 2011 to 2015. In 2012, Vietnam ranked 123 and dropped 11 places because of its unstable economy, and the inefficiency of state-owned enterprises, which made investors worried. According to the World Bank Group’s Vietnam 2035 Report, “Vietnam does worse than the average of uppermiddle-income countries although it is roughly the same or better than other lowermiddle-income countries” (World Bank Group & Ministry of Planning and Investment in Vietnam, 2016) (2016: 63). Another index that demonstrates a high degree of corruption in Vietnam is the Index of Economic Freedom. The Index of Economic Freedom is constructed through an analysis of 10 equally weighted specific components of economic freedom, which are grouped for ease of reference into four key categories: (i) rule of law (property rights, freedom from corruption); (ii) limited government (fiscal freedom, government spending); (iii) regulatory efficiency (business freedom, labor freedom, monetary freedom); and (iv) open markets (trade freedom, investment freedom, financial freedom) (Table 14.2). Table 14.1

Vietnam’s corruption perceptions index

Year

Rank

Score

2015 2014 2013 2012 2011

112/186 119/175 116/177 123/174 112/182

31 31 31 31 29

Source: Transparency International data summarized by the author for this study.

Corruption in Vietnam: the current situation and proposed solutions

Table 14.2

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Vietnam’s index of economic freedom

Year

World rank

Regional rank (Asia-Pacific region)

Overall score

Freedom from corruption Score

2015 2014 2013 2012 2011

148 147 140 136 139

32 33 30 29 30

51.7 50.8 51 51.3 51.36

31 26.9 29 27 27

Source: Economic Freedom of the World data summarized by the author for this study.

Each of the 10 economic freedoms is graded on a scale from 0 (very unfree) to 100 (totally free). According to the 2015 Index of Economic Freedom, Vietnam obtained a score of 31 out of 100 for freedom from corruption, making its economy the 148th freest in the 2015 Index. Although the Vietnamese economy has achieved its highest economic freedom score ever in the 2015 Index, its overall score continues to be lower than the world and regional averages with the note that a confused overlapping of the bureaucratic procedures and legislations generate opportunities for corruption, factionalism and bureaucratic rivalries, nepotism, and a general lack of accountability: Over the past five years, economic freedom in Vietnam has stagnated, with advances over the past year mitigating three years of deteriorating scores (Index of Economic Freedom, 2015).

Corruption takes places in multiple areas. It has considerably hindered the achievement of the Doi Moi reform and the fighting efforts of the Party. In the following, examples of corruption in several sectors that occur often in Vietnam are discussed. Corruption in the field of land management and using natural resources and minerals Corruption mainly takes place in the planning and conversion of land for purposes such as agriculture, for the construction of economic zones, industrial parks, and development of urban areas. It also occurs in land allocation, leasing of land, the recovery of land valuation and compensation, licensing for the exploitation of resources, minerals, etc. Some beneficiaries have taken advantage of their positions and powers to allocate land illegally, by filing false information or increasing the land area declared to seek more compensation. Corruption with regard to land administration and management is common in Vietnam (Vo, 2015). Corruption in the banking and finance sector There is an increase in corruption in this field. The violations by a number of Party cadres in the banking sector, particularly in commercial banks are increasing. Banking officials collude with others through lending activities such as underwriting, financial leasing, financial investments, entrusted loans, etc. in order to appropriate property, causing huge losses. Several cases have been detected, investigated, and judged or awaiting judgment. For example, the Director of the Vietnam Development Bank, Dak Lak,

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received 100,000 USD, a BMW car (worth $ 160,000 USD), and many other valuable assets of embezzlement from customers to falsify loan documents, thus resulting in bad debt and losses for the bank. He was prosecuted and had to compensate for the bank (Lˆe Ðức Tuấn, 2012). Corruption in the field of capital construction investment Corruption exists in almost all fields of construction investment, such as embezzlement and intentional wrongdoing. Violations occur in all stages, from project planning, design, cost estimates, and financing plan for approval to procurement, consultancy, supervision, construction, testing, and project settlement. There also exist failures to comply with the order and procedures for investment in capital construction. There is fraud and lack of transparency in the bidding process, with false declarations in the volume and value of supplies and equipment. The sector also suffers from use of poor quality materials, and more prevalent fraud practices are incorrect specifications and wrong construction processes to reduce costs. Corruption in the management and use of funds and state-owned assets in enterprises Some managers and officials hide value of assets by lowering actual land values which have been equitized or sold, exchanged or leased by the enterprise. There are falsified sale contracts and wrong transport invoices for appropriation, while rates are also raised to control prices when purchasing public assets for profiteering. Also, some officials use public assets for private functions or turn state property into private property. In several rural areas and remote provinces of Vietnam, cadres collect money from people, but they do not record financial receipts (not written in the books), and there is an illegal embezzlement of state budget. Corruption in the field of justice There are judicial officials who abuse their positions and powers to take bribes in the course of performing official duties (investigation, prosecution, adjudication, and enforcement of judgments). These acts not only affect the soundness of public service activities (such as preventing persons caught in the investigation, prosecution, or trial) but also distort the nature of the case, discrediting the judiciary and losing the trust of the people in the system. This area is usually related to large corruption cases. Being a developing country, transparency in decision-making and fiscal practices in Vietnam is limited. Vietnamese organizations have attracted ongoing criticism for reportedly high levels of corruption and inappropriate business practices. Corruption, harassment, and bribery are popular among public officials, state agencies, businessmen, and public servants that facilitate payments from their clients. Examples of public servants include traffic police, licensing/regulatory authorities, tax officers, and officials in the medical and education fields. There are mid-level officials who regularly accept payoffs and some amass great wealth.

14.5

Solutions to prevent corruption

Prevention and anticorruption play an important role in curbing corruption in Vietnam. Article 5 of the UN Convention against Corruption (UNCAC)

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recommends that member countries construct and maintain a continuous, comprehensive, and effective corruption prevention strategy United Nations Convention Against Corruption (2004). Vietnam has made great anticorruption efforts by implementing many measures such as anticorruption policies, training, and raising awareness as well as other administrative measures. In terms of the legal framework for anticorruption, Vietnam has the following regulations: 1. Penal Code No. 15/1999/QH10 (Penal Code No. 15/1999/QH10, 1999) (Chapter VI) in 1999, amended and supplemented in 2009 and took effect from 1 January 2010. 2. Law on Anti-Corruption No. 55/2005/QH11 in 2005, amended by the Law No. 01/2007/ QH12 in 2007 and the Law No. 27/2012/QH13 in 2012. 3. Decree No. 59/2013/ND-CP guiding some articles of Anti-corruption Law; Decree No. 78/2013/ND-CP about the transparency of assets and income; Decree No. 90/2013/ND-CP on the analyzing responsibilities of state agencies on the implementation of appointed tasks and powers. 4. Decision No. 115/2008/QD-TTg issued by the prime minister of Vietnam on the regulation on publicity of the management and use of state property at state agencies, public nonbusiness units, and organizations assigned to manage and use state property, etc. Vietnam’s current regulations on anticorruption have significantly improved and are quite full of corruption prevention measures.

In 2009, the Vietnamese government issued the National Anti-Corruption Strategy toward 2020 (The National Anti-Corruption Strategy toward 2020, 2009) (the Strategy). The Strategy recommends five measures in fighting corruption: (1) enhancing publicity and transparency in policymaking, lawmaking, and implementation; (2) improving the civil service and public servants’ mechanisms and public service delivery quality; (3) improving economic management mechanisms and establishing a competitive environment with equality and transparency; (4) enhancing the effectiveness and efficiency of inspections, examinations, supervisions, audits, investigations, prosecutions, and judgment in detecting and dealing with corruption; and (5) enhancing public’s awareness of and role in anticorruption. Following the publication of this Strategy, more concrete and comprehensive solutions should be deployed to effectively prevent corruption in Vietnam, including the following: i. The propaganda and education of the Party the State should make all officers and employees profoundly aware that corruption is a criminal act. The decadent lifestyle and lack of ethics need to be eliminated. Corrupt acts also need to be seen as dangerous as they not only kill the morale of an individual but also dishonor their families which is important in Vietnamese culture and also result in the loss of reputation of a country. ii. Along with the strict handling of corrupt offenders, officials and employees in the bureaucracy who behave with integrity should be appreciated. Officials and public servants are not allowed to harass or hinder any individual or organization from contacting state agencies. Officials and civil servants who are clearly corrupt, as concluded by the competent authorities, should be severely punished as an example for deterrence. There

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is a need to make public, and transparent, collective and individual corruption, including acts of people in positions of power. iii. There is a need to perform a thorough administrative reform, and focus specifically on the review of all regulations to eliminate any contradiction relating to complying with legal documents as well as to amend and supplement legal provisions that are no longer accurate. More clarity is required with respect to anticorruption law in order to minimize or limit taking advantage of loopholes in the corruption legislation. iv. Regulatory authorities must make public all the administrative processes and procedures for organizations and individuals and simultaneously reveal the name and title of the person who is assigned responsibility for these processes. This measure has a great effect in enhancing accountability for state civil servants while also curbing corruption of the bureaucracy in handling any civil requirements.

14.6

Conclusion

New challenges and opportunities are given to scholars to investigate ethics and corruption issues within developing countries, especially during the period of their transition from a planned to a market economy, and also where corruption is somewhat higher. After 30 years of Doi Moi, Vietnam has achieved significant progress from a poor and centrally planned economy to a middle-income country with a dynamic market economy. The success of the 30-year Doi Moi plan brings expectations for the future. Vietnam has set a goal of becoming a prosperous, creative, equitable, and democratic society by 2035. Initial, significant achievements have been made in combating corruption over the past years. However, Vietnam’s greater regional and global integration and the new opportunities created by its middle-income country status might truly increase corruption. Combating corruption is complicated, tough, fierce, and prolonged. The country needs to mobilize its people, organizations, and all levels of government involved and act on information provided by people in order to successfully prevent corruption. The critical role played by ethical government officials, managers, and employees in preventing and penalizing corruption and bribery, along with an effective legislation, will create and contribute toward sustainable economic development.

References Document on anti-corruption for teachers at high school (2011). “Chinh tri Quoc gia Su that http:// thanhtra.gov.vn/UserControls/PDFDocument/a390d17b-4b95-4fc2-bff1-284845d780e2/ 2/index.html. Index of Economic Freedom 2015 http://www.heritage.org/index/pdf/2015/book/index_2015. pdf. Law on Anti-Corruption No. 55/2005/QH11 (2005). Retrieved January 21, 2016, from http:// thuvienphapluat.vn/van-ban/EN/Bo-may-hanh-chinh/Law-No-55-2005-QH11-of-November29-2005-on-Anti-corruption/84204/tieng-anh.aspx.

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Lˆe Ðức Tuấn (2012) Vụ a´n tại Chi nha´nh Ngaˆn ha`ng Pha´t triển khu vực Ðắk Lắk - Ðắk Nˆong (Cases at Vietnam Development Bank, Ðắk Lắk - Ðắk Nˆong Branch), 31st May, accessed 2nd March 2016, http://noichinh.vn/ho-so-tu-lieu/201205/vu-an-tai-chi-nhanhngan-hang-phat-trien-khu-vuc-dak-lak-dak-nong-291068/. Ngo, P. T., Mujtaba, B. G., & Fisher, G. (2014). The Influence of Communism on Ethical Decision Making. Journal of Knowledge Management, Economics and Information Technology, 1(IV), 1 11. Penal Code No. 15/1999/QH10 (1999). Retrieved January 21, 2016, from http://thuvienphapluat.vn/van-ban/EN/Trach-nhiem-hinh-su/Penal-code-No-15-1999-QH10-of-December21-1999/78777/tieng-anh.aspx. https://www.transparency.org/cpi 2015. Segon, M., & Booth, C. (2010). Managerial perspectives of bribery and corruption in Vietnam. International Review of Business Research Papers, 6(1), 574 658. The National Anti-Corruption Strategy toward 2020 (2009). Retrieved May 21, 2014, from http://anti-corruption.org/pmb321/pmb/opac_css/doc_num.php?explnum_id 5 676. Tran-Nam, B., & Pham, C. D. (2003). The Vietnamese economy: Awakening the dormant dragon. London: Routledge. Transparency International (2015) Corruption Perceptions Index http://www.transparency. org/cpi2015 accessed 2 March 2016. United Nations Convention Against Corruption (2004) https://www.unodc.org/documents/ brussels/UN_Convention_Against_Corruption.pdf accessed 2nd March 2016. Vietnamese Dictionary (2002). Da Nang Publisher, page 910. Retrieved January 27, 2016, cited from http://www.tapchicongsan.org.vn/Home/Viet-nam-tren-duong-doi-moi/Phong-chongtham-nhung/2013/19790/Tham-nhung-nguyen-nhan-va-bien-phap-ngan-ngua.aspx. Vo, T.T.T. (2015). Corruption: Case Studies of Vietnam and Italy. Retrieved January 21, 2016, from http://digitalcommons.tacoma.uw.edu/cgi/viewcontent.cgi?article 5 1027&context 5 gh_theses. World Bank Group & Ministry of Planning and Investment in Vietnam (2016) Vietnam 2035 Report, Washington DC: World Bank Group, https://openknowledge.worldbank.org/bitstream/handle/10986/23724/VN2035English.pdf accessed 2nd March 2016.

Corruption in Myanmar: insights from business and education

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Tim G. Andrews1 and Khin Thi Htun2 1 Webster University Thailand, Bangkok, Thailand, 2Builder’s International Trading Ltd, Bangkok, Thailand

Set against a backdrop of decades of military dictatorship and insularity, Myanmar has to date been largely overlooked in Asian social science research (Andrews, Htun, & Nimanandh, 2016). Recent texts have referred to Myanmar as “set in aspic,” a forgotten land in Asia due its isolation and insularity where people often have only a vague idea of where the country is located, despite occupying an area of land between two of the world’s most heavily populated countries—India and China (O’Brien, 1991; Syrota, 2003; Yin, 2013). Not surprisingly, this neglect stems largely from the six decades of repressive government Myanmar has endured at the hands of a controlling army junta (e.g., Mawdsley, 2002). In recent years, however, influenced by the forces of globalization on the one hand and the progressive relaxation of strict political repression on the other, a democratic transition has begun during which the government has become quasi-civilian (Cockett, 2015). Toward the end of 2015, the country delivered a landmark election in which the National League for Democracy (NLD), led by Nobel laureate Aung San Suu Kyi, won with a landslide majority. It was this culmination of years of political struggle that has engendered a renewed sense of hope among the population at large, fueled by the subsequent freeing of hundreds of political prisoners from incarceration and the relaxation of media censorship. In a context where foreign investors and tourists are now being welcomed, Myanmar—with its young, 55 million-strong population, vast natural resource reserve, and critical geo-strategic location—holds huge investment promise for local and foreign businesses alike (Andrews & Htun, 2016; Yin, 2013). Indeed, spurred by economic reform and the easing of international sanctions, Myanmar is, at the time of writing, one of the world’s fastest-growing economies. In spite of such welcome developments, however, major challenges remain to Myanmar’s mid-term social and economic development. To begin with, there is the decrepit infrastructure, the conflicts along much of the nation’s resource-rich border, and the simmering intra-national religious and ethnic tensions. Secondly, there is the continuing influence of the junta-era cronies, who, while blacklisted across much of the Western world, still largely control many sectors of the economy, including ports, airports, banks, retail, transport, construction, and property. Indeed, it is difficult to see how the plight of the country’s poor (i.e., the vast majority) can change until this commercial, economic, and administrative stranglehold is addressed. The Changing Face of Corruption in the Asia Pacific. DOI: http://dx.doi.org/10.1016/B978-0-08-101109-6.00015-0 Copyright © 2017 Tim Andrews and Khin T. Htun. Published by Elsevier Ltd. All rights reserved.

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Thirdly, and our focus for the remainder of this chapter, is the staggering depth and pervasiveness of corruption across the country’s institutional landscape. A recent list by Transparency International ranks Myanmar among the top four most corrupt countries in the world (transparencyinternational.org, 2015). Corruption in Myanmar—as in several of the country’s southeast Asian neighbors—is not only “normal” but deeply rooted, well-organized, and centered at the confluence of public administration and commerce (Andrews & Htun, 2016; Backman, 2011). In this chapter we shall explore the antecedents and manifestations of corruption in Myanmar, with a focus on the education and business arenas. Given the lack of fieldwork to date, and wishing to look beyond the macro-level statistics, we emphasize how cronyism and nepotism are experienced on the ground, at the micro-level, using illustrative vignettes.

15.1

Antecedents: culture, development, and rule

Though held to exist wherever there is human society, a consensus of research continues to report a relatively elevated prevalence and influence of corruption across the emerging Asian sub-continent. As studies have sought to deepen our understanding of this phenomenon, one consensus to have emerged surrounds the major determining influences held to be cultural norms and values on the one hand and economic development on the other (Backman, 2011; Yin, 2013). Describing Myanmar’s national culture profile in the broad comparative sense, we can infer from the major models to date that the country embodies a conservative, collectivist, conforming culture based around the extended family unit (Hofstede, 1984, House, Hanges, Javidan, Dorfman, & Gupta, 2004; Schwartz, 1999; Trompenaars & Hampden-Turner, 1993). As with other Confucian cultures that permeate much of south and Southeast Asia, the twin pillars of Myanmar societal norms stand as relationships on the one hand and hierarchy on the other. Beginning within the family, this then ripples outward through one’s life within the confines of interpersonal networks built along status, wealth, education, knowledge, ethnicity, and (often) gender lines. In accordance with Myanmar cultural values, these social relationships must be maintained and kept smooth at all times. One “gets on” in life through dependence on and leveraging one’s interpersonal connections (known as a hse a thwe), which serve as a “bank of assistance” for survival and prosperity (Andrews & Htun, 2016). Myanmar social relationships are grounded in and nurtured through the workings of mutual assistance, mutually reciprocated favors, loyalty, protection, and benevolence (Sim, 2001; Yin, 2013). Virtues such as honesty, fairness, openness, and truth in institutional dealings are more likely to be set aside for the benefit of the human relationship. In turn this tends to induce patronage, clientelism, favoritism, partiality as social codes are placed above formal laws—the cultural norm being to help relatives and friends as a moral duty. At the practical level, dealing with those in your network is efficient as inherent bonds of trust cut down perceived risk, bureaucratic and other obstacles. One can get a job easily—even pass an exam—if one’s relatives/friends possess good social

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connections. It is quite acceptable that someone in a position of influence agrees to your request for assistance on the grounds that (for example) your grandfather assisted her younger brother decades previously. These things are not forgotten. One is expected to reciprocate if needed and, moreover, happy to do so—bending or breaking rules to protect friends and/or relatives in a culturally congruent manner. At the organizational level contracts are won, licenses secured, and competition neutralized if one’s network is sufficiently robust, exerting a pervasive but “belowthe-radar” influence in the norms of organizational exchange. Myanmar relations-based culture leads to what one might refer to as the normalization of corrupt activity (Backman, 2011). But this is clearly not the only major determinant concerned. What of Singapore, which, as a deeply Sinic, Confucian culture evinces far less corruption than the likes of Myanmar, Thailand, or Indonesia? An obvious moderating factor with regard to the influence of Asian relations/Confucian culture on “corrupt” activity is economic development. In the case of Myanmar we need to look at this in conjunction with another key plank in the trajectory of the country’s recent history, namely the arrested economic and infrastructural development linked to the years of military governance and repression. Known as “the Burmese way to socialism,” it was from 1962 under President Ne Win’s presidency that the regulatory and education system in Myanmar was rapidly dismantled and, or, neglected in favor of a centralized, quasi-totalitarian autarky. In a context where the dictator’s word is the law, the institutional void that ensues has meant that the legal framework can be easily manipulated, the governing structures are weak or nonexistent, and education levels tend to be low. So as the opportunities for corruption increase, the factors that prevent and punish corrupt activity are curtailed. Accordingly, the ruling elite have been able to amass staggering concentrations of national wealth, power, and resources. Perhaps more profoundly, as the depth of corruption has worsened under military rule, even traditional, deeply grounded Myanmar societal norms and values have become corroded and abused. One example concerns the increasing use of one’s interpersonal networks solely as a resource to gain gold bars and cash money, whereas before these acted as an extended system of mutual social help and assistance. Doing business in Myanmar—with the all-powerful military casting a constant shadow—has become a situation of simply asking upfront “how much do we need to give you get this and that. . ..?” This has been especially the case for immigrant ethnic groups such as the Chinese, who have traditionally lacked influential social networks. Apparently, paraphrasing a former national president, many in Myanmar view corruption as so ubiquitous that it is akin to a softwood box being placed upon a termite hill, that is, reduced to nothing within hours in the wake of rapacious, relentless appropriation.

15.2

Organizational manifestations

The pervasiveness of relationships, hierarchy, and corruption in Myanmar organizational process means that institutions of almost any kind can neither exist nor succeed without the “right” individuals’ with the “right” social relationships. Within the

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primary sectors of business and education, organizations/institutions both express and engage with corruption in multiple guises with both internal and external stakeholders. At the intra-organizational level we discuss below the effect of cronyism and nepotism on the selection, recruitment, and training of staff, as well as the more general issues of treatment and motivation. Externally, we then explore how corruption affects government contract bidding, license securement, and customer engagement.

15.2.1 Recruitment Concerning job candidate sourcing and selection, the importance of socially derived networks in Myanmar cannot be overstated. Affected deeply by “traditional” forms of corruption, much of it is based on receiving, giving, or repaying a favor to someone within your network. For instance, unlike in most Western societies, in Myanmar it is still traditional for parents to secure employment for their children (particularly their first post upon graduation). In practical terms, if you know somebody senior at an organization, you can thus request them to appoint your children or the children of your friends and relatives. According to our respondents, under military rule it became common for high-positioned military government officials to “place” their offspring inside a company or government department, seeing that a post was created for the purpose where none was available. In certain universities and other government-linked organizations, some posts are actually kept aside for these children of “VIPs.” One instance recounted to us concerns the medical graduate daughter of a minister who desired a research position in Yangon, the kind which would avoid her being posted—or even having to travel—upcountry. On hearing of her case, a friend of her parents advised her to seek the post of training officer in the Medical Science Department. The applicant was surprised herself, as she had not heard there was such a position there before, as were her friends, who she remembers asking her how they could get a similar posting. But then, on the first day of work, she began to realize what the real situation was here through the backgrounds of her new cohort, comprised exclusively of “ministerial children” and their relatives.

15.2.2 Management, treatment, and appraisal Within the traditional Myanmar superior subordinate work relationship (where the latter are often sourced from extended family networks), juniors will look to their bosses as teachers and father/mother figures, expecting advice and even loans in times of crisis and a measure of understanding in times of trouble. Conversely, subordinates recruited as above are expected, above all, to be loyal. Within this context, notions of tangible performance measures are often bypassed to focus on notions of right conduct. Bonuses are generally given as a flat rate to all (two or three months being the norm), and supplemented with discretionary amounts of pocket money for special events such as New Year or the Tha Din Gyut festival. As many foreign companies have experienced, even where a systemization of “rewards” is enacted, in reality there is an endemic bias toward network favorites.

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Favoritism and especially nepotism within the realm of evaluation can be seen perhaps most clearly when listening to anecdotes surrounding the use of entrance exams. One example concerns the son of a prominent civil servant whose influence was such that he was able to pass a university exam even with an almost minimal score. This was enabled through the pressure applied by his father’s office on the university authorities to lower the overall pass threshold until it captured his personal score—effectively allowing the entire cohort to secure a university place (Andrews & Htun, 2016). Another case concerns an individual seeking promotion within a prominent Myanmar government ministry. Coming second out of 35 in the initial written exam, he was clearly expecting to make to the top 25 (the cut-off point for inclusion). However, despite being confident of performing well in the subsequent viva (answering all questions correctly), when the results were formally announced he found his name was not on the list. Unperturbed, he tried again the following year—with the same result. Bemoaning his luck on social media, he was advised, informally, not to waste his time again in future—that due to his origins, regional background, and lack of quality a hse a thwe (interpersonal networks) he would not be acceding to the foreign ministry promotion he was seeking whatever his examination score. The more general treatment received by institutions can also often be subject to one’s (usually familial) contacts and connections. Within the sphere of tertiary education, one case recounted to us concerned the allocation of prized dormitory rooms in a university’s official halls of residence. Formally these were reserved only for the children of government staff transferred to the city from elsewhere. In the case of this individual, in order to try and gain this “situation status” her father—a former senior government official—faked a letter of transfer (apparently not an unusual practice), which was subsequently presented to the university Head. Given that this was executed at the last minute, and anxious it would be a little too obvious, the Head was hesitant about giving his signature of approval, and advised her father to try again the following year. Keen to pursue other network-related options, however, the individual in question managed to secure an invitation to visit the admissions officer at her home (following a letter of introduction passed via her father’s friend). It was during this personal visit that the request was again made for a room. In the days that followed this was organized by this officer and the official letter was soon made available. In a subsequent private telephone call to the student’s father, the officer explained that she had helped secure the room during a chance encounter with the Head when he was requesting her to please find a dormitory room for the child of the sister-in-law of the foreign minister. It was during this short discussion that the admissions officer asked whether she might also find a room for the individual concerned, who she described as being akin to her “niece.” And so it was arranged.

15.2.3 Business bids, government tenders The external engagement of any business organization will typically comprise dealings with customers, suppliers, business partners, government, media, NGOs, and even competitors. In Myanmar this is skewed massively toward an all-powerful,

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irresistible, unavoidable military junta. According to our respondents, in both the business and education sectors, winning government tenders in Myanmar has for decades been often equated to no more than being the favored bidder on the basis of a contact, friend, or family member in a position to influence the outcome. In practice this may mean that once the sealed bids have all been opened the “favorite” would receive a call from the ministry to inform him/her of any lower bid, such that he/she can then rush across to a prearranged off-site location (and even sometimes the ministerial offices concerned) to revise their own figure sufficiently downward. Within this process, gifts in the form of cash money will change hands, typically both at the securement stage and also usually at the completion, launch, and/or opening stage of the project concerned. Bidders who lose out will often give gifts (gold, diamonds, and money) regardless, in the hope of securing the next favored concession. Sometimes, bidders wishing to secure a tender will be told explicitly how much they will need to give in order to be awarded the license (tender or no tender), a malpractice especially prevalent for infrastructure projects such as road and bridge construction, where there are typically a lot of sub-contractors and limited competition.

15.2.4 Setting up: connections, ethics, and partnerships The establishment of a business venture in Myanmar depends in part on the securement of a license to trade from the government ministry concerned. As such, and as may be expected, many operators in sought after fields such as internet provision, construction, retail, and transport have obtained the requisite permission from their network contacts. Prime instances concern soon-to-be-retired government officials seeking to help their children set-up while they still hold influence, for example, within the field of telecommunications (of which several high-profile cases are widely known). Concerning the role of partnerships and alliances, it is worth considering the case of foreign incoming firms with a global brand reputation and values to protect (and be seen to protect). For these companies the dilemma lies in adequately balancing their long-term reputational interests with the desire to develop the brand and the business locally. Unlike the majority of their indigenous business counterparts, foreign MNCs (particularly from the West) have to consider issues of values, of identity, of promises, of consistency, and ultimately the reputation which sustains the brand around the world. This can encompass the need to monitor and prevent not only accusations—or suspicions—of bribery but also any other “unethical” conduct, such as doing business with repressive regimes (whether directly or through agents). In Myanmar a local partner is only “good” in so far as they have access to useful a hse a thwe. A good, well-connected partner is exceedingly important for success in that personal connections are needed to find opportunities, obtain goods in short supply, approvals from necessary authorities, and to resolve disputes. Lacking such connections—and hence protection—means valuable time can get wasted and the risks of doing business locally increase markedly. “Good” partnering in Myanmar almost inevitably entails some kind of working arrangement with the so-called

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military-era cronies. Fortunately (in a sense), the once critical concern with the ethical credentials of the partner in question—indeed, of entering Myanmar under military rule at all—is now one on the wane, as many of the once blacklisted individuals and organizations are witnessing their statuses being revised and changed (Pennington, 2016). The additional justification for working with militaryconnected partners in Myanmar is also the oft-cited preference for “engagement” over “isolation.” “We can do more good from the inside than from nowhere” is the basic idea now being widely promulgated. The other issue is that without strong local connections or networks, foreign MNCs will often find bribery to be the only other option to ensuring local business venture survival. As is often stated, in Myanmar bribery is seen as simply playing the game, used as a tool (in the absence of a good connection) to speed up business processes by overcoming bureaucratic issues and gaining favorable treatment in contract bidding and so forth. Conversely, not playing the game—without access to quality a hse a thwe and unwilling to make facilitation payments—can be fatal.

15.2.5 Customers/students and customs officials Where customers are concerned, the prevalence of traditional corruption—secured, invaluable access to customers via the right contacts—can be illustrated using two common situations from business and education. The first concerns a business organization’s ability to reach customers through desirable retail space/location. In an established mall, for instance, when the first vacant lot becomes available, even if others are already queuing, it may be possible to secure prime space through one’s contacts with the lessors concerned. This is particularly common in “captive” shopping areas such as the country’s airports. In a related manner, college and middle/high school teachers in Myanmar government schools often seek to expand their customer base through unsanctioned behavior—specifically from among their pupils at school. In many cases, such is the meager wages of state teachers, those earning money from extra private classes with their pupils can supplement their incomes significantly. But desirous of nurturing and expanding the pool of fee-paying students, there are widespread reports of teachers using tacit methods in class to favor those who attend privately, such that the latter category will put pressure on their parents to join the private classes, whether in actual need of them or not. Our final example here, as regards another external stakeholder often in need of “managing” through corrupt engagement, consists of customs officials checking incoming freight (sea, air, and land). As per the job description of a “normal” customs officer, their brief is to open and inspect incoming containers to examine quality and quantity of the materials when compared to what has been stated/disclosed in the import license. In this regard, they will check through the relevant details concerning the goods, such as country of origin, model numbers, quantity (set, pair, piece, etc.), and so forth. Indeed, they generally have good reasons for doing so. Companies in Myanmar (as well as elsewhere) tend to under-value their goods such that there is always a significant gap between actual value and stated (or unit) value.

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The major benefits of this are twofold. Firstly, if they can get away with showing less export earnings then you pay less import tax and duties. Secondly, a lower import value figure then gives you space as a company to export more. Basically you can only export to the same amount you import, and vice versa. In order to import you receive foreign money into your bank account, and it is this money you need to show in order to gain a successful application for import licenses. In this context, clearly customs officers hold the discretionary leeway to either facilitate or obstruct the process, both in terms of recorded value and the time it takes to secure approval. Where the company concerned has sought to complete the requisite forms as accurately as possible, officers may then demand additional evidence (such as more proof as to where the material was sourced or assembled). As amending the application can take so long, the “optimal” solution is for money to change hands and “grease the wheels”—though this itself will also be subject to negotiation, as the official’s initial figure is negotiated downward by the company concerned.

15.3

Looking forward

Myanmar’s lengthy lack of exposure to the international environment is often held to be a major reason behind the perceived tardiness of attempts to arrest and reduce corruption in its administrative and commercial spheres of public engagement. As the country opens up its borders to foreign trade, tourists, and investment, however, the attendant interaction with global systems, norms, and values is expected to engender the progressive—albeit sporadic—adoption of foreign structures, processes, and practices. Many educated Myanmar, based overseas and armed with their Western education, skills and knowledge, are also now looking to return— spurred by the recent NLD electoral victory and the perception of declining military influence. Against this backdrop one would predict to see a certain “reining-in” of the more blatant corrupt practices in the years to come, as well as government-led initiatives to tackle notions of corruption more broadly. To our mind, however, the key issue lies not so much in whether or not such moves come to fruition but rather in the manner, as well as the extent to which, any reduction in corruption is likely to occur. Importantly, this takes us back to the issue of what constitutes legitimate or acceptable versus illegitimate corruption (and hence the meaning of corruption itself) in the eyes of the wider Myanmar society. The dominant current narrative appears to be that the negative consequences of corruption on economic development, competitiveness, and organizational reputation are becoming more understood and less accepted among a society grown weary of repression and injustice, not just in the arenas of education and business, but right across the spectrum of public affairs. And this may well be the case. But what we also found among our participants was that this appears to mask a more complex issue concerning the different types of corruption and their varying association with the machinations of the military regime on the one hand and the workings of wider Myanmar communal life on the other. Much of the “corruption fatigue” observed and recounted to us

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appeared to be conflated with a weariness of the exigencies of senior military rulers. Indeed, in recent times, even the so-called military government “cronies” are complaining at what is seen as the unrealistic, unrelenting demands of the country’s rulers (such that many voted for the NLD in the last election). However, this pervasive weariness with a “corrupt” military—and the corollary welcoming of political democratization (as well as economic deregulation)—does not mean a desire to end all that is assumed and labeled to be “corruption” in the eyes of Western participants and observers. As, for example, London and Hart (2004) note, international business scholars—as well as social commentators more generally—often work on the implicit assumption that as emerging economies such as Myanmar’s open up they will follow a similar pattern of economic development to their Western counterparts. As such, difficulties with deficient legal frameworks, property rights protection issues and—yes—corruption will “iron themselves out” over time with the progressive absorption of Western business ideology. Based on our informant discussions, however, much of what constitutes the thirst for change expressed among the wider Myanmar community embodies something of a yearning for a return to (perceived) traditional (pre-military rule, for the most part) values and norms. So whereas “corruption” in the guise of the deliberate monetization of the cultural norm of mutual assistance is derided and critiqued, such criticism did not extend to covering the wider value of placing social duty above formal laws, or relations over rules. Indeed, the favoring of those within one’s a hse a thwe, whether in commerce, education or wider public engagement, is firmly considered as the moral backbone to Myanmar organizational and administrative life. In this context, although one might foresee the corrupt excesses of military controllers being reduced, the “traditional” corruption expressed in nepotism, cronyism, and favoritism is unlikely to diminish in scope and/or influence in the foreseeable future. To this extent this informal, deeply rooted “system” that undergirds Myanmar society, whereas legitimate in the eyes of the indigenous community, will remain illegitimate, corrupt, in the eyes of most incoming Western stakeholders. Perhaps the most that one might expect going forward is the partial absorption—one might say indigenization—of Western organizational approaches to corruption, for instance in notions of “responsible cronyism” wherein the duty to pay heed to one’s interpersonal network is balanced through adopting a more inclusive, “professional” consideration of wider alternatives (e.g., in the form of recruits, suppliers, partners, and/or customers).

References Andrews, T. G., & Htun, K. T. (2016). Business networks in Myanmar: Kjei zu, Corrosion & Reform. In J. Dolan, C. Rowley, & M. Warner (Eds.), Business networks in East Asian capitalisms: enduring trends, emerging patterns. Elsevier: Chandos Publishing. Andrews, T. G., Htun, K. T., & Nimanandh, K. (2016). Business system evolution and the indigenization of MNE practice transfers in Thailand & Myanmar: An ’emic’ perspective. In R. Whitley, & X. Zhang (Eds.), Changing business systems in Asia: Globalisation, socio-political change, and economic organisations. Oxford: OUP.

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Backman, M. (2011). Asian eclipse: Exposing the dark side of business in Asia. Singapore: John Wiley. Cockett, R. (2015). Blood, dreams & gold: The changing face of Burma. Yale University Press. Hofstede, G. (1984). Culture’s consequences: International differences in work-related values, abridged edition. Thousand Oaks: Sage. House, R. J., Hanges, P. J., Javidan, M., Dorfman, P. W., & Gupta, V. (2004). Culture, leadership, and organizations: The GLOBE study of 62 societies. Thousand Oaks, CA: Sage. London, T., & Hart, S. L. (2004). Reinventing strategies for emerging markets: Beyond the transitional model. Journal of International Business Studies (35, pp. 350 370). Mawdsley, J. (2002). The heart must break: the fight for democracy and trust in Burma. London: Arrow books. O’Brien, H. (1991). Forgotten land: a rediscovery of Burma. London: Michael Joseph. Pennington, M. (2016). US takes slow road on Myanmar sanctions. Bangkok Post, May 15th. Bangkok: Post Publishing. Schwartz, S. H. (1999). A theory of cultural values and some implications for work. Applied Psychology: An International Review, 48(1), 23 47. Sim, H. C. M. (2001). Myanmar on my mind: A guide to living and doing business in Myanmar. Singapore: Times Books International. Syrota, T. (2003). Welcome to Burma: And enjoy the totalitarian experience. Bangkok: White Orchid Press. Trompenaars, F., & Hampden-Turner, C. (1993). Riding the waves of culture. London: Nicholas Brealey Publishing. Yin, S. M. (2013). Myanmar: A survival guide to customs and etiquette. Singapore: Marshall Cavendish.

From credible threats to credible commitments? the changing face of South Korean corruption

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Ingyu Oh Korea University, Seoul, South Korea

16.1

Introduction

South Korea (henceforth, Korea) is notorious among OECD countries for its widespread corruption, both political and financial. According to the Corruption Perception Indices published by Transparency International, the country has continuously been placed below countries like Qatar, Chile, Bhutan, Cyprus, Spain, and the Czech Republic for corruption committed by politicians, government bureaucrats, business owners, and even academics (see Fig. 16.1). Under democracy, reportages and subsequent punishments of corruption have increased dramatically, even as law enforcement has been far stricter and more transparent than before. During South Korea’s miracle years (from the 1960s to the 1980 s), the military dictatorship monopolized violence and corruption in order to coordinate rapid economic development from above. This is the ‘credible threats’ system, reflecting the fact that threats are accompanied with callous violence to propagate their credibility among the victims.a In return for credible threats, dictators ensured an uninterrupted inflow of extorted subordinates of the government from chaebol owners. Under democracy, however, credible threats are now exercised by everyone who has power to extort money from contractual minions in any contractual relationships (Koreans call this gap-jil — meaning “callous deeds” inflicted upon the have-nots by the haves). A Korean joke has it that the restaurant owner has to pay for the meal ordered by a newspaper reporter, a government attorney, and a university Professor, as none of these infamous ‘haves’ wanted to pay. Usually, these powerful people are treated in a restaurant by less powerful people who want to secure their favor. Overall, the frequency and gravity of corruption have increased during the postmiracle years, despite the fact that the Korean economy has expanded and politics is more democratic than before. The Korean face of corruption has therefore changed from a state-led credible threat (i.e., monopoly of threats and corruptions) to a chaebol-led one (i.e., explosion a

For ‘credible threats’ and ‘credible commitments,’ see Williamson (1983), North (1993), Oh & Jun (2016). For ‘credible threats’ and the predatory mafia state during Korean development, see Oh (1999); Oh & Varcin (2002, 2010); Oh & Jun (2016).

The Changing Face of Corruption in the Asia Pacific. DOI: http://dx.doi.org/10.1016/B978-0-08-101109-6.00016-2 Copyright © 2017 Ingyu Oh. Published by Elsevier Ltd. All rights reserved.

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10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Australia

199 199 199 199 199 200 200 200 200 200 200 200 200 200 200 201 201 201 201 201 201 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 8.8 8.6 8.9 8.7 8.7 8.3 8.5 8.6 8.8 8.8 8.8 8.7 8.6 8.7 8.7 8.7 8.8 8.5 8.1 8.0 7.9

Canada

8.9 9.0 9.1 9.2 9.2 9.2 8.9 9.0 8.7 8.5 8.4 8.5 8.7 8.7 8.7 8.9 8.7 8.4 8.1 8.1 8.3

Germany

8.1 8.3 8.2 7.9

8

7.0 7.4 7.3 7.7 8.2 8.2 8.0 7.8 7.9 8.0 7.9 8.0 7.9 7.8 7.9 8.1

New Zealand 9.5 9.4 9.2 9.4 9.4 9.4 9.4 9.5 9.5 9.6 9.6 9.6 9.4 9.3 9.4 9.3 9.5 9.0 9.1 9.1 8.8 Singapore

9.3 8.8 8.7 9.1 9.1 9.1 9.2 9.3 9.4 9.3 9.4 9.4 9.3 9.3 9.2 9.3 9.2 8.7 8.6 8.4 8.5

South Korea

4.3 5.0 4.3 4.2 3.8 4.0 4.2 4.5 4.3 4.5 5.0 5.1 5.1 5.6 5.5 5.4 5.4 5.6 5.5 5.5 5.6

Australia

Canada

Germany

New Zealand

Singapore

South Korea

Figure 16.1 Corruption perceptions index. Source: Transparency International (transparency.org).

of the use of threats and corruptions by the super-rich over the poor). This means that the chaebol, which represents the haves in Korea, has become more violent than before vis-a`-vis workers, suppliers, and consumers (or any other stakeholders). In other words, political democratization in Korea has opened up a new opportunity for the chaebol to buy out the state monopoly of credible threats from the state (and both military and bureaucratic dictators) and replaced them with their own thugs and puppets in the market and even in the state (Oh & Jun 2016). Chaebol-induced corruption includes succession-related crimes (which are the most rampant and problematic in the postmiracle years), tunneling and other forms of tax evasion, financial frauds involving money laundering and managing slush funds, wrongful acquisition of state funds and business permits, and the outright use of brute violence against stakeholders to prevent any attempts at revealing chaebol corruption (see Table 16.1). The net result of the chaebol-led credible threat is twofold: (a) ‘credible commitments’ are few and far between in democratic Korean society, and (b) the amount of corruption and violence organized by the chaebol and other capitalists has increased substantially over the years, making it virtually impossible to transform the country into a normal OECD nation with low corruption and high transparency scores. In what follows, I substantiate these statements with empirical evidence and qualifying explanations.

From credible threats to credible commitments? the changing face of South Korean corruption

Table 16.1

245

Chaebol Corruption List (2005 2015)

Year

Chaebol Related Corruption and Use of Violence

2005

Assemblyman Roh revealed 9 prosecutors’ names who received bribery from Samsung Laywer Yong-Chul Kim revealed Samsung’s secret slush fund accounts Hanhwa’s Kim Seung-Yeon found guilty of hiring gangs and battering 2nd Lotte World approved amid defense and safety woes Tax lowered for top 5% income earners Samsung’s Lee Kun-Hee found guilty of keeping slush fund accounts Lee Kun-Hee pardoned and released from jail Chaebol-sponsored prosecutor received sex services Government brought back corrupt board members to Sangji University. President Lee’s in-laws (Hyosung Chaebol) found guilty of providing slush funds to the president Prime minister candidate linked to chaebol slush funds 63 firms hired ex-president aides Government awarded TV channels to big three newspapers Hanhwa Group slush fund investigation stalled Government unlawfully distributed $1.8 billion to chaebol construction companies President’s son and relatives related to stock price manipulation Government officials linked to biggest savings and loan scandal Hyundai Motor distributed slush funds to pro-FTA Assemblymen President’s relative linked to Metro construction President’s aide linked to campaign slush funds President’s aide involved in CJ chaebol’s sex scandal CJ’s Lee Jae-Hyun found guilty of tax evasion, embezzlement, and breach of trust Korean Air’s Hyun-A Cho found guilty of battering flight attendants

2007 2008 2009 2010

2011

2012

2014 2015

16.2

Why no credible commitment?

The postmiracle Korean society has been transformed from a materialist society with a strong anticommunist ideology to a purely materialist society that strives for cosmopolitan success (Park & Abelmann 2004). Cosmopolitan strivings represent Korean mothers’ desire to make their sons and daughters successful in global capitalism by providing full or often outlandish parental commitment to their children’s English education. However, from the 1960s to the 1980s, during the peak of military dictatorship and rapid economic development, the Korean state worked hard to transform its people with traditional (thus, Confucian), agrarian, and nonmaterialist mind-sets into anticommunist zealots who would take money as the most important value. To these newly modernized Koreans, English or success in global capitalism was less significant than passing national exams, first to go to elite high schools, then to enter Seoul National University, and finally to become elite state bureaucrats (Lie 2000; Oh 2010).

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Materialism in Korea fully opened to global capitalism made it much easier for the chaebol to buy out their competitors (e.g., the military, bureaucrats, labor leaders) from the state. The military dictators were ousted by the students’ and citizens’ revolts in 1987, about which the chaebol didn’t really lament. Contrary to the wish of pro-democratic groups of Korean society, the state was soon filled with politicians who favored globalization, neoliberalism, and pro-market reforms even within the Kim Dae Jung and Roh Moo Hyun administrations (Mo & Weingast 2013). Unlike in postwar Japan, the newly democratized governments failed to carry out full-scale chaebol purges ousting the owning families along with the military dictators. Instead, economic reform packages still favored the chaebol as key players of economic globalization and sustainable development in the postmiracle years. In fact, the chaebol-led economic recovery from the Asian financial crisis in 1997 had been extraordinary at an average growth rate of 5% or more from 1998 to 2010. Since 2011, this has slowed to an average growth rate below 5%. The chaebol response to chaebol reform was to politicize the entire process by coopting both pro- and contra-chaebol policymakers in the government (Oh 1999; Lee 2008). In the end the chaebol proclaimed its success at maintaining their monopoly position in the Korean (or sometimes in the global) market, cleverly preserving their family succession rituals. Every corruption case reported widely in Korea during this period was gradually obliterated from people’s memory, as chaebol owners were acquitted or pardoned one after another of prosecutors’ charges and even court rulings (see Table 16.1). For example, in 2007, Samsung’s former lawyer Kim Young-Chul revealed major slush fund accounts that Samsung controlled. Although Samsung Chairman Lee Kun-Hee was found guilty and sentenced to a prison term, he was immediately pardoned by the president (Kim 2013). During the course of litigation and prosecution, it was widely reported that Samsung bribed politicians, prosecutors, and journalists (Kim 2013). As Table 16.1 indicates, the Korean chaebol can now easily break the law for their own benefit and coopt the government that depends on chaebol money for elections and other purposes. During the period of military dictatorship, the chaebol sought state protection in exchange for bribes paid to the state. Under democracy, state officials and politicians seek chaebol protection in exchange for free reign to engage in the unlawful abuse of state power. This is a typical case of an instrumental state in which the capitalist class controls the state apparatus for its own economic benefits (Miliband 1969, 1983). This also confirms the thesis that the instrumental state in advanced capitalist countries is possible because rich corporations can buy out rogues and thugs from the government in order to make the state businessfriendly to the extent that the state abandons its duty of prosecuting chaebol family members for unlawful business transactions and political activities, including illegitimate donations and slush fund payments to state officials (Oh and Jun 2016). In the absence of the military dictators who used to occupy the monopoly position of violence and implement economic policies, the chaebol found an easy way to replace the military thugs in the government in the monopoly of violence and make economic policies for its own gain. In return, the chaebol is committed to spending more money to pay off the remaining state bureaucrats who have abandoned their duties as public officials and instead chose to be coopted by the chaebol

From credible threats to credible commitments? the changing face of South Korean corruption

247

(or, as it is said, to ‘purchase Samsung insurance’) for their own selfish benefits. At the same time, elected politicians actively seek blood and marital ties with Samsung in order to secure their campaign and slush funds for various illegitimate political activities. In the end, credible commitment turned out to be far more expensive than constructing a new instrumental state that can be financially controlled by the chaebol. The chaebol can use credible threats, instead of credible commitments, to discipline both domestic and international stakeholders.

16.3

Understanding postmiracle corruptions

The principal difference between corruption during the miracle and postmiracle years is the fact that corruption is now committed by the chaebol in order to maximize their market power in Korea and elsewhere. The chaebol extends protection (i.e., Samsung insurance) to stakeholders in the market in exchange for being lenient about the crimes giant firms commit. Chaebol consumers and workers also demonstrate collective loyalty to the firms for jobs and/or job security, whereas regulators and politicians incapacitate litigation against the chaebol for violations of labor laws, environmental protection laws, patent laws, and tax laws. Therefore, in the postmiracle years of massive democratic reforms, the chaebol appears to be the only antidemocratic force in Korea. Another crucial difference is the consequence of using credible threats. During the miracle years, the monopoly of violence and/or credible threats by the state-led to massive economic development and innovation. However, during the postmiracle years, the monopoly of using credible threats by the chaebol is leading the nation to massive economic slowdown without visible innovation. Of course, as Fig. 16.2 shows, chaebol wealth has grown substantially without causing similar growth in the national GDP. During the miracle years, the state monopoly of credible threats caused massive increase in the GDP, along with the chaebols’ wealth accumulation. This was possible because credible threats were used to motivate corporate level innovations that would dramatically boost up GDP performance (Oh and Jun 2016). However, in the postmiracle years, the chaebols’ monopoly of credible threats is creating the rentseeking behavior among bureaucrats and politicians that causes a stagnation in GDP growth (for rent-seeking, see Krueger 1974; Buchanan et al. 1980). Rent-seeking behavior was created over the years of democratization. The institutionalization of political democracy allows for checks and balances and public accountability among bureaucrats and politicians in their policymaking and implementations. When the rules of government transparency are institutionalized through democratization, bureaucrats and politicians lose their tools of corruption in the regulation of the market. The chaebol can then quickly provide bribes and other perks to these regulators who now have to seek rent instead of pressuring the chaebol for innovation and GDP growth. Instead of GDP growth, rent-seekers want only to maximize the rent that does not boost GDP growth. Simultaneously, the chaebol then can break any regulatory rules of the market in order to minimize their social and market costs, including investments in innovation, which altogether

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The Changing Face of Corruption in the Asia Pacific

(A) 90.0

83.2

80.0 69.6 64.3

70.0 60.0

51.8

50.0

44.7

40.0

32.4

53.9 46.5 35.6

30.0 19.7 20.0

11.6

14.8

10.0 .0 2002

2007

Top20 Conglomerates Top4 Conglomerates

2010 Top10 Conglomerates Samsung

(B) 80

74.8

70

64.4

60

58.2 51.7

58.4 49.2

50

47.1

40.5 35.5

40 30 20

15

17.9 12.7

10 0 2002 Top20 Conglomerates Top4 Conglomerates

2007

2010 Top10 Conglomerates Samsung

Figure 16.2 Chaebol Asset and Revenue Growth. (A) Asset (%). (B) Total revenue (%). Source: Chaebol.com.

From credible threats to credible commitments? the changing face of South Korean corruption

249

would have boosted GDP growth. When democratic governments finally press charges against the chaebol for rule violations, the chaebol would then hire corrupt judges, politicians, and bureaucrats to derail such litigations. As a consequence, the chaebols, which want to perpetuate its monopoly on the credible threats in the market (i.e., monopoly of violence and threats) by incapacitating the democratic state that tries to reform them to no avail, remains the sole victor in the struggle for democratization and economic development in Korea.

16.4

How to dismantle credible threats: suggestions

If the chaebol had enough cash to buy out politicians and bureaucrats from the institution of credible threats by reducing them to mere instruments for their purposes, the easiest way to buy the chaebol out from credible threats would be to stop their cash from flowing into the state illegally. At the same time, the state can also stop this cash from flowing through inheritances to sons from incumbent chaebol owners or the chairmen. The first example of such a measure is what Koreans refer to as the Kim Yeong-Ran Bill (or the Anti-Corruption and Bribery Prohibition Act) that was passed in the legislature in 2015. This new law stipulates that all civil servants, including politicians, public officials, and bureaucrats, who accept one million won (US$1,000) or more in bribes will end up in jail for up to three years, regardless of whether the inducement was related to an official’s duties or position, or whether favors were given in return. The second is the Monopoly Regulation and Fair Trade Act, which was last revised in 2015. The act intends to curb the cross shareholding that has often been used by the chaebol not only to dominate the market but to hand over their firms to male successors (Chang 2003, 2011; Lee 2008). However, the Kim Bill won’t hurt the chaebol as much as it hurts the bureaucrats and politicians who accept bribery. Buying ‘Samsung insurance’ means the chaebol would take care of corrupt officials even when they are imprisoned for taking bribes. Bureaucrats will be busy moving around the state, jail, and chaebol firms, even as the chaebol will continue to buy their services from the state. Moreover, the Fair Trade Act is not designed to punish the chaebol, as it intends to curb only new cross shareholding agreements between firms, and does not even attempt to tinker with existing cross shareholdings (Jeong 2014). In order to ameliorate these problems, therefore, the Kim Bill must punish bribers as much as recipients. Simultaneously, the Fair Trade Act should forbid cross shareholdings, both old and new. Or alternatively, cross shareholdings should be allowed only when the ownership and control of the chaebol are fully disjointed with a strict cap on individual, family, or institutional ownership of any chaebol group. These two solutions are not easy to implement, unless the justice system works properly regardless of the fact that many judges would be recruited by the chaebol for anti-chaebol suits. If they remain neutral during court deliberations, chaebol owners would eventually stop recruiting them. This can be done only when the state provides full protection to the state prosecutors and judges vis-a`-vis chaebol

250

The Changing Face of Corruption in the Asia Pacific

lawyers. One critical means of providing state protection to prosecutors and judges is to maintain the national exam system instead of the law school system that is deeply connected to chaebol lawyers and their law firms in the recruitment of justice officials. If these prosecutors and judges keep punishing bribers and recipients in the government, it is not impossible to pass laws that implement the separation between chaebol ownership and control.

16.5

Conclusion

In this chapter, I analyzed how Korean corruption has changed between the miracle and the postmiracle years or between the dictatorial and the democratic eras. Although corruption under dictatorship boosted GDP growth, it is also hampering economic growth. The key factors are rent-seeking and the ‘Samsung insurance’ that are devastating the Korean economy. The rogues that used to rule the Korean state have been replaced by the chaebol, which is acting to maintain the institution of credible threats. In order for the democratic state in Korea to abolish credible threats and install the institution of credible commitments, it has to secure its democratic justice system to begin with.

References Buchanan, J. M., Tollison, T. D., & Tullock, G. (1980). Toward a theory of the rent-seeking society. Texas: A&M University Press. Chang, S. (2003). Ownership structure, expropriation, and performance of group-affiliated companies in Korea. The Academy of Management Journal, 46(2), 238 253. Chang, S. (2011). Sony vs Samsung: the inside story of the electronics giants’ battle for global supremacy. Singapore: John Wiley & Sons. Jeong, W. (2014). Dokjeom gyujeibeopsang daegyumogieopjipdan eui sunhwanchuljageumji wa geu gaeseon pilyoseong e gwanhan gochal [Study on the improvement of the regulation of the cross-shareholding under the Antitrust Law in Korea]. Kyunghee Beophak, 49(3), 103 128. Kim, S. (2013). Jaebeol gonghwaguk gwa beopjojibae: sareibunseok [The chaebol republic and the domination over the justice system: case studies]. Simin gwa Segei, 23, 56 69. Krueger, A. O. (1974). The political economy of the rent-seeking society. The American Economic Review, 64(3), 291 303. Lee, S. J. (2008). The politics of chaebol reform in Korea: Social cleavage and new financial rules. Journal of Contemporary Asia, 38(3), 439 452. Lie, J. (2000). Han unbound: The political economy of South Korea. Stanford: Stanford University Press. Miliband, R. (1969). The State in Capitalist Society. New York: Basic Books. Miliband, R. (1983). State power and class interests. New Left Review, 138, 57 68, (March-April) Mo, J., & Weingast, B. R. (2013). Korean political and economic development: crisis, security, and institutional rebalancing. Cambridge: Harvard University Asia Centre.

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North, D. C. (1993). Institutions and credible commitment. Journal of Institutional and Theoretical Economics, 149(1), 11 23. Oh, I. (1999). Mafioso, big business, and the financial crisis: the state-business relations in South Korea and Japan. Surrey: Ashgate Publishing. Oh, I. (2010). Education and development: Why are Koreans obsessed with learning? Comparative Sociology, 9(3), 308 327. Oh, I., & Jun, H. (2016). Economic miracle: From post-war reconstruction to post-crisis affluence. In M. Seth (Ed.), Routledge Handbook of Modern Korean History (pp. 293 311). London: Routledge. Oh, I., & Varcin, R. (2002). The mafioso state: state-led market bypassing in South Korea and Turkey. Third World Quarterly, 23(4), 711 723. Oh, I., & Varcin, R. (2010). Rent-sharing: organizational and technological innovations under military regimes in South Korea and Turkey. International Journal of Technology Management and Sustainable Development, 9(2), 77 94. Park, S. J., & Abelmann, N. (2004). Class and cosmopolitan Striving: Mothers’ management of English education in South Korea. Anthropological Quarterly, 77(4), 645 672. Williamson, O. E. (1983). Credible commitments: using hostages to support exchange. The American Economic Review, 73(4), 519 540.

Indonesia’s anticorruption campaign: civil society versus the political cartel

17

Johanes D. Widojoko1,2 1 Indonesia Corruption Watch (ICW), Jakarta, Indonesia, 2Australian National University, Acton, ACT, Australia

17.1

Introduction

Indonesia has a strong anticorruption commission (Komisi Pemberantasan Korupsi, KPK)a. The KPK is equipped with the legal authority to arrest and imprison suspects, and has successfully punished a large number of corrupt perpetrators (Bolongaita, 2010; Kuris, 2012a; Schu¨tte, 2012). Since 2004, the KPK has successfully prosecuted and won in all 313 corruption cases (Easter, Yuntho, & Caesar, 2015, p. 11). From 2005 to 2015, KPK has prosecuted 82 members of Parliament (Riana, 2015) and also high-profile figures such as cabinet ministers, Central Bank governor, Chief of Constitutional Court, and other heads of state institutions. However, the KPK’s success invites resistance from a broad political coalition among major political parties in Indonesia (see the section titled “Political Cartel”). Parliament has continuously tried to weaken the KPK, and abolish its prosecution and wiretapping powers. The 2015 attack by the police upon the KPK’s commissioners paralyzed the KPK. The police named KPK commissioners as suspects in a criminal case, forcing them to step down. However, the success of police actions against the KPK depended upon support from political cartels. The KPK’s biggest supporter is civil society, which is able to organize an effective movement against corruption. Civil society is defined as “the arena of the polity where self-organising groups, movements and individuals, relatively autonomous from the state, attempt to articulate values, create associations and solidarities and advance their interest” (Mietzner, 2012, p. 217). Scholars argue that civil society in Indonesia is weak and unorganized due to repression during the New Order (Hadiz & Robison, 2013; Robison & Hadiz, 2004). Despite its weaknesses, I argue that civil society is able to build an effective movement and challenge the predatory interests of the elites to dissolve the KPK. I will start by discussing the institutional reforms that were set out to eradicate corruption. The following section discusses the resistance to a

KPK was officially established in December 2003 with no staff and no facilities at all. Thus, KPK started to investigate corruption cases in 2004 after its staff, organizations, and facilities were established.

The Changing Face of Corruption in the Asia Pacific. DOI: http://dx.doi.org/10.1016/B978-0-08-101109-6.00017-4 Copyright © 2017 Johanes D. Widojoko. Published by Elsevier Ltd. All rights reserved.

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The Changing Face of Corruption in the Asia Pacific

anticorruption institutions, and the political cartel’s attempts to weaken the KPK. Finally, I will explain several factors that enable civil society to defend KPK and the future challenges the anticorruption movements face.

17.2

Anticorruption reform

Corruption eradication was an important agenda after the fall of the New Order regime, which ruled Indonesia for more than three decades.b Eradicating corruption, collusion, and nepotism was a demand the student protestors made in the uprising against President Suharto in 1998, in the midst of the Asian financial crisis. Student demonstrators “called for reduction in prices of basic commodities and the rejection of korupsi, kolusi and nepotisme and reformasi in all spheres” (Aspinall, 2005, p. 222). They occupied Parliament buildings in Jakarta and organized demonstrations in several main cities and smaller cities around Indonesia (Aspinall, 2005). It was these student protests that triggered Suharto’s resignation and brought an end to the New Order authoritarian regime. Students demanded an investigation into the corrupt practices of Suharto and his cronies. Time magazine conducted investigative reporting to trace the wealth of Suharto and his family worldwide. Time estimates that “Suharto and his six children still have a conservatively estimated $15 billion in cash, shares, corporate assets, real estate, jewelry and fine art” (Colmey & Liebhold, 1999). A World Bank project, Stolen Asset Recovery Initiative, quoted estimations by Transparency International that Suharto and his family embezzled around US$15 US$35 billion.c The International Monetary Fund (IMF) offered financial support during the 1997 financial crisis; the loans were, however, contingent upon a number of economic reforms to reduce government intervention that had led to rent-seeking. In the case of the New Order regime, large government interventions provided support, protection, and facilities for Suharto’s cronies and family businesses. For instance, hiscrony business, Liem Sioe Liong or Soedono Salim was granted the monopoly to import wheat flour and enable his company Indofood to be the biggest instant-noodle producer in the world. An important goal of the economic reform package was the eradication of corruption. Reforms consisted of revising the anticorruption law and establishing an independent anticorruption commission.d b

Suharto named his administration as New Order as a distinction with the Old Order led by President Soekarno, the first Indonesian President. Suharto succeeded Soekarno as the president of Indonesia from 1966 to 1998. He was forced to resign as president by student uprisings in 1998. See Aspinall (2005). c See http://star.worldbank.org/corruption-cases/node/18647, accessed June 10, 2016. d There were numerous reforms implemented in Indonesia. In legal reform, Indonesia created regulation to make the Supreme Court independent and establish Constitutional Court and Judicial Commission, National Police Commission, Prosecutor Oversight Commission, and Witness and Victim Protection Agency among others. Nevertheless, this chapter will focus only on KPK.

Indonesia’s anticorruption campaign: civil society versus the political cartel

255

There were several setbacks that affected the process of the anticorruption commission law. The most important was the failure of law enforcement institutions to investigate and prosecute Suharto, his family, and cronies. The Suharto trial was stopped due to his illness. Furthermore, the Attorney General failed to prosecute several major cases against former ministers, and other Suharto’s children and family, for example, the case of Central Bank liquidity support for major conglomerates during the 1997 financial crisis that diverted to save their own interests.e Another important event was the failure of the Joint Investigation Team to Eradicate Criminal Acts of Corruption (Tim Gabungan Pemberantasan Tindak Pidana Korupsi, TGPTPK) set up by President Abdurrahman Wahid (Assegaf, 2002; Butt & Lindsey, 2011). An important feature of TGPTPK was combining the investigation and prosecution arms by recruiting the state auditor, police, prosecutor, and legal experts under the leadership of a clean judge, former Justice Adi Andojo Soetjipto. TGPTPK was investigating the corruption case involving three Supreme Court judges. Unfortunately, the investigation failed after three judges submitted a petition for the judicial review of Government Regulation No. 19/2000 to the Supreme Court: “The Supreme Court again accepted the Judges application and held the regulation to be invalid, ordering government to revoke it within 90 days” (Assegaf, 2002, p. 139). The Supreme Court decision disbanded TGPTPK and stopped the investigation on that case. The failure of the TGPTPK was in keeping with past patterns. Historically, Indonesia had four anticorruption commissions, none of which succeeded beyond prosecuting cases of petty corruption by low-rank officers.f Haunted by the failure of anticorruption commissions, civil society organized public consultations with legal experts and practitioners as well as rallying the public to support a new and stronger anticorruption commission.g Finally, in 2002, the Parliament passed the Law 30/2002 on establishing the anticorruption commission or KPK. Unlike previous commissions, the KPK is equipped with extraordinary authority.h First, the KPK enjoys autonomous status. The commissioners cannot be removed from their position unless they commit a crime. Second, the KPK has authority to investigate and prosecute corruption cases.i Following the TGPTPK

e

There was a suspicion of corruption behind the Attorney General’s decision to stop the investigation of corruption cases. To prevent such corrupt practice, the law on anticorruption commission stipulated that the commission cannot stop the investigation once the commission named a suspect. f The previous government of Indonesia had established four anticorruption commissions:. The New Order regime had established Corruption Eradication Team (Tim Pemberantas Korupsi), Commission of Four (Komisi Empat), and Operasi Tertib. The Abdurrahman Wahid administration established the Joint Investigation Team to Eradicate Criminal Acts of Corruption (Assegaf, 2002, pp. 133 136). g Interview with Wasingatu Zakiyah, June 8, 2016. She was the civil society coordinator during the deliberation of the anticorruption commission bill in 2000 2002. h For details of the KPK authorities (see Bolongaita, 2010; Butt, 2012, pp. 25 33; Kuris, 2012b). i In the earlier bill, following Hong Kong Independent Commission against Corruption, the anticorruption commission will transfer the prosecution to the Attorney General Office. But that idea was opposed by civil society because it will lead to failure (Interview with Wasingatu Zakiyah, June 8, 2016).

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model, the KPK combines investigation and prosecution by recruiting its staff from state auditors, police, and prosecutors to handle cases efficiently. Third, the KPK bring the cases to a special anticorruption court. The court consists of five judges, two of them are career judges and three are ad-hoc judges, either legal practitioners or academicians. It was hoped that the combination of career and ad-hoc judges could insulate the court from the problematic judicial mafia in Indonesia. Particularly, since “for decades, Indonesians have regarded the Indonesian judiciary as one of their nation’s most corrupt institutions” (Butt & Lindsey, 2011, p. 189). Judges, prosecutors, and police are part of systemic judicial corruption, which hinders anticorruption campaigns (Lev, 2007). Fourth, to investigate bribery, the KPK has the authority to wiretap communications without court approval. Fifth, to appoint commissioners, there is a rigid selection procedure. To start the selection, the president establishes an independent team, comprising of government representatives and prominent society leaders, to nominate ten candidates. From these ten candidates, Parliament selects five commissioners, including the chairperson, for a four-year term (Schutte, 2011).j Equipped with a strong legal authority, the KPK became a successful anticorruption institution. The KPK stands out as a unique success, and Emil Bolongaita (2010) points out that the KPK is “an exception to the rule” because similar interventions have failed in many other countries. KPK has maintained a near 100% conviction rate.k It has imprisoned not only businessmen and public officials but also high-level figures such as members of Parliament, head of state institutions such as the Central Bank, judges, high-rank police officers, and cabinet ministers. In 2009, the KPK prosecuted the Deputy Governor of Indonesia Central Bank Aulia Pohan, who was the father of President Susilo Bambang Yudhoyono’s (SBY) daughter-in-law. This case showed the public that no one was above the law in Indonesia, including those close to power.

17.3

Political cartel

Democracy is supposed to be an effective system to eradicate corruption because, in theory, it limits political power by providing checks and balances. According to Rose-Ackerman (1999, p. 363), “the desire for re-election constrains the greedy politician. The protection of civil liberties and free speech. . .makes open and transparent government possible.” In democracy, corruption can be eradicated because of the existence of horizontal and vertical accountability (Chalmers & Setiyono, j

Although the president can intervene in the selection by favoring a particular candidate, the independent selection team can reject by imposing high standards. Civil society also takes active role by exposing poor records of candidates in order to ensure the president nominates the best ten of candidates. k KPK won almost in all cases. KPK only lost in a first court of corruption case in West Java court but KPK won in appeal court. However, after the pre-trial hearing has been expanded to the investigation, KPK lost in several pre-trial hearings.

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2012; Slater, 2004).l Unfortunately, accountability is not so easily achieved in contexts of inadequate state institutional capacity, and where elections fail to bring politicians to account (Chalmers & Setiyono, 2012). In addition, Rose-Ackerman (1999, p. 378) points out the problem of “illegal campaign contribution and the bribery of politicians” that undermine democracy’s ability to prevent corruption. A more comprehensive explanation of why democracy is unable to prevent corruption is provided by political cartel theory. In a democracy, political parties can decide not to compete but instead collude and build political cartels (Ambardi, 2012; Slater, 2004; Slater & Simmons, 2012). Political parties only compete during the election and then afterward choose to join a coalition of ruling parties. There is no clear ideological and program distinction among political parties. Political parties build a pragmatic coalition in order to share in the material benefits of office, leading to a kind of collusive democracy. Dan Slater and Erica Simmons assert that “promiscuous power sharing represents flexible coalition-building practice, in which parties express or reveal a willingness to share executive power with any and all other significant parties after an election takes place, even across a country’s most important political cleavage” (2012, p. 1370). Furthermore, in the political cartel, “as the distinction between parties in office and those out of office becomes more blurred, the degree to which voters can punish parties even on the basis of generalized dissatisfaction is reduced” (Katz and Mair, 1995 in Slater, 2004:66). Political cartels undermine checks and balances among state institutions and vertical oversight by voters in the election. In his analysis of the transition from the Abdurrahman Wahid to the Megawati Soekarnoputri presidencies, Dan Slater (2004) asserts that the political cartel determined political stability. Political cartels supported Abdurrahman Wahid as president in 1999 and then ousted him when he fired several ministers and disturbed the coalition. The cartel then supported Megawati to replace Abdurrahman Wahid as the president in 2001.m The same structural condition was sustained under President Susilo Bambang Yudhoyono’s (2004 2014) administration, which shared power with almost all political parties. As a result of this power-sharing arrangement, “. . .the Yudhoyono decade was a period of both remarkable democratic stability and underlying democratic stagnation” (Aspinall, Mietzner, & Tomsa, 2015). Behind the stability and stagnation was the political cartel’s interest that it be accommodated by whoever is in power. President Joko Widodo, who came to l

Horizontal accountability is a checks-and-balances relationship between the executive and judiciary, Parliament, bureaucracy, and political parties. It prevents absolute power in democracy because the executive powerholder is limited by judiciary power and legislative institutions. There are also independent state institutions, such as the anticorruption commission, election commission, and ombudsman, among others, to ensure the accountability of the powerholder. Vertical accountability is the relationship between a president and any representative bodies in the election. People have the right to select and evaluate their leader and representatives in the ballot box. m Abdurrahman Wahid was supported by the coalition of several political parties and defeated Megawati in the presidential election in 1999. The coalition then ousted Abdurrahman Wahid and elected Megawati in 2001. At that time, presidential election was carried out by People Assembly (Majelis Permusyawaratan Rakyat, MPR) before the direct presidential election was introduced in 2004.

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power in 2014, seems to follow his predecessors in creating political stability. Joko Widodo expanded his governing coalition by accommodating political parties to join his cabinet, including parties that ran against him in the 2014 presidential election. Joko Widodo thus appears unable to change the structural conditions that sustain the political cartel. The underlying problem of political cartels is the failure of Indonesian political parties to raise funds from their members and supporters (Mietzner, 2007). Apart from donations from big businesses, parties depend on public resources, particularly through their access to strategic positions within government institutions. Positions within cabinet are an important gateway for political parties to access public resources, which constitute their main financial revenue. Kuskridho Ambardi (2012) expands the political cartel analysis and argues cartels operate not only in the executive but also in Parliament. Access to public resources is not only available in the executive but in the legislative as well, primarily due to Parliament’s authority to approve the executive budget and through deliberation over legislative changes. He exposes several big corruption scandals involving members of Parliament in the management of state-owned enterprises, bureaucratic corruption, and bribery to pass bills (Ambardi, 2012, pp. 302 344). In 2010, the KPK arrested 27 members of Parliaments who received bribes in the selection of the Central Bank deputy governor. The KPK investigated members of Parliament by wiretapping their communication. As a consequence, politicians are primarily concerned with challenging the KPK’s wiretapping and prosecution powers.

17.4

Resistance against KPK

The success of the KPK to expose and investigate political corruption is a threat to the political cartels. As a consequence, there are many attempts to disband the KPK. Parliaments have consistently tried to dissolve KPK or to revise the KPK law, particularly to cut several extraordinary powers of the KPK that allow it to prosecute corruption cases and to wiretap communication. The initiatives of Parliament have so far failed to receive support from the president. Both Presidents Susilo Bambang Yudhoyono (SBY) and Joko Widodo refused to revise the KPK law.n However, at the time of writing, the proposal to revise the KPK law remains on the Parliament’s legislation proposal list. One example of where Parliament has tried to undermine the KPK is how Parliament has blocked the proposal from the KPK to build a new office since 2008. The previous office was not enough for more than 700 employees and some of them have to work in several different office locations in Jakarta. After a series of protests and public pressure organized by civil society through “Saweran KPK” n

According to Indonesia state administration regulation, to revise a law or to create a new law, there should be an agreement between Parliament and president to start.

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(donation for KPK) campaign in 2012, the Parliament finally agreed to pass the proposal to build a new building for KPK in 2013. However, the most significant attacks on the KPK have been launched by the police in response to the KPK’s investigation into high-rank police commanders. An article in the KPK law stipulates that “commissioners must leave their positions or be removed from their positions if they become a defendant (terdakwa) in a criminal case” (Butt, 2012, p. 96). This article provides an opportunity for the police to retaliate against the KPK by investigating the commissioner in any criminal case.o The police attacked the KPK four times in this way. First, the police investigated the chairperson of KPK Antasari Azhar in regard to the murder of Nasrudin Zulkarnaen in 2009.p Antasari was sent to jail although “most of the evidence against Antasari was weak, unreliable or contradictory” (Butt, 2012, p. 88). Judges ignored much of the evidence that did not support the involvement of Antasari. Many believed the case was retaliation by President Susilo Yudhoyono after the father of his daughter-in-law was sentenced to jail by the KPK. Previously, SBY had warned KPK in a public statement: “Regarding the KPK, I must caution it. Power must not go unchecked. This KPK has become an incredible powerholder. It seems to be accountable only to God. Be careful” (Butt, 2012, p. 93). The first attack was successful due to support from SBY and the absence of support from civil society. Civil society was reluctant to support Antasari due to his poor record in the past when he was a prosecutor in the Attorney-General’s Office. The police attempt was supported by the political cartel that supported SBY; therefore, there was no obstacle and no criticisms or objections from the political cartel elites. However, in the second attack, civil society successfully organized a massive support for the KPK. The police investigated two KPK commissioners, Chandra Hamzah and Bibit Samad Rianto, in 2009 after the KPK investigated Police Chief Detective Susno Duadji in a bribery case. Unfortunately, the KPK investigation was leaked to Susno Duadji.q He retaliated by investigating those two commissioners in an abuse of power case. It was an obscure case. When Susno Duadji detained Chandra Hamzah and Bibit Samad Rianto, civil society organized a famous campaign “Gecko vs Crocodile.” The title was a quotation from Susno Duadji, who stated that the police are a crocodile and the KPK is a mere gecko. The campaign used the quote and made the gecko an honest and modest KPK fighting against a o

According to KPK law, commissioners must leave their office if they committed a crime. Resisting police criminalization, Chandra Hamzah and Bibit Samad Rianto requested judicial review to Constitutional Court (Mahkamah Konstitusi, MK). Then MK decided, “KPK leaders can be dismissed permanently only after they had been found guilty of a crime by court decision that is binding” (Butt, 2012, p. 108). However, while being investigated, commissioners should leave office temporarily. p Antasari Azhar was the chairperson of KPK for the period 2007 2011. But he left the office permanently in 2009 due to his involvement in the murder of Nasrudin Zulkarnaen, a director of a private company. There was a love affair between Antasari Azhar and Rani Juliani, the second wife of Nasrudin Zulkarnaen. The Supreme Court sentenced him to 18 years in prison. It was widely believed that police fabricated elements of the case. q KPK recruits its investigation staff from police officers. Police headquarters transfer their officers to KPK for a certain period of time. Previously they stay for a four-year contract in the KPK, but after the attack on the KPK, police headquarters transfer officers only on a year’s contract.

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powerful corrupt crocodile the police. To support the KPK, civil society not only organized demonstrations in several big cities in Indonesia but also used social media. In 2009, Facebook was the most popular social media. Through its Facebook page “Gerakan 1.000.000 Facebookers Dukung Chandra Hamzah and Bibit Samad Riyanto” (Movement of 1,000,000 million Facebookers Supporting Chandra Hamzah and Bibit Samad Riyanto), civil society gained support from more than one million Facebook users in a short span of time (Lim, 2013). Moreover, mainstream media such as television, radio, and newspapers echoed the social media campaign. There was also important support from artists by launching popular music to support the movement.r In response to the public protest, President SBY finally established an independent team, “Team of Eight” (Tim 8), to review the police investigation. The team consisted of eight prominent society leaders and legal experts that eventually gave recommendations to the president to stop the police investigation. In this second attack, Parliament supported police. However, the target of the investigation was to stop the KPK from investigating Susno Duadji. It was a personal interest of Susno Duadji and police could not get sufficient support from the political cartel to investigate KPK.s The third attack by police was launched in 2012 after the KPK investigated the corruption of driving simulator procurement in a traffic police unit. The Head of Traffic Police General Djoko Susilo was named as the suspect. When KPK staff searched for evidence in the traffic police office, police forces stopped them and ordered them to leave all materials. The police insisted that the case would be investigated internally.t In retaliation, the police investigated the KPK’s head investigator, Novel Baswedan, on the case. Novel is a talented police officer who worked for the KPK and successfully coordinated a number of KPK sting operations. Hundreds of police were deployed to arrest Novel Baswedan in the KPK office (Setyarso, 2012). Fortunately, police attempts to arrest Novel Baswedan failed due to the quick support of civil society. Thanks to social media, particularly Twitter, within a few hours, hundreds of civil society activists arrived at the KPK and formed a human chain to stop police. Furthermore, civil society organized public campaigns, mainly through Twitter with the hashtag #SaveKPK to stop the arrest of Novel Baswedan. The protest was not only in social media but also in street demonstration to pressure President SBY. Finally, the president ordered police to stop the investigation on Novel Baswedan and let the KPK prosecute General Djoko Susilo. r

Several artists who supported civil society to defend KPK in 2009 then provided support for Joko Widodo in the 2014 election, particularly Slank, a famous rock Indonesia band, Efek Rumah Kaca, an indie rock band, Glenn Friedly, a famous popular singer, and other numerous artists. They created a popular song KPK di Dadaku (KPK in my chest) that was widely sung in every public protest. s Finally, Susno Duadji was investigated internally by police. Later, he was sentenced three and a half years in jail due to his involvement in the corruption case when he was a province police commander. t Indonesian traffic police are well known as the main source of police income, legal and illegally. Police collect legal money from driving license fee and vehicle tax. Illegally, people have to bribe in order to get their driving license and to pay their vehicle tax. At that time, General Djoko Susilo was a strong candidate for the next chief police commander, especially due to his generosity to donate large amounts of money to policing institutions.

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In the third attack, it was in the interest of the police institution. Therefore, there was no support from political cartel. The police launched a fourth attack in early 2015 when the KPK named General Budi Gunawan as a suspect in corruption and money laundering. A day earlier, President Joko Widodo had nominated Budi Gunawan as the police chief commander. General Budi Gunawan is the former adjutant of Indonesian Democratic Party-Struggle or Partai Demokrasi Indonesia Perjuangan (PDI-P) Chairperson and former president Megawati Soekarnoputri, thus he was supported by the PDI-P.u In retaliation, the police reopened the case of KPK staff Novel Baswedan. Police also targeted the chairperson of the KPK Abraham Samad and another commissioner Bambang Widjojanto.v By investigating the KPK commissioners and naming them as the suspects, the police forced both Abraham Samad and Bambang Widjojanto to leave office temporarily. To stop the case, General Budi Gunawan went to a pre-trial hearing. Several police officers threatened KPK staff. Then, in a controversial decision, the pre-trial judge released General Budi Gunawan. It was a controversial verdict because the pre-trial hearing was limited only on the validity of the arrest, detention, investigation cessation, or termination of prosecution, not to stop the investigation. The Judge Sarpin ruled that the KPK investigation was unlawful and must be stopped. Again, civil society organized a campaign to pressure President Joko Widodo. However, the police attack was successful because the political cartel supported police. The PDI-P and ruling party coalition supported Budi Gunawan against the KPK. Responding to the protest, President Joko Widodo canceled his nomination for General Budi Gunawan. He nominated another police general, Badrodin Haiti, to be the chief of police and then appointed Budi Gunawan as Haiti’s deputy. Later, President Joko Widodo ordered the police and prosecutor to stop the investigation of Abraham Samad, Bambang Widjojanto, and Novel Baswedan. People were disappointed with the settlement made by the president. People perceived the president to not fully support the KPK, despite being elected because of his record as a clean and reformist figure. The protest brought a significant blow to President Joko Widodo’s popularity. His approval rating decreased from 75% in October 2014 to 41% in June 2015 (Muhtadi, 2015, p. 362). The most crushing attack on the KPK came from the police, particularly due to the regulation that the commissioner should leave office if named as a suspect in u

Megawati Soekarnoputri is the daughter of Soekarno, the first Indonesian president. She was the president of Indonesia during the period 2001 2004. Megawati was the chairperson of the Indonesia Democratic Party (PDI), but after Suharto intervened and replaced her with another politician, Megawati established her own party, Indonesia Democratic Party Struggle (PDI-P). In 1999, PDI-P won the first free election after the fall of Suharto. Later in 2014, PDI-P won the election and supported Joko Widodo as the president. v Police were investigating Abraham Samad in a case of document falsification when he helped his friends get the citizen identity. Bambang Widjojanto was investigated in a case of fake witness testimony in the MK trials. Prior to serving KPK, Bambang Widjojanto was a prominent human rights lawyer in Indonesia. However, public believed that those cases were fabricated by police to stop the investigation on General Budi Gunawan case.

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criminal case. This article gave an opportunity for police to criminalize commissioners and to paralyze the KPK. However, the police could not do it alone unless it had the support of political cartels. In the third attack, in the investigation of the traffic police commander, the attack was not successful because police could not get political support from the political cartel, while in other attempts the police obtained their strong support.

17.5

Enabling factors of civil society success

There are several factors that enabled civil society to be an important force to defend the KPK. First, the anticorruption reform in Indonesia was a combination of international pressure and domestic demand. The eradication of corruption is not only a good governance reform prescription imposed by the IMF but also a consequence of the student uprising in 1998. The strong authority given to the KPK is largely a result of civil society influence. The IMF did not dictate the details of the commission. It was the contribution of civil society to equip the KPK with extraordinary powers, learning from the failure of previous anticorruption commissions in Indonesia. The involvement of civil society in the reforms provided strong domestic ownership over the anticorruption commission. This ownership sustained social support for the KPK. Therefore, critics that claim anticorruption initiatives are primarily about defending the interests of international capital to facilitate their investment (Bratsis, 2014), or only a legal transplantation project toward a regulatory state (Jayasuriya, 2005), are insufficient. Such claims neglect the role of domestic power contestation, in which civil society plays an important role. Without active participation of civil society, there would not have been such a strong anticorruption commission established in Indonesia. Domestic ownership would be an important factor that enabled independent institutions to survive despite numerous attempts to dissolve it by predatory interests. Second, social media has empowered civil society in Indonesia. Through social media, civil society can reach a large number of people to support their cause to defend KPK. Civil society is also able to organize demonstrations and protests, not only in Jakarta, but also in several main cities in Indonesia through social media. The infrastructure of social media, such as Facebook and Twitter, enables civil society to spread messages and to coordinate large numbers of people (Lim, 2013). Third, the support from the mainstream media, television, newspapers, and radio stations was also fundamental for defending the KPK. Strong support from mainstream media does not only empower the cause to defend KPK but also enables civil society to reach a large number of people. Despite media ownership that is controlled by a few business groups (Sudibyo & Patria, 2013), mainstream media has mostly provided support to the KPK. Editors and journalists enjoy freedom to report as long as they do not directly threaten the interests of the owner. Ross Tapsell points out the owner will intervene in the editorial processes when it affects their interest directly (Tapsell, 2015). However, people like the news about the KPK and anticorruption, and the campaign brings more readers and thus more profit

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to media outlets. Another important factor is the support from the Indonesia Journalist Alliance (Aliansi Jurnalis Indonesia, AJI). Established in 1994 following the bans on mass media by the New Order authoritarian regime, AJI consists of progressive journalists who are always critical to the power and support anticorruption movement. Fourth, the small size of Indonesia’s civil society is not necessarily a weakness. Civil society enjoys “flexibility and mutability” (Aspinall & Weiss, 2012, p. 214) as a legacy of the strategy during the New Order regime to avoid repression. This condition enables civil society to build larger networks with various organizations. Therefore, civil society cannot be limited to only professional NGOs. It is an important component, but the civil society network is much bigger, consists of artists, religious mass organizations, university alumni, etc. Fifth, there is also improvement in civil society’s strategies. After Parliament blocked KPK’s request to build a new office, civil society organized the donation movement #SaweranKPK. The most important contribution of #SaweranKPK campaign is not the total money collected but the ability to involve large numbers of people from different backgrounds, including high school students and even poor people such as street musicians and pemulung (scavengers), who donated their change to KPK.w That campaign opened the opportunity for thousands of people to be involved in the movement and increased the public ownership over the KPK and anticorruption movement. Another strategy is building support from organized grassroots organizations, particularly labor unions. To defend the KPK in the 2015 police attack, the unions expressed support by mobilizing a large number of its members. Sixth, in a competitive electoral democracy, the key terms are popularity and electability. According to Aspinall (2013, p. 114), “throughout Indonesia, candidates for political office. . .are responding to electoral incentives and competing with one another to offer increasingly elaborate and generous social programs.” It is not only social programs but also a commitment to eradicate corruption that becomes an important factor to win office: No president has been electable without pledging to take a firm stance against corruption. . .In 2009 SBY secured re-election through having demonstrated support for the anti-corruption drive and likewise in 2014 newcomer Joko Widodo. . .by standing on his ‘clean’ record as governor of Jakarta and previously as mayor of central Javanese city of Solo. Dick & Mulholland, 2016, p. 45.

Moreover, Marcus Mietzner (2013) shows the ability of civil society proponents who join political parties to influence several important government policies, particularly in military regulation, women rights, and labor. In the 2014 presidential w

The total amount of donation money collected was a little, only IDR 403 million, while total budget for a new building was IDR 315 billion. Nevertheless, the “Saweran KPK” campaign had successfully pressured Parliament to pass the proposed budget by KPK in the 2013 state budget deliberation.

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election, there was an important contribution of civil society. Marcus Mietzner (2014) observes how a fluid network of “relawan” (volunteer) were supporting Jokowi. The relawan consists of civil society activists that had been connected from the previous movement to support KPK.x

17.6

Conclusion

Although civil society has successfully defended the KPK, the big question remains, for how long? As Michael Johnston argues, eradicating corruption requires deep democratization, “a continuing process of setting limits to power, building accountability and establishing social and political foundations of support for reforms” (Johnston, 2013, p. 1238). The attempts to undermine the KPK will continue as long as the political cartels system is sustained in Indonesian politics. Therefore, civil society should improve and develop their strategy, especially by building a larger movement with organized groups such as labor unions and other grassroot organizations. It is also very clear that police is the only institution that has the capability to weaken KPK. There should be an alternative strategy to curb police corruption. Indonesia can learn from the New South Wales experience by establishing the Police Integrity Commission, an independent institution to prevent and to investigate any police misconduct, including corruption.y This institution can be replicated in Indonesia by accommodating highly respected figures and representatives from police to prevent resistance from the whole police institution.

References Ambardi, K. (2012). Mengungkap Politik Kartel. Studi Tentang Sistem Kepartaian di Indonesia Era Reformasi. Jakarta: KPG & Lembaga Survei Indonesia. Aspinall, E. (2005). Opposing Suharto. Compromise, Resistance and Regime Change in Indonesia. Stanford: Stanford University Press. Aspinall, E. (2013). Popular Agency and Interests in Indonesia’s Democratic Transition and Consolidation. Indonesia, 96. Aspinall, E., Mietzner, M., & Tomsa, D. (2015). The moderating president: Yudhoyono’s decade in power. In E. Aspinall, M. Mietzner, & D. Tomsa (Eds.), The Yudhoyono Presidency. Indonesia’s Decade of Stability and Stagnation. Singapore: ISEAS. x

An important event during the 2014 presidential election was Salam 2 Jari (Two Finger Greeting) concert. The concert had successfully boosted the electability of Jokowi. The concert was attended by more than one hundred thousand of people in Jakarta, organized by volunteer led by Abdee Negara, a member of Indonesia famous rock band Slank, and a number of artists who were part of the old network to defend KPK (interview with Teten Masduki, the founder of ICW and former Secretary General of Transparency International Indonesia Chapter 20 October 2014. Later, President Jokowi appointed him as the chief of the presidential executive office in 2015). y See https://www.pic.nsw.gov.au/default.aspx

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Aspinall, E., & Weiss, M. (2012). The Limits of Civil Society. Social movements and political parties in Southeast Asia. In R. Robison (Ed.), Routledge Handbook of Southeast Asian Politics. Oxon: Routledge. Assegaf, I. (2002). Legends of the Fall: An Institutional Analysis of Indonesia Law Enforcement Agencies Combating Corruption. In T. Lindsey, & H. Dick (Eds.), Corruption in Asia. Rethinking the Governance Paradigm. Sydney: The Federation Press. Bolongaita, E.P. (2010). An Exception to the rule? Why Indonesia’s Anti-Corruption Commission succeeds where others don’t a comparison with the Philippines’ Ombudsman. Retrieved from. Bratsis, P. (2014). Political Corruption in the Age of Transnational Capitalism. From the Relative Autonomy of the State to the White Man’s Burden. Historical Materialism, 22 (1), 105 128. Butt, S. (2012). Corruption and Law in Indonesia. London&New York. Routledge. Butt, S., & Lindsey, T. (2011). Judicial mafia: the courts and state illegality in Indonesia. In E. Aspinall, & G. v Klinken (Eds.), The State and Illegality in Indonesia. Leiden: KITLV Press. Chalmers, I., & Setiyono, B. (2012). The Struggle against Corruption during the Democratic Transition: Theorising the Emergent Role of CSOs. Development and Society, 41(1). Colmey, J., & Liebhold, D. (1999, May 24). Suharto Inc.: All in the Family. TIME Asia. Dick, H., & Mulholland, J. (2016). The Politics of Corruption in Indonesia. Georgetown Journal of International Affairs, XVII(1). Easter, L., Yuntho, E., & Caesar, A. (2015). Laporan Hasil Evaluasi Institusional KPK: Mencari Capim KPK yang Menjawab Kebutuhan Institusional. Jakarta: Indonesia Corruption Watch. Hadiz, V., & Robison, R. (2013). The Political Economy of Oligarchy and The Reorganization of Power in Indonesia. Indonesia, 96. Jayasuriya, K. (2005). Beyond institutional fetishism: From the developmental to the regulatory state. New Political Economy, 10(3), 381 387. Johnston, M. (2013). More than Necessary, Less than Sufficient: Democratization and the Control of Corruption. Social Research: An International Quarterly, 80(40), 1237 1258. Katz, R. S., & Mair, P. (1995). Changing Models of Party Organizations and Party Democracy. Party Politics, 1(1). Kuris, G. (2012a). Holding the High Ground with Public Support: Indonesia’s Anticorruption Commission Digs In, 2007 2011 Princeton University, Innovations for Successful Societies, Retrieved from http://www.princeton.edu/successfulsocieties, on May 11, 2016. Kuris, G. (2012b). “Inviting a Tiger Into Your Home”: Indonesia Creates an AntiCorruption Commission with Teeth, 2002 2007 Princeton University, Innovations for Successful Societies, Retrieved from http://www.princeton.edu.successfulsocieties on May 11, 2016. Lev, D. S. (2007). State and law reform in Indonesia. In T. Lindsey (Ed.), Law Reform in Developing and Transitional States. Oxon: Routledge. Lim, M. (2013). Many Clicks but Little Sticks: Social Media Activism in Indonesia. Journal of Contemporary Asia, 43(4), 636 657. Mietzner, M. (2007). Party Financing in Post-Soeharto Indonesia: Between State Subsidies and Political Corruption. Contemporary Southeast Asia, 29(2), 238 263. Mietzner, M. (2012). Indonesia’s democratic stagnation: anti-reformist elites and resilient civil society. Democratization, 19(2), 209 229.

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Mietzner, M. (2013). Fighting the Hellhounds: Pro-democracy Activists and Party Politics in Post-Suharto Indonesia. Journal of Contemporary Asia, 43(1), 28 50. Mietzner, M. (2014). How Jokowi Won and Democracy Survived. Journal of Democracy, 25 (4), 111 125. Muhtadi, B. (2015). Jokowi’s First Year: A Weak President Caught between Reform and Oligarchic Politics. Bulletin of Indonesian Economic Studies, 51(3), 349 368. Riana, F. (2015). Dewie Yasin Limpo, Anggota DPR Ke-55 yang Dijerat KPK Retrieved from https://m.tempo.co/read/news/2015/10/22/078711843/dewie-yasin-limpo-anggotadpr-ke-55-yang-dijerat-kpk, on June 30, 2016. Robison, R., & Hadiz, V. R. (2004). Reorganizing Power in Indonesia. The Politics of Oligarchy in an Age of Market. London: Routledge. Rose-Ackerman, S. (1999). Political Corruption and Democracy. Connecticut Journal of International Law, 14(2), 363 378. Schutte, S. A. (2011). Appointing top officials in a democratic Indonesia: the corruption eradication commission. Bulletin of Indonesian Economic Studies, 47(3), 355 379. Schu¨tte, S. A. (2012). Against The Odds: Anti-Corruption Reform In Indonesia. Public Administration and Development, 32(1), 38 48. Setyarso, B. (2012). KPK vs Polri. Mengungkap Fakta Mengejutkan yang Belum Terekspos Media. Jakarta: Noura Books. Slater, D. (2004). Indonesia’s Accountability Trap: Party Cartels and Presidential Power after Democratic Transition. Indonesia, 78, 61 92. Slater, D., & Simmons, E. (2012). Coping by Colluding: Political Uncertainty and Promiscuous Powersharing in Indonesia and Bolivia. Comparative Political Studies, 46 (11), 1366 1393. Sudibyo, A., & Patria, N. (2013). The Television Industry in Post-authoritarian Indonesia. Journal of Contemporary Asia, 43(2), 257 275. Tapsell, R. (2015). Indonesia’s Media Oligarchy and the “Jokowi Phenomenon”. Indonesia, 99, 29 50, (April).

The road to nowhere: the rise of a neo-patrimonialist state in East Timor

18

James Scambary Australian National University, Canberra, ACT, Australia

18.1

Introduction

In October 26, 2015, in a move that sent shockwaves through East Timor’s political establishment, East Timor’s Audit Chamber vetoed the largest contract in the country’s history—worth over USD720 million dollars—for the design and construction of a sea wall and supply base. This contract was part of a highly ambitious resource corridor project that is intended to span the country’s entire South Coast. The justification given for the veto was “non-compliance with basic standards in force in Timor-Leste” (LUSA, 2015). It is not unusual in any democracy for a major resource project to be stopped in its tracks due to a legal challenge or popular pressure. Such an incident is unprecedented in East Timor, however, and is highly illustrative of both the progress of its beleaguered justice system and the evolving contours of its political system. After 15 years under the tutelage of the United Nations and a variety of donor agencies, East Timor is well equipped with the necessary political, regulatory, and juridical frameworks to monitor public spending and enforce the rule of law. However, until now, these systems have served as little more than speed humps under the wheels of a major government oil revenue-fueled infrastructure spending drive. At the same time, the political system has become highly centralized under the leadership of its former resistance leader Kay Rala ‘Xanana’ Gusma˜o. Procurement decisions, contracts, and spending consistently evade regulatory oversight both through Gusma˜o’s executive-style decrees and through a complex web of informal networks and sub-legal mechanisms. As a consequence, development outcomes have been minimal at best, while the country is still anchored on the bottom rungs of most global poverty indicators. At the time of writing, a number of highly ambitious but controversial mega projects, including the South Coast project, have now commenced without any meaningful feasibility assessments, inflating budgetary layouts well beyond economically sustainable limits. In tandem with an ongoing pattern of unregulated spending and declining oil revenues, these projects have a very real potential to bankrupt the state. The Changing Face of Corruption in the Asia Pacific. DOI: http://dx.doi.org/10.1016/B978-0-08-101109-6.00018-6 Copyright © 2017 James Scambary. Published by Elsevier Ltd. All rights reserved.

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This chapter explores the political economy of East Timor’s public expenditure patterns over the last seven years, and the implications for future development. It will be argued here that East Timor’s unique constellation of historical, cultural, and economic factors—in particular, its resistance networks and relationship with its former occupier Indonesia—while potentially a source of strength, has instead combined to set East Timor on a self-destructive political and economic trajectory.

18.2

Background

After more than 400 years of foreign occupation, East Timor customs and traditions are still vibrant and resilient. Ancestrally based descent groups form the bedrock of its social structure, with attendant customary systems of allegiance and reciprocal obligation. Such traditions are reflected in East Timor’s politics, which can be described as competing networks of patronage and reciprocity, with access to state resources the chief objective of incumbency (Blunt, 2009). Voters are mobilized at election time through traditional authorities and local or regional “big men” figures. These figures are often veterans—former guerrilla fighters or leaders of the resistance movement during the fight for independence. Guerrilla and clandestine resistance leaders still retain high personal prestige and authority, which, like customary rules of exchange and reciprocity, has implications for the rule of law. As the previous head of East Timor’s Anti-Corruption Commission (CAC) Aderito Soares observes, this has led to a parallel process of legal standards and procedures, which he terms the maun bo’ot (big brother) culture. A maun bo’ot, according to Soares, is a respected senior figure with strong authority often due to their former service to the nation as a clandestine resistance leader or guerrilla fighter. Such figures tend to make decisions based on personal judgment and discretion, rather than established procedures. Due to their authority, there are few who will challenge them (Soares, 2013). This culture is also reflected in the fact that two former guerrilla commanders are now the most powerful men in the country: Gusma˜o—previously the supreme commander of the armed resistance movement, and President Taur Matan Ruak. Gusma˜o is still widely revered and also feared (International Crisis Group, 2013). Given Indonesia’s more than two decades of occupation, as well as its ongoing close cultural and economic bilateral ties, unsurprisingly, East Timor’s politics and society bear many similarities with its former occupier. Many of East Timor’s politicians and civil servants were educated there or socialized in the Indonesian civil service, leaving indelible marks on bureaucratic practice (Blunt, 2009). One major legacy is corruption. According to Soares, corruption, including both civil and military authorities, was rampant at all levels of society during the Indonesian occupation (Soares, 2013). There is also a small but powerful and well-connected business elite. During the Indonesian occupation, a number of these figures had businesses in partnership with the Indonesian military or members of the Suharto family, while also supporting

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the independence movement. Prominent financial backers of Gusma˜o’s party, the Conselho Nacional de Resistencia Timorense—National Congress for Timorese Reconstruction (CNRT), they maintain close links to senior figures in government. With transnational links to both Indonesia and China (a number of these figures are ethnic Timorese-Chinese), they are well placed to take advantage of the current spending spree, and so have gained a disproportionate share of government contracts. Such informal parallel networks and systems of reciprocal obligation exist in tandem—and in tension—with a Western-style legal-bureaucratic model set in place by the UN administration. After over four centuries of Portuguese colonialism and two decades of a destructive and genocidal Indonesian occupation, at the dawn of independence in 1999, East Timor possessed few of the resources required to run a modern state. Following the restoration of order by international forces in the latter part of 1999, the UN Security Council mandated the establishment of the interim United Nations Transitional Administration of East Timor (UNTAET) to manage East Timor’s transition to independence. Over the passage of the next decade and a number of new UN missions, and technical assistance from a wide range of donors and international financial institutions (IFIs) such as the World Bank, this ground-up state-building enterprise set in place the foundations of a new Western-style democracy, including national security forces, judicial and regulatory bodies, and a Westminster-style parliamentary system.

18.3

Political transformation

In the first free elections in 2001, the Frente Revoluciona´ria do Timor-Leste Independente—Revolutionary Front for East Timorese Independence (FRETILIN)— formed East Timor’s first government and Gusma˜o became the country’s first president in April 2002. Development and reconstruction progress was slow, hampered by an inexperienced civil service and, being largely reliant on foreign aid at the time, a tight budget (International Monetary Fund, 2005). Expectations of a peace dividend were also high. People wanted accelerated development, and employment and educational opportunities, so tensions did not take long to surface. Veterans of the resistance and their supporters were prominent in a series of sometimes violent demonstrations and sporadic conflict over the next 6 years. The second parliamentary and presidential elections took place in 2007 against a backdrop of ongoing violence. In what is now popularly referred to as the “Crisis,” between April and June 2006, a protest by a group of sacked soldiers outside the national Parliament descended into a riot and led to a series of armed confrontations between the national army, the police force, and paramilitary groups. This series of events then became a catalyst for a wider communal conflict on a national scale. By the time the conflict ended in January 2008, as many as 200 people had been killed and at least 150,000 others forced into internally displaced people’s (IDP) camps, in addition to widespread destruction (United States Agency for International Development, 2007).

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While there are many complex underlying social and historical causes of this violence (see, e.g., Gunter, 2007; Scambary, 2009), patterns of violence in the early stages showed strong indications of being politically orchestrated. There was a sequence of armed attacks on the military resulting in multiple fatalities, followed by a period of concerted violence by organized groups composed of veterans’ groups, sundry gangs, and paid mobs trucked in from rural areas. Coordinated through a variety of opposition party controlled political front groups, these groups targeted selected areas dominated by FRETILIN supporters from the eastern regions of the country (Scambary, 2009). Gusma˜o’s CNRT first signaled its intent to embark on a rapid development path with its glossy campaign posters of high-rise towers, gleaming shopping malls, and modern highways. While there were many other complex factors at play, this crudely populist appeal was undoubtedly highly popular with the electorate. The CNRT took power with a fractious and makeshift coalition of parties with little in common other than an antipathy to FRETILIN.

18.4

The emergence of a clientelist state

Gusma˜o quickly moved to shore up this shaky alliance with the appointment of loyalists to top political and administrative positions in a bloated cabinet of 44 ministers, vice ministers, and secretaries of state—adding another nine after the 2012 election (Tempo Semanal, 2012). The public service was also used as a tool of patronage, with staff levels swollen by family members and party loyalists. By way of comparison, the South African National Road Administration department manages a 20,000-kilometer national highway system at high quality with 187 staff, in contrast to the 879 staff employed to manage 1400 kilometers of deteriorating national roads in East Timor (World Bank and Ministry of Finance, 2015). While the scope of post-2007 election government expenditures was inclusive— in other words, not limited to people or regions loyal to the government—groups and individuals who had been instrumental to the violence of 2006 were prominent among the beneficiaries of government contracts and public appointments. The veterans were particularly well rewarded. The day after the 2012 election campaign began, in an act of flagrant pork barreling, the government announced that it would begin paying pensions to more than 27,000 veterans of the resistance and their families, worth around US$46 million. It also awarded the veterans $78 million in contracts (without a tender process) for projects related to the national electrification scheme (detailed further in the following section). As a report by the EU Election Observer team noted, the veterans’ networks had been integral to the CNRT’s success, and some of these networks appeared to overlap with the state agencies handling veterans’ affairs, including their pensions, and were run by individual veterans who have benefited from government contracts (European Union, 2012). Soon after coming to power, the government embarked on a major escalation in public expenditure—which continues to the current day. With the benefit of increased

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oil revenue, government spending, especially on infrastructure, rose by an estimated 245% between 2006 and 2012, with current expenditure levels expected to remain constant until at least 2017 (Democratic Republic of Timor-Leste, 2012). East Timor now has one of the highest rates of infrastructure investment in the world. The quality and cost-effectiveness of this spending and selection of projects have drawn sustained criticism from local NGOs and IFIs. The World Bank and Ministry of Finance, for example, released a Public Expenditure Review on infrastructure in March 2015. As the report noted, there is little consideration for criteria such as level of demand or financial or economic return in expenditure or investment decision-making (World Bank and MoF, 2015). A series of Deloitte reports in 2011 (Deloitte, 2011a, 2011b, 2011c) and East Timor’s Audit Chamber (2015a, 2015b, 2015c, 2015d) on spending by different government departments and ministries went further, painting a damning picture of chronic mismanagement and possible corruption. A major example of mismanagement of public funds is single-source procurement (no tender process). World Bank analysis of public road construction contracts data, for example, shows that the use of single-source procurement rose from 65% in 2010 to 100% in 2013. The only projects to follow a proper tender process were those managed by IFIs (World Bank and Ministry of Finance, 2015). As a consequence, projects are then frequently contracted out on an entirely discretionary basis, without any objective criterion or legal framework, and no monitoring (Audit Chamber, 2015c). Even where projects follow a tender process, this process is often subverted, with contracts awarded, for example, to family members of ministers, even when winning bids were as much as three times greater than competitors’ bids (Audit Chamber, 2015a). In other cases, companies have won contracts through a legitimate tender process, only for them to be then rescinded and awarded to another company favored by authorities (Audit Chamber, 2015c). Corruption is also evident at all levels, although there have been few prosecutions to date. Ministerial reviews carried out by Deloitte on behalf of the Finance Ministry catalogued a litany of mechanisms being used to subvert or avoid established procedures. Some of these ruses are remarkably crude and blatant, yet seldom result in prosecution. In some cases, for example, invoices were merely adjusted after a contract had been signed, raising invoice amounts from the hundreds into the millions (Deloitte, 2011b). Public funds are also siphoned off through fraudulent government bank accounts. The Audit Chamber report on the Ministry of Agriculture, Fisheries and Forestry discovered 21 such unauthorized bank accounts (Audit Chamber, 2015a).

18.5

The centralization of power

Gusma˜o’s centralization of power within the prime minister’s office and later, to his new ‘super ministry,’ has had a major impact on the nature and quality of major national level expenditure. Despite stepping down from power early in 2015,

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Gusma˜o’s new position as self-appointed head of his own self-designed Ministry of Planning and Strategic Investment means that he continues to maintain total control over the capital budget and the three main regulatory bodies overseeing infrastructure spending. An internal UN presentation, leaked in 2011, drew a virulent backlash from the government when it claimed that Gusma˜o’s growing recourse to executive-style authority was undermining both accountability and the rule of law (Tempo Semanal, 2011). This is not an isolated perspective; according to a confidential 2008 US Embassy cable, Gusma˜o has taken many decisions himself without consultation with his ministers, or, at best, only with a small coterie of advisers or confidantes. This small circle, the cable states, were typically figures from the clandestine resistance well known to the prime minister and who serve as brokers for foreign firms (US Embassy, 2008). Some of the biggest budget expenditures and contracts have been allocated in this way. The most notorious case was the contract for the national electricity grid. In 2008, a contract for the construction of a nationwide electrical power grid and power plant was awarded to a Chinese construction company CNI22. The project was worth more than 40 percent of the national budget, yet the tender period lasted less than three weeks, with only about two pages of specifications (La’o Hamutuk, 2011a). This generated widespread suspicion that the purchase had been agreed before the government announced the tender. Again, according to the leaked cable, Gusma˜o made the decision and someone from his inside circle brokered the deal, with no consultation with the Electricity Department (US Embassy, 2008). With growing evidence of incompetence and mismanagement, and after sustained pressure from IFIs, the government reallocated the contract to an Indonesian firm, nearly doubling the cost of the entire project in the process (La’o Hamutuk, 2011a). While the tender process that awarded the contract in the first place was derisory, as a Deloitte report on the Electricity Department noted, despite being approved by the Council of Ministers, there was no documentation to indicate a tender process had been followed at all for the reassignment of the contract (Deloitte, 2011a). The lack of an adequate tender process and failure to consult relevant ministries and expert advice on the most appropriate and cost-effective designs have major and sometimes ongoing cost implications. The current total electricity generation capacity provided by the new generators under the electrification scheme, for example, is at least five times the current peak level of demand. Increased electricity generation capacity has resulted in a fivefold fuel budget increase since 2009, and it is expected to climb, given that the tender process for fuel supplies is also less than transparent (World Bank and Ministry of Finance, 2015). A report on the Millennium Development Goal social housing project—also awarded to a government donor without an adequate tender process—found that prices of construction materials were inflated by as much as 1441% (Audit Chamber, 2015d). The quality of single-source road construction and other projects has also been widely condemned, with some roads, for example, left unfinished or deteriorating only months or weeks after being built, requiring constant and recurrent expenditure. The World Bank/MoF report described a “build, neglect, rebuild” culture within the Secretariat of State for Public Works (2015).

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18.6

273

Rational-legal institutions

The East Timorese government and civil service have received extensive donor support over the last 15 years in the design and capacity-building of its various regulatory bodies. This assistance has created its own problems. The current legal environment in East Timor is now a tangled and unwieldy amalgam—the product of a shotgun marriage between Portuguese, UNTAET, Indonesian, and Australian legal traditions. Nonetheless, while proliferating and contradictory systems and low civil service capacity play a significant part, the government has frequently interfered with these mechanisms, or bypassed them altogether. The Ministry of Finance website, for example, provides a detailed 10-step guide to the procurement process, including the roles and responsibilities of the half a dozen or so bodies tasked with oversight of these projects at different stages (Democratic Republic of Timor-Leste, 2016). At the same time, the government has set up more funds that evade these mechanisms, giving the government full power to change line items and delay expenditures for future years “without prior Parliamentary notice, approval or oversight” (La’o Hamutuk, 2010). The role of Parliament in vetting public spending has also been substantially nullified by recent political developments. Until recently, the opposition FRETILIN party had been the most effective critical voice in Parliament, with a number of highly competent officials in key parliamentary committees tasked with financial oversight. In February 2016, however, Gusma˜o stood down as prime minister, appointing the respected former FRETILIN Minister of Health Dr Rui Maria de Arau´jo in his place (despite vehement opposition of members from his own governing coalition). A number of other FRETILIN members were appointed to key roles and positions. The FRETILIN leader Mari Alkatiri, previously a bitter rival and vocal critic of Gusma˜o, is now head of his own white elephant project, the special economic zone project in the Oecusse enclave, as is further discussed in the following section. Timor’s Anti-Corruption Commission (CAC), which was set up in 2009, is tasked with investigating high-level corruption. Like many government and other institutions, CAC faces many challenges in terms of human resources and, as mentioned, a complex legal framework, but the chief obstacle is Government interference with the legal system. The perception that CAC was under political pressure to limit the scope of its investigations was reinforced when it began to investigate the previous finance minister, Emilia Pires, on suspected conflict of interest charges. This move drew a furious response from Gusma˜o, who reportedly threatened to resign (McDonnell, 2014). This political interference became even more blatant with Gusma˜o’s sacking of eight international judges in 2014, causing an international outcry. Apart from being possibly illegal under East Timor’s Constitution, this move sent a clear message to the judiciary that like CAC, their independence was conditional. The government used the pretext of alleged incompetency in the wake of the failed tax case against petroleum companies. According to a report by the Northern Territory Bar Association, however, none of the sacked judges appeared to have anything to do with that case (Wyvill, 2014). Instead, among those sacked were public prosecutors and legal advisers

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involved in preparing a number of cases against high-profile government officials, including Pires. Gusma˜o also personally wrote an appeal to Parliament not to lift the impunity of these officials, further enhancing suspicions that this act was about protecting corrupt loyalists (Judicial Systems Monitoring Program, 2014). To date, the impunity of these officials has not been lifted. In December 2016, in a major win for CAC and East Timor’s justice system, Pires was finally convicted by the Dili District Court, along with the ex-Deputy Health Minister (Judicial Systems Monitoring Program, 2016). The reason why Pires’ immunity was lifted is unclear her misdemeanour was insignificant compared to documented evidence of corruption and mismanagement in other ministries such as in the Audit Chamber report on the Ministry of Agriculture, Fisheries and Forestry (2015a) but it is most likely related to ongoing power struggles within the governing coalition. Whether Pires will ever see the inside of a jail cell is another question, as before she was sentenced she was allowed to travel to Portugal for medical treatment, which, according to a recent statement by the East Timorese Prime Minister, does not have an extradition treaty with East Timor (Timor-Leste Subscriber News, 2016). Even if she returned, there is no guarantee that she, like Lobato before her, would not also receive a pardon. The sudden emergence of the Audit Chamber, which sits within the Court of Appeal, has been the one bright spot on the horizon. East Timor’s Audit Chamber, tasked with oversight of budget expenditure, was set up in 2011 with the assistance of the UNDP, and its legal officials trained in Portugal (UNDP, 2014). They have released a series of highly critical and, in the case of the Ministry of Agriculture, Fisheries and Forestry (Audit Chamber, 2015a), potentially incriminating reports. The court’s staff has not been personally appointed by Gusma˜o, which is one possible reason why they have been able to be so critical and independent. The government is now appealing their decision to cancel the sea wall and supply base contract, and time will tell if this court is able to withstand the kind of political pressure experienced by other legal structures, or see its rulings bypassed or ignored altogether.

18.7

The road to nowhere

The government’s manifestly poor record so far on infrastructure project management has not dented their ambitions. A series of major infrastructure projects are planned that could potentially bankrupt the state. The biggest of these is the Tase Mane (South Coast) project which includes a regional airport, a supply base and port (as mentioned), and a 250-kilometer-long autobahn-like highway along the rugged South Coast to service a yet-to-be built oil refinery and liquefied natural gas plant (La’o Hamutuk, 2011b). The project is premised on a pipeline being built from the as-yet untapped Greater Sunrise oilfield East Timor shares with Australia. The pipeline has very little chance of ever being built, for a variety of reasons. East Timor’s share of the Greater Sunrise oil field with Australia is currently the subject of protracted and acrimonious negotiations between the two countries, with little progress so far. Falling oil prices, political uncertainty plus the lack of human resources, technical capacity, onshore

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facilities, and almost total lack of a regulatory environment in East Timor make the development of this oilfield increasingly unattractive to the three main project partners—Woodside Petroleum, ConocoPhillips, and Shell (McDonald, 2015). The government’s determination to pursue this grandiose project without any real evidence of cost-effectiveness, sustainability, or feasibility invites comparisons with the Zairian (Democratic Republic of Congo) dictator Mobutu Sese Sekos’s ‘bridge to nowhere’—a railway bridge and highway built to carry copper exports to markets that no longer existed, through a port that was never built (Mufson, 1986). If the pipeline does not come, the South Coast highway could become East Timor’s own ‘road to nowhere.’ In tandem with this development, as mentioned, the government is also planning another grandiose scheme with similar disregard for reality or feasibility. Construction is already underway for a special economic zone in Oecusse, a geographically isolated enclave, which sits within Indonesian territory. There are febrile plans for industrial zones, waste recycling plants, a commercial port, universities, an “ecumenical reflection centre,” and a center for “ethical investment” (La’o Hamutuk, 2014). The project has an open-ended budget that is not subject to any parliamentary or regulatory oversight. These projects have generated widespread concern for a number of reasons—feasibility notwithstanding. The processes used to convince or coerce local communities to relocate from their ancestral lands, for example, have already drawn sustained criticism. One report claimed that villagers have faced a campaign of disinformation and even intimidation, with potential long-term loss of sources of livelihood and cultural traditions (Cryan, 2015). The track record of some of the companies awarded major contracts to build these facilities is also controversial. A number of them are facing prosecution in their own countries on bribery and corruption. The company awarded the aforementioned sea wall contract, for example, Hyundai Engineering & Construction, is one of 20 major South Korean firms banned from receiving South Korean government contracts as punishment for collusion in a 2009 construction project there (Korea Joongang Daily, 2015).a As a recent press report alleged, the East Timorese government had been “repeatedly” informed of the scandal involving this company (LUSA, 2015). Apart from issues of due diligence, the choice of contractors with such chequered histories raises major questions about whether development outcomes were really the primary objective of these projects in the first place.

18.8

Made in Jakarta?

Such practices as described above can be found in other small Pacific and Melanesian island states like Papua New Guinea and the Solomon Islands, and indeed in larger industrialized democracies, including Australia. East Timor is interesting for the way that its political economy of public expenditure and modes of a

At the time of writing, Hyundai Engineering & Construction Company has pulled out of the project, citing extensive delays in the appeal process (He-Suk, 2016).

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distribution have more in common with larger South East Asian states like Indonesia or the Philippines (see Hutchcroft, 2013), rather than the more traditional patronage model of these Melanesian states. Its history of resistance to, and links with Indonesia—under Suharto in particular, is key to understanding how such patterns have emerged. It is highly doubtful that the idea of creating extra-budgetary funds free from regulatory oversight emanated from IFI advisors, or their financial management manuals, since they usually advocate against such practices (see, e.g., Allen and Radev, 2006). Given the influence of 24 years of Indonesian occupation as described earlier, in addition to continuing close political and economic ties, it is unsurprising that these funds bear closer resemblance to the off-budget financing of Suharto’s New Order regime, whereby resource wealth was placed in special funds for government spending outside the central budget. As with East Timor, according to Ascher (1998), the motive was as much the desire to pursue particular development strategies as it was to maximize political power. Ascher notes, however, that this was a potentially disastrous strategy, as mismanagement in the oil sector practically bankrupted Indonesia in the mid-1970s (Ascher, 1998). The terms “patronage” and “clientelism” have both been employed to describe politically targeted modes of distribution of state funds. Gero Erdman and Ulf Engel employ a group versus individual distinction, defining patronage as the politically motivated distribution of favors or goods, not to individuals, but to larger groups (Erdmann and Engel, 2007). Politics and patronage in other small island states like the Solomon Islands or Papua New Guinea tend to be based on clan and regional affiliations. In these highly fluid polities where party leaders rarely survive the next election, the relationship therefore tends to be between politicians and their local constituents (Duncan and Hassall, 2011). While such patronage-style politics can certainly still be discerned in East Timor, its stable and enduring leadership under Gusma˜o has allowed a more clientelist system to develop and become entrenched. Under clientelism in East Timor, the political center is linked through a network of brokers with larger groups in the countryside, whereby Gusma˜o, using veterans and other influential local figures, can mobilize nationwide resistance networks at election time. Gusma˜o’s executive-style decision-making process, which many have likened to his resistance-era commander-in-chief role, could best be described as neopatrimonialist—a lack of distinction between office and office holder masked behind discourses, juridical norms, and institutions that nourish the illusion of a legal-bureaucratic logic (Brinkerhoff and Goldsmith, 2002, p. 2). As such, the way that he has used his centralized power to maintain political stability by the inclusive disbursement of public funds through government projects and positions bears closer resemblance to Indonesia. This system under Suharto’s New Order has been described as a steeply ascending pyramid, with Suharto at its apex. Authority and stability were derived not only through repression and coercion but also by ensuring that the benefits of corruption, in the form of the disbursement of state funds through questionable development projects, were distributed widely through the pyramid, so that bureaucrats at all levels had a stake in the system (Robertson-Snape, 1999). Unlike Indonesia, however, East Timor has no alternative revenue source to fall back on. It has no real tax base and no indigenous manufacturing industry other

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than coffee, worth about $33 million, while its imports amount to nearly 20 times that. A substantial proportion of these imports are comprised of food, such as rice, sold at state-subsidized prices, and tinned goods. Such a level of spending also flies in the face of decreasing oil revenues. Production from current fields peaked in 2012, and is forecast to end in 2020, while the prospects for new development remain bleak (Asian Development Bank, 2015). Nonetheless, there has been no attendant reduction in the budget outlay. Unless current trends are reversed, East Timor will not just run out of money to maintain essential services such as health and education; within the next decade, it could also run out of food.

18.9

Conclusion

East Timor’s enduring traditional social structures and tightly knit resistance networks have proved a source of strength and resilience through centuries of colonialism and foreign occupation. However, combined with Indonesia’s ongoing influence, these networks and structures have instead operated to produce a predatory form of clientelist and neo-patrimonial state that has locked the nation in a self-destructive pattern of public expenditure. Development outcomes serve as a pretext for state-funded projects, but in effect, they come as a distant second consideration to the servicing of clientelist networks. An almost total disregard for feasibility, quality control, or due process means that despite current record levels of government spending, much of the country’s revenues will end up offshore in the bank accounts of foreign businesses. The current raft of mega projects, if fully implemented, could have a drastic impact on livelihoods for generations to come. The appeasement of fractious militant groups within society, such as the veterans, through public patronage, is also a shortsighted strategy, as conflict may return once the money runs out. Recent history and a constant ebb and flow of sub-national communal violence over the last decade indicate that this is not a remote possibility. The recent decision by East Timor’s Audit Chamber is without doubt a significant new development and a break with the record of the past nine years. It could be argued that this institution has not suffered the same fate as the country’s other legal institutions due to both flying under the radar and not being filled with Gusma˜o appointees. It could also be argued that with the new change in leadership roles and the entry of FRETILIN into government, there is an optimistic sense that maybe the old rules can now be challenged.

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He-suk, C., (2016). ‘Hyundai E&C scraps US$720m East Timor project’, Korea Herald, June 17. http://www.koreaherald.com/view.php?ud520160617000118 (accessed 20.6.16) Hutchcroft, P. (2013). Linking capital and countryside: patronage and clientelism in Japan, Thailand, and the Philippines. In D. A. Brun, & L. Diamond (Eds.), Clientelism, Social Policy, and the Quality of Democracy (pp. 17 203). Baltimore, MD: Johns Hopkins University Press. International Crisis Group, (2013). Timor-Leste: Stability at What Cost?” Asia Report no. 246. May. Jakarta/Brussels: International Crisis Group. International Monetary Fund (2005). Country Report: Timor-Leste 5 (245). Washington, DC: International Monetary Fund, (Author’s private copy). Judicial System Monitoring Program, (2014). Dismissal of international officials and advisors in the Timor-Leste judicial sector: an analysis of the constitutionality, legality and impact of Parliamentary Resolution No. 11/2014 and Government Resolutions No. 29/2014 and 32/2014. Dili. December. Judicial System Monitoring Programme (2016). ‘Tribuna´l Distrita´l Dili kondena pena prizaun tinan 7 ba eis-Ministra Finansa no tinan 4 ba eis-Vice Ministra Sau´de. (Dili District Court sentences Ex-Finance Minister to seven years jail and ex-Vice Minister of Health to four years). December 23. Available at , http://jsmp.tl/wp-content/uploads/2016/01/ PrDesizaunbaKazuHanzamnoEMILIA_Tetum.pdf . Accessed 07.01.17. La’o Hamutuk, (2010). Letter to IMF Updating Public Financial Management and Fiscal Transparency Reports. http://www.Laohamutuk.org/econ/OGE11/LHLetterIMF14Dec10. pdf. (accessed 05.4.14). La’o Hamutuk, (2011a). Power Plant and National Electrical Grid 2008 2009: Mega-project or Mega- problem? http://www.laohamutuk.org/Oil/Power/ 08PowerPlant.htm. (accessed 17.5.13). La’o Hamutuk, (2011b). South Coast Petroleum Infrastructure Project. http://www.laohamutuk.org/Oil/TasiMane/11TasiMane.htm. (accessed 04.12.11). La’o Hamutuk, (2014). Special Economic zone in Oecusse. http://www.laohamutuk.org/econ/ Oecussi/ZEESMIndex.htm. (accessed 18.03.15). LUSA, (2015). Timorese Audit Chamber “fails” largest contract in the history of the country. August 30. (Translation from Portuguese by La’o Hamutuk) https://lists.riseup.net/www/ arc/east-timor/2015-11/msg00000.html. (accessed 28.11.15). McDonald, Hamish., (2015). ‘Pipe Dream’ The Saturday Paper, November 28. Found at: https://www.thesaturdaypaper.com.au/news/politics/2015/11/28/maritime-arrangementsand-timor-lestes-oil-ploy/14486292002682. McDonnell, T., (2014). Graft Case Rocks East Timor’s Prime Minister Xanana Gusma˜o. The Australian, August 2. http://www.theaustralian.com.au/news/world/graft-case-rocks-easttimors-prime-minister-shyxanana-gusmao/news-story/771678cb0b4d0c1a950f5f79f6aecaa3. (accessed 25.8.14). Mufson, S. (1986). White elephants in black Africa: the bridge to nowhere and other developmental follies. New Republic, 195(026), 18 20. Robertson-Snape, F. (1999). Corruption, collusion and nepotism in Indonesia. Third World Q., 20(3), 589 602. Scambary, J. (2009). Anatomy of a conflict: the 2006-7 communal conflict in East Timor. Confl. Security Dev., 9(2), 265 288. Semanal, T., (2011). Exclusive: Internal UN Document Says Xanana Obstacle to Constitutionalism. May 15, 2011. http://temposemanaltimor.blogspot.com.au/2011/05/ exklusif-internal-un-document-says.html. (accessed 07.3.12)

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Semanal, T., (2012). Breaking News: Tempo Semanal Exclusive: Fifth Constitutional Government, August 3, 2012. http://www.easttimorlawandjusticebulletin.com/2012/08/ breaking-news-tempo-semanal-exclusive.html (accessed 13.7.13). Soares, A. (2013). Combatting corruption: avoiding ‘Institutional Ritualism’. In M. Leach, & D. Kingsbury (Eds.), The Politics of Timor-Leste: Democratic Consolidation after Intervention (pp. 85 97). Ithaca, NY: Cornell University Press. Timor-Leste Subscriber News. (2014). No extradition agreement; it is hard to bring Emilia Pires back’ January 4. UNDP, (2014). Paving the way for Timor-Leste’s first Audit Chamber. http://www.tl.undp. org/content/timor_leste/en/home/ourwork/democraticgovernance/successstories/TL_Audit_ Chamber.html. (accessed 15.11.15). United States Agency for International Development, (2007). East Timor Complex Emergency Fact Sheet. Dili: United States Agency for International Development, Bureau For Democracy, Conflict, and Humanitarian Assistance. U.S. Embassy, (2008). Major Projects and Government Procurement in Timor-Leste. http://www. Laohamutuk.org/reports/Wikileaks/2008Dec31Infrastructure.pdf. (accessed 06.08.12). World Bank and Ministry of Finance, (2015). Timor-Leste Public Expenditure Review: Infrastructure, A Joint Ministry Of Finance and World Bank Review of the Quality of Infrastructure Spending in Timor-Leste, Focusing On Roads, Irrigation and Electricity. March, Dili: World Bank and Ministry of Finance, Democratic Republic of TimorLeste. Wyvill, Alistair, (2014). Report on relations between the Judiciary and the Government in Timor Leste following investigations in country between Sunday 16 November 2014 and Tuesday 18 November 2014. Available at: https://www.laohamutuk.org/Justice/ 2014/14Judges.htm Accessed January 7, 2016.

The politics of Australian anticorruption policy to Papua New Guinea

19

Grant W. Walton Australian National University, Canberra, ACT, Australia

19.1

Introduction

During the Cold War, corruption was largely absent from international aid discourse both sides of the iron curtain were more interested in gaining the support of “Third World” governments than monitoring how they spent their aid. That changed in the 1990s with the rise of Transparency International, and the World Bank signaling its intention to fight corruption through its projects and programs. While global anticorruption efforts have grown, many international agencies still struggle to respond to the political nature of corruption. Indeed, international aanticorruption interventions have been described as mostly technical in nature and failing to adequately respond to the political dynamics that enable corruption (Polzer, 2001; Jayasuriya, 2002; Brown & Cloke, 2004; Brown & Cloke, 2006; Brown & Cloke, 2011). This technical response is, in part, due to donors and other international organizations not wanting to be seen as taking political sides, particularly given they are ostensibly guests of the countries in which they operate (de Sousa, 2009). This situation puts international donors in a precarious position vis-a`-vis raising awareness about and addressing political corruption. On the one hand, these agencies promote the virtues of addressing corruption in multiple forms; on the other, raising such issues can invite political backlash and reduce the willingness of partner governments to cooperate. In other words, donors’ anticorruption efforts can result in a tension between their stated aims and political realities. The growing literature about the challenges facing anticorruption organizations in developing countries helps illuminate this tension. However, there has been little written about the challenges facing donor organizations seeking to implement and support anticorruption efforts when their political power is waning. This chapter examines the challenges that donors promoting anticorruption reform can face when their political leverage weakens. Examining Australia’s response to political corruption in Papua New Guinea (PNG) Australia’s closest neighbor, ex-colony, and now largest recipient of Australian aid (aid to PNG now accounts for 12.5 percent of total Australian Overseas Development Assistancea (Department of Foreign a

In the 2016 17 budget, Australia put aside AUD477.3 million for PNG, compared with AUD296 million for Indonesia, the second-highest destination for Australian aid (Department of Foreign Affairs and Trade, 2016: 51).

The Changing Face of Corruption in the Asia Pacific. DOI: http://dx.doi.org/10.1016/B978-0-08-101109-6.00019-8 Copyright © 2017 Grant W. Walton. Published by Elsevier Ltd. All rights reserved.

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Affairs and Trade, 2016: 51)) it highlights how the Australian aid program has failed to adequately live up to its policy rhetoric on anticorruption. The chapter argues that the limitations of Australia’s responses to corruption mean that political corruption is best fought by those willing to take political risks risks that donor agencies are often poorly positioned to make. It draws on media analysis, policy statements, and academic literature. The chapter first outlines Australia’s new anticorruption paradigm; it then examines the nature of corruption and anticorruption in PNG. It highlights Australia’s response to this corruption, how PNG’s leverage over Australia shapes this response, and how local and international actors have been able to more effectively engage with political corruption. The final section discusses what this case means for the limitations and potential for international responses to political corruption.

19.2

Promises, promises: Australia’s new aid/ anticorruption paradigm

Good governance has been a key theme of the Australian aid program since the late 1990s, with the country pouring millions into programs that seek to improve governance, and reduce corruption. More recently, the importance of governance and anticorruption for the aid program has increased, even though the size of Australia’s aid program has diminished. In September 2013, a conservative government was voted into power and made a number of successive cuts to the aid budget reducing it by 33 percent in real terms between the 2013 14 and 2017 18 financial years (Howes, 2015). It also subsumed the once stand-alone aid program, the Australian Agency for International Development (AusAID), into the Department of Foreign Affairs and Trade (DFAT). This merging of diplomatic and aid functions was reflected in the new anticorruption framework released by the governement in early 2014. The new aid framework put anticorruption front and center it became a topten priority for the recently merged aid program (Department of Foreign Affairs and Trade, 2014b: 27). This reprioritising of anticorruption was in part a political maneuver. It was introduced by the conservative Coalition government to differentiate itself from its predecessors the left-wing Labor party. The latter had softened its rhetoric over corruption when it took over from the Coalition in 2007 (Walton, 2012). Under the Coalition the aid program was meant to ground its anticorruption efforts in analysis of and response to the realities of the political economy in which it operated. The new Development Assistance Budget (2014 2015) which accompanied the policy committed the government to tailoring “support to the political context,” and conducting political economy analysis to help address “challenges in fragile and conflict affected situations, including unequal access to the benefits of economic growth and employment, political alienation and a sense of injustice, which can lead to conflict” (Department of Foreign Affairs and Trade, 2014a: 12). This political analysis and response were to be embedded in new anticorruption policies at the country and regional levels by mid-2015. According to the policy, these plans

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will detail the measures we [Australia] will adopt to protect Australian Government aid funds and how [Australia] will support our partner country’s anti-corruption efforts. Support may include public financial management reform programs, funding of civil society organisations that champion anti-corruption and funding other anti-corruption bodies. Department of Foreign Affairs and Trade, 2014c: 29.

At the time of writing, these plans have not been available to the public, which is ironic given that they will seek to promote accountability and transparency. Recent changes to Australia’s aid budget have further highlighted the importance that the current (at the time of writing, October 2016) Coalition government places on governance and anticorruption. In May 2016, it was announced that while there would be cuts to the overall aid budget, governance which includes spending on anticorruption efforts and broader programs that promote the rule of law would be spared. The governance sector was protected from AU$ 220million (US$167 million) worth of cuts in the 2016 17 budget, making it the largest sector for aid spending in the Australian aid program for the second year running (Howes 2016). In PNG, the Australian aid program has prioritized spending on governance the banner under which anticorruption efforts are undertaken. This has included supporting the Ombudsman Commission of PNG (OC PNG), the local chapter of Transparency International and the Financial Intelligence Unit, which was set up to investigate illicit financial flows. In 2008/2009, spending on governance reached 49 percent of Australia’s aid budget to PNG (AusAID, 2009: 37), although it declined in subsequent years. In 2015 16, DFAT projected that governance would make up 40 percent of Australian official development assistance to PNG (Department of Foreign Affairs and Trade, 2015b). Australia has emphasized that it will take a tough stand on corruption, particularly in relation to its own aid funds. In October 2012, Australia and PNG jointly signed a zero-tolerance policy on fraud in Australia’s aid program to PNG (The Government of Papua New Guinea & The Government of Australia, 2012). Despite prioritizing governance-related programs in PNG and promoting zero tolerance towards corruption, the aid program struggles to meaningfully respond to high-level political corruption in the country.

19.3

The politics of corruption and anticorruption in PNG

PNG is a parliamentary democracy which has maintained democratic rule despite a turbulent political history since its independence from Australia in 1975. Just like many developing countries, corruption is a key concern to both those within and outside of the country. As a result notwithstanding the problems of these measures (Walton, 2014) the country ranks poorly on international corruption and governance indices. In 2014, it was ranked in the 15th percentile (0 lowest ranking and 100 highest) in the World Bank’s Worldwide Governance Indicators (World Bank, 2015). It scored a low 25 out of 100 on Transparency International’s 2015 Corruption Perceptions Index (Transparency International, 2015).

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The PNG state is threatened by numerous types of corruption, from nepotism to bribery to rent-seeking, which some fear undermines state stability and legitimacy (Pitts, 2002; Hughes, 2004). A recent household survey conducted in five out of 22 provinces in the country by the local chapter of Transparency International found that 90 percent of respondents said that corruption had gotten worse over the past decade (Transparency International Papua New Guinea, 2015). In the same survey, almost half of the respondents said they paid a bribe for a service they were entitled to, and 77 percent said that government efforts to stamp out corruption were not sufficiently genuine. PNG’s elites have long been involved in corruption scandals. Most recently, in September 2016, the country’s founding father and recent prime minister (from 2002 to 2011), Michael Somare was named in a Singapore court as the recipient of AU$ 1.04 million from a couple found guilty of laundering money into PNG (Fox, 2016). Somare denies wrongdoing, but the case has yet to be tried in PNG. Based on previous experience it is far from certain that there will be a meaningful response. Over time PNG elites have seemingly gotten away with corruption without fearing significant sanctions (Pitts, 2002; Sharman, 2012). Ainsley Jones (2014) has examined the political fallout from a number of cases of politicians brought before the country’s Leadership Tribunal an ad hoc court for state officials. While acknowledging that there may be some shame suffered by MPs from the resultant media, over the long term, being found guilty of wrongdoing did not concern their constituents enough to not vote for them. Nor did it sufficiently undermine the faith their colleagues had in the ability of many to manage key ministries. In short, the ability of PNG’s anticorruption agencies to meaningfully sanction elites involved in corruption has been, for much of PNG’s postindependence history, severely limited. While civil society organizations and the OC PNG a constitutionally mandated anticorruption agency that has powers to investigate state officials have done much to fight corruption, they have been hampered by poor resources and sporadic public support. Yet in 2011, a new anticorruption institution was set up to run in tandem with the OC PNG (although with a broader mandate), which for a short time reinvigorated anticorruption efforts and put some elites on notice that they had less opportunity to get away with corruption. In August of that year, Investigation Taskforce Sweep (ITFS) was set up by the then new prime minister, Peter O’Neill, soon after he rose to power to help legitimize his controversial removal of the elected prime minister, Michael Somare. Initially, ITFS showed numerous signs of success, although subject to accusation of political bias for failing to take on the prime minister and other political elites. ITFS’ investigations led to the recovery of millions of dollars of stolen funds and the arrest of numerous public servants and even politicians, with three of them receiving significant jail sentences even though the sentences of two politicians were overturned by the nation’s Supreme Court. Buoyed by its early success and initial political support, the organization’s leader, Sam Koim, spoke out against corruption beyond PNG’s borders, taking particular aim at Australia’s complicity. In 2012, Koim drew international attention to the millions of kina (the local currency) that have been laundered into Australia by PNG elites much of it ending up in the Queensland (a state in the north-east of

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Australia) property market. For its role in harboring illicit funds, he called Australia the “Cayman Islands of the Pacific” (Mason, 2012). At the time, Koim suggested that a range of Australian financial institutions were failing to adequately monitor and report the laundering of possible corrupt funds. This, he suggested, included, “Western Union money transfers, chartered accountants, law firms, financial investment companies, and other cash dealers such as heavy equipment dealers and real estate agents that appear to be commonly used to launder funds” (Koim, 2013: 248). Koim’s comments reflected his, and others,’ frustration that Australian regulators, private companies, and intermediaries were doing very little to respond to the laundering of ill-gotten gains. In 2013, Taskforce Sweep answered critics who accused it of political fealty in the most sensational way possible: the agency moved on Prime Minister O’Neill over accusations that he had signed away 72 million kina (AU$31 million, or approximately US$ 22 million) of the state’s largesse for fraudulent legal fees to a firm headed by Paul Paraka, who was himself facing criminal charges from ITFS investigations (Business Advantage PNG, 2014). This is known as the “Parakagate Affair.” An arrest warrant was issued by the PNG police force on corruption charges; however, the warrant is still outstanding. O’Neill has so far managed to stay in political power by recruiting police commissioners sympathetic to his cause. The new commissioners have not pursued the arrest warrant and have been resisting its implementation in the courts. At the same time O’Neill defunded ITFS, severely weakening its ability to operate (Koim, Walton, & Betteridge, 2014). Australia’s response to this and other accusations of corruption in PNG has, as discussed in the following section, been severely constrained.

19.4

Australia’s response

Australia is a party to numerous international instruments aimed at combating corruption and money laundering, including the United Nations Convention Against Corruption; the United Nations Convention against Transnational Organized Crime; and the Organization for Economic Cooperation and Development (OECD) Convention on Combating Bribery of Foreign Public Officials in International Business Transactions; and the Financial Action Task Force’s (FATF) 40 Recommendations. It has passed laws including the Financial Transaction Reports Act 1988, the Proceeds of Crime Act 2005, and the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 which impose duties of due diligence when dealing with international transactions (Koim, 2013: 247). Yet questions have been raised over Australia’s commitment to upholding these instruments. A 2012 evaluation of Australia’s implementation of the OECD’s anti-bribery convention found that Australia only had “one case that has led to foreign bribery prosecutions since it enacted its foreign bribery offence in 1999” and noted that this was “of serious concern” (OECD Working Group on Bribery, 2012: 19). A 2015 mutual assessment of Australia’s anti-money laundering measures published by FATF and Asia/Pacific Group on Money Laundering (APG) drew attention to the poor coordination between state and federal responses, particularly

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in the Queensland property market, where (Koim, 2013) and others believe much of PNG’s corrupt money from political elites ends up: [W]hile ML [Money Laundering] of foreign illicit proceeds through real estate is perceived to be a risk for Queensland (Gold Coast), Queensland has no ML convictions for this activity. AFP [Australian Federal Police] indicated that it does not focus on this risk, believing this ML activity relates to State level predicates, whereas the Queensland Crime and Corruption Commission stated it does not focus on this risk as it relates to foreign money and is thus a matter for AFP. FATF and APG, 2015: 57

Australia’s response is part of a broader reluctance to respond to money laundering. The FATF and APG report found that corruption offenses are often not prosecuted as “Australia does not consider that foreign predicate offences [those generating proceeds of crime that can be laundered] are major predicates for [money laundering] in Australia” (FATF and APG, 2015: 57). Given this, it is unsurprising that there are few convictions for money laundering. Nor is it surprising that despite much to suggest that PNG elites have laundered corrupt funds into Australia, Australia has not repatriated any illicit funds back to PNG (Koim 2013). Australia’s response is also significantly shaped by the political pressure of domestic and international actors. After Koim’s “Cayman Islands speech,” he noted that Australian officials increased their cooperation with his agency (Walton, 2013). It is likely that his speech nudged Australia into action over PNG businessman Eremas Wartoto, linked to corruption, who had been living in Australia since 2011 (Elks, 2013). In May 2013, not long after Koim’s speech, Australian authorities seized Wartoto’s Queensland property, and canceled his temporary 457 visa (Walton, 2013). Wartoto has been accused of misappropriating more than AU$30 million from the PNG government (Walton, 2013). In addition, Australia’s few successes in addressing money laundering involved “the registration of two restraint orders from Papua New Guinea in Queensland” (FATF and APG, 2015: 57). External actors have also significantly shaped Australia’s response to O’Neill’s resistance to his arrest warrant, and subsequent defunding of ITFS. Australia was initially reluctant to respond to these events. When first asked about this issue shortly after the arrest warrant had been announced, the Foreign Minister Julie Bishop deflected the question saying that PNG was “family” and noting that this would not impact on the aid program (Walton and Howes, 2014). It took an international NGO’s sensational investigation to finally elicit a public response to political corruption from Australian policymakers. In 2015, a year after an arrest warrant was issued for O’Neill’s arrest, Global Witness caught PNG lawyers explaining how corrupt funds were channeled into Australia. This story was broken by an Australian television station (SBS) and newspaper group (Fairfax), forcing Australian Foreign Minister Julie Bishop to respond, saying: We take very seriously allegations that the proceeds of crime in PNG and the proceeds of corruption can be laundered in Australia. . .We are working closely with PNG to ensure Australia is not a safe haven for the proceeds of corruption. Garnaut, McKenzie, & Baker, 2015.

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While it took a very public expose´ to get the minister to respond, Australian governments have not always been this shy to talk about corruption in PNG and the Pacific. Indeed, Bishop’s reluctance to speak out against corruption in PNG is a far cry from her Liberal party predecessor. In 2007, Australian Liberal Foreign Minister Alexander Downer arguably went too far and harmed Australia’s relationship with its Pacific neighbors including PNG by openly calling their political leaders corrupt (AAP, 2007). Downer’s response was a part of a more concerted effort by the then coalition government to address corruption in the Pacific region (including PNG). Such bold discussion about corruption is unimaginable now. What has changed?. Australia has quietened down on its anticorruption retorts due to its declining political leverage. PNG’s GDP grew by 9.9 percent in 2015 (Asian Development Bank, 2016). Even though this represents a significant downgrading from earlier estimates, 21 percent from the Asian Development Bank (Asian Development Bank, 2015; Brennan, 2015), it still means that PNG was one of the faster-growing economies in the world. With fluctuating but recently strong revenue growth due to a resource boom, PNG is economically less reliant on Australian aid. Indeed, at the time of PNG’s independence, Australian aid represented 40 percent of PNG’s government budget; in 2015, it represented around only 8 percent (Department of Foreign Affairs and Trade, 2015a). This is despite the fact that Australia remains PNG’s largest bilateral aid donor. Australia is further restrained in its response to political corruption in PNG due to a bilateral agreement to house Australian-bound refugees. In July 2013, on the back of mounting domestic criticism to the number of refugees arriving by sea to Australian shores, the Australian prime minister and leader of the Labor government Kevin Rudd, along with Prime Minister O’Neill, announced the Regional Resettlement Arrangement between Australia and Papua New Guinea. This policy became known as the “PNG solution.” This “solution” significantly expanded the role PNG’s Manus Island Regional Processing Centre played in responding to Australian-bound refugees. The policy means that “any unauthorized maritime arrival entering Australian waters will be liable for transfer to Papua New Guinea (in the first instance, Manus Island) for processing and resettlement in Papua New Guinea and in any other participating regional, including Pacific Island, states” (Department of Foreign Affairs and Trade, 2013). The policy revived a previous agreement between PNG and Australia, which was introduced under the coalition government in the early 2000 s but significantly scaled back when Rudd was elected prime minister in 2007. The deal has given PNG strong leverage over Australia given that the influx of refugees into Australia is a hot domestic political issue. Australians vote for political parties that will stem the flow of refugee boats into the country (Donoughue, Ford, & Blumer, 2016). One national poll found that 71 percent of voters supported boats carrying asylum seekers be turned back from entering Australian waters (Flitton, 2014). If PNG was to pull its support, the Australian government would likely face a domestic backlash from voters. Given this domestic concern, the Manus detention center has become a key part of Australia’s inhumane, yet

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politically popular, immigration policy. In agreeing to house Australian-bound refugees on Manus, Australia has become significantly indebted to PNG politicians. PNG elites know they have good leverage over the country’s ex-colonial master. This is exemplified by O’Neill’s declaration that he would reclassify foreign advisors as of January 1, 2016. Australia has advisors in numerous governmental departments, and, at the time, O’Neill’s threat was a shot across of the bow of the Australian aid program. By December 31, 2015, the O’Neill government had removed 15 advisor positions. One long-time commentator on PNG, Paul Barker, suggested the move would result in less accountability in government; he suggested this was the real reason for the decision (ABC News, 2016). However, officially, O’Neill explained the decision in terms of protecting PNG’s sovereignty and improving efficiencies: As a developing country we don’t want handouts, we don’t want Australian taxpayer money wasted and we don’t want boomerang aid [money from the aid program that ends up back in Australia through consultancy fees for Australians and Australian businesses] (ABC News, 2015)

19.5

International and local responses

In the absence of response from international donors Australia in particular other external actors have helped to shine a light on political corruption in PNG. Global Witness’ expose´ of two lawyers describing how to launder corrupt monies resulted in the PNG Law Society committing to appointing an independent inspector to investigate the law firm involved (Global Witness, 2015). It has long been known that lawyers have been engaged in this type of behavior in PNG, but this expose´ helped spur this peak body into action. Whether the investigation leads to meaningful sanctions is yet to be seen, but it is a sign that local responses can be significantly shaped by external actors who are willing to take risks and expose high-level political corruption. There have also been significant responses to corruption scandals by other local actors. PNG’s burgeoning “middleclass” (Cox, 2014) are becoming increasingly outspoken about corruption. The spread of mobile phones and internet connectivity, accessed though rapidly spreading smart phone technology, has allowed Papua New Guineans to share information about, and form alliances against, corruption like never before. In some instances outrage over corruption on social media has helped fuel anticorruption protests, which have become a feature of urban life. For example, immediately after O’Neill defunded Taskforce Sweep and refused to present himself for questioning, urban-based Papua New Guineans went out on to the streets to protest. Papua New Guineans take risks in protesting against corruption. Anticorruption activists are threatened by the police, have had their protests forcibly broken up, and have been assaulted. The renowned anticorruption activist Noel Anjo Kolao has accused the then prime minister, Sir Michael Somare, of kidnaping and physically

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assaulting him in 2010 (Walton, 2016). It is little wonder then that some have expressed anger about Australia’s silence around these issues with Papua New Guineans risking life and limb on the streets (Walton and Howes 2015). Martyn Namorong, a Papua New Guinean social commentator, tweeted at the time of Sam Koim’s sacking: “next time DFAT wanna talk about good governance in PNG remind them of their silence now” (Walton and Howes 2014). So, some in PNG have framed Australia’s response to these threats to the rule of law as performative in nature and out of step with the desires of many Papua New Guineans to see meaningful responses to political corruption. Australia’s lack of response during attacks on ITFS, and its inactions over accusations of political corruption, has led some activists to accuse Australia of hypocrisy (Walton & Howes, 2014). Protests against O’Neill’s attacks on the rule of law and government corruption again flared in May 2016, when university students across the country united to boycott classes to protest the suspension of Fraud Squad Director Matthew Damaru a suspension overseen by the O’Neill government. This new round of protest saw the largest universities across the country display a rare show of unity in demanding that O’Neill resign. In a petition presented to the government the students demanded O’Neill explain the authorization of payments to Paraka Lawyers, his defunding of ITFS, and his refusal to submit to an arrest warrant. In a written response, after arguing that he had no case to answer, he asserted: “I wish to state clearly that I have no intention of either stepping aside or resigning from the Office of the Prime Minister” (Tlozek, 2016). While students faced down police and took their messages to provincial towns around the country, Australia was silent about the alleged corruption that was central to the students’ concerns. Rather it used its diplomatic muscle to lobby the PNG government on other matters. Media reports (e.g., Flitton, 2016) suggested that its bureaucrats were busy with what they saw as a far more important concern: the PNG Supreme Court’s decision to shut down the Manus detention center. In April 2016, PNG’s highest court ruled that the facility was illegal and unconstitutional. Subsequently, Australian immigration department officials were flying between Canberra and Port Moresby trying to persuade PNG government officials that the camp should stay open (Flitton, 2016). Once again, Australia preferenced its domestic political concerns (allowing Manus to stay open) over “counselling careful respect for law and order” (Flitton, 2016).

19.6

Conclusions

Australia has, like many other donor countries, made anticorruption a core part of its aid program. It broadcasts its intention to fight corruption in a range of public forums, including through its website, media events, and policy chapters. It promises to direct support to help address the “sense of injustice” corruption causes (Department of Foreign Affairs and Trade, 2014a). Due to PNG’s increased leverage over Australia, this rhetoric stands in contrast with its inability to meaningfully address political corruption.

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Australian responses to PNG’s numerous corruption scandals have, on a number of occasions, been shaped by third parties, rather than stated policy. For instance, Sam Koim’s “Cayman Islands speech” in 2012, and the publication of evidence of Australia harboring laundered funds from corrupt PNG elites (particularly in the Queensland real estate market), led to a shift in the nature of Australia’s cooperation with PNG law enforcement. Australia was moved by the threat to its domestic and international reputation, not by the actual nature of corruption in PNG corruption by elite politicians which has been considered a serious threat to the country for decades. So, this case study suggests that policy responses to elite political corruption are driven not by stated policy concerns per se but by political leverage and third parties. In particular, Australia’s broader diplomatic relationship with PNG has been a central part of its anticorruption efforts. This relationship has been shaped by the country’s growing economic and political independence, which has reduced Australia’s leverage in the country. These diplomatic relationships are matters of elite politics; they lie beyond the technical assistance, support for NGOs, and other programmatic approaches to fighting corruption supported by the Australian aid program. This suggests that evaluating Australia’s anticorruption efforts in PNG requires an examination of its broader diplomatic relationship with the country. It cannot only be determined by assessing the soundness of policy documents and programs. In turn, the PNG supreme court’s decision to close the Manus detention facility will likely significantly reshape Australia’s diplomatic response to corruption in PNG. While the Australian aid program may make some inroads in helping address the causes of corruption in PNG, it is poorly positioned to take the risks associated with fighting political corruption. Given this, it is important for other actors to step in to fill the void. In particular, the fight against political corruption in PNG relies upon local and international actors willing to risk the political fall-out of their actions and discourse.

References AAP. (2007). Downer Blasts Corrupt Pacific Leaders. Sydney Morning Herald. 11 May. Retrieved 8 August, 2014, from http://www.smh.com.au/news/National/Downer-blastscorrupt-Pacific-leaders/2007/08/08/1186530439769.html. A.B.C. News. (2015). Papua New Guinea PM Says Aid Money Wasted on ‘Middlemen’; Calls for Development Support Rethink. ABC News. 4 August. Retrieved 2 September, 2015, from http://www.abc.net.au/news/2015-08-03/papua-new-guinea-plans-rethink-ofdevelopment-support-delivery/6667642. A.B.C. News. (2016). PNG removes foreign adisors with 15 Australian Government aid positions targeted. ABC News 6 Jaunary. Retrieved 2 June, 2016, from http://www.abc.net. au/news/2016-01-06/png-removes-foreign-advisers/7070344. Asian Development Bank. (2015). Pacific Economic Monitor. (July) Mandaluyong City: Asian Development Bank.

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Asian Development Bank (2016). Asian Development Outlook 2016 Update: Meeting the Low-Carbon Growth Challenge. Manila: Asian Development Bank. AusAID (2009). Australian Agency for International Development Annual Report 08-09. Canberra: AusAID. Brennan, E. (2015). PNG: The World’s Biggest Grower in 2015? The Diplomat 14 January. Accessed: 6 October, 2016. Retrieved from: http://thediplomat.com/2015/01/png-theworlds-biggest-grower-in-2015/ Business Advantage PNG. (2014). Repercussions from ‘Parakagate’ Anti-Corruption Investigation Continue. Business Advantage. 27 June. Accessed: 6 October, 2016. Retrieved from: http://www.businessadvantagepng.com/repercussions-from-parakagateanti-corruption-investigation-continue/ Cox, J. (2014). ‘Grassroots’, ‘Elites’ and the New ‘Working Class’ of Papua New Guinea. SSGM In Brief. 2014/6. Canberra: Australian National Univesity. Department of Foreign Affairs and Trade. (2013). Regional Resettlement Arrangement between Australia and Papua New Guinea. DFAT Webstite. 19 July. Accessed: 22 September. Retrieved from: http://dfat.gov.au/geo/papua-new-guinea/pages/regionalresettlement-arrangement-between-australia-and-papua-new-guinea.aspx. Department of Foreign Affairs and Trade. (2014a). The 2014-15 Development Assistance Budget: A Summary. DFAT Website. Retrieved 11 August, 2014, from: http://dfat.gov. au/about-us/corporate/portfolio-budget-statements/Documents/2014-15-developmentassistance-budget-a-summary.docx. Department of Foreign Affairs and Trade. (2014b) Australian Aid: Promoting Prosperity, Reducing Poverty, Enhancing Stability. June: Commonwealth of Australia, DFAT. Department of Foreign Affairs and Trade. (2015a) Australian Aid to Papua New Guinea. DFAT Website. October, retrieved 25 May, 2015, from http://dfat.gov.au/about-us/publications/Documents/aid-fact-sheet-papua-new-guinea.pdf. Department of Foreign Affairs and Trade. (2015b). Aid Investment Plan Papua New Guinea: 2015-16 to 2017-18. DFAT Website. 30 September. Accessed: 22 September, 2016. Retrieved from: http://dfat.gov.au/about-us/publications/Pages/aid-investment-plan-aippapua-new-guinea-2015-16-to-2017-18.aspx. Department of Foreign Affairs and Trade (2016). Australian Aid Budget Summary 20162017. Canberra: Australian Government. Donoughue, P., Ford, M., & Blumer, C. (2016). Election 2016: 10 Things Vote Compass Reveals About Voters’ Views on Immigration. ABC News. 9 June. Accessed: 22 September, 2016. Retrieved from: http://www.abc.net.au/news/2016-06-09/election2016-vote-compass-asylum-seekers-immmigration/7493064. Elks, S. (2013). Police Seize Assets of PNG’s Most Wanted Man Eremas Wartoto. The Australian, 14 May. Accessed: 23 September, 2016. Retrieved from: http://www.theaustralian.com.au/news/nation/police-seize-assets-of-pngs-most-wanted-man-eremas-wartoto/ story-e6frg6nf-1226641918552. FATF and APG (2015). Anti-Money Laundering and Counter-Terrorist Financing Measures: Australia. Fourth Round Mutual Evaluation Report Paris and Sydney: FATF and APG. Flitton, D. (2014). Asylum Seeker Boat Turn-Backs Supported by 71 Per Cent in Poll. Sydney Morning Herald, 4 June. Accessed: 22 September, 2016. Retrieved from: http:// www.smh.com.au/federal-politics/political-news/asylum-seeker-boat-turnbacks-supportedby-71-per-cent-in-poll-20140603-39h2a.html. Flitton, D. (2016) Neighbourly advice no help to PNG. 29 May. Retrieved 2 June. From: http://www.theage.com.au/comment/neighbourly-advice-no-help-to-png-20160523-gp23eu. html#ixzz4AIc6XiAD.

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Fox, L. (2016). Former PNG PM Somare Named as Recipient in Singapore Money Laundering Case. ABC News, September 2. Accessed: September 19. Retrieved from: http://www.abc. net.au/news/2016-09-02/former-png-pm-somare-implicated-in-singapore-money-launderingc/7810080. Garnaut, J., McKenzie, N., & Baker, R. (2015). Julie Bishop Vows to Get Tough on Papua New Guinea Money Laundering. Canberra Times. 1 July. Accessed: 23 September, 2016. Retrieved from: http://www.canberratimes.com.au/national/julie-bishop-vows-to-gettough-on-papua-new-guinea-money-laundering-20150630-gi24ft. Howes, S. (2015). Australian Aid: The way we were. Devpolicy Blog. 12 May. Retrieved 2 September, 2015, from http://devpolicy.org/australian-aid-the-way-we-were/. Howes, S. (2016) Scaled Down. The Last of the Aid Cuts. Devpolicy Blog. 4 May. Retrieved 28 May, 2016, from http://devpolicy.org/scaled-last-aid-cuts-20160504/. Hughes, H. (2004). Can Papua New Guinea Come Back from the Brink? Sydney: Centre for Independent Studies. Jones, A. (2014). Corruption Amongst Government Ministers in Papua New Guinea: Leadership Tribunals and Their Impact on Re-Election. International IDEA (unpublished). Koim, S. (2013). Turning the Tide: Corruption and Money Laundering in PNG. Griffith Journal of Law & Human Dignity, 1(2), 240 253. Koim, S., Walton, G., & Betteridge, A. (2014). The Perilous State of Taskforce Sweep: An Interview with Sam Koim. Devpolicy Blog 19 December. Accessed: 7 May 2015. Retrieved from: http://devpolicy.org/the-perilous-state-of-taskforce-sweep-an-interviewwith-sam-koim-20141219-2/. Mason, C. (2012). PNG Investigator Claims Australia ‘Cayman Islands’ of Pacific MoneyLaundering. Pacific Scoop. 13 November. Retrieved 2 June, 2015, http://pacific.scoop.co. nz/2012/11/png-investigator-claims-australia-cayman-is-of-pacific-money-laundering/. OECD Working Group on Bribery. (2012). Phase 3 Report on Implementing the OECD AntiBribery Convention in Australia. (October) OECD. Pitts, M. (2002). Crime, Corruption and Capacity in Papua New Guinea. Canberra: Asia Pacific Press. Sharman, J.C. (2012). Chasing Kleptocrats’ Loot: Narrowing the Effectiveness Gap. U4. Retrieved 13 January 2015, from: http://www.u4.no/publications/chasing-kleptocratsloot-narrowing-the-effectiveness-gap/. The Government of Papua New Guinea, & The Government of Australia. (2012). Joint Statement on Zero Tolerance to Fraud in Australia’s Aid Program to PNG. Port Moresby. Tlozek, E. (2016) Papua New Guinean PM Peter O’Neill tells Protesting Students he will not Resign. ABC News. 23 May. Retrieved 1 June, 2016. from: http://www.abc.net.au/news/ 2016-05-23/png-pms-tells-protesting-students-he-will-not-resign/7438986. Transparency International (2015). Corruption Perceptions Index 2015. Berlin: Transparency International, International Secretariat. Transparency International Papua New Guinea (2015). Public Opinion Survey in Five Provinces on Levels & Consequences of Corruption in Papua New Guinea & State & Society Response. Port Moresby: TI PNG. Walton, G. (2013). Anti-Corruption on the Front Line: An Interview with Sam Koim. Devpolicy Blog. 11 June. Retrieved 25 June, 2015, from http://devpolicy.org/anti-corruption-on-the-front-line-an-interview-with-sam-koim-20130611/. Walton, G., & Howes, S. (2014). Using the C-Word: Australian Anti-Corruption Policy in Papua New Guinea. Devpolicy Blog. 22 August. Retrieved 2 September, 2015, from

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http://devpolicy.org/using-the-c-word-australian-anti-corruption-policy-in-papua-newguinea-20140822/. Walton, G. W. (2012). Comparing Local and International Perspectives on Corruption in Papua New Guinea. (PhD). Melbourne: The University of Melbourne. Walton, G.W. (2014). Handle with Care: Results from the 2014 Corruption Perceptions Index. Devpolicy Blog. 3 December. Accessed: 5 October, 2016. Retrieved from: http:// devpolicy.org/in-brief/handle-with-care-results-from-the-2014-corruption-perceptionsindex-20141203/. Walton, G.W. (2016). The (Soft) Power and the Passion: Challenges to Anti-Corruption Activism in PNG. Devpolicy Blog. 19 February. Accessed: 5 October, 2016. Retrieved from: http://devpolicy.org/the-soft-power-and-the-passion-challenges-to-anti-corruptionactivism-in-png-20160219/. Global Witness. (2015). Briefing. Global Witness. 2 July. Retrieved 2 September, 2015, from https://www.globalwitness.org/campaigns/corruption-and-money-laundering/png-lawyers/. World Bank (2015) Worldwide Governance Indictors. World Bank. Retrieved 1 June, 2016, from http://info.worldbank.org/governance/wgi/index.aspx.

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Jane Ellis* International Bar Association, London, United Kingdom

20.1

Introduction

In 2008, global giant Siemens AG reached legal settlements with authorities in the United Statesa and Germanyb in which it agreed to pay to the authorities a total of US$1.4 billion in fines. Siemens was fined for paying more than US$1.4 billion in bribes to government officials to secure business contracts in different countries around the world, a pattern of bribery described by the US Department of Justice (DOJ) as “unprecedented in scale and geographic reach.”a Siemens’ conduct contravened the anti-bribery laws of both the United States and Germany even though the payment of bribes occurred in other countries. How can the laws of one country or more apply to you even when you do business in another country? What was the genesis of anticorruption laws that extend beyond domestic boundaries? What does it mean for those businesses that do operate more than one country? And what other international developments are likely to apply to how companies go about their business?. This chapter first briefly explores the history of international anticorruption conventions and domestic laws that have extraterritorial application. It then goes on to consider what it means for business that either operates or wants to operate in other countries. In doing so, it briefly explores the tension between a legally robust compliance program and business ethics. It finishes with a brief consideration of another international development of which business needs to be aware and for which it needs to be prepared.



Jane Ellis is Director, Legal Policy & Research Unit, International Bar Association in London, England. Prior to joining the IBA, Jane was based in Sydney, Australia, and had a law firm/consulting business through which she advised companies on corporate governance, compliance, and business ethics with a focus on anticorruption. Jane was formerly a board member of the Australian chapter of Transparency International and a partner in the competition practice of Ashurst in Sydney. The views expressed in this chapter are those of the author alone and do not reflect the position of the IBA. a https://www.justice.gov/archive/opa/pr/2008/December/08-crm-1105.html. b http://www.fcpablog.com/blog/2007/10/5/siemens-settles-corruption-and-tax-cases-with-german-prosecu. html. The Changing Face of Corruption in the Asia Pacific. DOI: http://dx.doi.org/10.1016/B978-0-08-101109-6.00020-4 Copyright © 2017 Jane Ellis. Published by Elsevier Ltd. All rights reserved.

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Background—where it all began

The origins of domestic laws with such unprecedented reach go back quite a few years to the United States in the mid-1970s. The United States was a country in crisis. It had experienced Watergate, which resulted in the resignation of Richard Nixon as president, and a significant erosion of trust in the political administration. The Watergate investigations found evidence of secret and illegal domestic political contributions made by American companies. The Securities Exchange Commission (SEC) became interested in these secret contributions when it became evident that such payments violated federal securities laws. The SEC extended its investigations beyond the shores of the United States to payments made in other countries. These investigations revealed further securities violations by some of the United States’ most well-known and, in some cases, iconic companies—such as Gulf Oil, Mobil Oil, and Lockheed Martin—all of which were found to have paid political contributions and bribes to foreign government officials to secure contracts. Many of these payments were substantial and they had not been reported to shareholders. What was of particular concern to Congress was that one of these companies—Lockheed—had been the recipient of a US$250 million federal loan guarantee to help it avoid bankruptcy. Such payments most likely breached the local laws of the countries in which they were paid. However, there was no prohibition in the United States on US companies paying bribes or any other form of secret payment in other countries. It was recognized that corrupt payments to foreign government officials or politicians were not unique to US business. However, the US Congress believed it was its responsibility to provide global leadership and address the problem. In the debates that followed, the US Congress considered various options available to it, including imposing mandatory disclosure requirements of all and any payments made by US companies, regardless of where they were made. In the end, the change in administration from that of Gerald Ford to Jimmy Carter in January 1977 determined the outcome of the debates, and the Foreign Corrupt Practices Act (FCPA) was passed in late 1977.c In brief, the FCPA prohibits any person or company that has a connection with the United States from paying a bribe to a foreign public official in order to secure a business advantage. The lobbying by US business in the lead up to and passing of the FCPA was fierce. But it did not stop once the FCPA was passed and in force. US business was concerned that the FCPA created hurdles for it that were not experienced by its competitors. It argued that a “level playing field” was required if US companies were to be competitive. It was the threat of prosecution, however, that was of particular concern to US companies. The FCPA, although in force since 1977, was seldom prosecuted or enforced until relatively recently.

c

For a detailed history of the FCPA, see Koehler (2012).

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299

Next step—exporting the foreign bribery prohibition

It was possible to achieve a level playing field only if the FCPA was revoked, or if other countries (where competitors to US business had headquarters) introduced comparable legislation. Revoking a law that prohibits bribery is somewhat problematic. As such, the focus turned to the latter option. Up to and for most of the 1990s, corruption was a topic that generally was excluded from any agenda, business or otherwise. Despite the FCPA, paying bribes was regarded as a price that had to be paid by business, including US companies, to invest in some countries and/or to facilitate development. While bribery was most often an offense under local laws, bribes paid in other countries by OECD-based businesses to secure business were often treated as legitimate business expenses and indeed often were claimed as tax deductions. It was in this context that negotiations for the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (OECD Anti-Bribery Convention), encouraged by the US administration and dedicated individuals within the OECD, commenced in 1989. A further significant development occurred in 1993. A former World Bank official, Peter Eigen, together with nine allies, set up a small organization to tackle corruption. The name of the organization was, and is, Transparency International. The objective of Transparency International is to have a world in which the workings of government, business, and civil society and the daily lives of people are free of corruption. From very small beginnings, Transparency International is now one of the most highly regarded anticorruption NGO in the world with a presence in more than 100 countries and significant political influence.d A further catalyst was James Wolfensohn, then president of the World Bank, who publicly acknowledged in 1996 that “we need to deal with the cancer of corruption.”e It brought corruption out from the “domestic closet” of international organizations into the realm of public international debate. The increasing ventilation of corruption issues made it equally increasingly difficult for governments to avoid their responsibilities. As such, in 1997 after 10 years of negotiation, the OECD Anti-Bribery Convention was signed by all OECD member states (plus seven others), and it came into force in 1999.f In brief, the OECD AntiBribery Convention requires signatories to introduce lawsg that, among other things, G

d

prohibit the providing or offering to provide a benefit or undue advantage to a foreign public official, either directly or through an intermediary, with the intention of influencing the

For information on TI and the work it does, see: http://www.transparency.org/. See Bhargava (2006). f For details around the negotiation and signing of the OECD Anti-Bribery Convention, see: http://www. oecd.org/corruption/oecdantibriberyconvention.htm. A copy of the OECD Anti-Bribery Convention can be found at: http://www.oecd.org/daf/anti-bribery/ConvCombatBribery_ENG.pdf. g Australia signed the OECD Anti-Bribery Convention in 1997 and implemented its obligations under that Convention in 1999. The prohibition on bribing foreign public officials can be found at Division 70, Criminal Code Act 1995 (Cth). e

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decision-making of the foreign public official to secure an improper business advantageh (prohibited conduct); make prohibited conduct as well as any conduct that constitutes complicity, including incitement, aiding, and abetting or authorization of prohibited conduct, a criminal offense;i extend liability for prohibited conduct to legal persons.j

The OECD Anti-Bribery Convention is quite targeted. It is aimed at business and the prohibition is quite specific.k These provisions are not offended if a payment made is legal under local laws or if a payment constitutes a “facilitation payment.”l It is important to note, however, that there has been a considerable push against retaining the “facilitation payment” exceptionm and the extraterritorial antibribery laws of most countries no longer make any such exception. A few years later, in 2002, the United Nations Convention Against Corruption (UNCAC) was signed by UN member states. It came into force in 2005.n Unlike the OECD Anti-Bribery Convention, the remit of UNCAC is very broad. In addition to provisions applying specifically to the private sector, it covers the public sector, preventative measures, enforcement, technical assistance, and asset recovery, to name but a few. Although the implementation of UNCAC is slow, the fact that it has been agreed has gone some way to raising awareness of the importance of the anticorruption initiatives. In addition to the OECD Anti-Bribery Convention and UNCAC, there are a number of regional anticorruption conventions and initiatives that have been agreed and implemented.o Clearly, there was some momentum gathering here, but penetration of the antibribery laws into business psyche still was very slow. And, prosecutions were few and far between. So, what changed? A significant change was prompted by the events of September 11, 2001. Intelligence agencies intensified their investigations of questionable financial transactions. The aim of these intensified investigations was to identify transactions h

Article 1.1, OECD Anti-Bribery Convention. Article 1.2, OECD Anti-Bribery Convention. j Article 2, OECD Anti-Bribery Convention. k For further information as to the role of the OECD Anti-Bribery Convention, see the Annual Report of the OECD Working Group 2014, which contains message from the current and immediate past chairs of the Working Group: http://www.oecd.org/daf/anti-bribery/WGB-AB-AnnRep-2014-EN.pdf. l Paragraphs 8 and 9, Article 1, Commentaries to the OECD Anti-Bribery Convention. “Facilitation payment” is not clearly defined but is generally understood to mean a payment for a routine government action to which you might otherwise be entitled. An example might be having paperwork stamped once all approvals for a particular transaction have been secured. m OECD Anti-Bribery Convention signatories are encouraged to regularly review their policies and approach to facilitation payments: see Article VI, Recommendation of the Council for Combating Bribery of Foreign Public Officials in International Business Transactions, adopted 26 November 2009 n For further information on the UNCAC, see https://www.unodc.org/unodc/en/treaties/CAC/. The UNODC is responsible for administering, and overseeing signatories implement of, the UNCAC. o Details of and links to the regional anticorruption instruments that have been agreed, including when the instruments were adopted and came into force, can be found at: http://www.oecd.org/cleangovbiz/ internationalconventions.htm. i

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carried out by potential terrorists. In doing so, the agencies also identified questionable transactions of another nature—that is, the transfer of funds for corrupt purposes. This information was passed on to the US DOJ and the SEC, which then conducted their own investigations of the various transactions and companies involved in them. In short, transgressions became easier to identify. Another thing that changed was the means by which the DOJ and SEC enforced actions against companies. Traditionally, in the United States, companies suspected of wrongdoing were prosecuted criminally or civilly. From 2004, however, FCPA enforcement has largely been through various kinds of settlements negotiated between prosecuting authorities and companies.p These settlements are called deferred prosecution agreementsq (DPAs) and nonprosecution agreementsr (NPAs).s Using DPAs and NPAs meant the DOJ and SEC no longer had to secure sufficient evidence to satisfy a court in criminal proceedings of wrongdoing. This has made its enforcements easier, particularly as companies generally agree to DPAs or NPAs as a means of minimizing reputational damage and avoiding protracted criminal court actions. It also means enforcement by the DOJ and SEC has increased significantly, with the previously mentioned Siemens case being the biggest “scalp” to date, in terms of penalties imposed. Other companies that have agreed to DPAs or NPAs with the DOJ and SEC for amounts in the US$100s of millions include Total, KBR/Halliburton, Eni, Alstom, BAE, Alcoa, and JGC Corp. Australian companies are not immune from investigations or prosecutions by US regulatory authorities. For example, BHP Billiton was subject to lengthy, extensive, and very expensive investigations by both the DOJ and the SEC, which culminated in the SEC imposing a penalty of US$25 million on BHP Billiton in May 2015.t This all had a profound impact on raising awareness of bribery laws that have extraterritorial reach—most significantly within the international business community. As may be apparent, many of the companies listed are not US-based companies: Total (France), Eni (Italy), JGC Corp (Japan). The US authorities were enforcing US law not just against US companies but also against non-US companies.

p

For a brief background to this change in approach, see: http://www.lexology.com/library/detail.aspx? g54f0cc529-bfdb-49c3-ac8d-e989e87fc84a. q A DPA is technically filed with a court but the arrangements are negotiated between the DOJ and the company. Essentially, the DOJ agrees to defer any prosecution for a period of time during which the company complies with the requirements agreed. If at the end of that period the DOJ is satisfied with the company’s conduct, it dismisses the criminal charges filed. r A NPA is a privately negotiated agreement between the DOJ and the company whereby the DOJ agrees not to prosecute the company if the company acknowledges responsibility for its conduct and agrees to various undertakings. A NPA is not filed in court. s For a quick overview of the FCPA and the use of DPAs and NPAs when prosecuting alleged contraventions of it, see: http://fcpaprofessor.com/fcpa-101/. t See: https://www.sec.gov/news/pressrelease/2015-93.html. The DOJ ultimately declined to take action: http://www.bhpbilliton.com/investors/news/BHP-Billiton-Announces-End-of-US-Investigations.

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The most significant catalyst was the introduction by the UK government of the Bribery Act in 2010u (UK Bribery Act). The UK Bribery Act G

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prohibits bribery in both the public and private sectorsv makes no exception for facilitation payments specifically prohibits the bribery of foreign public officialsw most radically introduced an offense of a passive nature—a company that conducts part of its business in the United Kingdom can contravene the UK Bribery Act if it fails to prevent bribery.x

For example, in relation to the latter point, if a UK company (Company A) does not take all reasonable steps to ensure a company in its supply chain (Company B) complies with the UK Bribery Act, and Company B pays a bribe to secure business for Company A, then Company A has committed an offense in the United Kingdom. The defense available to Company A in these circumstances is if it had in place “adequate procedures” (this is discussed in more detail in the following).y The UK business community’s reaction to the introduction of this law was immense; the consequences of UK companies implementing measures to ensure compliance with the law extended far beyond the shores of the United Kingdom. For example, Australian-based companies were confronted with contracts that contained lengthy anti-bribery and anticorruption warranties and indemnities and clauses obliging them to comply with anti-bribery laws. This was despite the fact that, until recently, prosecutions of contraventions of the UK Bribery Act and its predecessor had been minimal. This is changing, primarily because the ability of the UK Serious Fraud Office (SFO) to prosecute contraventions of this law was further strengthened in 2013 when the UK Parliament passed legislation giving it, among others, the authority to use DPAs.z The SFO agreed its first DPA in November 2015 with Standard Bank Plc. Under that DPA, Standard Bank agreed that it failed to implement adequate procedures and that its subsidiary in Tanzania contravened anti-bribery laws as a consequence.aa The use of DPAs and NPAs in criminal proceedings is not a practice that is in use in Australia. However, during 2016 the Australian government undertook consultations as to the advantages and disadvantages of providing the relevant regulatory authorities with the power to do so.bb Settlements are frequently negotiated in civil proceedings with regulators such as the Australian Securities and Investment u

The UK Bribery Act came into force in 2011. Section 1, UK Bribery Act. w Section 6, UK Bribery Act. x Section 7, UK Bribery Act. y Section 7, UK Bribery Act. z DPAs were introduced in the United Kingdom through the Crime and Courts Act 2013. The SFO and the Director of Public Prosecutions published a joint code of practice on the use of DPAs in February 2014. See: https://www.sfo.gov.uk/2014/02/14/deferred-prosecution-agreements-new-guidance-prosecutors/. aa See: https://www.sfo.gov.uk/2015/11/30/sfo-agrees-first-uk-dpa-with-standard-bank/. bb On March 16, 2016, the Minister for Justice released a public consultation paper on a possible Australian scheme for deferred prosecution agreements (DPAs) for serious corporate crime. See: https://www.ag.gov.au/Consultations/Pages/Deferred-prosecution-agreements-public-consultation.aspx. The Australian government is now considering the responses to the consultation paper. v

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Commission and the Australian Competition and Consumer Commission (ACCC). However, their use has been the subject of criticism in some judicial decisions.cc This increased scrutiny of companies’ conduct and increasing enforcement of corporate misconduct means companies need to manage their corruption risk, among others. The question is how.

20.4

What does this mean for business?

Codes of conduct, company policies, and compliance programs are critical. Together these inform, provide guidance to, or at best encourage a change in attitude of employees as to what they can and cannot do. This is particularly important in industries or sectors that are highly regulated or for companies that operate in high-risk environments. That is, compliance programs are practical tools. Most companies have in place policies and compliance programs specifying their expectations of their employees in the areas such as workplace health and safety, discrimination, and competition and consumer engagement. Policies and compliance programs on anti-bribery and anticorruption must now be included.

20.4.1 Compliance requirements Authorities responsible for monitoring compliance with regulatory frameworks, such as anticorruption laws, have long insisted on the importance of companies having in place policies and compliance programs.dd The expectation is that companies develop the policies and programs and roll them out regularly to all those employees who are most likely to be at risk. Essentially, authorities when investigating cases have been concerned by what they consider to be “corporate cultures” that either expressly or implicitly endorse certain misconduct.ee So, for example, the DOJ and/or the SEC insist on including in the settlements reached with companies, whose conduct they consider to be most egregious, a requirement that the companies develop and implement robust anticorruption compliance programs. The development and implementation of these cc

See, for example, ASIC v Ingleby [2013] VSCA 49 in which the Victorian Court of Appeal reinstated the penalty agreed between ASIC and Paul Ingleby, the former Chief Financial Officer of AWB Limited. In doing so, however, the Court of Appeal criticized, among other things, the lack of transparency in the settlement negotiated and the discrepancy between the available evidence and the agreed statement of facts that formed the basis of the settlement negotiated: http://www.austlii.edu.au/au/ cases/vic/VSCA/2013/49.html. dd The US DOJ took this into consideration in its prosecution of Siemens. In the press release setting out the settlement it reached with Siemens, the DOJ noted that “According to court documents, beginning in the mid-1990s, Siemens AG engaged in systematic efforts to falsify its corporate books and records and knowingly failed to implement and circumvent existing internal controls”. See: https://www.justice. gov/archive/opa/pr/2008/December/08-crm-1105.html. ee Australia’s Criminal Code Act 1995 (Cth) makes express reference to corporate culture in provisions relevant to corporate criminal responsibility. See Division 12, in particular section 12.3.

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programs can be subject to independent monitoring and review, usually for the duration of the settlement agreed. Similarly, in the sphere of competition law, the ACCC, Australia’s competition authority and the Federal Court of Australia often require companies found to have contravened competition or consumer protection provisions to G

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develop and implement relevant policies and compliance programs toward improving their “culture of compliance,” if these are currently lacking in a company; or revise and strengthen an existing program and implement it with more frequency.ff

Such programs too are usually required to be subject to independent monitoring and review. To ensure compliance with the OECD Anti-Bribery Convention,gg countries are expected to encourage companies to develop and adopt adequate internal controls, ethics, and compliance programs or measures for the purpose of preventing and detecting foreign bribery, taking into account, among other things, the Good Practice Guidance on Internal Controls, Ethics, and Compliancehh (Guidance). Further, those companies that are subject to the Bribery Act can only avail themselves of a defense to the passive offense of “failing to prevent a bribe” if they have in place “adequate procedures.”ii Adequate procedures comprise G

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procedures proportionate to the complexity of the organization’s activities; top-level commitment; risk assessment of the potential exposure; due diligence undertaken that is proportionate and risk-based; communication of the procedures throughout the organization; and monitoring and review of compliance with the procedures.

The guidance, the “adequate procedures” requirements of the Bribery Act, and the requirements of regulatory authorities all adopt broadly similar principles; the focus is on internal controls, compliance programs, and training. While these look straightforward enough, many companies still fall short of meeting these requirements. For a compliance program to work, it needs to be the first line of defense, not the last. That is, it needs to be an integral part of business decision-making. It is only then that operating in accordance with compliance requirements is seen as how a company does business, not as a bottleneck or blockage or adjunct to business decisions. This requires a company to thoroughly understand how it, its senior management team, and the rest of the business operate as the compliance program is developed and implemented. ff

See, for example, ACCC v Harvey Norman Holdings Ltd [2011] FCA 1407; ACCC v SIP Aust Pty Ltd [1999] FCA 858 and ACCC v Nissan Motor Co (Aust) Pty Ltd (1998) ATPR 41-660. gg Paragraph X, Recommendation of the Council for Further Combating Bribery of Foreign Public Officials in International Business Transactions, Adopted by the Council on November 2009. See: http://www.oecd.org/daf/anti-bribery/ConvCombatBribery_ENG.pdf. hh See: http://www.oecd.org/investment/anti-bribery/anti-briberyconvention/44884389.pdf. ii For more information on what constitutes adequate procedures, see the Guidance on the Bribery Act issued by the UK Ministry of Justice: https://www.gov.uk/government/publications/bribery-act-2010-guidance.

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The process that needs to be undertaken to develop and implement such policies and programs, therefore, can be considerable. For a policy and compliance program to meet regulatory requirements, it is not enough to adopt one from “off the shelf.” Although compliance programs, broadly speaking, often paraphrase the legal requirements to which a business must adhere, they must also mirror the feel and culture of the company to which they apply. So, for example, a company in the telecommunications industry is likely to have an anticorruption compliance program that reads differently to that of a company in the shipping industry. Although the law that the compliance programs paraphrase is the same—for example, you are prohibited from paying bribes to secure a business transaction—the areas in which such risks are likely to arise will be different in each industry. As such, it takes significant time and resources to undertake a risk analysis to identify the breadth of the program required and the areas of the company most likely to be at risk undertake the internal reviews necessary to identify what a company needs to address in its policy and compliance program identify who must comply with the policy and compliance program, for example, employees and contractors may be obvious but what about regular suppliers and casual staff? draft the policy and compliance program to address those needs run the policy and compliance program by the relevant board committees (e.g., risk committee), senior management teams, heads of department (e.g., marketing department), to ensure, first, that the materials cover matters relevant to that particular part of the company and, second, there is buy-in on the policy and program finalize the policy and compliance program and announce its implementation across the company develop a training program, focusing on those employees, contractors, suppliers, etc. most at risk, for example, sales people in high-risk jurisdictions implement training across the company with priority given to those identified as being most at risk regularly review the policy and compliance program for relevance and update them as required conduct regular training across the organization.

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This last point is a critical one. Often there is a view that the senior management team and the board are immune from training requirements or, conversely, it can be assumed that they know their obligations. One memorable comment that has been seen is, “when the big people get in trouble, the little people get ethics training!” But any such training must be properly targeted with the objective of ensuring that a “culture of compliance” is embedded across an organization. Such a “culture of compliance” should be the basis upon which any company conducts its business. In 2014, an organization, called the goodcorporation, released a report called Combating Corruption: Are businesses doing enough?jj The goodcorporation conducted a survey of more than 3,000 anticorruption controls implemented by companies and found that “businesses are still struggling to implement the procedures necessary to prevent corruption.”kk jj

The report can be accessed at: http://www.goodcorporation.com/combating-corruption.pdf. See: http://www.goodcorporation.com/news/anti-corruption-white-paper-published-by-goodcorporation/.

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The goodcorporation’s analysis found that more than half of businesses’ compliance programs required further work and more than a third required significant work. Further, it found there is a considerable gap in the compliance programs of high- and low-performing businesses: the higher the performer, the better the compliance program. Certainly, the companies that have greater brand recognition generally have a more sophisticated understanding of the bribery and corruption risks that they are likely to experience. The implications for smaller businesses seeking to operate overseas, however, are significant. Many do not have the leverage of larger, well-known international companies to push back on corrupt demands for bribes or complain of having insufficient resources to implement a rigorous anticorruption program. In addition, in some cases, larger multinational companies may seek to push the risk of managing corrupt conduct onto smaller companies operating along the supply chain. Collective action can increase the ability of smaller companies to push back in these circumstances.ll Further, this is an area in which agencies such as Austrade actively seek to provide assistance.mm The practical reality, however, is that the implementation of anticorruption compliance programs to date tends to be more in response to an investigation or prosecution as opposed to a proactive adoption of good practice. Those businesses that have well-developed compliance programs and have taken a proactive approach may appreciate more clearly the need to avoid the experience. That is, a company’s brand is sufficiently well known for it to consider that the cost of developing, and implementing a compliance program is a good and necessary investment to manage reputational risk. More often, however, many companies remain reluctant to commit the resources to develop a necessary policy and compliance program unless they have experienced a “dawn raid,”nn an in-depth investigation or a prosecution for an alleged contravention of a law.oo A consequence of this reactionary approach is that the legal division of an organization tends to be allocated responsibility for the compliance program. This is not necessarily a bad thing. But, increasingly, there is a tendency to equate a company’s legally robust and rigorous anticorruption compliance program with ethical business. ll

Collective action is a collaborative and sustained process of cooperation among stakeholders toward achieving a common objective. For example, the Maritime Anti-Corruption Network (MACN) is a global network that was established in 2011 with the objective of working toward the vision of a maritime industry free of corruption that enables fair trade to the benefit of society at large. MACN collaborates with key stakeholders, including governments and international organizations, such as the United Nations Development Programme, to identify and mitigate the root causes of corruption in the maritime industry. See: http://www.maritime-acn.org/#home For more information about collective action generally, see: http://info.worldbank.org/etools/docs/antic/Whole_guide_Oct.pdf and http://www3.weforum. org/docs/IP/2015/PACI/WEF_PACI_Overview.pdf. mm For information on the tools Austrade makes available to businesses, see: http://www.austrade.gov.au/ Australian/Export/Guide-to-exporting/Legal-issues/Bribery-of-foreign-public-officials. nn An unannounced inspection by a regulatory authority, usually conducted prior to or at the beginning of business hours. Such inspections, or “raids,” cause significant disruption for business and can signal the start of protracted investigations, thereafter proceedings, potentially leading to fines, damages actions. oo This information is drawn from the author’s professional experience.

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Anticorruption compliance and business ethics are not the same. Taking a strict “compliance with the law” approach inculcates a “culture of compliance” but not necessarily a robust and ethical “corporate culture.” Indeed, if compliance programs are “owned” and led by a company’s legal team, then it tends to reinforce to a company’s employees that the company’s attitude to bribery and corruption is a legal one. That is, it does not form part of the broader ethical position taken by the company.pp A comprehensive policy and compliance program has many purposes relevant to a company’s operations and expectations of its employees. In addition, it should prescribe the level of research or due diligence an employee must conduct on any third party with whom it proposes to engage. And, it must make clear that anticorruption due diligence must be conducted in any potential acquisition, be it a company or an asset.

20.4.2 Due diligence and third parties A quick review of the settlements reached between the DOJ and various defendants indicates that intermediaries were used in some 70 percent of bribery and corruption investigations and prosecutions.qq That is, third parties have paid bribes or engaged in corrupt conduct when conducting business for other companies. Some companies engaging intermediaries often were completely aware that this conduct was occurring; indeed, they had engaged the intermediaries for that purpose. In other cases, companies deliberately turned a blind eye to the conduct of their intermediaries on the basis that what they didn’t know couldn’t hurt them.rr This never has been, and certainly is not, the case. The scope of various anti-bribery and anticorruption laws, and the expectations of the effectiveness of a company’s anticorruption policy and compliance program by regulators, means a company cannot avoid liability if a third party pays a bribe when doing business for that company. The only way a company can defend itself in these circumstances is if it can establish that (a) it conducted reasonable due diligence on the third party prior to engaging them, and (b) required each third party to conduct themselves in accordance with the company’s requirements and the law. That is, companies have to do some homework before they engage third parties. As a starting point, a company may wish to have a close look—a really close look— at what it does when it engages a third party: G

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What does the company want the third party to do? What is the third party going to do that the company cannot do itself? Why that third party? How was that third party selected? How is that third party to be paid and to what bank account? Where is that third party located and where are they going to undertake the company’s business? What do you actually know about that third party, for example, is it possible a government official or a relation of one has an interest in it?

This is a topic worthy of detailed exploration in its own right but is beyond the scope of this chapter. See https://www.justice.gov/criminal-fraud/related-enforcement-actions. rr For an analysis of the use of corrupt intermediaries in business transactions, see Lambsdorff (2013). qq

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Similar scrutiny needs to be used for those organizations operating in transitioning countries. For example, if an organization proposes to fund community-based projects, it will need to conduct similar due diligence to ensure the project is sound and is not, say, connected to political interests. This does not mean a company needs to be immobilized by due diligence. But it does mean ensuring a company has in place a basic due diligence framework that employees are obliged to follow before engaging a third party. So, for example, G

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the level of due diligence required will increase with the level of risk—while it is not necessary to overcook it, the level of due diligence undertaken needs to be reasonable and defensible given the risk. a company should set out a risk-based due diligence framework that it will follow, depending on whether the risk is low level, medium level, or high level and on the nature of the transaction, etc. So, for example, if a company is proposing to engage a business partner in Mongolia to secure certain government approvals, then the level of due diligence is likely to be considerably greater than engaging a business partner for a similar purpose in Canada. the agreement between the company and the third party must include anti-bribery/anticorruption provisions and a right for the company to conduct a compliance audit. there must be evidence that the company had addressed all red flags—the existence of a red flag does not automatically preclude a company from securing the services of the third party, but the company needs to be able to explain why it proceeded with a transaction despite the red flag if the question arises. due diligence must be ongoing—in many cases the corrupt conduct may arise a few months or a couple of years after the third party is first engaged.

Any cost-benefit analysis of due diligence by a company should consider not just the cost of the transaction or the cost of securing the services but the potential cost to the company if the third party engages in corrupt conduct that can be attributed to the company. Finally, companies should undertake due diligence on those third parties with which they have already contracted. In addition to satisfying any anticorruption requirements, it is a useful way of reviewing the agreements a company already has in place, for example, to satisfy itself of the validity of the agreements.

20.4.3 Due diligence and acquisitions Due diligence into third parties with which a company wants to contract is critical. Equally important, but usually far more difficult, is conducting due diligence by a company (A) into potential corruption risks of G

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another company (B) with which A wants to merge; or the assets of B which A proposes to acquire.

Again, in the past, there was the expectation that if A merged with B or acquired B’s assets unaware that they were “tainted” with corruption, this lack of knowledge would protect A from prosecution. What happened in the past, stayed in the past. This is no longer the case. Companies merging with other companies or acquiring

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the assets of other companies are expected to undertake a full due diligence into potential corrupt conduct that may underlie the operations of the target organization or assets. If such due diligence is not conducted, the acquiring company cannot rely on ignorance or “willful blindness” as a defense. The scope of the due diligence required will depend very much on a range of factors, such as G

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the nature of the business or assets being acquired the industry in which the business/assets operate the location of the company and/or the assets the extent to which red flags are discovered as any initial due diligence is conducted.

The issue that acquiring companies have to address in this context is what they should do if they find the company/asset they propose to acquire is tainted with corruption. There is no hard and fast rule here. However, the company must do something and that decision must be clearly recorded. So, for example, what does A do if the due diligence it conducts identifies that in one of the countries in which B operates, B bribed a government official to secure a right to operate. Does A decide G

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to brazen it out and proceed with the acquisition in the hope that no one will find out? to structure the deal such that a separate vehicle acquires the “tainted” part of B, again in the hope that there is sufficient separation such that A is protected from the taint? to walk away from the deal in its entirety? to negotiate with B so that A acquires B minus the “tainted” part of the business? to acquire B in its entirety but put in place a plan to “fix” the wrong? to engage with regulatory authorities to negotiate how best to proceed with the transaction?

While the first two options listed are not recommended, the remaining options— or variations of them—are all perfectly legitimate responses. What approach a company adopts in these circumstances will depend on the individual circumstances of the deal. It is in these cases that lawyers and other transactional professionals are best placed to provide guidance.

20.5

But wait, there’s more

Bribery and corruption now figure prominently in the risk priorities of companies with extensive international operations or otherwise generally have greater brand recognition. It is strongly recommended that other companies, particularly those operating in higher-risk environments, also take bribery and corruption risks seriously. Corruption increasingly is being considered in the context of human rights abuses. Readers may recall the devastating images that came out of Bangladesh in 2013 when the Rana Plaza complex collapsed, killing more than 1,100 people. Factories in the Rana Plaza complex provided cheap clothing to many major Western retailers. In 2015, Bangladesh had more than 40 people arrested and charged with a range of offenses related to the disaster, including corruption and

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murder. Those charged include the owners of the factories in the complex and various government officials.ss Human rights abuses—both contemporary and historical—in the supply chains of goods or services that are produced for the benefit of Western societies are not, unfortunately, new. However, companies’ treatment of human rights—directly, through a supply chain or historically, for example, local populations illegally displaced to accommodate the development of a mine—increasingly are being subject to scrutiny. The advent of social media in particular has made such scrutiny and the public broadcast of such abuses much easier.tt The ten principles of the UN Global Compact set out the premise upon which companies are increasingly expected to operate which “at a minimum, meet fundamental responsibilities in the areas of human rights, labor, environment and anticorruption.”uu The Human Rights Council of the United Nations approved the UN Guiding Principles on Business and Human Rights (UNGPs) in 2011. The UNGPs, while not legally binding, are treated as the authoritative instrument on expectations of business and their role in the treatment of human rights. The Office of the United Nations High Commissioner for Human Rights has expressly linked corruption with the abuse of human rights.vv Again, those companies that have greater brand recognition generally have a more sophisticated understanding of the human rights risks those companies are most likely to experience. There is now considerable work being undertaken by such companies with expert consultants to implement comprehensive human rights compliance programs—similar in detail to anti-corruption programs—including conducting human rights due diligence, across their operations.ww This work includes undertaking detailed human rights due diligence, not just in the context of proposed acquisitions, but also on those third parties with whom they contract all the way along the supply chain. This has further implications for smaller business both in the conduct of their own operations but in terms of how they engage with larger companies.

20.6

Conclusion

The days when companies could be confident that misconduct engaged by it or any of its employees, its subsidiary, a joint venture, among others, either directly or ss

http://www.independent.co.uk/news/world/asia/bangladesh-factory-collapse-41-charged-over-deadly-ranaplaza-tragedy-a6781876.html. tt For example, see: https://www.newtactics.org/tactic/using-social-media-collectively-document-abusesand-honor-victims-and-activists. uu For details of the 10 principles, see: https://www.unglobalcompact.org/what-is-gc/mission/principles. vv See: http://www.ohchr.org/Documents/Issues/Development/GoodGovernance/Corruption/HRCaseAgainst Corruption.pdf. ww See, for example, BHP Billiton’s Code of Business Conduct, p. 21 at http://www.bhpbilliton.com/ B/media/bhp/documents/aboutus/ourcompany/code-of-business-conduct/160310_codeofbusinessconduct_ english.pdf?la5en and Glaxosmithkline’s Living our values: Our Code of Conduct, p. 2 at http://www. gsk.com/media/325203/code-of-conduct-policy-english.pdf.

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indirectly, would remain undiscovered are gone. Local communities, nongovernment organizations, and concerned citizens are able to bring to the attention of the international community acts of corruption, human rights abuses, and other misconduct almost immediately. Organizations cannot be complacent about the importance of managing their potential risk in these and other areas. They need to develop and implement effective and comprehensive compliance programs across the organization. This is usually a role undertaken by an organization’s legal team. If this is done effectively—that is, a legally robust compliance program is disseminated and implemented across the organization and across the business divisions—then an organization is likely to be successful in inculcating a “culture of compliance.” Indeed, a company will know it has achieved that objective when anti-bribery and anticorruption and protection of human rights compliance are as embedded as work place safety in how it and its employees do business. Caution is advised, however, in assuming that a legally robust anticorruption compliance program is the same as ethical business. Taking a strict “compliance with the law” approach inculcates a “culture of compliance” but not necessarily a robust and ethical “corporate culture.” Indeed, if compliance programs are “owned” and led by an organization’s legal team, then it tends to reinforce the view that the organization’s attitude to bribery, corruption, and human rights is a legal one rather than the organization having “embedded” ethics in the way it does business.

References Bhargava, V. (2006). Curing the cancer of corruption. Global issues for global citizens: An introduction to key development challenges. Washington, DC: World Bank. ,http:// siteresources.worldbank.org/EXTABOUTUS/Resources/Ch18.pdf.. Koehler, M. (2012). The Story of the Foreign Corrupt Practices Act. Ohio State Law Journal, 73(5), 929 1013. ,http://papers.ssrn.com/sol3/papers.cfm?abstract_id52185406.. Lambsdorff, J. G. (2013). Corrupt intermediaries in international business transactions: Between make, buy and reform. European Journal of Law and Economics, 35(3), 349 366.

Is it as simple as ABC? a practitioner’s perspective on anti-bribery compliance

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Neville Tiffen Neville Tiffen & Associates, Melbourne, Australia

21.1

Introduction

In concept, anti-bribery compliance (ABC) is simple. In practice, it does not turn out that way. An ABC program should be part of the company’s overall integrity and compliance program. That overall program should cover leadership, roles and responsibilities, planning—both design and implementation—monitoring, improvement, detecting (e.g., whistle-blowing programs) and responding (e.g., investigations), and human resource systems that encourage integrity and compliance—recruitment, promotion, reward. Then, more specifically for ABC, the program should include G

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leadership and commitment specifically on anticorruption—this is the “tone at top” and it starts with zero tolerance; corruption risk assessment; enhancing the Code of Conduct with specific policy(s) on anticorruption supported by further internal controls and registers as necessary financial and nonfinancial controls gifts, travel, and entertainment donations and sponsorships conflicts of interest political support facilitation payments authority/approval levels a specific requirement for accurate books and records above that required to meet accounting principles; third-party due diligence and monitoring, including anti-bribery contractual provisions; employee vetting; and training and communication, specifically addressing anticorruption. G

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The author was Global Head of Compliance at Rio Tinto. He is now a consultant on business integrity, compliance, and governance and is a member of the OECD Secretary-General’s high-level advisory group on anticorruption and integrity and of the Victorian Department of Education and Training Integrity Committee.

The Changing Face of Corruption in the Asia Pacific. DOI: http://dx.doi.org/10.1016/B978-0-08-101109-6.00021-6 Copyright © 2017 Neville Tiffen. Published by Elsevier Ltd. All rights reserved.

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Every multinational company is aware that, under the laws of the country where the official is based, it is illegal to bribe government officials. Most companies based in the Organization for Economic Co-operation and Development (OECD)1 are aware that OECD countries have laws making it illegal for companies and citizens to bribe foreign government officials. There have been screaming headlines about the penalties the US authorities have imposed on US-connected companies for bribing foreign government officials, for example, Siemens, Alstom, and Alcoa (Chon et al., 2008). There was also a great deal of publicity surrounding the introduction of the Bribery Act in the United Kingdom in 2011. None of the foregoing has resulted in all companies trying to stop corruption. Why? In many OECD countries, there is a very low chance of being prosecuted, let alone convicted. The “playing field” facing companies has in fact become more uneven over the years. Authorities in the United States, the United Kingdom, Canada, Australia, and some western European countries have increased their enforcement of the foreign bribery laws. However, there are many companies from low enforcement or low governance jurisdictions that face a very small chance of being prosecuted (Carnegy et al., 2011). This has been highlighted in a recent chapter published by the OECD: “Is foreign bribery an attractive investment in some countries?” (OECD, 2016).

21.2

The heterogeneous private sector

So often, you hear reference to the private sector, as if all companies were homogeneous. Of course, they are not. There is a full range of companies from G

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those that are concerned about their reputation and want to conduct business with integrity (and be seen to be doing so); to those who give lip service to appear they are complying; to those who just do not care provided they get the business—“whatever it takes.”

And, the range extends from large stock exchange-listed global companies with operations and markets in many countries to small companies venturing offshore in one or two countries. Many companies want to do the “right” thing. There is a plethora of guidance advising companies on anticorruption compliance; in fact, there is too much. The outline at the start of this chapter is my summary of the elements of an effective ABC program based on the various guidances.

21.3

International guidances

Some government regulators have issued guidance. The United States has its Resource Guide to the U.S. Foreign Corrupt Practices Act (U.S. Department of Justice and U.S. Securities and Exchange Commission, 2012) and in early 2017, the Evaluation of Corporate Compliance Programs. The United Kingdom issued guidance in relation to the Bribery Act (U.K. Ministry of Justice, 2012) Brazil issued guidance

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in 2015 as to what is a proper compliance program (Controladoria-Geral Da Unia˜o, 2015). However, many countries, including Australia, have not issued any official guidance. In the absence of any published court decisions, Australian compliance professionals will look at the most influential overseas guidance—the United States and the United Kingdom—even though they are based on different legislation.2 However, there are also other guidances available. To my mind, the most notable are the Business Principles for Countering Bribery (Transparency International, 2013) by Transparency International (TI) and TI United Kingdom’s guidances based on the UK Bribery Act with its concept of “adequate procedures.” (Transparency International UK, 2010) In addition, the World Economic Forum’s Partnering Against Corruption Initiative (PACI) has issued guidance on third-party due diligence (World Economic Forum, 2013). In Australia, there have been standards issued covering compliance programs, fraud and corruption, and whistle-blowing3. Unfortunately, these have not had much traction in the anticorruption area. The compliance program standard has had some interest and has been referred to by judges in competition law cases. It was the genesis for the international standard4 that was issued in late 2015. It provides at a high level the elements that any compliance program should have and is reflected in the list at the start of this chapter. That is a great start for a compliance officer, as the ABC program should be part of the overall compliance program and not be competing with it for airtime inside the company. In the United Kingdom, following the Bribery Act, the British Standards Institute issued a standard for anti-bribery management systems5. That has led to work to produce an international standard. An international standard on anti-bribery management systems was issued in late 2016.6 It would be of great assistance to compliance professionals if an international standard received recognition in many countries by the regulators, prosecutors, and courts, so that the compliance professionals know that the international standard is the accepted benchmark against which they should be measuring their programs.7 Time will tell if the international standard receives as much recognition as some of the other major international standards such as risk management8. In the meantime, compliance professionals need to choose which guidances and standards they will use to design and to benchmark their programs. (It is impossible to benchmark against all of them.) They should be reporting to their boards and senior management accordingly. However, the guidances and standards often use terms like “appropriate” and “reasonable” and “should consider.” The compliance professional will need to decide how they will be applied to the company in its particular circumstances. In doing so, the compliance professional should ensure that the external and internal audit teams agree with the approach.

21.4

Organizational leadership and culture

The culture of a company is set from the top. There has been a lot of media about poor corporate culture (Bersin et al., 2015). Many companies today recognize that it is a competitive advantage to the business if they are viewed as conducting business

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with integrity (See Yeates et al., 2016). Apart from the increasing enforcement of corruption laws by various authorities around the world, companies are expected by institutional shareholders to have a greater focus on ethical behavior. When companies do not do this, they risk significant damage to their reputations and share prices and, apart from direct monetary penalties, they could face class actions, debarment from future work, and greater difficulty in attracting and retaining talented staff. In late 2014, the OECD produced a report on foreign bribery convictions in OECD countries. OECD (2014) That report showed that over 50 percent of cases involved management directly in the bribery and, amazingly, 12 percent involved the CEO directly. Quite clearly, in many companies, a culture of integrity and compliance is missing and the tone at the top is absent. If that is the case, then the compliance program will fail. One of the central planks of any compliance program is leadership. It starts with the board and the senior management team. If you are the company’s compliance professional and you have difficulty in reaching the board’s agenda or presenting to the board in any meaningful way, then you will have difficulty in having the company’s executives take the program seriously. Similarly, if the CEO and senior executives are only giving lip service to the program, it will not be taken seriously. You might then need to consider other avenues to ensure that the ABC program receives the senior support needed—this could include engaging with both internal and external audit, with the risk management team and perhaps with company secretarial. When you have an engaged discussion at the board or board committee level, then senior management will also take it seriously. When I was Global Head of Compliance for Rio Tinto, Tom Albanese, the CEO, agreed to join the board of PACI, the World Economic Forum’s anticorruption body. In itself, that was a very strong message to the company’s executives that the CEO took the issue seriously. When the CEO and other senior executives participate in external discussions and bodies on the topic, it demonstrates that they regard the topic as a priority. This is important, both internally and externally. The company’s compliance professional needs to have a good understanding of the business and should be senior in management ranks so as to be taken seriously and given a seat in appropriate meetings. While it is their job to design the compliance program, roll it out for implementation, monitor that implementation, and recommend improvements as needed, it is the business itself that must implement the program and make it part of the business. It is important that the business understands why the program is needed. So many times, you hear business executives complain about extra “red tape” or another requirement “imposed by Legal.” The importance of syndicating during the design phase and socializing the program during implementation cannot be overstated.

21.5

The importance of governance arrangements to compliance

It is important to establish arrangements where senior management of the various business units in a company regularly consider the ABC program—is it being

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applied, what are the issues arising, is more training or communication needed, are there lessons to be shared, can the program be improved? A successful method is the use of governance committees. This might be an existing committee or it could be one set up for the purpose. It should consider all aspects of governance, risk, and compliance at the business unit and be comprised of senior management and heads of the various disciplines, for example, risk management, internal audit, compliance, legal, human resources, community relations, safety, and environment. It would consider papers or presentations on all issues facing the business from regulatory, reputational, and cultural perspectives, including anticorruption. It is a very obvious demonstration of the commitment of senior management to conduct business with integrity and, should a compliance incident occur, the company can point easily to how seriously it was taking the issues.

21.6

Corruption risk assessments

A corruption risk assessment is vital to the design and ongoing implementation of an ABC program. It needs to be a deep dive. Identifying countries with poor ratings under the TI Corruption Perceptions Index (Transparency International, 2015) is only the very start. The assessment needs to look at the business processes and identify the “touch points” where staff or the company’s agents could be exposed to corruption. The identification of the touch points will enable the company to determine whether its policies and practices are sufficient to meet those risks. Identification enables management to support staff in those positions in following company policies. It also helps to determine the training and communications strategy needed to ensure staff and agents are aware of the company’s approach. It is a good question to senior management at a site in a risky country to ask if they can name the roles and indeed the individuals that are the touch points. If they can, then ask: when was the last time you had a conversation with them about the company’s position on anticorruption and to indicate the support available if they do have difficulties in their roles. If touch points have not been identified, it is possible an external observer will not regard the risk assessment as comprehensive, particularly if the observer is looking back with the benefit of hindsight following an allegation of bribery. In many of those touch points, staff and agents will be suffering constant bribery demands. It is important to ensure that they recognize a demand for a bribe. Again, this will influence the training and communications strategy. The training, in particular, will help staff identify what is a bribe. Bribes of course are not only monetary. They can take several forms. Staff and agents need to know what a bribe is and what to do if requested to make or receive a bribe.

21.7

Dealing with gifts and entertainment

Gifts and entertainment are common in business in many countries. Quite often, there is no issue in providing or receiving gifts and entertainment, although there have been many reports by integrity commissions suggesting that anything but a

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nominal gift could be problematic9. Most people agree that anything “lavish” could be considered a bribe. But, what is lavish? Some companies have a strict rule that no gifts or entertainment can be received or provided. Others have a limit on the amount and that limit is applied globally. Personally, I favor a more flexible approach that can adjust to the particular circumstances. That would be one where there is a country-by-country limit, but if circumstances warrant it is possible to go above that limit with senior management’s written approval. If the business unit managing director is meeting with a government minister, it is reasonable to expect that any gift would be more expensive than if a mid-level manager was meeting a mid-level public servant. The gift still cannot be extravagant and must be able to be justified by the approving senior manager. Most providers of gifts and entertainment say they do so to create goodwill and good relationships, not to influence the recipient in any inappropriate manner. It is difficult to know where the tipping point is. It is always amusing to me when commercial executives seek advice from lawyers as to what is acceptable. There are few published cases that demonstrate what is an acceptable amount in any particular circumstance. The commercial executive is probably in a better position to know if the gift or entertainment is likely to influence unduly the recipient and more pertinently whether that is the intention. Company executives often regard recording of gifts and entertainment as more “red tape.” I recall when new rules on the provision and receipt of gifts and entertainment were introduced in the company for which I worked; it was three weeks before the Australian Tennis Open—I was not popular with the Melbourne office. But it is important that executives understand why these processes are established and it is particularly important for the senior managers to understand the issues when they are approving more expensive hospitality. Transparency is an important safeguard for a company. A company should be able to produce quickly, when asked by a regulator, its records of gifts and entertainment to and from third parties. Rules relating to gifts and entertainment are not just for the prevention of corruption but also for the prevention of conflicts of interests, actual and perceived. They are a protection for the employee, as much as for the company10. Companies should be on the front foot. Ahead of festival times and other occasions where gifts and entertainment might be regarded as customary, the company should determine to which government officials and third-party officers they will provide the gifts and entertainment and let the recipients know well ahead of the date about the company’s approach. This might avoid embarrassment and allow some time to discuss the matter if there appears to be an issue. It is prudent to let the recipient’s superiors know about the provision of gifts or entertainment. Similarly, with major sporting or cultural events, corporate packages would be viewed by many as lavish, and there needs to be a clear process in place to determine who can be invited. Companies that take corporate packages to major events do so to spread their largesse. What are they trying to achieve in doing so? Is there any element of “quid quo pro” in the hospitality? It is likely that regulators will focus on such hospitality and want answers an example is BHP Billiton and the Beijing Olympics (US SEC, 2015).

Is it as simple as ABC?

21.8

319

Third parties

A company cannot argue that it has not been guilty of corruption simply because a third party engaged by the company undertook the bribery. Organizations may be held liable for acts of corruption by their third parties, that is, their agents, consultants, suppliers, distributors, joint-venture partners, or any individual or entity that has some form of business relationship with the organization. The US regulators are the most aggressive in pursuing bribery of overseas officials. Up to 2013, 90 percent of reported FCPA cases involved third-party intermediaries (EY, 2013). The OECD 2014 report found that over 75 percent of foreign bribery convictions in OECD countries involved third parties (OECD, 2014). Therefore, companies need to take active steps to ensure that potential corruption risks flowing from these relationships are assessed and managed. It should be on a risk basis. It requires some effort to establish a workable process to ensure third parties are assessed, due diligence conducted where appropriate, and remedial actions taken if necessary. Often, due diligence is not limited to corruption issues; it will also cover human rights and other issues that might be sensitive in the particular circumstance. It is a sign of compliance maturity when a company decides not to proceed with a third party because of the results of the due diligence, even though the contract or project is otherwise attractive. It is also a sign of compliance maturity when a company addresses red flags raised in the due diligence and actively monitors the remedial steps inserted into the arrangements with the third party. Records of such decisions need to be kept so that they can be produced to regulators if there is an incident—this demonstrates that the company endeavors to address issues. Critical long-term contracts may require enhanced deep-dive due diligence. Perhaps one of the most difficult decisions is what to do when the company is in a long-term contract with a third party that does not abide by the anticorruption clauses. In many cases, termination would be difficult, not just from a monetary viewpoint. This scenario should always be part of the risk assessment prior to entering any long-term contract. Many company executives regard the third-party due diligence process as “overkill.” It can delay the commencement of contracts and projects and can add a significant extra cost to the supply chain. It is only in very recent years that global companies have really started to address this issue seriously, and many are requiring other companies in their supply chain to do likewise. Third-party due diligence is now common, and because of its cost and time, many are looking at the possibility of having their ABC program certified and using such certification as evidence to other companies in their chain looking to do due diligence on them. The difficulties of undertaking due diligence on third parties and also in relation to certification of ABC programs have been clearly demonstrated in the recent media controversy surrounding UnaOil. Its program was certified by an experienced due diligence entity, but, according to media reports, the company is now being investigated in relation to allegations of bribery (The Age and Huffington Post, 2016).

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Of course, in many countries, corporate laws and processes are opaque. It is not possible to determine much about the ownership of many local companies. This makes it difficult to determine with whom you are really dealing. Is a government official benefitting from your dealings? In such circumstances, local knowledge may come into play in the due diligence process. This is all part of the risk assessment that senior management must make in deciding whether to engage with that third party.

21.9

Facilitation payments

In many locations, facilitation payments are the norm. These are sometimes called “grease payments.” They are small amounts paid to hasten a routine government action. Some countries have inserted an exception for facilitation payments in their extraterritorial legislation outlawing bribes to foreign government officials, most notably the United States and Australia. The United Kingdom made it abundantly clear in its Bribery Act that facilitation payments were bribes. Canada has removed the exception from its legislation and there is growing pressure for all OECD countries to do the same. Facilitation payments are bribes and illegal in the country in which they are paid even though they may be commonplace and expected. Companies importing and exporting perishable goods, companies with strict delivery time commitments, and companies requiring government licenses or permits are most vulnerable to facilitation payments. Nearly every company’s code of conduct states that it complies with the law wherever it operates. If that company tolerates facilitation payments, it is saying to its staff and agents that there are some laws which it regards as discretionary—a very mixed message indeed. Many people call any small bribe a facilitation payment, but they are not. Any payment to a traffic police officer is a bribe and not a facilitation payment. I recall in more than one country staff telling me how they hated having to pay to receive government services but none of them thought it wrong to pay a couple of dollars to a traffic police officer if stopped. I worry more about “per diem” payments, those payments that are made to cover the costs incurred by a government official to attend a meeting or carry out an inspection. In some countries, officials and their departments do not have the money to go to site or attend a meeting. It is legitimate to reimburse them for their costs. A process and register should be maintained for this. Unfortunately, officials often view this as a way to supplement their income. They also try to ratchet up the payments, sometimes setting companies and other organizations in competition with each other to have the appropriate official attend. Unless there is a strict process, a company can easily find that it has strayed away from a legitimate per diem payment into the territory of bribery. Payments to police and military for the provision of security are often referred to as facilitation payments or per diem payments. These payments are most likely bribes. Sometimes, there is an implicit or even explicit threat that the police will

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not arrive in a timely way if a crime or security incident occurs. I recall a company compliance professional who found out that one of their business units was paying the local police chief a monthly “stipend.” The business unit was adamant this payment was necessary for the safety of its personnel. The compliance professional discussed the matter with the embassy of the company’s home country. The compliance professional was reminded of the company’s potential liability under the home country’s extraterritorial laws. Later, the compliance professional found out that the embassy also made such payments to local police officers. Of course, the safety and security of a company’s workforce is a primary responsibility. These issues can arise well after the company has spent much capital in establishing its presence in the country. To try to resolve the problem would require some difficult conversations at very senior levels of the company and the government. In many ways, this is the hardest of all corruption issues to address.

21.10

Clear communication and training strategies

Often a company’s operations are in remote locations, well away from the glare of corporate centres. It is unlikely that there will be a full-time compliance officer; at best there might be a staff member who has compliance and/or ethics as part of their role. The business unit leaders always “talk the talk” when corporate HQ personnel visit, but do they “walk the talk” at other times? Compliance professionals need to get out of the office and into the field. I found that holding facilitated discussion groups with staff at site was an effective way to judge this. These groups would be about 10 to 12 people in size and would cover a number of areas of the business, but without bosses in the room wherever possible. It was not uncommon to get a slightly different take on matters to what senior leaders were saying. I always stated that it was a two-way effort in these meetings because I wanted them to help me improve the program—what did they know about the program, what did they think was working, and what were the issues. I took that information and used it to adjust the training and communications strategy. This was part of the monitoring of the program that resulted in improvements. Communications and training are a vital element. Nobody should ever be able to say that they were not aware of the ABC program and how it works. However, the communications need to fit in with the mass of other communications that companies send to their employees and agents. As with any change process, you need to assess where the organization is, where it needs to reach, and how it will get there. Of course, if there is an important new policy, there should be a communications plan as to who in the company needs to know, how this will be done, and by whom. But, at other times, there could be special days or events on which to make a major ABC communication, for example, World Anti-corruption Day—the first time, I arranged for the CEO and Chair to make a joint announcement, a comparatively rare occurrence; on another occasion, the CEO and all the senior management team issued a signed anticorruption pledge to all staff; and on another, all the country heads in each country of operation made a similar pledge.

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However, some communications are not formal. I used to suggest to very senior executives and directors that when visiting sites they ask to see the posters for the whistle-blowing program. I remember after a senior staff meeting at an overseas site the CEO asked to be taken to look at the whistle-blowing posters in the office. That act became known around the company—it was worth 100 messages from me. Training in many ways is an extension of the awareness campaign. How many of us have been to training that is boring or was the same as last time and the time before? Generally, for most large organizations, training will be a combination of online and face-to-face sessions. Online training has come a long way in recent years. It is not difficult to tailor it to your particular organization using examples that will resonate with your staff. I instituted a rolling program over three years where the online content was changed each year to emphasize different aspects. Technology allows different training to be assigned to different roles, usually based on risk and/or whether they are leadership roles. Also, some companies are using very short vignettes to promote the message. In the past, some senior executives have been known to treat online training with some disdain—they know it is compulsory and tell their people “just do it; get it over with.” That was never good leadership but perhaps it was understandable when the online training was predictable and never changed. With advanced technology, that should no longer be the case. I recall one senior executive was shocked when he was advised of poor training rates in a particular project location. He sent a very strong message telling the project’s leaders that he regarded the training as essential and that any manager level or above staff who had not completed the training within two weeks would be receiving a personal call from him so they could explain their failure. Of course, nothing really beats face-to-face training. This is essential for business leaders and for those in the “touch point” roles referred to above. However, it is resource intense—how often, where, and by whom. Ideally, the numbers in the room should not exceed 20. That way, you can really judge the understanding of the attendees. It is always good to try to “localize” the training and to get a general discussion going about the issue. I recall a session in Kazakhstan, when, asked why there was so much corruption, a participant said it was because bribery was “cultural.” This led to a good discussion—bribery was commonplace but most people hated it; therefore, the conclusion was that it was not cultural and could be resisted. On another occasion, I was conducting sessions in India; discussion was slow. I raised the issue of corruption associated with the 2010 Commonwealth Games. In each session, this prompted a lot of discussion because the participants regarded this as a national disgrace. It then led to discussion on whether the company faced similar challenges in resisting corruption demands.

21.11

An ethical organization

To have a successful ABC program, the company needs a culture of integrity. It will only have a culture of integrity if there is a culture of speaking up—one where

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senior management wants to know about “bad news” early so the company can address it. An ethical organization wants to know about serious misconduct and will respond to it—it will be thankful to those who have brought it to the attention of senior management. There will always be issues that employees are nervous raising directly with management. Therefore, you need an effective whistle-blowing program, emphasis on effective. However, this is a safety net. There needs to be ongoing internal publicity about the whistle-blowing program and how it works. I recall conducting a staff discussion at site. The attendees knew about the whistle-blowing program but none of them knew how it operated and, worse, none of them knew if anything ever happened if someone used it—consequently they would not use it. A company must communicate to its employees about the program— how many matters were received and how many resulted in some action. If a company wants to hear about corruption issues, it will need to have a culture of speaking up but it will need a whistle-blowing program that is trusted.

21.12

Organizational response to bribery allegations

Having such culture and systems in place means that a company will respond when it hears about a suspicion or allegation of bribery. An effective ABC program will have already considered how the company will respond—who hears about the allegation and when, who handles the investigation and how. I set rules that clearly indicated that any allegation involving senior management would be referred immediately to me as head of compliance, but the rules went further, for example, if an allegation involved the CEO, then the Chair was informed and no one else until appropriate. Similarly, if an allegation involved corruption, it came to me as head of compliance. It would then be decided how the matter would be handled. If a bribery incident appears to have occurred, a company will need to decide if and when to self-report to regulators and to which regulators. A global company might be caught by the laws of several different jurisdictions applicable to the same incident. I favor self reporting. A company that has clearly endeavored to have a culture of integrity and compliance and can demonstrate a good ABC program should cooperate with the regulators and it should receive favorable treatment. In some countries, there is an obligation to report suspected corruption. A company needs to comply with the laws where it operates. Unfortunately, some of those countries do not have a strong rule of law, as we are used to in many OECD countries. A company might have to consider the safety of its personnel in those countries—perhaps that of the suspected perpetrators insofar as a fair trial is concerned, but definitely the safety of those that have raised the issue and cooperated in any investigation. Responding to allegations and learning lessons, even when allegations are not proven, is a hallmark of an effective ABC program.

21.13

Conclusion

There are so many other issues that could be discussed in a chapter like this, including difficulties in dealing with state-owned enterprises, the challenges facing small-

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to medium-sized enterprises, charitable donations, community relations support, political contributions, and human resource systems that vet senior employees and reward those that hold the anticorruption line. I have not mentioned in any detail issues that relate to bribery entirely within the private sector, that is, not involving government officials. Also, the chapter has not considered in detail the issue of employees and agents receiving bribes and thereby distorting the returns to the company. All of these are also important aspects of an effective ABC program. ABC programs are simple in concept but they are not easy to implement. They require clear and transparent commitment from the very top; a solid understanding in middle management; and strong, experienced compliance professionals overseeing their implementation.

Endnotes 1. http://www.oecd.org 2. The United Nations Office on Drugs and Crime, OECD and Asia Pacific Economic Cooperation have also produced helpful publications such as: G

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An Anti-Corruption Ethics and Compliance Programme for Business: A Practical Guide—UNODC http://www.unodc. org/documents/corruption/Publications/2013/13-84498_Ebook.pdf Guidelines for Multinational Enterprises—OECD http://www.oecd.org/daf/inv/mne/ 48004323.pdf Good Practice Guidance on Internal Controls, Ethics, and Compliance—OECD http://www.oecd.org/daf/anti-bribery/44884389.pdf Anti-corruptionCode of Conduct for Business—APEC http://www.apec.org/groups/ som-steering-committee-on-economic-and-technical-cooperation/task-groups/B/media/ files/groups/act/07_act_codebrochure.ashx

3. AS 3806—2006 Australian Standard Compliance Programs; AS 8001—2008 Fraud and Corruption Control; AS 8004 - 2003 Whistleblower Protection Programs for Entities. 4. ISO 19600 Compliance Management Systems. 5. BS 10500:2011 Anti-Bribery Management System. 6. ISO 37001 Anti-Bribery Management Systems. 7. Is the new ISO a step change in the foreign bribery journey?” Governance Directions Vol 68 No 11 December 2016 p.654 8. ISO 31000 Risk Management. 9. A couple of examples are: Report of the Integrity Commission No. 1 of 2015 Tasmania http://www.integrity.tas.gov.au/__data/assets/pdf_file/0003/326037/Report_No_1_of_2015. pdf and Implementing the Gifts, Benefits and Hospitality Framework, Victorian AuditorGeneral’s Report December 2015 http://www.audit.vic.gov.au/publications/20151210Gifts-Benefits/20151210-Gifts-Benefits.pdf. 10. Refer to the author’s article “Premier’s downfall a timely warning to all” Australian Financial Review May 9, 2014 http://www.afr.com/business/legal/ofarrells-downfall-atimely-warning-to-all-20140508-itsj3.

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References Chon, G. (2014). Alstom to pay record $772m fine for bribery. Financial Times. December 22, 2014 https://next.ft.com/content/0a8989c6-8934-11e4-9b7f-00144feabdc0 Accessed 21.07.16., Crooks, E. (2014). Alcoa in $384m deal to settle Bahrain bribery charges. Financial Times. January 10, 2014 https://next.ft.com/content/62b10d60-793e-11e391ac-00144feabdc0 Accessed 21.07.16., Schafer, D. (2008). Siemens to pay h1bn fines to close bribery scandal. Financial Times. December 16, 2008 https://next.ft.com/content/ 1cc029de-cae9-11dd-87d7-000077b07658 Accessed 21.07.16. Carnegy, H. (2012). OECD hits out at France over bribery. Financial Times. October 23, 2012 https://next.ft.com/content/b86cee54-1ce7-11e2-a17f-00144feabdc0 Accessed 21.07.16. OECD (2011) “Serious Concerns Remain over Japan’s Enforcement of Foreign Bribery Law, Despite Some Positive Developments” December, http://www.oecd.org/daf/anti-bribery/ seriousconcernsremainoverjapansenforcementofforeignbriberylawdespitesomepositivedevelopments.htm. Accessed 21.07.16. OECD (2016). OECD Business and Finance Outlook 2016. Paris: OECD Publishing. Chapter 7 http://www.oecd-ilibrary.org/finance-and-investment/oecd-business-and-finance-outlook2016/is-foreign-bribery-an-attractive-investment-in-some-countries_9789264257573-12-en. U.S. Department of Justice and U.S. Securities and Exchange Commission. (2012). A Resource Guide to the U.S. Foreign Corrupt Practices Act, Washington DC. ,https://www.justice. gov/sites/default/files/criminal-fraud/legacy/2015/01/16/guide.pdf. Accessed 28.06.16. U.K. Ministry of Justice. (2012). Guidance to the Bribery Act 2010, February 11. ,http:// www.justice.gov.uk/downloads/legislation/bribery-act-2010-guidance.pdf.. Accessed 28.06.16. Controladoria-Geral Da Unia˜o. (2015). Programa de Integridade: Diretrizes para Empresas Privadas, September, Brasilia. ,http://www.cgu.gov.br/Publicacoes/etica-e-integridade/arquivos/programa-de-integridade-diretrizes-para-empresas-privadas.pdf.. Accessed 28.06.16. Transparency International (2013) Business Principles for Countering Bribery, December 17 ,https://www.transparency.org/whatwedo/publication/business_principles_for_countering_ bribery.. Accessed 28.06.16. The author was a member of the Steering Committee that revised the Business Principles for TI. Transparency International UK. (2010). The 2010 UK Bribery Act Adequate Procedures, July. ,http://www.transparency.org.uk/publications/adequate-procedures-guidance-tothe-uk-bribery-act-2010/.. Accessed 28.06.16. The author was a company representative on the TI UK Corporate Supporters Group. World Economic Forum. (2013). Good Practice Guidelines on Conducting Third-Party Due Diligence, Geneva, ,http://www3.weforum.org/docs/WEF_PACI_ConductingThirdParty DueDiligence_Guidelines_2013.pdf.. Accessed 28.06.16. The author was a board delegate for PACI and is on a PACI project advisory group. Bersin, J. (2015) “Culture: Why It’s the Hottest Topic in Business Today,” Forbes March 19, 2015. ,http://www.forbes.com/sites/joshbersin/2015/03/13/culture-why-its-the-hottest-topicin-business-today/#ec5f982b6e28.. Accessed 21.07.16; “ASIC want to prosecute executives for ‘bad culture’ Australian Financial Review June 4, 2015. ,http://www.afr. com/business/banking-and-finance/asic-wants-to-prosecute-executives-for-bad-culture-20150 602-ghfg6a.; Rose, S., Eyers, J., & Moullakis, J. (2015). “Banking’s ‘rotten culture’ must go” The Age 30 May 2015 ,http://www.theage.com.au/business/regulators-put-banking-culture-andincentives-in-the-firing-line-20150529-ghcmuk.html .. Accessed 21.07.16.

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Yeates, C. (2015). “CBA wants to be ‘the ethical bank’” The Sydney Morning Herald November 18, 2015. ,http://www.smh.com.au/business/banking-and-finance/cba-wantsto-be-the-ethical-bank-20151117-gl11rc.html. Accessed 21.07.16; “Reputation on corruption ‘a risk for Australian companies’” BRW June 17, 2013. ,http://www.brw.com. au/p/business/reputation_on_corruption_risk_for_8CaqyHnMu8te8ISic8RquJ.; Shapiro, J. (2016). Banks can gain competitive advantage by lifting standards and putting customers first. Australian Financial Review May 24, 2016. ,http://www.afr.com/news/ special-reports/risk-culture/banks-gaining-a-competitive-advantages-by-lifting-standardsand-putting-customers-first-20160523-gp1kid#ixzz4DnKXO7Zg. Accessed 21.07.16. OECD (2014). OECD Foreign Bribery Report: An Analysis of the Crime of Bribery of Foreign Public Officials. Paris: OECD Publishing. December 2 http://dx.doi.org/ 10.1787/9789264226616-en Accessed 28.06.16. Transparency International. (2015). Corruption Perceptions Index ,http://www.transparency. org/cpi2015. Accessed 28.06.16. US SEC. (2015). SEC Charges BHP Billiton with violating FCPA at Olympic Games, May 20. ,https://www.sec.gov/news/pressrelease/2015-93.html. Accessed 21.07.16. EY (2013). Growing Beyond: a place for integrity: 12th Global Fraud Survey. Ernst & Young. http://www.ey.com/Publication/vwLUAssets/Global-Fraud-Survey-a-place-forintegrity-12th-Global-Fraud-Survey/$FILE/EY-12th-GLOBAL-FRAUD-SURVEY.pdf Accessed 21.07.16. OECD (2014). OECD Foreign Bribery Report: An Analysis of the Crime of Bribery of Foreign Public Officials. Paris: OECD Publishing, 2 December. The Age and Huffington Post. (2016). Joint Investigation: Big Oil’s Bribe Factory The Age 31 March 2016 http://www.theage.com.au/interactive/2016/the-bribe-factory/ and Trace International: UNAOIL vs the Compliance Community. ,https://www.traceinternational.org/blog/779/.. Accessed 21.07.16.

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Andrew Proctor Independent Consultant, Canberra, Australia

22.1

Introduction

The revelations, early in 2016, of the “Panama Papers”a added to the increasing international public and civil society disquiet regarding grand corruption, whether based on the hiding of ill-gotten gains or simply the evasion of tax on legitimate income. One outcome of the increased public pressure on governments has been the announcement of numerous initiatives,b many focused on establishing either beneficial ownership requirements or the power to pursue unexplained wealth enquiries. Whether these new measures will make a real impact on the worldwide level of this kind of corruption remains to be seen; however, these decisions provide some hope that better times may be ahead. While the increased attention on grand corruption is welcome and helps to assuage the sense of moral outrage—and helplessness—that many feel, it does nothing, however, to address the less noticeable but far more widespread and insidious problem of petty corruption. Unlike petty corruption, grand corruption doesn’t have a direct impact on those who are disadvantaged: a minister who pockets a kickback from a public sector procurement contract may add to the cost to the country or slightly reduce the value of the goods and services which are delivered but not in a way that an individual citizen would notice. Not so with many forms of petty corruption, when citizens and businesses are required to pay—or pay extra—for public sector services which they seek to use. Although petty corruption takes many forms and in some cases is instigated by members of the public rather than public officials, millions of people throughout the developing world face unlawful daily demands for payments (or gifts)— or extra payments—for public sector services which they rightfully seek to use. As with grand corruption, there are, of course, many different types of petty corruption, from the ubiquitous “hurry up money” to payments which influence the outcome of applications or other situations, either allowing an entitlement to be

a

The Panama Papers refers to leaked documents exposing widespread, multinational tax avoidance through the use of offshore vehicles (see ICIJ, 2016). b For example, those adopted at the Anti-Corruption Summit held in London in May 2016; see: https:// www.gov.uk/government/uploads/system/uploads/attachment_data/file/522791/FINAL_-_AC_Summit_ Communique_-_May_2016.pdf (accessed July 28, 2016). The Changing Face of Corruption in the Asia Pacific. DOI: http://dx.doi.org/10.1016/B978-0-08-101109-6.00022-8 Copyright © 2017 Andrew Proctor. Published by Elsevier Ltd. All rights reserved.

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achieved or granting an unwarranted approval. And while many payments and gifts are demanded, others are offered. Multiple factors contribute to the existence and maintenance of petty corruption in societies, not least of which cultures which accept—and, in some cases, even expect—those in positions of power to exercise that power to their own advantage: greed and self-interest are seen to be legitimate social conduct. This acceptance is exacerbated when the members of a society are aware of the paucity of civil service salaries and the motivation this provides for those with some power to wield. Other factors such as poor levels of governance, inadequate development of legal institutions and the failure of law and order institutions, such as police, also contribute to the continuing problems in so many countries, where petty corruption is systemic and often highly organized within public sector institutions. There are many ways of categorizing the various forms of petty corruption. The three situations described below, all of which are based on bribes, cover most of the scenarios and allow identification of the winners and losers: i. When a member of the public offers a bribe to achieve an outcome to which they are not entitled. When such a bribe is accepted: the person offering the bribe wins by getting something to which they were not entitled, the value of which, presumably, exceeds the value of the bribe the person accepting the bribe wins because they are better off the losers are those in the general public who are disadvantaged by the regulations involved not being upheld these disadvantages or losses may not be readily identifiable but are real nonetheless an example: a motorist is stopped for driving a vehicle with a safety deficiency (worn tyres, defective headlights, etc.) and pays a bribe to avoid a fine; the losers will be those that may be involved in an accident caused by that vehicle as a result of the defects which were “overlooked.” ii. When a public official demands a bribe so that a member of the public can avoid unwarranted problems. Typically occurring with police, the outcomes are as follows: the member of the public loses by having to make an unjustified payment the public official wins by receiving the payment the society at large loses because the aggregation of these events reduces public confidence in the likelihood of the police upholding the law iii. When a public official demands a bribe to perform their regular duties. Whether this is the classic “lunch money” to ensure that processing of the application doesn’t get overlooked or the utilization of discretionary decision-making opportunities to suggest that the outcome may not be as the applicant prefers: the member of the public loses by having to make an unjustified payment the public official wins by receiving the payment. G

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The existence of the first category of petty corruption demonstrates that one of the factors which undoubtedly allow petty corruption to flourish is the perception that, in some cases, no one loses from corrupt acts. Take, for example, the

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operations of tax inspectors who collect or assess corporate income taxesc and start from the (factual) assumption that, in every case, there will be a “correct” amount of tax that is payable. It is clear that, when an inspector inflates the amount of tax payable to a level above the correct level, so as to negotiate a bribe to reduce the amount payable, the loser is the company which is being assessed, if the total of the amount payable and the bribe exceeds the correct amount. (It should be noted that a scenario such as this can only exist when the company concerned believes that they have no reasonable recourse to an effective legal remedy: reporting the inspector to a superior, instigating a complaint to an ombudsman, initiating a case at an administrative appeals tribunal, etc, none of which are available in countries with poor governance.) On the other hand, both an inspector who indicates that a lower than correct assessment is possible with an inducement—and the company making the payments—may well believe that the arrangement they come to in this scenario does no harm, forgetting that the reduced public sector revenue has implications for the provision of government services: education, health, infrastructure, etc. The widespread belief that such behavior “doesn’t hurt anybody” continues because there are no direct and clearly visible losers, while failing to appreciate that large numbers of indirect and non-identifiable individual losers do exist. It is within the third category listed above that the less affluent levels of society are most disadvantaged. While small payments to officials to ensure that they fulfill their duties may be an annoyance to more affluent people, they do not generally have a substantial impact on the lifestyle of these people. The less affluent, however, are often in the situation of having to make difficult choices as to whether access to the service they are asked to (illegally) pay for is more important than the other, often fundamental, demands on their limited incomes. If this, then, is a brief survey of petty corruption in the developing world, two questions are relevant: what can be done to address the underlying causes of this corruption and what efforts are currently being made? The factors which contribute to the existence of widespread petty corruption are, of course, many and varied. By examining the most prevalent, it is possible to discern what might be done to address them and, in turn, determine the extent to which remedial activities are currently being undertaken. On a nonexhaustive basis and in no order of priority, some of the major contributors to the continued prevalence of petty corruption are listed below, with some notes provided as to the potential measures to address them and some comments as to the extent to which such measures are currently being pursued by either the governments independently or with the assistance of their development partners.

c

World Bank data indicate that the percentage of firms that were expected to give gifts in meetings with tax officials was 26.8 in East Asia and the Pacific and 19.6 in South Asia (World Bank Group Enterprise Surveys/Data/Corruption, 2016: http://www.enterprisesurveys.org/data/exploretopics/corruption#--1).

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The Changing Face of Corruption in the Asia Pacific

Low civil service salaries

Mention has been made above of the fact that low civil service salaries can become a motivation for officials to engage in petty corruption as a means of enhancing their remuneration from their public sector employment—and, in some cases, for public awareness of these low salaries to contribute to a level of acceptance of this conduct. Low civil service salaries are often in existence with substantial overstaffing and strong civil service unions, with both these factors complicating civil service reform. While raising productivity and salaries in an expenditure-neutral manner is theoretically possible through down-sizing, the political cost is generally too high for governments to contemplate, and making significant increases to the salary cost of the public sector is seldom an option. This unwillingness by governments to make fundamental reforms in this area is evident from the very low level of donor-funded activity of this kind, despite widespread acknowledgment within the donor community of the pervasive problems to which civil service inefficiencies contribute.

22.3

Inadequate legal structures and services

Easily accessible recourse to an effective and prompt legal system is the obvious remedy for those who are disadvantaged by corrupt behavior. Unfortunately, legal infrastructure in much of the developing world is characterized by inadequate court structures—typically not offering ombudsman services or facilities for small administrative appeals—and operational systems which incur significant costs and result in long delays. While reform of judicial systems is an active area for many development agencies, to the extent that programs of this kind are being implemented throughout the developing world, the focus of these programs tends to be on improving legal access—and outcomes—for private sector businesses. While there is no doubt that such improvements are fundamental requirements for enhanced private sector growth and the benefits which such growth brings, the reforms effected are not likely to make much difference for individuals trying to negotiate within corrupt administrations.

22.4

Poorly drafted legislation, regulations, and procedures

The actual interface with the public sector for both individuals and other legal entities such as private sector firms is the procedures which are drawn up to administer the legislation passed by parliament and the subsequent implementation of the regulations which are prepared. Whether it is an application for an electricity connection, registration of a child for school entrance, or having a vehicle pulled over by a

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police officer, the procedures which have been developed within the relevant public sector agency—whether written or not—are what governs the interaction between the public and private sectors at this point. And herein lies a major impediment to the reduction in petty corruption. Numerous theories have been advanced to explain why regulations and procedures in developing countries have been written in ways which encourage the use of the term “red tape,” that is, complicated and often requiring multiple steps based on achieving prerequisite conditions which can only be fulfilled through dealings with separate public sector agencies. “Colonial legacy” is often advanced as the origin of these proceduresd which, indeed, probably explains some of the current problems where the relevant legislation often predates the country’s independence. However, even when this is true, the question remains as to why the regulations and procedures were developed in this manner. It can be argued that the answer lies in the fact that the accepted role of government has changed dramatically in the last half century, from regulations designed to control private sector activity to the establishment of regulatory frameworks designed to facilitate that activity. While more developed economies have placed a greater focus on effecting this transition, developing countries have lagged well behind. And what is the corruption issue with poorly drafted regulations and procedures? Apart from the fact that poorly drafted regulations and procedures tend to be much more time-consuming for all parties (i.e., both the private sector—firms and individuals—and the public sector officials responsible for administering them), they also tend to yield unpredictable outcomes because of the prevalence of issues within those procedures which require discretionary decision-making by the processing officials. It is the existence of these discretionary powers which provides officials with the opportunity to engage in corrupt practices which have a major impact on the private sector, through increasing the cost of doing business, as well as on individuals who have a need to interact with the public sector for a range of everyday reasons. The remedy for the problems in this area appears simple enough: revise regulatory and procedural arrangements to make them simpler, more transparent, and more predictable by eliminating or, at least, substantially reducing the extent to which discretionary decision-making is required. And, indeed, many governments, with assistance from their development partners, are working toward this and other improvements in the general area of governance. However, in many countries, progress toward the stated goals remains slow and cannot be expected to increase in the near term, with three main factors within these countries’ public sectors contributing to this inaction: G

G

G

d

a reluctance to move away from the status quo; an unwillingness to give up known opportunities for “income enhancement”; and a lack of understanding of how governments can adjust their processes so as to become facilitators.

See, e.g., Mahmood (2007, p. 132).

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An underlying issue in all three of these factors is the widespread absence of firsthand experience of systems which are based on the philosophy of public sector facilitation: if those tasked with undertaking reforms have no knowledge of what a better arrangement looks like, the changes introduced tend to be cosmetic, rather than fundamental. A typical departmental response to a government direction to reform a procedure is to speed up the processing of an existing application form or provide for online applications (without changing the application form), in each case failing to appreciate that it is the application form itself and the procedures which are used to process it that require the changes. In recent years, regulatory reform has received a great deal more attention from developing country governments as the pendulum has swung away from public sector regulatory control of and equity participation in productive activities toward a wider appreciation of the importance of