GLOBAL REPORT SEPTEMBER 2020 Enhancing Government Effectiveness and Transparency The Fight Against Corruption Enhancing Government Effectiveness and Transparency The Fight Against Corruption © 2020 International Bank for Reconstruction and Development / The World Bank Sasana Kijang, 2 Jalan Dato Onn, Kuala Lumpur 50480, Malaysia Some rights reserved. This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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GLOBAL REPORT SEPTEMBER 2020 Revised on October 3, 2020 Enhancing Government Effectiveness and Transparency The Fight Against Corruption Table of Contents List of Abbreviations viii Acknowledgements x About the Team Leaders xi Preface xiii EXECUTIVE SUMMARY xiv SETTING THE STAGE 1 Jim Anderson Rationale and Structure of the Report 1 Trends, Measurement, and Emerging Issues 6 PART I: CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS 17 Chapter 1: Public Procurement 18 Joel Turkewitz Case Study 1: Strengthening Competitive Procurement in Somalia 28 Fiona Davies, Carrie Farley and Geoff Handley Case Study 2: e-Procurement Reform in Bangladesh 34 Joel Turkewitz, Mihaly Fazekas and Zafrul Islam Case Study 3: Reforming Procurement and Political Party Financing in Chile 40 Serena Cocciolo and Joel Turkewitz Chapter 2: Public Infrastructure 52 Ida Richter Gade and Ian Hawkesworth Case Study 4: Accountability in Infrastructure: The CoST Approach (Thailand, Ukraine, Honduras) 62 Alexandra Habershon, Soren Kirk Jensen and Marcela Rozo Case Study 5: Managing Public-Private Partnership (PPP) Renegotiation 76 David Bloomgarden Case Study 6: Open Contracting Reforms in Colombia 84 Ida Richter Gade, Nicolas Penagos and Sophie Brown Chapter 3: State-Owned Enterprises 94 Sunita Kikeri and Ruxandra Burdescu Case Study 7: Enhancing SOE Accountability in Colombia 103 Ruxandra Burdescu, Ana Maria Palacio Jaramillo and Fanny Weiner Case Study 8: SOE Reforms in Brazil following “Lava Jato” 108 Kjetil Hansen and Ruxandra Burdescu Case Study 9: SOE Reforms in Angola 114 Kjetil Hansen, Soren Kirk Jensen and Ruxandra Burdescu Chapter 4: Customs Administration 122 Odd-Helge Fjeldstad, Ernani Checcucci Filho and Gaël Raballand Case Study 10: Customs Reforms in Madagascar 135 Andreas Henrik Fiebelkorn Case Study 11: Customs Reforms in Afghanistan 140 Anna Custers Chapter 5: Public Services: Land, Ports, Healthcare 152 Jana Kunicova Case Study 12: Land Administration Reforms in Rwanda 158 Thomas Shipley Case Study 13: Collective Action for Reforms in Nigeria Ports 162 Thomas Shipley Case Study 14: Reforms in the Health Sector in Ukraine 168 Sarah Steingrüber iv Enhancing Government Effectiveness and Transparency: The Fight Against Corruption TABLE OF CONTENTS PART II: KEY INSTRUMENTS FOR FIGHTING CORRUPTION 177 Chapter 6: Open and Inclusive Government 178 Stephen Davenport and Emily Kallaur Case Study 15: Boosting Accountability through Participatory Budgeting in Kenya 186 Blair Cameron Case Study 16: Enhancing Social Accountability in Ethiopia 192 Blair Cameron Chapter 7: GovTech 202 Kai Kaiser Case Study 17: Digital Transformation in Andhra Pradesh, India 214 Pooja Churamani, Shashank Ojha and Kai Kaiser Chapter 8: Asset and Interest Declarations 224 Dmytro Kotlyar and Laura Pop Case Study 18: Reform of Asset and Interest Disclosure in Ukraine 232 Dmytro Kotlyar and Laura Pop Case Study 19: Enhancing Effectiveness of Asset Declarations in Romania 238 Laura Pop, Laura Stefan and Silviu Popa Chapter 9: Beneficial Ownership Transparency 248 Alexandra Habershon, Solvej Krause and Zosia Sztykowski Chapter 10: Exchange and Collaboration with Tax Administrations 266 Prof. Jeffrey Owens, Joy Waruguru Ndubai and Siddhesh Rao Case Study 20: Inter-agency Collaboration to Detect Corruption 268 Prof. Jeffrey Owens, Joy Waruguru Ndubai and Siddhesh Rao Case Study 21: Sharing Evidence with Joint Prosecution Teams 275 Prof. Jeffrey Owens, Joy Waruguru Ndubai and Siddhesh Rao PART III: ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION 289 Chapter 11: Anti-Corruption Agencies 290 Alan Doig and Francesca Recanatini Chapter 12: Supreme Audit Institutions 304 Seongjun Kim, Donald Mpande, Pooja Churamani, Manoj Jain and Carmen Loo Chapter 13: Justice System 316 Klaus Decker COUNTRY SPOTLIGHT: MALAYSIA’S APPROACH TO FIGHTING CORRUPTION 332 Firoz Abdul Hamid and Jeevakumar Govindasamy CONCLUSIONS 340 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption v TABLE OF CONTENTS List of Boxes Box A Corruption Risks Stemming from COVID-19 2 Box 1.1 Timeline on Somali National Army Rations Re-tendering 32 Box 2.1 IFC’s Integrity Due Diligence (IDD) 58 Box 2.2 The Evolution of Multi-Stakeholder Approaches to Accountability in Infrastructure 63 Box 2.3 The Role of the CoST Secretariat 64 Box 2.4 The Open Contracting for Infrastructure Data Standard (OC4IDS) 66 Box 2.5 Transparency in Renegotiation for Public-Private Partnerships 81 Box 2.6 Present Value of Revenue Contracts in Infrastructure Partnerships 82 Box 3.1 About Empresas Públicas de Medellin 104 Box 3.2 Power Sector Reforms in Colombia and the Success of EPM 106 Box 3.3 The Impact of Operation Car Wash across Latin America 109 Box 3.4 Brazil’s National Strategy against Corruption and Money Laundering (ENCCLA) 110 Box 4.1 Standard Operating Procedures and Internal Audit Capacities in Latin America 130 Box 4.2 Comprehensive Modernization of Customs: The Uruguay case 131 Box 4.3 Donor Support to Afghanistan Customs Department 143 Box 6.1 What Does Open Data Have to Do with Open Government? 180 Box 6.2 The Extractive Industries Transparency Initiative (EITI) 183 Box 6.3 The 10-Step Process to Implement Participatory Budgeting 188 Box 7.1 Brazil’s Tribunal of Accounts Robots 204 Box 7.2 Singapore’s SkillsFuture Program and Fraud Detection 205 Box 8.1 Scope of Asset and Interest Disclosure Form 235 Box 9.1 What is a Beneficial Owner? 250 Box 9.2 The Beneficial Ownership Data Standard (BODS) 255 Box 9.3 Key Data Questions for Policy Makers to Consider 257 Box 10.1 The Extent of Corruption 267 Box 13.1 Romania’s National Anti-Corruption Directorate (DNA) 319 Box 13.2 Specialized Anti-Corruption Courts: Political Commitment or Implementation Gaps 321 Box 13.3 Specialized Anti-Corruption Courts in the Philippines and Indonesia 322 Box 13.4 International Cooperation and Mutual Legal Assistance (MLA) 323 Box 13.5 Court User and Multi-Stakeholder Justice Surveys 325 Box 13.6 Trade of Influence in the Judiciary 326 vi Enhancing Government Effectiveness and Transparency: The Fight Against Corruption TABLE OF CONTENTS List of Figures Figure A Percentage of Enterprises making Informal Payments (Gifts) to Tax Inspectors, among those 9 with Contact (89 Countries) Figure 1.1 Trends of Electronically Administered Tenders and their Value 38 Figure 1.2 Change in Corruption Risk Indicators as a result of the e-GP Intervention 39 Figure 2.1 Core Elements of the CoST Approach 62 Figure 2.2 CoST Goals benefit from Synergies with other Multi-Stakeholder Initiatives 62 Figure 2.3 Increase in number of Projects fulfilling CoST Data Disclosure Requirements (2015-2019) 65 Figure 2.4 Disclosure and Assurance of Infrastructure Projects in Thailand 68 Figure 2.5 Multi-Stakeholder Working at the Project Level 69 Figure 2.6 Making Infrastructure Data Useful for Planners, Implementers and Policy Makers 70 Figure 2.7 Causes of Renegotiation, based on 48 Projects that experienced Renegotiation 79 Figure 4.1 Excessive Interaction between Inspectors and Brokers 137 Figure 4.2 Evolution of Average Delays 138 Figure 4.3 ACD Presence and Main Transit Trade Routes 142 Figure 4.4 Customs Revenue (in USD) 144 Figure 5.1 Disaggregating Corruption Typology within Service Delivery Sectors 155 Figure 6.1 Unpacking Open Government 179 Figure 8.1 Implementation Timeline of Electronic Asset and Interest Disclosure System in Ukraine 235 Figure 8.2 Final Findings of ANI Reports between 2008 and 2019 243 List of Tables Table 2.1 GIH Study: Prevalence of Renegotiation by Region 78 Table 4.1 Revenues Doubled in 4 Years 138 Table 5.1 Corruption in Public Services: Estimating the Magnitude of the Problem 154 Table 7.1 Public Sector Fraud and Corruption Domains 206 Table 7.2 Major Technology Trends for Public Sector Fraud and Corruption 207 Table 7.3 Navigating GovTech for Public Sector Fraud and Corruption 212 Table 7.4 AP’s Transformational Technologies 215 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption vii List of Abbreviations 1MDB 1 Malaysia Development Berhad EACC Ethics and Anti-Corruption Commission (Kenya) ABMS Anti-Bribery Management System EEEB Empresa de Energia Electrica de Bogota  ACA Anti-Corruption Agency e-GP Electronic Government Procurement ACC Anti-Corruption Commission EIC Economic Intelligence Council (India) ACCC Auditing in Complex and Challenging Contexts EICE Empresas Municipales de Cali  ACD Afghanistan Customs Department EITI Extractive Industries Transparency Initiative ACE Anti-Corruption Evidence Research Program EIU The Economic Intelligence Unit ACGA The Asian Corporate Governance Association Brazil’s National Strategy Against Corruption and Money ENCCLA Laundering, ACT Anti-Corruption Organization of Thailand EOCO Economic and Organized Crime Office ADELE Analysis of the Dispute in Electronic Bids EPM Empresas Públicas de Medellin AEOI Automatic Exchange of Information ERP Enterprise Resource Planning AfDB African Development Bank ESAP 2 Ethiopia Social Accountability Program 2 AG Auditor General ESG Environmental, Social and Governance AI Artificial Intelligence EU European Union AID Asset and Interest Disclosure FATF Financial Action Task Force AI-ML Artificial Intelligence-Machine Learning FBI Federal Bureau of Investigation (USA) ALICE Analysis of Bids, Contracts and Public Calls FCPA Foreign Corrupt Practices Act AML Anti-Money Laundering FCV Fragile, Conflict and Violence AMLD5 Fifth Anti-Money Laundering Directive FEC Financial Expertise Centre (Netherlands) ANI National Integrity Agency (Romania) FELDA Federal Land Development Authority AP Andhra Pradesh (India) FGC Financial Governance Committee (Somalia) APIs Application Programming Interfaces FIC Financial Intelligence Centre ASYCUDA Automated System for Customs Data FIFA Fédération Internationale de Football Association AUSTRAC Australian Transaction Reports and Analysis Centre FinCEN Treasury Department’s Financial Crimes Enforcement Network BIAC Business and Industry Advisory Committee FIU Financial Intelligence Unit BODS Beneficial Ownership Data Standard FMIS Financial Management Information System CAC Corporate Affairs Commission (Nigeria) FOI Freedom of Information CAG Comptroller & Auditor General FSDEA Fundo Soberano de Angola CBi Convention on Business Integrity GAS Ghana Audit Service CCAGG Concerned Citizens of Abra for Good Government GDP Gross Domestic Product Colombia Compra Eficiente (National Public Procurement CCE GDPR General Data Protection Regulation Agency) CCS Account Register of National Financial System GEIU Grey Economy Information Unit (Finland) CCTV Closed-circuit television GIACC National Centre for Governance, Integrity and Anti-Corruption CDD Community Driven Development GIH Global Infrastructure Hub CEIB Central Economic Intelligence Bureau (India) GIS Geographic Information System CEO Chief Executive Officer GLC Government-Linked Companies CEP Center of Public Studies GovTech Government Technology CGD Comptroller General’s Department (Thailand) GPS Global Positioning System CGPAR Corporate Governance and Property Administration GRECO The Group of States against Corruption CHRAJ Commission on Human Rights and Administrative Justice GTF Government-Tenderers’ Forum CNJ National Council of Justice IAD Income and Asset Declaration CODELCO National Copper Corporation IAS Internal Audit Service COE Council of Europe IBP International Budget Partnership CONGRES National Congress of Chile ICJA Internal Criminal Judicial Assistance (China) CoST Infrastructure Transparency Initiative ICT Information and Communications Technology CPI Corruption Perception Index ICU International Corruption Unit (UK) CPS Crown Prosecution Service (UK) IDD Integrity Due Diligence CPTU Central Procurement Technical Unit (Bangladesh) IEG Independent Evaluation Group CSO Civil Society Organizations IEM Independent external monitor CVM Cooperation and Verification Mechanism IFC International Finance Corporation (World Bank Group) DFID Department for International Development (UK) IFFs Illicit financial flows DIAL Digital Impact Alliance The Institute of Assets Management and State Holdings IGAPE (Angola) DNA National Anti-Corruption Directorate (Romania) IGEA Inspectorate-General of the Public Administration DT Disruptive Technology viii Enhancing Government Effectiveness and Transparency: The Fight Against Corruption LIST OF ABBREVIATIONS IIM Malaysian Institute of Integrity PETS Public Expenditure Tracking Survey IMF International Monetary Fund IMF PFM Public Financial Management INTEGRITI Malaysian Institute of Integrity National Anti-Corruption and Money Laundering Training PNLD Program INTOSAI International Organization of Supreme Audit Institutions PPP Public-private Partnership INVIAS Public Roads Agency (Colombia) PSC Person of Significant Control IoT Internet of things QR Quick Response IPCMC Independent Police Complaints and Misconduct Commission RAA State Audit Institution (Bhutan) ISSAI The International Standards of Supreme Audit Institutions RBLs Resource-based Loans ITU International Telecommunication Union Red-LAB National Network of Money Laundering Laboratories JKKMAR Jawatankuasa Khas Kabinet Mengenai Anti-Rasuah REIC Regional Economic Intelligence Council (India) KPK Corruption Eradication Commission (Indonesia) RFID Radio Frequency Identification Trackers KWAP Kumpulan Wang Persaraan RIA Regulatory Impact Assessment KYC Know Your Customer RNRA Rwanda Natural Resources Authority LAPOP Latin American Public Opinion Project RTI Right to Information M&E Monitoring and Evaluation SAI Brazilian Supreme Audit Institution MACC Malaysian Anti-Corruption Commission SAN Senior Advocate of Nigeria MACN Maritime Anti-Corruption Network SAPS South African Police Service MAPS Methodology for Assessing Procurement Systems SARB South African Reserve Bank MAT Multi-agency Team SARS South Africa Revenue Services MDA Ministries, Departments and Agencies SCI Society of Engineers (Colombia) MLA Mutual Legal Assistance SECOP Sistema Electrónico para la Contratación Pública MOH Ministry of Health SFO Serious Fraud Office (UK) MOI Ministry of Infrastructure (Ukraine) Information and Monitoring System for Works and Supervision MONICA Integrated Monitoring for Acquisition Control SISOCS Contracts (Honduras) MOU Memorandum of Understanding SLA Service Level Agreement MP Member of Parliament SLPs Scottish Limited Partnerships MPLA The People’s Movement for the Liberation of Angola SOE State-owned Enterprise MSG Multi-stakeholder working group SOFIA Guidance System on Facts and Evidence for the Auditor MTMC Ministry of Transparency, Monitoring and Control (Brazil) SOP Standard Operating Procedure NACAP National Anti-Corruption Action Plan (Ghana) StAR Stolen Asset Recovery Initiative (World Bank) NACP National Anti-Corruption Plan (Malaysia) STT Special Investigation Service (Lithuania) NACS National Anti-Corruption Strategy TABUNG Haji Pilgrims Fund Board HAJI NCA National Crime Agency (UK) TCU Tribunal de Contas da União NEITI Nigeria’s EITI multi-stakeholder group TI Transparency International NFCC National Anti-Financial Crime Centre TI-CPI Transparency International’s Corruption Perceptions Index NGO Non-governmental Organization TIEA Tax Information Exchange Agreements NHSU National Health Service of Ukraine UAVs Unmanned Aerial Vehicles NIC News flow indices of corruption UK United Kingdom NIP National Integrity Plan (Malaysia) ULB Urban Local Bodies NOC National Oil Companies UNCAC United Nations Convention Against Corruption NPA National Prosecuting Authority (South Africa) UNCITRAL The United Nations Commission on International Trade Law NRRET National Revenue Recovery Enforcement Team (Malaysia) UNCTAD United Nations Conference on Trade and Development NTCA National Tax and Customs Administration (Netherlands) UNDP United Nations Development Programme O&M Operation and Maintenance USA United States of America OACP Organisational Anti-Corruption Plan (Malaysia) UTIP Technical Unit for Private Investment OC4IDS Open Contracting for Infrastructure Data Standard UWOs Unexplained Wealth Orders OCDS Open Contracting Data Standard. WCO World Customs Organization OCP Open Contracting Partnership WDR World Development Report OECD Organisation for Economic Co-operation and Development WGI-CC Worldwide Governance Indicators- Control of Corruption OGP Open Government Partnership WHO World Health Organization OIA Official Information Act WSJ The Wall Street Journal OOP Out-of-pocket Payments PEFA Public Expenditure and Financial Accountability PEPs Politically Exposed Persons Enhancing Government Effectiveness and Transparency: The Fight Against Corruption ix Acknowledgements The preparation of this report was co-led by Bernard The authors would like to thank the Government of Myers and Rajni Bajpai (task team leaders) from the Malaysia for their support as part of its ongoing joint- World Bank’s Inclusive Growth and Sustainable Finance research partnership with the World Bank Group. Hub in Malaysia. The thematic leads for the report A special thanks to Datuk Dr Anis Yusal Yusoff, include Jim Anderson (Setting the Stage), Joel Turkewitz former Deputy Director General, National Centre for (Procurement), Ian Hawkesworth (Infrastructure), Sunita Governance, Integrity & Anti-Corruption (GIACC), for Kikeri (State-Owned Enterprises), Gaël Raballand his guidance and support for the Malaysia case study. (Customs), Jana Kunicova (Services), Stephen Davenport (Open and Inclusive Government), Kai Kaiser (GovTech), The team is grateful to peer reviewers – Alberto Leyton, Laura Pop (Asset and Interest Declarations), Alexandra Charles Undeland, Knut Leipold, Steve Zimmerman, Habershon (Beneficial Ownership and Infrastructure Sanjay Pradhan, Roland Clarke, Emile Van Der Does Transparency initiatives), Francesca Recanatini (Anti- De Willebois, Jim Brumby, and Clive Harris – for their Corruption Agencies), and Klaus Decker (Justice). Other thoughtful comments and suggestions on either the key team members included Ruxandra Burdescu, Blair concept note and/or the full draft report. The team is Cameron, Ida Richter Gade, and Carmen Loo, who also thankful to all the Country Management Units for provided substantive inputs into multiple chapters providing helpful comments and timely clearances for and/or cases. Chapter 10 was written in collaboration country cases and references in the report. with the WU Global Tax Policy Center at the Institute for Austrian and International Tax Law. Graham Colin- Jones skillfully edited the report, Carmen Loo and Shanta Vincent Pillai provided editorial assistance, and Kane Chong and Francis Sim created the graphic design and layout. Lara Saade provided advice on strategic communications. Helpful inputs on design were also provided by Joshua Foong, Min Hui Lee, and Nick Nam. Moustapha Ndiaye, Special Advisor on Governance, supervised the work. The team worked under the overall guidance of Edward Olowo-Okere, as Director of the Governance Global Practice. Early direction and support were received from Debbie Wetzel, Jim Brumby, George Larbi, and Alma Kanani. The team closely coordinated with Mara Warwick, Achim Fock, and Firas Raad as the management team responsible for the Malaysia Hub. x Enhancing Government Effectiveness and Transparency: The Fight Against Corruption About the Team Leaders Rajni Bajpai is a Lead Public Sector Specialist at the Bernard Myers is a Senior Public Sector Specialist World Bank. She is currently based in Kuala Lumpur, for the World Bank, based in Washington, DC (as where she leads engagements on Public Sector issues of August 2020). Previously located in the Bank’s with the Government of Malaysia at the World Bank’s Inclusive Growth and Sustainable Finance Hub in Inclusive Growth and Sustainable Finance Hub in Malaysia, he led various engagements on Public Malaysia. Her most recent research includes work Sector Management issues. Mr. Myers’s previous is on public service reform and role of institutions assignments have taken him to over twenty-five in Malaysia’s transition to a high-income economy. countries across Europe and Central Asia, Southeast With over 25 years of experience in development, Asia, the Caribbean, and Africa. His areas of Ms. Bajpai has worked extensively with governments specialization include public investment management, on improving public sector performance. Her areas performance budgeting, medium-term planning, civil of expertise include institutional strengthening, service reform, and functional reviews of the public improving ser vice deliver y, local governance, administration. While based in Asia, Mr. Myers led the budgetary and fiscal reforms, civil service and public Bank’s work with the Public Expenditure Management administration reform. Prior to relocating to Malaysia, Network in Asia (PEMNA), a peer-to-peer knowledge Ms. Bajpai was working in India as the Program Leader exchange network for public finance officials in East for Economic Growth Finance and Institutions, South- Asia. Mr. Myers is a US national with 30 years of Asia Vice Presidency. She led the dialogue at the experience helping governments to enhance their highest levels of government and was responsible for performance. Prior to joining the Bank, he worked for coordinating the work of several teams on the ground. the US Government Accountability Office (GAO) and An Indian national, she holds a Master’s Degree in for the US Treasury’s Office of Technical Assistance. Economics from the Delhi School of Economics and Mr. Myers holds an MBA from Stanford Business an MBA in Finance from International Management School and a Bachelor’s degree in Political Economy Institute. from Princeton University. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption xi Preface Achieving economic growth and shared prosperity in a Emergency responses to the COVID-19 pandemic nation requires public sector interventions across a range have resulted in huge expenditures by governments of domains. And yet corruption – the abuse of entrusted circumventing the standard operating procedures and power for private gain – frequently undermines those approval processes. This may create new vulnerabilities efforts in many of the countries in which the World Bank and leakages that may only come to light after the operates. Although anti-corruption initiatives are often initial containment phase has passed. In the short term, a part of a country’s public administration landscape, procedures that strengthen accountability will have to many of them are insufficient to overcome deep-seated be balanced with the urgent need for governments to corruption as well as public perceptions of corruption. respond to the crisis. Over the medium term, the same policy instruments featured in this report will remain Though an abundance of literature exists on the relevant in the recovery and post-recovery phases. subject of corruption, the World Bank has undertaken a fresh assessment of challenges faced by governments in tackling corruption, with a focus on instruments and policies that have been effective and why, and how The report is not incremental progress is being achieved in specific intended to be read from country contexts. In many cases, the instruments and policy responses are not new, but merit a fresh look cover to cover and has at what impacts policy design and implementation been structured in a of such measures. The report also discusses the role of selected institutions and their impact in the manner that allows the fight against corruption, also demonstrated through reader to easily identify country cases. and focus on a thematic This “compendium” of case studies and country area of interest. examples is intended as a reference guide to practitioners and civil society organizations working to shape their country’s approach to anti-corruption. It This reference guide may inspire new innovations and builds on the existing body of literature, the experiences experiences in the fight against corruption and bring of World Bank staff around the globe, and the initiatives to light areas where further work is needed to sharpen undertaken in international fora. The report is not the application of traditional anti-corruption tools. intended to be read from cover to cover and has been What emerges from the cases is that multiple factors structured in a manner that allows the reader to easily contribute to the impact of anti-corruption efforts, identify and focus on a thematic area of interest. including political leadership, institutional capacity, incentives, technology, transparency and collaboration. Corruption is still rampant in many of the countries Enhanced collaboration with stakeholders within and featured in the report, and examples presented outside of government is a critical success factor in the report are limited because they do not fully in overall government effectiveness. Since such resolve corruption risks. The endeavor is to present collaboration involves civil society, the media, the a candid picture of the progress and to highlight the private sector and the country’s citizens, it is clear that limitations and risks of policy reversal. The cases are strengthening the fight against corruption is a collective not “best practice”, but merely a “palette” of examples responsibility. and approaches that are being tried, and which may be illustrative for other policy makers with similar challenges. While countries that are fragile and conflict- afflicted face persistent challenges in addressing corruption, middle-income countries are not free from their own political economy challenges. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption xiii Executive Summary EXECUTIVE SUMMARY Introduction News headlines over the last few years have been initially may have limited impact, they could provide an filled with global scandals involving corruption important foundation for future actions. However, these on an unprecedented scale. They touch virtually impacts should be carefully assessed by public officials every continent, from Asia to Africa, Europe, and the and civil society as many high-profile anti-corruption Americas. The scale, magnitude, and sophistication of strategies have proven to be ineffective and only give a the operations has increasingly risen to levels that many veneer of government action. had not considered possible before. Governments are forever in search of new approaches and tools The purpose of this report is to equip public sector that can help identify loopholes and entry points for officials and civil society with a modular set of corrupt activities. While the containment of COVID-19 approaches, entry points and tools that can be and its devasting human and economic impacts have drawn upon and adapted to their specific country more recently been the focus of government actions, context. It is informed by international experience in it is almost certain that huge amounts of spending in what is and is not working to address corruption and a short time, circumventing the standard operating to enhance government effectiveness. Importantly, procedures, will result in new corruption scandals in the although the approach is modular, it is not a menu. post-COVID years. There are already reports in papers While the chapters and cases do not analyze the political regarding inflated food prices or favored medical economy of reform in each country or sector in depth, contracts to firms from a few countries. In drawing on they do recognize the relevance of political context and the past and looking ahead to the future, the time is elite bargaining that takes place to constrain options. ripe for the World Bank to take a fresh look at the state Rather, the report presents successful approaches and of play in tackling corruption and how countries are policy responses in various country contexts for the attempting to address this long-standing scourge on lessons they provide for reform-minded leaders and development. civil society. In so doing, it highlights the importance of ins titutions for implementing gover nment The multi-faceted and complex nature of corruption policies, engaging civil society, and ensuring greater has shown that while technical solutions and transparency in government operations. compliance measures are enablers, they are rarely sufficient in themselves to root out corruption. The key messages of this report are the following: In many societies corrupt behavior is deeply rooted in the historical origins, social norms and political • Progress is not linear and reforms could suffer culture. It is not unusual to find strong inter-linkages due to political setbacks and/or institutional between power, politics, and money. Political parties weaknesses, yet even basic efforts could provide a and campaigns are often financed on the back of close foundation on which to build. links with business, which can be corrupt. Entrenched political elites are eager to maintain their grip on power • The “how” of reform can be as important as the and money. The scope for reformers to make changes “what” of reform, as it requires an understanding is therefore constrained by the limits of their political of how key obstacles could be overcome in a influence, and any significant impact on corruption particular context. usually takes a long time. • There is no single success factor; impactful reforms While corruption may be entrenched, the case usually require a combination of several layered studies in this report demonstrate that progress or sequenced interventions (described in the is possible even in challenging contexts. By design, Conclusions chapter). For example, technology the report focuses primarily on developing countries, can be an enabler for transparency, but is not a full where institutional capacities may be less established solution on its own. than in advanced countries. Impactful anti-corruption measures are often opportunistic, targeting specific • Open government reforms can lead to a stronger areas of vulnerability where and when the political relationship between government and citizens, space allows for actions to be taken. Though the actions increasing levels of trust and social capital. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption xv EXECUTIVE SUMMARY • Sector and function-specific interventions can single report can expect to address all the sources be effective and complementary to broader of corruption and approaches required to combat it. government-wide efforts to enhance transparency, The report examines the manifestations of corruption integrity, and good governance. and efforts to address them from three perspectives: • It is critical to look beyond the de jure of anti- I. Selected key sectors and functions of the corruption institutions and tools, to the de facto government impact and to make course corrections so that II. Policy tools and interventions used to control national anti-corruption strategies and institutions corruption are not mere window-dressing; but are tailored to III. Institutions used by government for oversight the needs and contexts of countries. and accountability • Collaboration and information sharing across Part I of the report covers issues, challenges and traditional agency boundaries, and across trends in five key thematic areas: public procurement; international boundaries are becoming increasingly public infrastructure; state-owned enterprises (SOEs); important to address corruption. customs administration; and delivery of services in selected sectors. These are intended to capture a • It is important to factor the historical, social, small selection of high-value functions and sectors of economic, and political realities of a country into public sector activity. Part II examines some of the anti-corruption reform efforts. policy responses that government and civil society may employ for corruption prevention and detection, Given the wide scope of behaviors considered to be while Part III assesses the role of three institutions corruption, and the diverse range of approaches, no (Supreme Audit Institutions, Anti-corruption Agencies SELECTED THEMES Compendium of Cases PART I PART II PART III Functions government Selected policy tools Oversight institutions performs government uses government uses Procures goods and Open Government Anticorruption Agencies services Provides public goods GovTech Supreme Audit Institutions e.g. Infrastructure Runs Public Sector Asset and Interest Justice System Companies (SOEs) Disclosure Collects revenue, Beneficial Ownership prevents smuggling: Transparency Customs Provides services Exchange of Tax Information e.g. Ports, land management, and Identification of Tax health care Crimes xvi Enhancing Government Effectiveness and Transparency: The Fight Against Corruption EXECUTIVE SUMMARY and the Justice system) that oversee, implement or they did not merit a detailed description and instead contribute to anti-corruption efforts, and draws lessons are cited as examples. The cases are intended to about their effectiveness (see Figure below). The report bring out the “how to” of the reform process, while also features a brief country case study on Malaysia also showing the influence of political economy and that traces the history of the country’s anti-corruption institutional capacity constraints. None of the individual efforts over the last few decades and the influences cases would be sufficient to demonstrate the broader on its development. It concludes with a reflection on lessons of international experience, but they do show several key reform characteristics or drivers that were how some experiences were adapted into a specific common across the case studies. context. Moreover, the cases are often incomplete stories of reform – either because implementation is still The structure and format of the chapters vary by ongoing or because corruption remains an ongoing and thematic area. In most instances, the chapter starts with significant challenge. By design, many of the examples an overarching chapeau that highlights key issues and are taken from countries and sectors where corruption lessons learned, supported by case studies that focus remains widespread but where public officials and civil on why and how specific actions were implemented. In society have not given up battling it. some chapters, cases are in-built into the chapeau as PART I: Confronting Corruption in Sectors and Functions Public Procurement the strength of resistance to reform. The experience with e-GP reflects the experience overall with reducing Often placed at the epicenter of discussions of corruption in public procurement, where technical corruption, public procurement has wide-ranging approaches to governance challenges have had ramifications for the economy and delivery of public sustained success only when they are understood as services. It accounts for anywhere between 10%-25% of enabling change rather than as the primary driver of public spending globally.1 Corruption in procurement is reform. While the success of anti-corruption reforms in rampant, with estimates of the cost of capital investment public procurement has varied greatly, the two factors projects being consumed by corruption ranging from that have been consistently associated with declines in 10% to 30%2, with repercussions that go far beyond the corruption in procurement across different jurisdictions price tag of capital projects as it impacts the poorest are transparency and increased frequency of audits. sections of society disproportionately. Corruption in procurement creates the wrong incentives for firms and Reducing corruption in public procurement requires distorts competition and economic growth. a country-specific approach. Focusing on incentives and the capabilities of the institutions; improving the There is a vast literature providing guidance transparency and efficiency of the procurement system; on the features of procurement systems that overcoming opposition to change; and harnessing operate with high degrees of integrity. While forces in the private sector and civil society who have a increasingly, electronic government procurement strong interest in improving procurement outcomes are (e-GP) is identified as a key platform for addressing key. The three case studies from Somalia, Bangladesh, corruption vulnerabilities, its impact on procurement and Chile demonstrate the country-specific anti- has differed significantly in countries that have adopted corruption reforms in public procurement along a e-GP systems. Variation in changes in the incidence governance continuum. of corruption reflects a combination of factors, including the overall governance environment, the • The Somalia case explores an effort to reduce technical aspects of the specific e-GP system used, corruption in a limited number of strategic high- the capacity of staff responsible for procurement, and value procurement contracts, using a specially Enhancing Government Effectiveness and Transparency: The Fight Against Corruption xvii EXECUTIVE SUMMARY designed mechanism established jointly by corruption also has reputational risks for governments, development partners and the Government of undermining public trust and disincentivizing public- Somalia. Success was achieved in restricting private cooperation from quality contractors. corruption in a number of transactions and demonstrates the ability to achieve results in even Every phase in an infrastructure project involves the most challenging of environments. distinct combinations of institutions and stakeholders, each with their own vulnerabilities • The Bangladesh case explores an effort to reduce to particular types of misconduct. During project corruption as one dimension of an overall reform of identification and selection, some stakeholders may the country’s public procurement system featuring seek to undermine merit-based procedures for project the adoption of an e-GP system. The reform has selection, while the subsequent procurement phase built momentum over a decade of implementation. tends to be where the most entry points for corruption While intensive work on monitoring progress has exist, and the biggest payoffs. The construction phase demonstrated a substantial reduction in corruption, is vulnerable to ex-post renegotiation of performance as measured by key corruption indicators, it has requirements in the contract details, and the losses to also revealed certain aspects of procurement that the public purse can be significant. The estimates of are resistant to change. Recognizing corruption losses to bribery in construction, i.e., downstream from upfront as a key issue ensured that the e-GP procurement, are as high as 45 percent of construction program factored it in explicitly in the design of costs.4 the procurement reform. For integrity to overcome the forces of corruption, • In Chile, the reform program was driven by a non- a broad and vigorous alliance is needed, using political task force that recommended steps to varied tools to foster transparency and openness. improve the coherence of the public procurement Corruption is a reflection of how things are currently system, within a larger program of reforms aimed at done by certain officials, businesses and politicians restructuring the role and transparency of private in specific situations. This doesn’t happen in a financing of political parties. The Chilean example vacuum; corruption is enabled by the conventions demonstrates how a well-performing state, with and approaches that have been allowed to develop a relatively high degree of capacity and integrity, over time. In some situations, these practices may addressed corruption in public procurement by not even be considered particularly harmful or wrong modifying the incentives and dynamics in an by the participants – as illustrated by the oft used overarching system of governance, in order to term for corruption: the price of doing business. This confront the causes of corruption and not just its chapter argues that if the political level commits to symptoms. systematically implementing integrity measures across the infrastructure cycle, it will have an impact at both a systemic and a project level. In addition, and crucially, Public Infrastructure mobilizing citizens and stakeholders and strengthening their hand through greater project transparency and Studies show that the developing world’s openness can build momentum, and change the infrastructure needs are huge and attracting political economy and cultural considerations that quality private sector investment is critical to have allowed corrupt practices to happen. Through closing the gap. As much as $3-4 trillion annually such a sustained and broad-based movement, country will be needed globally through 2030 to meet the examples demonstrate that change can happen at both infrastructure needs of the 1.2 billion people who lack the project and society level. electricity; the 663 million who lack adequate drinking water sources; the 1 billion who live more than two Chapter 2 includes three case study examples kilometers from an all-weather road; and the many of strategies to mitigate corruption risks in the millions who are unable to access work and educational acquisition of public infrastructure. opportunities due to the absence or high cost of transportation services.3 However, the size, complexity • The Infrastructure Transparency Initiative and long-run nature of infrastructure projects leaves (CoST) offers a multi-stakeholder approach to them vulnerable to corrupt practices. The perception of strengthening governance in the infrastructure xviii Enhancing Government Effectiveness and Transparency: The Fight Against Corruption EXECUTIVE SUMMARY sector through improved transparency, stakeholder State-Owned Enterprises (SOEs) engagement and accountability. The expansion of digital government and open contracting Corruption in SOEs has gained prominence in data has created a more enabling environment recent years due to high-profile scandals in for multi-stakeholder approaches than would countries like Brazil, South Africa, Angola, and have been possible in the past. Three country Malaysia. Corruption risks arise from various sources. examples are presented: Thailand shows the SOEs in high-value sectors often enjoy monopoly or evolution of a multi-stakeholder working group. quasi-monopoly rights that provide an opportunity for The Ukraine case examines the institutional abnormal profit generation, a privileged relationship foundations for actionable data disclosure. The with the government and state financial support. Honduras example focuses on how international This creates incentives and opportunities to extract support has been combined with local leadership significant rents. Such mechanisms are often used to to strengthen transparency and accountability in benefit political groups and party finances in order infrastructure. Each case represents an evolving to sustain the resource diversion over time. Risks also story, with no doubt significant hurdles and gaps in arise from weak legal and regulatory frameworks; implementation yet to be overcome. corporate governance weaknesses at SOE levels; a lack of transparency and disclosure over SOE finances • Public-private partnership (PPP) renegotiation compounded by poor financial reporting practices; of infrastructure projects has the potential for and limited effective government and citizen oversight. abuse, as evidenced in Brazil, which was the These risks are exacerbated by inadequate technology epicenter of one of the largest corruption scandals in SOE operations and weak citizen participation in in history. PPPs are renegotiated much more monitoring SOE performance. Corruption can be often than similar private contracts. Dishonest detrimental to the SOE itself, to the economy, and to contractors make lowball bids to win contracts, the people when SOEs fail to provide critical public knowing that they can later reap windfalls during goods and services. a less transparent contract renegotiation process. PPP renegotiations can also allow governments Phasing or sequencing of SOE reforms based on to elude spending controls and defer costs to their political and institutional feasibility can future administrations, while companies can use help overcome entrenched interests and provide renegotiations and bribery to build market share. confidence to policy makers to take further steps. While changes to a long-term PPP contract may be The Bank’s experience suggests several categories of inevitable, this case study offers guidance to reduce actions that can contribute to enhancing integrity in the probability of opportunistic renegotiations that SOE governance: (a) opening up markets to greater are motivated by corruption. competition to reduce monopoly power and market share and incentivize financial and fiscal discipline; (b) • The third case examines how the Colombia strengthening SOE legal and regulatory frameworks Society of Engineers (SCI) began supporting Open and practices; (c) building a commitment to good Contracting, when they suspected that tender governance and capacity of state-owned entities; (d) specifications were so narrow that they were professionalizing the SOE board of directors and senior being tailored to benefit particular bidders. The management; (e) establishing effective internal controls, case highlights how the government acted upon compliance, and risk management functions in the SOE; the SCI findings by making standard documents (f) promoting transparency and full financial disclosure, mandatory for all state governments in 2019, including of SOE debt; (g) digitalizing financial and and by updating the country’s e-procurement service delivery information to improve the accuracy of platform to publish data in the open, standardized, information available to the public; and (h) facilitating and reusable Open Contracting Data Standard citizen engagement in holding SOEs to account for (OCDS) format. Utilizing data analytics to assess performance and providing feedback to management these reforms, the government is already seeing on issues of particular relevance to them such as the increases in competition and better value-for- quality of service delivery for water or energy utilities. money for the public. Reforming governance of SOEs alone may not always be enough to prevent corruption and assure Enhancing Government Effectiveness and Transparency: The Fight Against Corruption xix EXECUTIVE SUMMARY efficiency. Additional measures could include SOE corruption cases. The implementation of the restructuring, which may involve breaking large SOE privatization program is still unfolding. multi-layered enterprises into smaller business units or bringing opportunities for greater private sector • Colombia stands out from the other cases, because involvement in the operations, management or even it reflects a proactive approach by an SOE to make ownership of SOEs through PPPs or privatization, itself accountable to citizens and shareholders when the necessary conditions are being met. Such through a series of transparency initiatives, conditions include reduced or contestable market digitization, and customer-engagement practices. share and economic dominance; transparency over With a robust legislative framework for corporate ownership, operations and finances including SOE responsibility set in place decades earlier, debts; increased capacity for monitoring and oversight; Empresas Públicas de Medellin (EPM) distinguished and improved efficiency. Especially important is itself from other SOEs in the country and in the ensuring that transactions occur without special region by emphasizing public transparency and privileges for insiders or other favored buyers, so that engagement as the core pillars of its integrity drive there is a level playing field with potential competitors. and of its corporate governance more generally. Where privatization or private sector participation is Citizens in the community are encouraged to see not a viable option, SOEs can still be exposed to capital EPM as belonging to them, through the company’s market discipline through partial listings. approach to service delivery, customer feedback, and even share price. The three cases presented in this chapter are ongoing stories that highlight the complex challenges that political leaders and citizens face Customs Administration to improve SOE governance: Customs administration is vital for its role in trade • In Brazil, following the high-profile Lava Jato facilitation and protection of national borders, as scandal, the government passed the Law on the well as revenue collection. Collection of trade taxes Responsibility of Federal State Companies to (tariffs, excises and import value added tax) account strengthen the internal control environment in for a significant portion of government revenues – SOEs through the introduction of fiscal councils commonly 30-50% – in low-income countries and even and internal audit committees. The law also aims more in fragile states. Corruption in customs can be a to increase transparency around contracting disincentive to foreign investors, especially those who and procurement, which was the main channel intend to rely on smooth import of inputs and export of kickbacks exposed by Operation Car Wash. of goods. A low capacity customs administration also However, effective implementation of the law presents challenges for national security in an age of and deeper sector reforms remain in question international terrorism. Yet the customs administration and subject to the full support of the political is highly vulnerable to corruption because officials often leadership. enjoy discretionary powers over important decisions, and risk-based systems of control and accountability • In Angola, recent reforms of SOE governance are are often absent or easily breached. The number of in the early stages, and like Brazil, are set against “success” stories in addressing corruption in customs a backdrop of massive scandals related to the is limited. Georgia and Rwanda traditionally stand out; state oil company. Since mid-2017, actions have both countries’ reform efforts involved a dismantling included reforming SOEs’ public procurement, of old, discredited agencies and replacement with new opening up the income and asset declaration ones based on the principles of leaner bureaucracies system, implementing a divestiture of SOE and administrative simplification, and both were made non-core assets, increasing the transparency possible by the emergence of new leaders who broke of the privatization process, establishing a new ties with the old networks. reinforced SOE unit in the Ministry of Finance to collect data and exercise more active oversight, The chapter argues that legal and technical re placing mos t SOE b oard of direc tor s, reforms are necessary but insufficient to disrupt strengthening corporate governance in the corrupt behavior in customs administrations. state oil company, and prosecuting suspected Technical measures often include introducing an xx Enhancing Government Effectiveness and Transparency: The Fight Against Corruption EXECUTIVE SUMMARY upgrade to the legal framework, simplification of Service Delivery in Sectors (Land, processes and rate structures, automation, etc. But laws Health, Ports) and regulatory reforms must also be supplemented with other approaches that take into account deeply Corruption in public services takes many forms embedded norms and expectations of political and and imposes significant costs on the government, social life. The report argues for two broad principles: (1) citizens, and businesses. Estimates of the magnitude ownership of the reform among the officials involved in of dollars lost to corruption vary widely across countries reforming the customs administration is a critical issue and sectors. While these estimates rely on various for sustainability, and (2) opportunities for corruption assumptions, and are subject to critiques, they point can be reduced by designing mechanisms that create to the significant magnitude of the monetary costs of appropriate incentives, limit discretion by public corruption in public services. servants, and include enhanced controls. It concludes that understanding social normative pressures in a given Unpacking sector-specific issues is crucial to context can help practitioners design interventions to diagnose the root causes of corruption in public relieve those pressures, allowing collective behavior to services and design appropriate interventions. Even change. Reformers should target the informal networks within a sector, a reform could be narrowly focused on of patronage and social domination, which often rooting out a particular issue, such as bribery in surgery determine the behavior of customs officers. waiting lists, or adopt a multi-pronged approach to focus on the entire service. The correct diagnostics The two country cases show that effective customs also allows reformers to assess the feasibility of the administration reforms are possible even in fragile program, as well as to identify the loci of leadership states with limited capacity, when technical reforms and how to build stakeholder coalitions. are coupled with an understanding of the local political economy surrounding customs agents. Corruption in the three distinctive service delivery sectors of healthcare, land administration, and • Customs reforms in Madagascar are ongoing, port services impacts the economy in different but there have already been signs of significant ways. The three services are very distinct: healthcare, progress to reduce corrupt practices, facilitate that affects virtually all citizens, as seen during the trade, and increase revenue at their major port. current COVID-19 pandemic; land administration, Their performance-based pay program has helped a sensitive service impacting a large proportion of incentivize customs inspectors to curb tax evasion the population; and ports, a specific and narrower and expedite customs clearance. Importantly, the government to business service. If the health sector is reform was accompanied by extensive data mining plagued by pervasive corruption, human development and monitoring to detect corrupt individuals and can be impacted; corruption in land administration can practices. undermine land reform and citizens’ trust in government as a whole; and corruption in ports directly affects trade • Afghanistan’s government faced the daunting and the investment climate in the countries relying on challenge to curtail the parallel or shadow customs maritime commerce, hampering their development. regimes that operated beyond government The case studies describe reforms to address these control. For about 15 years now, the Afghanistan issues and improve service delivery. Customs Department has been progressively implementing a countrywide computerization of • Rwanda’s reform of land mapping and titling customs clearance operations. The strategy has aimed to modernize the entire sector through centered around the automation of procedures to enhanced transparency, thus increasing the cost significantly reduce face-to-face contact and the of malfeasance and reducing corrupt incentives resulting informal negotiations. Though significant in service delivery. It was focused on good vulnerabilities exist, including adaptation to “game” management practices in land administration, the system, Afghan authorities have witnessed including the digitization of records. increased revenue, improved clearance time, and improved transparency of trade transactions. • Ukraine’s ongoing health system reform is focused on changing the incentives of healthcare providers to improve outcomes. The reforms initiated so Enhancing Government Effectiveness and Transparency: The Fight Against Corruption xxi EXECUTIVE SUMMARY far have included capitation financing in primary of a pro-reform coalition. Such a coalition in Nigeria care; raising health professionals’ remuneration; included private shippers, the United Nations designing transparent, merit-based medical staff Development Programme (UNDP) and three of the appointments; and initiating an eHealth digital country’s anti-corruption agencies. The network record-keeping system. These reforms aim to worked together with the Nigerian government to lower out-of-pocket expenditure, reduce the develop corruption risk assessments of five ports, number of acute medical events, and increase followed by standardizing procedures, using an patient satisfaction with their care providers. This e-governance portal, and establishing a grievance is an example of a true “ecosystem reform,” in mechanism. Surveys conducted by the network which changes to legislation went hand-in-hand and its partners suggest the measures have had with executive implementation and strong civic a positive impact in improving the functioning of engagement to serve as a feedback loop. ports, even though substantial work remains to be done. • Nigeria’s reform program in ports is an attempt to address corruption in service delivery with the help PART II: Key Instruments for Fighting Corruption Open Government Initiatives While there has been a surge in interest in transparency in recent years, the impact of Open government reforms aim to promote transparency on improving accountability hinges an ethos of transparency, inclusiveness and on several factors. These factors include whether or collaboration. The aim is to shift norms in a sustainable not stakeholders can easily find and understand the way by introducing changes that lead to enhanced information, and the ability and willingness of the transparency and promote an environment that is less officials to respond to requests for information. Other conducive to corrupt activity, and empowering citizens reasons include lack of civic space, political will and to demand better services from the government. The institutional capacity, which results in governments impact of these reforms depends on the existence of failing to meet the expec tations of dif ferent other enabling factors, such as political will, a free and stakeholders. Under such circumstances, reform independent media, a robust civil society, and effective champions, coalitions for change, “infomediaries,” accountability and sanctioning mechanisms. such as journalists, an independent media where that exists and watchdog organizations, can play a critical Openness can lead to a stronger relationship role. Even though about 120 countries have passed between government and citizens, increasing levels a right to information law, evidence of the impact of of trust and social capital. An open government legal rights to access information on the extent and involves citizens in oversight of government functions by nature of corruption is inconsistent. Transparency by providing relevant information, creating opportunities itself cannot address corruption, although it is often for citizen engagement, and implementing mechanisms seen as a necessary first step and is certainly key in that strengthen accountability. While it is a challenge to shifting incentives and nudging behaviors. A broader make an empirically-grounded causal link between open enabling environment that supports the involvement government measures and reduced corruption, due to of a range of stakeholders in accessing, analyzing limited evidence, a growing body of case studies and and responding to information in the public domain experimental evidence demonstrates that well-designed helps access to information initiatives lead to more open approaches can lead to positive change. fundamental change. xxii Enhancing Government Effectiveness and Transparency: The Fight Against Corruption EXECUTIVE SUMMARY W hile mea suring the impact of citizens’ delivery, the initiative likely had spillover effects in engagement on corruption is hard, there is reducing corruption, even if on a small scale. evidence that social accountability mechanisms, such as social audits, surveys, citizen report cards, or grievance redress mechanisms, can all be used GovTech to address corruption in service delivery. Impactful interventions are effective when they address citizens’ The broadening and deepening of global digitization private interests, and garner high levels of citizen of governments and citizens is changing the face participation. Important enabling factors include access of public sector governance and its impact on to information, legislation, policy and practices, an anti-corruption. While digitization as a ‘foundational’ active and independent media, citizens’ ability to hold factor is important, other factors like institutional institutions accountable through oversight institutions incentives and capacities and strong leadership are and political channels, markets and institutions that key for enhanced efficiency, improved service delivery prevent elite capture, credible sanctions, and the and fewer opportunities for corruption. Reducing the existence of coalitions among multiple actors.5 human interface in service delivery helps governments to curtail the risk of rent-seeking behavior. Yet, the Open government measures can directly or traction of digital technologies in reducing fraud indirectly lead to a reduction in corruption even and corruption depends on the institutional context. though the impact can be difficult to measure. Any system will only be as good as the practices that However, if information is increasingly reaching citizens complement it. To gain greater traction for addressing and the media, and officials are acknowledging its fraud and corruption, data needs to be captured and accuracy, that is a step in the right direction. Over time, linked with other data. Mandating the use of the system with a holistic approach tailored to the context, open and validating and analyzing data using Artificial governance may help change behaviors so that public Intelligence (AI) or other methods can prove to be resources are directed not to the pockets of individuals effective. but rather to the common good. Two case studies focus on engaging citizens: Digital government transitions, coupled with disruptive technological change, offer both • Kenya’s experience with open budgeting illustrates opportunities and risks for anti-corruption. While that engaging citizenry in the budgeting process digitization can help improve transparency, with near can enhance accountability of public officials. real-time feedback helping expose illicit behavior, it ‘Participatory budgeting’, an approach introduced can also facilitate a rapid or scaled illicit syphoning of at the local government level (counties), involved resources. The options for leveraging opportunities that allocating a portion of the budget for citizens’ new forms of digital data offer are very different for a priorities and creating a participatory process country like Singapore (see Box 7.1) than those available where citizens could work together to define and to economies reliant on paper-based workflows, and vote on development priorities. While participatory where existing systems are not set up to link to each budgeting did not directly target corruption, it other, at least in the short run. nonetheless had an impact on ensuring public funds were spent on citizens’ needs, increased Developing countries could leapfrog and deploy citizen oversight of public spending, and in some new disruptive technologies more widely to cases resulted in cost savings. address public sector challenges. Digital technology disruptions are being used in a number of areas, • Ethiopia’s Social Accountability Program, an effort including for revenue, expenditure, regulation, and to better engage its citizens and improve public financial and physical asset management. Framing service delivery at the local level, led to increased technology-supported reforms as a public services trust between civil society, service providers, and delivery agenda, rather than in the first instance as an the government. While the program’s goals were anti-corruption crusade, may also be a more disarming mostly to increase public participation, build better approach in light of the existence of the vested interests relations between local governments, citizens, and benefiting from corruption. However, the impact will civil society organizations, and to improve service be heterogenous and depend on complementary Enhancing Government Effectiveness and Transparency: The Fight Against Corruption xxiii EXECUTIVE SUMMARY practices like the degree to which electronic channels Municipal Reform program demonstrates how the sub- are voluntary, and how discretion was used. national government progressively leveraged digital government platforms and emerging technologies to Big data, cloud-based platforms, biometrics and improve public services. fin-tech are all being used, but the full advantage can be realized only by addressing omissions and • In Andhra Pradesh, the government used drones biases. Greater access to digital data in usable form, to collect geospatial data and update maps, alongside technology tools, can empower civil society replaced paper-based systems with digital ones, and reform champions in government to detect fraud and trained both staff and citizens on how to use and corruption. While big data—and the related the new platforms. Citizens could access services application of Artificial Intelligence-Machine Learning or lodge grievances through multiple channels: (AI-ML)—can enhance detection and limit discretion online, by telephone or through a mobile phone abuse, the perseverance and skills to link and clean application. The reforms significantly reduced data will be key. Cloud-based platforms and services opportunities for fraud and corruption in key areas, are providing for on-tap computing, better data such as taxation and construction permits, and management capabilities, and storage capacities. improved revenue for local governments. Although biometrics have been used in identity validation, better targeting and access to services, and to improve attendance of public servants, the risk Asset and Interest Declaration (AID) of excluding genuine beneficiaries from government programs needs to be factored in. Finally, while fin- AID systems have increasingly become a multi- tech innovations have increased the scope and scale purpose tool aimed at preventing conflicts of for digital payments between governments and interest, detecting unjustified assets and building citizens, blockchain technology is still evolving, and broader integrity of public service. While many sensor technology is increasingly gaining momentum. countries have AID systems, there is limited evidence Blockchain technology has the potential to improve of their effectiveness. Most AID systems have yet to live trust in digital government in settings where trust is low. up to their potential. Cumbersome filing procedures, The internet of things (IoT) and other sensor technology crucial gaps in the disclosure forms, and lack of are increasingly allowing for richer and more dynamic transparency and enforcement are limiting the role of tracking and feedback. AID. Such weaknesses also may make it merely another check-a-box exercise to implement national anti- While different technologies have merit in corruption strategies. Lack of control of submission and their own right, the full impact lies in breaking ineffective verification of declarations undermine their technology silos and implementing interlinked importance as an anti-corruption tool. The chapter on approaches across sectors and services. Given the AID elaborates on what an effective AID system should expanse and diverse nature of public sector services, look like and how it can be relevant in the context of the most productive strategies build on a mix of wider transnational financial flows, new ways of disguising government digitization contexts and intersecting unjustified wealth, as well as domestic typologies of technology developments, rather than focusing conflict of interest and hidden wealth. excessively on a single technology. The roll-out of the latest ICT systems, including those supported by The chapter provides guidance on several critical development partners, may be seen as potentially AID system design questions: Who should file, how solving the problem, but this is not necessarily the frequently to file, paper vs electronic filing, what to case. What is essential is that for any country to adopt declare, how to verify declarations, how to sanction new technology or ‘leapfrog’, the corresponding non- compliance, and how much transparenc y. analog complements must be in place. In some Though the direct impact of AID systems on anti- cases, they may indeed be game-changing, but care corruption will always be dif ficult to quantif y, must be taken that the next must-have technology governments should nevertheless try to assess their does not become an excuse to address persistent effectiveness—public perception sur veys, exper t challenges, such as poor service delivery and fraud opinions, and quantitative review of compliance data and corruption. The case study on Andhra Pradesh’s are some methods available. xxiv Enhancing Government Effectiveness and Transparency: The Fight Against Corruption EXECUTIVE SUMMARY The two case studies highlight the impact of illicit practices and proceeds. Addressing the abuse enforcement, digitization, and transparency: of anonymous corporate entities is a global challenge. Regulatory loopholes in beneficial ownership disclosure • In Ukraine, the asset declaration system put in place requirements in one country have serious consequences in the 1990s had been nothing more than a formality. because illicit financial flows (IFFs) are not constrained But in 2014, civil society successfully advocated by national borders: illicit funds can find a safe haven an overhaul of the countr y’s anti-corruption in jurisdictions where regulations protect anonymity. infrastructure. When the new asset declaration Developing countries pay the heaviest price for these system became operational in September 2016, practices because of lost revenues or funds that are it was one of the most comprehensive worldwide. diverted as a result of fraud, tax evasion, and the illegal By the end of 2019, the system held over 4 million exploitation of natural resources. electronic documents, all of which were available for free public access, including in machine- Though still relatively new, the use of publicly readable format. However, at the end of 2019, due available registers of the beneficial owners of to concerns over effectiveness and impartiality corporate entities (beneficial ownership registers) of enforcement, Parliament adopted a law that is beginning to have an impact in two ways: (1) overhauled the anti-corruption agency in charge helping enforce illicit enrichment laws, 6 and (2) of the system and further strengthened provisions helping detect and prevent conflicts of interest in on the disclosure and verification of assets and public procurement. Even before the release of the interests. Panama Papers, international bodies like the Financial Action Task Force (FATF)7 were emphasizing the • Romania reversed a long history of inactivity value of beneficial ownership disclosure as a tool for on tackling corruption with the introduction of law enforcement authorities. Since then, civil society AID forms for a wide range of public officials, organizations, thinktanks and watchdogs have been together with a verification mechanism focused on contributing ideas to help solve technical challenges detecting and sanctioning unjustified variations of associated with establishing credible and effective wealth, conflicts of interest and incompatibilities. public disclosure systems. One of the important Transparency has been critical to the system’s milestones is the development of the Beneficial effectiveness, as all disclosure forms are published Ownership Data Standard (BODS), a framework for on the website of the National Integrity Agency representing information about people, companies, (ANI) and used by civil society and investigative and relationships as structured data, in a standardized journalists. ANI uses the system to sanction format that can be replicated across countries and unjustified changes in wealth, as well as conflicts systems. of interest and incompatibilities. ANI’s work is also focused on prevention, most notably though the The path to implementing beneficial ownership PREVENT system, which issues early warnings to transparency reforms is not easy. The report contracting authorities about potential conflicts of presents three diverse country examples as to how interest in procurement procedures. they have approached the adoption of a beneficial ownership transparency policy: Beneficial Ownership Transparency • Nigeria is an illustration of how reforms that are politically and technically challenging have been The release of the Panama Papers and Paradise initiated by leveraging international commitments Papers in 2016 and 2017 shone a spotlight on and policy plat forms, building on existing the extensive use of anonymous companies for institutional frameworks, such as the transparency concealing corrupt practices and proceeds. The commitments in the extractives sector. Beneficial sudden growth in publicly available information on this ownership requirements were introduced in 2019 widespread practice has helped increase pressure on as part of a bill to reform the private sector. The policy makers to address the abuse of anonymously- Nigerian Corporate Affairs Commission (CAC) is owned companies and other anonymous financial now tasked with collecting beneficial ownership vehicles, given the role that they play in concealing information for all 3.1 million Nigerian companies, Enhancing Government Effectiveness and Transparency: The Fight Against Corruption xxv EXECUTIVE SUMMARY and making that information publicly available. penalties, and recovered assets amounting to $15 billion. • In Slovakia, companies are required to register as a Partner of the Public Sector through ‘authorized Chapter 10 presents two case study examples on persons,’ (e.g., attorneys, notaries, banks, or tax how tax administrations can play a stronger role advisors), who are jointly liable for false information. in the fight against corruption and specifically Free public access is another cornerstone of against illicit financial flows: Slovakia’s approach to verifying data. Slovakia shif ted the burden of validating beneficial • Exchanging data to detect potential corruption: ownership information to companies through While most prosecutions for tax crimes related to these ‘authorized persons,’ given the technical and corruption can be undertaken by the tax authorities, administrative challenges inherent in verifying the they often require support in the form of information accuracy of beneficial ownership information. sourcing or expertise from other agencies. There are multiple obstacles to such information sharing, • The UK experience offers an example of how to but an increasing number of countries are creating balance data protection and privacy in a disclosure the legal precedence to overcome them. A policy, through: (a) publishing enough personally starting point is to establish bilateral agreements identifying information to distinguish between or memoranda of understanding (MOUs) to share beneficial owners and officers, while withholding information, while respecting relevant privacy sensitive information, and (b) allowing beneficial laws within the country. Establishing a national owners with privacy concerns to apply to have task force to enhance collaboration and improving their information removed from the register, but inter-connectivity among databases are also key only under very strict rules-based criteria. Out of steps to be taken by national authorities. millions of companies registered, only around 300 have applied to have their information removed, • Using tax data as evidence in the prosecution of and only 30 of these applications have been corruption: The level of cooperation between granted. tax administrations and other domestic law enforcement agencies is critical in countering tax and financial crimes. Tax administrations are Exchange of Tax Information and granted access to the transactions and records of Collaboration on Tax Crimes millions of individuals and entities, but they may be unaware of the typical indicators of possible Corruption is intrinsically linked to tax crimes, as bribery, corruption, and other financial crimes corrupt persons do not report their income from not related to tax. Moreover, in many countries corrupt activities for tax purposes. FATF includes there are legal barriers to the ability of tax tax crimes in the set of designated predicate offenses administrations to share information with the police for money laundering purposes, explicitly recognizing or public prosecutors in non-tax investigations. the linkages between tax crimes and money laundering. The ability of tax administrations to be involved in Moreover, the extensive level of corruption related to prosecuting financial crimes is often made easier tax has serious implications for government revenues when tax crimes are recognized as predicate and economic development. offenses to money laundering because it means that a person may be charged with the offense of The impact of inter-agency cooperation can be money laundering and the predicate offense of tax significant. In the Brazilian Petrobras investigation, evasion. tax auditors supported the transnational corruption investigation by analyzing suspects’ tax and customs data and sharing this with the police and public prosecutor as permitted by law. With that information, officials were able to uncover evidence of money laundering, tax evasion and hidden assets and the investigation has, so far, resulted in criminal fines, tax xxvi Enhancing Government Effectiveness and Transparency: The Fight Against Corruption EXECUTIVE SUMMARY PART III: Role of Institutions in Fighting Corruption Anti-Corruption Agencies Despite high expectations, ACAs have fallen short of achieving the organizational standards set by Anti-Corruption Agencies (ACAs) have in recent the United Nations Convention Against Corruption years received a great deal of attention and (UNCAC). ACAs have often been introduced in criticism because of the high visibility of their environments where other key institutions (for work and their seemingly limited impact compared example the judiciary) were weak and/or captured by to the resources devoted to them. The existing private interests. Moreover, the independence of the literature8 has highlighted the complexity and variety of institutions (functional, budgetary and appointments), these institutions and identified key elements for their strategic focus, human and financial resources, and effectiveness. Political will and high-level commitment mechanisms for collaboration and coordination have are the cornerstone of every successful anti-corruption not achieved the level that would enable them to be effort. Once political support is obtained, the next effective. ACAs have therefore not been successful in step is the introduction of a comprehensive and clear delivering according to their mandates and in line with legal framework for anti-corruption work. Such a legal citizens’ expectations, and in many cases have not had framework, although necessary, is not sufficient, and any significant impact on the trends, types, and levels laws and regulations need to be applied to make a of corruption in their jurisdictions. difference. Furthermore, inter-agency coordination and cooperation among different jurisdictions is required to The pervasive institutional limitations raise enhance the investigative capacity (and effectiveness) of questions as to whether the model of a stand-alone ACAs. Once this is assured, ACAs need an explicit role multi-functional ACA is the right one, or whether and mandate, and, as with every public institution, they the need can be addressed through existing require adequate resources to operate. ACAs, because institutions. Corruption has all too often been of the complexity of their work, must also position regarded as a stand-alone issue, with the establishment themselves clearly within the institutional environment of an ACA being a stand-alone response. In most cases, and establish effective inter-agency coordination and countries do not develop a national anti-corruption cooperation. A lack of clarity about their mandate strategy in advance of establishing an ACA and so do and position, and unclear political commitment, not tailor the design of such an agency to the problem. are two factors that have commonly contributed to There is often a lack of clarity over the roles and the emergence of ineffective ACAs that encompass responsibilities of other key institutions which also play a multiple ill-defined functions. Measures promoting the role in combating corruption, as well as the mechanisms ACA’s accountability and relationship with citizens and and incentives to ensure the inter-connectedness and the media (including the emerging social media) can be inter-dependence of the institutional landscape. Three powerful tools to create an enabling environment for case studies, the UK, Lithuania, and Bhutan, show three ACAs that face faltering political support. ACAs should different approaches to anti-corruption, each partly set an example and make themselves accountable for effective in its own way. their work by regularly sharing the outcome of their efforts and initiatives. Investing in programs to establish • The UK opted not for an ACA, but allocated a good relationships and communication with the public, number of anti-corruption roles to the International based on visible and relevant indicators of impact, has Corruption Unit (ICU) of the National Crime helped several ACAs to fend off political pressures and Agency, through a reconfiguration of expertise survive attacks aimed at undermining them. Clear and within existing institutional arrangements. The comprehensive performance indicators for ACAs are ICU was given dedicated staff and budget, and its not commonly used by ACA officials, making ACAs capacity was enhanced, yielding positive results. less able to track and report on results and impact and Success was also due to the flexibility of the parent even more vulnerable to political pressure and vested institution, and the leadership of a senior official interests. with a clear focus and a degree of executive Enhancing Government Effectiveness and Transparency: The Fight Against Corruption xxvii EXECUTIVE SUMMARY authority that ensured availability of and control with respect to its size and capacity, and its staff and over resources necessary to maintain, to date, its activities were quickly ramped up. Furthermore, organizational development and consolidation. despite the very challenging environment, the ACC was set up without an institutional and corruption • Lithuania set up a dedicated ACA, the Special risk assessment, which could have helped identify Investigation Service (STT), as a unit within the institutional gaps and weaknesses that the ACC Ministry of Interior. It was able to handpick could have begun to address in its work. This lack experienced staf f on enhanced terms and of strategic planning had consequences for the benefited from internal and international guidance. agency’s impact. Many reforms did not address The STT was seen as a quasi-law enforcement past cultural heritage issues. As a result, the ACC agency with strong leadership and technical continues to face challenges as it does not fit expertise. Its effectiveness can be attributed to entirely into the country’s environment and the the combination of a strategic approach taken environment does not fully facilitate its purpose. on the basis of informed intelligence, specific technical approaches, and continued guidance These experiences highlight the importance of having from international agencies. a political commitment to tackling the problem of corruption, developing a deep understanding of the • In Bhutan, the Anti-Corruption Commission (ACC) nature of the corruption problem, and mapping the was established as part of the 2005 constitutional existing institutional landscape before establishing a arrangements, with the aim of rooting out new anti-corruption agency if it is to be effective. corruption. It was given a disproportionate mandate xxviii Enhancing Government Effectiveness and Transparency: The Fight Against Corruption EXECUTIVE SUMMARY Supreme Audit Institutions audit model they follow, the country context, and the associated norms of behavior. The two case studies Supreme Audit Institutions (SAIs) can play a useful from Ghana and India demonstrate the effectiveness of role in detecting and preventing corruption, when the SAIs in two different contexts: they have the mandate, tools, and trust of the government to take on the fight against corruption.9 • The case study of SAI Ghana is an apt example of SAIs are the chief auditors of the government and play a an overlapping or hybrid model of a Westminster12 pivotal role in ensuring transparency and accountability. type SAI equipped with sanction powers. It The SAI’s independence and operating capacity are shows the transformation of a marginalized important foundations for providing fiscal oversight agency to a reform champion in the fight against through presenting credible and timely audit results to corruption. This was possible due to a seasoned legislatures, government, civil society, and the general and charismatic leader, operational autonomy to public. The primary purpose of the SAI is to report on investigate irregularities, and building alliances with the management of public funds and the quality and civil society to help communicate the importance credibility of the government’s reported financial data. of financial integrity. Their work has helped curtail Its recommendations can indicate ways to strengthen corrupt practices and lend added voice to CSO institutions. SAIs can contribute to combating advocates on a range of other related issues, such corruption by directly reporting on transactions and as asset disclosure. internal controls; and by assessing ways to improve the accountability and performance of government • The case study on India, also a Westminster agencies and anti-corruption bodies. SAIs are not model, demonstrates the key role played by the primarily responsible for tackling corruption and fraud. Comptroller and Auditor General in unearthing However, given the nature of work performed by SAIs, inappropriate financial transactions costing the including checking government accounts, verifying government huge sums of money. It revamped regulatory compliance and assessing the performance the manner in which future awards for the telecom of government entities, SAIs are capable of contributing spectrum were allocated. The core mandate to the anti-corruption agenda. allowed for not just examining expenditure programs, but also forgone revenue and potential To be effective in detecting fraud and corruption, conflicts of interest in government procedures. SAIs need to build capacity including guidance and training for auditors.10 They also need to strengthen their relationship with parliaments and anti-corruption Justice System agencies. SAIs could establish formal collaboration agreements with law enforcement agencies, where For the justice system to perform effectively, the the scope of collaboration extends to information constituent parts – courts, prosecutors, police, and sharing, joint conferences and workshops to share supporting bodies – need to be supported by the knowledge and experiences, referred case follow-up, political leadership and encouraged to play their staff exchanges and joint agenda setting. role. Without strong political commitment, there is often a gap between the laws on the books and the In an environment where corruption is widespread, implementation on the ground. Under-resourcing of establishing the integrity of SAIs can be a the justice system (both financial and human resources) challenge.11 Top management of the SAI can be is a long-standing problem in many countries and one expected to lead by example in maintaining high that impedes performance, including as it relates to integrity and establishing zero tolerance regarding prosecuting corruption cases. staff violations, failing which they will not be able to administer or propagate an organizational culture of Enhancing the effectiveness of the justice system integrity. This can be complex territory to navigate in the fight against corruption needs to proceed as auditors are often insiders who are asked to play at multiple levels: system-wide, at the criminal justice the role of outsiders. While the effectiveness of an chain level, and at the institutional level. Governance SAI largely depends on its operational and financial reforms at the system level need to ensure judicial and independence, it is also influenced by the external prosecutorial independence so decisions are made Enhancing Government Effectiveness and Transparency: The Fight Against Corruption xxix EXECUTIVE SUMMARY without undue interference, while encouraging judges citizens with the justice system and surveys worldwide and prosecutors to be accountable to the public for indicate that many citizens in developing countries have their performance, including for non-compliance with experienced police corruption, for example with police integrity requirements. Reforms at this highest level to stopping or arresting vulnerable people to extort a increase performance in the fight against corruption bribe or other favors. Corruption among judges and should also target the process of selection, evaluation, court staff often involves the speeding up and slowing and promotion of judges, prosecutors, and court staff. down of case processing, or other manipulations of case Second level reforms should address the criminal files. Surveys also indicate that many countries struggle justice chain, i.e., how different institutions interact and with a lack of integrity among judges and prosecutors, collaborate on agreed performance targets. which affects their decision-making. Finally, each institution itself should diagnose its In an increasingly interconnected world, mutual performance bottlenecks as well as the corruption legal assistance and other forms of international challenges it faces internally (e.g., through court cooperation between jurisdictions are crucial to user and multi-stakeholder justice surveys). effectively fight against cross-border corruption. Indeed, justice institutions themselves are not exempt The Justice chapter highlights two recent examples from corruption and capture that affect the broader where such cooperation has been instrumental in public sector. Police is a common first interface for exposing large-scale and pervasive corruption. Malaysia Case M ala ysia’s case study hig hlig hts both the government – a loosely formed coalition of opposition opportunities and challenges of building and parties led by the former Prime Minster (PM) – stressed sustaining an effective anti-corruption drive over the “rule of law” and took upon itself to revitalize the time. Despite several reform initiatives to address institutions that were put in place to fight corruption corruption, Malaysia continued to fair badly in global and to re-establish limits on the power of the PM. Yet, perception surveys on corruption. Indeed, many of the without the parliamentary majority needed to make institutions that were set up to detect and sanction changes in the Constitution, the scale of changes was corruption became gradually compromised, with necessarily limited. The actions taken by the Pakatan increasing concentration of political power. Only when Harapan (PH) government during its two years in the magnitude and scale of corruption in the 1MDB office boosted Malaysia’s ratings in global surveys of sovereign wealth fund became widely known to civil corruption perceptions in 2019. With the collapse of society and the global media, did citizens become the PH government in March 2020, it is unclear whether so outraged that they voted out the political party the momentum on anti-corruption reforms will be that had been in power for over 60 years. The new sustained. Conclusions Corruption is stubborn but not intractable, as and more subtle changes that governments and demonstrated by the dozens of cases of progress communities make that may go unobserved. The cases toward combating corruption presented in this presented here provide evidence of how opportunities report. The progress in the fight against corruption can be seized within a specific sector or function to is not necessarily from the large government-wide enhance governance; in many cases, the push to more announcements and initiatives that garner extensive transparency has been a common theme. However, the press coverage, but from the more focused efforts impact of the initiatives reviewed here may not always xxx Enhancing Government Effectiveness and Transparency: The Fight Against Corruption EXECUTIVE SUMMARY be measured in quantifiable savings from corruption • Incentives (often captured in social norms) drive or a jump in global survey rankings, as perceptions of behavior and the entry points for corruption vary corruption may be slower to adjust. Indeed, one of the across functions of government.  Therefore, one criticisms of the global survey rankings is that they are needs to focus on corruption at the micro-level and not actionable, and rather obtusely relate to the nature its manifestation in specific sectors or functions of the corruption problems being faced. and changing the incentives of the perpetrators. Effective anti-corruption strategies typically • Technology is enabling countries to standardize combine multiple measures, often including both processes, minimize human interaction, and sector-specific interventions and transparency capture comprehensive data that helps establish and accountability measures that apply to the accountability for a wide range of transactions. whole public sector. Corruption manifests itself in specific functions and sectors of government, and the • Finally, ef for t s that fos ter colla boration report emphasizes the relevance of this sector-based among multiple stakeholders, including across perspective. Yet, corruption at the sectoral level may international borders, to pursue a common goal flourish because of the existing social norms and a achieve greater success. governance ecosystem that encourages opacity or even secrecy, which either tolerates or encourages Sustaining the momentum for corruption- corruption. Broader governance measures may mitigating reforms is challenging but could be include strengthening institutions that help to combat aided by improving the measurement of their corruption on the one hand, and implementing specific impact. The current tools that are used internationally tools or policy measures that encourage transparency to measure corruption have the common problem of and make it harder to hide corrupt activity (and the relying on perceptions of experts. While there is some associated proceeds) on the other. benefit from such surveys as a broad proxy, they are not a substitute for having a more quantitative or evidence- While many factors may contribute to the based set of indicators. effectiveness of anti-corruption initiatives, there are six cross-cutting drivers of anti-corruption Achieving long-term economic growth and shared reforms that can be identified from the case prosperity depends upon governments, private studies. Not every factor is evidenced in every case sector, and communities working together to study, but these six are present in some combination in address corruption and its corrosive impacts. This each of the cases. report acknowledges that the challenges to confronting corruption are deep-rooted but shows that they are not • Strong and determined political leadership is impossible to overcome. Each case study gives evidence often needed to provide vision for reform and a of impact in reducing the risk of corruption, spanning a commitment to support increased integrity in the variety of country contexts: fragile states, low-income, face of opposition from vested interests.  and advanced countries. However, public policy practitioners and civil society advocates must recognize • Countries benefit as institutions become more that the success and sustainability of reforms cannot capable, providing checks and balances and be achieved solely through legislation, technology, or fostering accountability. Without strong institutions even citizen participation. What is needed above all, to assure implementation, reforms risk being short- is the commitment of all parties to engage proactively lived or only superficial. in the fight against corruption through collaboration, innovation, and mutual trust. Only then can the war be • Transparency can promote greater compliance won, with economic growth no longer being impeded, and improve human behavior. Open government but rather benefiting the whole of society, especially policies and access to information help make the poor and vulnerable. corrupt actions harder to hide and contribute to their prevention, particularly when they are linked to engaged and empowered communities and official processes. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption xxxi EXECUTIVE SUMMARY Notes 1. World Bank. (2020). Doing Business 2020. Washington D.C.: 9. The Congress of the International Organization of Supreme The World Bank. https://www.doingbusiness.org/en/reports/ Audit Institutions (INTOSAI), held in 1998 in Montevideo, global-reports/doing-business-2020 Uruguay, discussed and delivered concrete recommendations for SAIs to make an effective contribution to the fight against 2. G. Ware, S. Moss, J. Campos, and G. Noone, Corruption in corruption. See also U4. 2018. “The Role of Supreme Audit Public Procurement: A perennial Challenge, in J. Campos Institutions in Fighting Corruption” for a more detailed and S. Pradhan, The Many Faces of Corruption: Tracking overview. Vulnerabilities at the Sector Level, World Bank, 2007. 10. According to the survey conducted in 2010 by INTOSAI 3. Rozenberg, Julie; Fay, Marianne. 2019. Beyond the Gap: Working Group on Fight Against Corruption and Money How Countries Can Afford the Infrastructure They Need Laundering (WGFACML), only one-third of SAIs (18 out of 54) while Protecting the Planet. Sustainable Infrastructure;. responded positively on the questions of availability of audit Washington, DC: World Bank. https://openknowledge. staff and training program specialized in audits related to worldbank.org/handle/10986/31291 License: CC BY 3.0 IGO; corruption or money laundering. http://wgfacml.asa.gov.eg/ and OECD. 2007. Infrastructure to 2030 (Vol.2): Mapping Policy for Electricity, Water and Transport. http://dx.doi. 11. INTOSAI provides IntoSAINT, a tool to assess the org/10.1787/9789264031326-en. vulnerabilities and the maturity of the integrity controls of SAIs and to strengthen integrity in SAIs. https://www.intosaicbc. 4. OECD. 2014. OECD Foreign Bribery Report: An Analysis of the org/intosaint/ Crime of Bribery of Foreign Public Officials. OECD Publishing. ht tps://w w w.oecd.org/corruption/oecd-foreign-briber y- 12. A model where the work of the SAI is intrinsically linked to the report-9789264226616-en.htm.; and Hawkins, John, and Bob system of parliamentary accountability. McKittrick. 2012. Construction Sector Transparency Initiative: making construction more accountable. Proceedings of the Institution of Civil Engineers-Civil Engineering. Vol. 165. No. 2. Thomas Telford Ltd. 5. DFID. 2015. “Why corruption matters: understanding causes, effects and how to address them – Evidence Paper on Corruption.” January 2015. https://assets.publishing. service.gov.uk/media/57a08979e5274a31e00000d0/61212- corruption_evidence_paper_final_16Feb15.pdf; Johnsøn, Jesper, Nils Taxell and Dominik Zaum. 2012. “Mapping Evidence Gaps in Anti-Corruption: Assessing the state of the operationally relevant evidence on donors’ actions and approaches to reducing corruption.” U4 Issue Oct. 2012 No. 7. https://www.u4.no/publications/mapping- evidence-gaps-in-anti-corruption-assessing-the-state-of- the-operationally-relevant-evidence-on-donors-actions-and- approaches-to-reducing-corruption.pdf. 6. Illicit enrichment is defined in Article 20 of the United Nations Convention Against Corruption as “a significant increase in the assets of a public official that he or she cannot reasonably explain in relation to his or her lawful income.” Some states have adopted laws that criminalize illicit enrichment to strengthen their ability to fight corruption and recover assets. Evidence of disproportionate or illicit wealth allows these states to prosecute public officials and confiscate proceeds, on the basis that unexplained wealth is evidence of corrupt conduct. See Stolen Asset Recovery Initiative, 2012 “On the Take: Criminalizing Illicit Enrichment to Fight Corruption” Lindy Muzila, Michelle Morales, Marianne Mathias, Tammar Berger. 7. FATF is an inter-governmental body that sets international standards that aim to prevent global money laundering and terrorist financing. First established in 1989, it is now comprised of 37 member jurisdictions and 2 regional organizations. 8. Doig, A., & Norris, D. (2012). Improving anti‐corruption agencies as organisations. Journal of Financial Crime, 19(3), 255 -273. ht tps://doi.org/10.1108/13590791211243101; Recanatini, F. (2011). Anti-Corruption Authorities: An Effective Tool to Curb Corruption?, in International Handbook on the Economics of Corruption, Susan Rose-Akerman and Tina Soreide, eds., 2011. xxxii Enhancing Government Effectiveness and Transparency: The Fight Against Corruption EXECUTIVE SUMMARY References DFID. (2015). Why corruption matters: understanding causes, effects and how to address them – Evidence Paper on Corruption. January 2015. https://assets.publishing.service. gov.uk/media/57a08979e5274a31e00000d0/61212-corruption_ evidence_paper_final_16Feb15.pdf. Doig, A., & Norris, D. (2012). Improving anti‐corruption agencies as organisations. Journal of Financial Crime, 19(3), 255-273. https://doi.org/10.1108/13590791211243101. Hawkins, John, and Bob McKit trick. (2012). Construc tion Sector Transparency Initiative: making construction more accountable.  Proceedings of the Institution of Civil Engineers- Civil Engineering. Vol. 165. No. 2. Thomas Telford Ltd. Johnsøn, Jesper, Nils Taxell and Dominik Zaum. (2012). Mapping Evidence Gaps in Anti-Corruption: Assessing the state of the operationally relevant evidence on donors’ actions and approaches to reducing corruption. U4 Issue Oct. 2012 No. 7. https://www.u4.no/publications/mapping-evidence-gaps- in-anti-corruption-assessing-the-state-of-the-operationally- relevant-evidence-on-donors-actions-and-approaches-to- reducing-corruption.pdf. OECD. (20 07). Infras truc ture to 2030 ( Vol.2): Mapping Policy for Electricity, Water and Transport. http://dx.doi. org/10.1787/9789264031326-en. OECD. (2014). OECD Foreign Bribery Report: An Analysis of the Crime of Bribery of Foreign Public Officials. OECD Publishing. https://www.oecd.org/corruption/oecd-foreign-bribery-report- 9789264226616-en.htm. Recanatini, F. (2011). Anti-Corruption Authorities: An Effective Tool to Curb Corruption?, in International Handbook on the Economics of Corruption , Susan Rose-Akerman and Tina Soreide, eds., 2011. Rozenberg, Julie; Fay, Marianne. (2019). Beyond the Gap: How Countries Can Afford the Infrastructure They Need while Protecting the Planet. Sustainable Infrastructure;. Washington, DC: World Bank. https://openknowledge.worldbank.org/ handle/10986/31291 License: CC BY 3.0 IGO. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption xxxiii Setting the Stage SETTING THE STAGE Rationale and structure of the report The centrality of corruption for society. Corruption creates an uneven playing field for growth and development firms, distorting competition and innovation. Corruption continues to make headlines around the While corruption impacts everybody, the impact on world in both developing and developed countries — the poor and most vulnerable is disproportionate, billions of dollars stolen from countries, leaks of off- thereby exacerbating poverty and inequality. shore databases helping to bring down governments, Empirical studies have shown that corruption hits the and mass protests over corruption threatening poor the hardest. Many studies find that the poor pay political stability. New governments come to power a larger share of income in bribes, consistent with the on the promise of clean, accountable, and transparent idea that many payments for services are flat charges. regimes—as in the case of Malaysia, which saw a Moreover, some have argued that the poor are more change in government in 2018 after 61 years. In rich likely to be victimized either because they rely more countries, the term “corruption” is routinely hurled at heavily on state services2 or because they are seen as political opponents, sometimes with facts to support having less power. In one study in Mexico, car accidents the allegations, sometimes not. Relatives of leaders find were staged in an experiment—the traffic police hit themselves losing court battles in foreign countries over up the drivers of old cars for bribes and waved luxury their unexplained wealth, triggered by the ostentatious cars along with warnings.3 While the rich gain access consumption of luxuries. Already in 2020, the record for to services by paying bribes, the poor and vulnerable the largest legal settlement for overseas bribery ever are restricted from accessing health, educational, was broken when Airbus SE agreed to a settlement of and justice services that, in theory, are open and $4 billion with France, the UK, and the USA. free.4 Likewise, some among the rich and powerful gain from grand corruption, while the poor suffer Recognition of the pernicious effects of corruption the consequences when money is siphoned off. Such helped establish its primacy as a development money could have been put to more productive uses issue. Since the founding of Transparency International to build human capital and infrastructure, or address in 1993 and James Wolfensohn’s candid speech on issues related to high-quality service delivery, jobs, the “cancer of corruption” in 1996, there have been gender equality, and climate change, to name a few. deepening analyses and evolving approaches to tackling corruption. Governments across the world are Corruption not only undermines credibility and trying to address this phenomenon, which manifests trust in governments but impacts the development itself in different ways in different sectors and services. of economic, social, and human capital, which is From 1Malaysia Development Berhad (1MDB) to the fundamental to long-term progress. 5 For example, Fédération Internationale de Football Association the two key factors that produce human capital, (FIFA), from Operation Car Wash to the Luanda Leaks, namely education and health, see corruption of various recent headlines of corruption scandals only serve forms. Teacher absenteeism, kickbacks for school meal to highlight the continuing need for attention to the contracts, nepotism, and false degrees all weaken the problem of corruption. efficacy of learning-related spending, and the pernicious effects of corruption do not stop there.6 In the health Research has long examined the deep and far- sector, goals can be undermined by corruption in the reaching impact of corruption on economic growth, procurement of pharmaceuticals or medical equipment, management of public resources, and inequality. and has been associated with problems as wide- Early economic studies argued that corrupt practices ranging as antimicrobial resistance7 and HIV infection,8 distort the distribution and utilization of resources, and to child mortality 9 more generally.10 In addition to leading to inefficiency.1 Corruption also affects the long-term consequences, corruption in the health public welfare when investment decisions are driven sector can have immediate effects as we see now in the by opportunistic, rent-seeking motives, rather than ability to efficiently address the COVID-19 pandemic the intrinsic value that such investments can bring to (see box below). Further, corruption in infrastructure, Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 1 SETTING THE STAGE BOX A Corruption Risks Stemming from COVID-19 At the time of finalizing this report, all countries are dealing with the crises surrounding the COVID-19 pandemic. Governments are responding not just to contain the disease, but to address the multiple challenges of providing health care, food, and security to people as well as keeping the economy from crumbling due to the closing of businesses and forced lockdowns across the world. This unparalleled crisis has caught most governments unprepared and has led to very large sums of unplanned money being spent on health care, social security and economic stimulus. Speed is key and hence regular or standard operating procedures are often not realistic. Billions of dollars are being raised, borrowed, and spent by countries, circumventing standard procurement and other accountability procedures as they try to control the spread and aftermath of COVID-19. The large scale of emergency spending by governments exposes them to a variety of corruption risks that may undermine the effectiveness of government responses. The strains placed on the public sector in responding to the current situation present enormous opportunities for corruption to flourish. Corruption can lead to the theft, wastage, and misuse of scarce resources, resulting in unnecessary suffering and death. It can also entrench elite privilege and inequality, and undermine institutions of accountability with lasting consequences. The risks and associated responses in such a situation are of a very different nature to those highlighted in the report, as this situation is unique and unprecedented. Key risks of corruption from the COVID-19 response in the health sector include those related to corruption in the procurement of emergency supplies and services; supply chain and service delivery; and in the administration of the response to the health crisis. Risks in responding to safety nets, food and livelihood security stem from the theft and capture of emergency funds. The use of these funds could be undermined by distorted targeting, capture by vested interests and inclusion or exclusion of certain populations, as well as by being stolen prior to reaching the intended beneficiaries. Finally, the risks associated with reviving the economy are multi-faceted and include unequal application of emergency powers granted for various economic activities, ranging from distribution of benefits to implementation of policies and decisions taken by the government, and abuse of power. Minimizing such risks, whether for health sector spending or safety nets or revival of the economy, requires mechanisms for oversight. This would involve defining and activating explicit processes and protocols for documenting emergency spending; tracking delivery of supplies involving central and decentralized authorities; publishing information on emergency spending; and conducting quick reviews. Such reviews would involve undertaking audits of spending as well as receiving feedback from beneficiaries through specific mechanisms, so that responses can take account of identified shortcomings and become more effective as the situation evolves. Use of pre-existing digital platforms both for distribution of benefits, as well as for addressing grievances and fostering partnerships with the private sector and civil society organizations for distribution and oversight, can build greater oversight and trust. In short, to foster greater accountability it is important that government actions are clearly articulated, rules are enforced, violations are addressed, and problems remedied as quickly as possible in a transparent manner. Follow-up actions include dismantling temporary or emergency powers and provisions, conducting post reviews and bringing perpetrators to task. Communication to the public on all government actions from the allocation of funds to their use, as well as publicly reporting about the measures being taken to prevent corruption and to follow up on violations, will not just deter corrupt behavior in this situation but will help maintain the focus on the broader corruption agenda. Source: World Bank. 2020. Ensuring Integrity in Governments’ Response to COVID-19 (English). Washington, D.C.: World Bank Group. http://documents.worldbank.org/curated/en/801501588782665210/Ensuring-Integrity-in-Governments- Response-to-COVID-19. 2 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption SETTING THE STAGE with its effects on road quality, and corruption in the including fragile and conflict-affected countries. police, with its effects on safety enforcement, are both associated with road fatalities with consequent impact This report is structured to optimize its value and on human capital. Corruption to avoid environmental interest to government practitioners, researchers, regulations, kickbacks in procurement, bribes to pass international developmental organizations, civil building inspections, and state capture by interests society organizations (CSOs), think-tanks and the in pharmaceutical companies, all undermine the public at large. Within that sphere, the report should developmental impact of public sector expenditures. find an audience not only among anti-corruption agencies, but also ministries and institutions performing functions that tend to be most vulnerable to corruption What makes this report on corruption (e.g., public procurement, infrastructure, and customs different? administration). This report is granular as it slices the issue of corruption into key thematic areas and specific Since corruption manifests itself in many diverse sectors that are prone to corruption. Examples suggest ways, no single report can expect to address a set of potential entry points and platforms for future all the sources of corruption and approaches engagement in specific areas. The structure along required to combat it. Instead, this report aims to themes and approaches will enable practitioners, policy highlight accumulated knowledge on anti-corruption makers, and other audiences to zero in on sections that thematically. It curates stand-alone case studies in may be most relevant for their context. Hence most the fight against corruption, i.e., examples of where sections of the report can be read as stand-alone public officials have implemented promising initiatives pieces depending on the area of interest. Cases aim to combat corruption and enhance public sector to give a detailed account of not only what was done, performance. While a specific intervention or case but “how” the obstacles were addressed to achieve the may be showing signs of impact, it does not mean that reform and results. these countries have made generalized progress in reducing corruption at the country level. Nonetheless, The report approaches corruption by unpacking it may be possible to scale up these limited successes it into selected themes and provides examples of in difficult environments or to apply them to other successful interventions. Focusing on emerging countries keeping local conditions in mind. There may stories of impact across a range of countries, sectors, be learning in these cases. At the same time, as with and tools challenges the notion that little can be many anti-corruption efforts, any of these successes accomplished. To focus on successes is admittedly runs a risk of reversal due to a policy or political change risky, as reforms can be weakened or even reversed, in the country. sometimes quickly and sometimes through a gradual erosion of commitment. Alternatively, there may even Case selection was done through World Bank staff be non-observed aspects of the success, making who have technical expertise in selected areas attempted replication fraught with difficulties. However, and countries, and through an extended network there is merit in focusing on success; where there is of partners, practitioners, and think-tanks known a will and an opportunity to confront the problem of to staff. This process was similar to that used to corruption in one’s organization, seeing how others have produce Improving Public Sector Performance through successfully addressed similar challenges can spark Innovation and Inter-Agency Coordination, published ideas and innovation. The case studies also provide in 2018 out of the World Bank’s Global Knowledge examples of reforms driven not necessarily from within and Research Hub in Malaysia. This approach implies government but from civil society and by private sector that there may be other cases across the world that are interests. The cases also contextualize the design of known to individuals and practitioners, but they may reforms to warn against using those approaches blindly not be documented or disseminated in a way that is with scant attention to the country context. Given accessible to a wider audience. Cases were solicited the diverse nature and magnitude of the problem, and selected on the basis of themes and sectors it is important to understand the tools, policies, and covered in the report rather than their geographical approaches that have worked in specific contexts to origin. Hence, while there may be several cases from achieve goals at defined times. By no means exhaustive, a particular country or none at all, overall there is a the selected tools, policies, and approaches may help broad geographic spread covering almost all regions, with the design of appropriate interventions within Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 3 SETTING THE STAGE country contexts. While the chapters and case studies description and instead are cited as examples or boxes are modular, they do not make up a menu. Though within the chapter. Cases are used to draw lessons on the report does not claim to fully address the complex key elements that drove success and aim to provide political or social dimensions in each case, it recognizes hands-on guidance to practitioners and policy makers. the role or lack thereof of political leadership, cultural In contrast, for one or two thematic areas – such as the norms and other key factors in spearheading or putting use of tax data and collaboration with tax agencies – at risk some of the anti-corruption reforms. the focus is on the cases. The first part of the report covers issues, challenges Coverage, limitations and structure of and trends in five key thematic areas, supported the report by specific country cases that demonstrate some degree of success or provide valuable lessons. The report is selective about what manifestations The five thematic areas include public procurement, of corruption are covered. The overarching criteria infrastruc ture, state-owned enterprises (SOEs), for the selection of thematic areas are functions or customs administration, and delivery of public services sectors that are particularly prone to corruption and in selected sectors. These themes were chosen not instruments or institutions that have experienced some necessarily because they offer the best possible success in combating corruption. The report organizes solutions to address corruption but because of the these thematic areas in three broad categories. First, it central role they play in long-term economic and social drills down into selected sectors and functions that are development. Due to the centrality of these areas prone to corrupt activity and that have a high impact for economic systems and the pervasiveness of their on development. Second, it zeros in on some of the interaction with the private sector and the general policy practices and tools that have been effectively population, they pose large risks for misappropriation used by practitioners in different country contexts; of public funds, the capture of revenues by elites, and and third it highlights the role of three key institutions collusive networks. in preventing and detecting corruption. Beyond these three categories, the report highlights successes The five thematic areas cover a large canvas but in expanding transparency, citizen engagement, are by no means exhaustive or distinct. Estimates technological adoption, and stakeholder collaboration, show that procurement accounts for 10-25% of which are critical across all sectors. As the report is spending globally and anywhere between 10-30% of case-study based, the focus is on the perspective of the cost of capital projects is consumed by corruption. leaders and practitioners and the sorts of issues that The report cites three cases of which two are from they face in corruption-beset sectors. The chosen fragile and conflicted countries (Afghanistan and themes, instruments and institutions are not exhaustive, Somalia). The first three thematic areas (procurement, nor are they distinct sets as evident from linkages and infrastructure and SOEs) are inter-twined as many large overlaps discussed briefly below. The final section also corruption scandals in procurement are associated has a country-specific focus on Malaysia, a case that with infrastructure services, several of which stem from traces the history of a country’s anti-corruption efforts SOEs. Case studies from Colombia, Brazil and Angola over the last few decades. highlight the importance of transparency, citizens’ oversight and integrity to foster greater accountability Each thematic area is covered in a separate in the functioning of SOEs. The report also examines chapter that generally begins with an overarching the importance of public-private partnerships (PPPs) in chapeau that delves deeper into the sector or this context through examples of poorly designed long- instrument-specific issues, supported by case term partnerships that have resulted in renegotiations studies. It provides context to the reader about why in several countries. Customs administration is the sector, instrument or institution is relevant for another sector prone to both transactional and governments’ anti-corruption efforts, possible entry systemic corruption, where deal-based relationships points for engagement, what works, and what is less and political interference are rampant. The report effective. It then draws on lessons from the two or three highlights an interesting case from Madagascar wherein country cases that support the issues discussed in the ‘performance contracts’ were used to tackle corruption. chapeau. In some chapeaus, cases are in-built into Finally, delivery of services, which is a key area as it the broader write-up, as they did not merit a detailed impacts people’s day-to-day life, is covered through 4 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption SETTING THE STAGE three interesting and important sectors: health, land, and the United Kingdom, three countries with very and ports. Together, they represent a wide spectrum of different histories. A short piece on Supreme Audit services with unique approaches used in three country Institutions (SAIs) and their role in flagging dubious environments: health in Ukraine, land administration in transactions is supported by case studies from Ghana Rwanda and ports in Nigeria. and India. The last chapter discusses the role of Justice Institutions in controlling corruption and the challenges The second part of the report focuses on cross- they face in strengthening operational effectiveness cutting themes like transparency , citizen and independence. engagement, and GovTech, plus selected tools to build integrity and detect corrupt behavior. The A special country case study on Malaysia traces the chapeau on transparency and openness, a cross- evolution of the country’s anti-corruption efforts cutting and foundational tool to deter corruption, is and its political-economy dimensions over several supported by case studies from Kenya and Ethiopia that decades. The Malaysian case reviews the efforts, demonstrate the role citizens can play in bringing about opportunities and challenges faced by a country that greater accountability and integrity in government had one-party rule for over 60 years until 2018, following functions. New technologies and their use to deliver a very large corruption scandal at its sovereign wealth services and detect fraud and corruption are discussed in fund 1MDB. It also highlights Malaysia’s institutional the GovTech chapter. Asset and interest declarations and policy reform efforts to address corruption from with different degrees of sophistication are beginning the 1950s to the present. to show results in building integrity in some countries, as highlighted in the case of Ukraine and Romania. This The report concludes with a review of six cross- is followed by a discussion of beneficial ownership cutting factors that are common across the transparency, another powerful tool to end the corrupt case studies, as well as some reflections on the practices and proceeds of anonymous companies. Part agenda that lies ahead. It notes that while there are II concludes with a focus on two case study examples no panaceas for confronting corruption, the featured of how inter-agency collaboration with tax agencies cases exhibit a mix of reform drivers that contribute to can contribute to better detection and prosecution of their impact. The chapter highlights the importance corruption. of political leadership and alignment of incentives, coupled with information technology, to enable greater Part III uses a broader institutional lens to consider transparency and accountability in public expenditure. the role played by oversight institutions to support Institutional capacity enables effective and sustainable government-wide reforms to fight corruption. implementation of reforms, while collaboration across Lessons regarding the role, evolution, structure international institutions and countries across the globe and effectiveness of Anti-corruption Agencies are is critical to detect and confront illicit flows of funds. demonstrated by country cases from Bhutan, Lithuania Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 5 SETTING THE STAGE Trends, measurement, and emerging issues Global trends in implementing policies often see such laws used by investigative journalists and tools that help reduce corruption and civil society activists to uncover malfeasance of all sorts. Based on the Global Right to Information Rating The tools, policies and mechanisms for controlling (RTI Rating), which uses 61 indicators corresponding corruption have seen improvements in many areas, to features of a good RTI regime, both the number and are generally moving in the right direction, and quality of access to information laws have been despite some reversals. Systems of public financial increasing. An indicator that tempers optimism about management (PFM), access to information, and this trend is provided by the Open Government mechanisms for accountability have all become more Partnership (OGP), which tracks implementation of RTI sophisticated with the use of improved technology. commitments by OGP members. Between 2014 and Laws prohibiting overseas bribery are becoming more 2018, the number of OGP members implementing RTI prevalent and more widely enforced. On the other commitments dropped 15 percent and fewer members hand, in several countries, the right to information made such commitments in 2018 than in 2012. Since or to participate in public affairs is being curtailed, most OGP members already have RTI laws in place, the accountability mechanisms exist in name only, and concern is over commitment by countries to improve enforcement is lax. Freedom House, in its annual review, their RTI legal frameworks and ensure quick and finds steadily declining averages for their Functioning effective servicing of information requests.13 Access to of Government measure, which focuses specifically on information systems feature in the chapters on open measures for controlling corruption. There is a growing government (chapter 6), infrastructure, and public- need to address the role of secrecy and offshore private partnerships (chapter 2), and supreme audit jurisdictions, concern about the shrinking space for civil institutions (chapter 12). society, and distress over repressive means being used to curtail information. Public Financial Management. Strengthening PFM systems can help reduce the risk of some forms of While some of the common foundations for corruption through better accountability, improved controlling corruption appear to be moving in the spending and greater scrutiny of the budget, both by right direction, corrupt individuals are also finding legislatures and the public, and can help constrain the it easier to hide their illicit gains. The need to move ability to shift resources towards corrupt purposes. and hide large sums of illicit funds has contributed to One useful source for tracking progress on PFM is growth in the demand for services that facilitate these the Public Expenditure and Financial Accountability movements and for the creation of offshore structures.11 (PEFA) program, initiated in 2001.14 The PEFA program Secrecy-focused jurisdictions provide havens for hiding provides a framework for assessing and reporting on wealth, whether obtained legally or illegally, and some the strengths and weaknesses of PFM, using evidence- jurisdictions have competed for such business. While based indicators to measure performance. A recent the historical origins are deep, the competition has World Bank study15 demonstrates the usefulness of led to an increasing number of secrecy jurisdictions. matching measures of corruption with measures of the There is increasing recognition of the pernicious effects policy and institutional framework. It found that “firms that policies in these jurisdictions and the abuse of report paying fewer and smaller kickbacks to officials in anonymous companies and other legal structures have countries with more transparent procurement systems, on corruption.12 effective and independent complaint mechanisms, and more effective external auditing systems.” Overall, for Access to Information. The ability of citizens to make the subset of countries that have undergone the PEFA informed choices in their daily life and hold government exercise multiple times, some saw their assessments accountable is directly related to their ability to have get worse, but a larger number of countries saw access to government information in a meaningful improvements.16 Studies of PFM remind that reforms way. When access to information is the default, rather require long-term engagement with all stakeholders for than the exception, the public, the media, and civil successful implementation. Different aspects of public society can serve as watchdogs over the government. financial management are discussed in the chapters Countries that have passed access to information laws on procurement (chapter 1), public infrastructure 6 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption SETTING THE STAGE (chapter 2), state-owned enterprises (chapter 3), open Enforcement of Stricter Foreign and Domestic Anti- government (chapter 6), and supreme audit institutions corruption Legislation. While the United States of (chapter 12). America was the leader in pursuing its companies for overseas bribery, it is no longer alone. The Foreign Transparency and Participation in Decision-Making. Corrupt Practices Act (FCPA) of 1977 made it unlawful Transparency can help strengthen accountability for for entities to make payments to foreign government the implementation of policies. When coupled with officials to assist in obtaining or retaining business.19 mechanisms of participation, transparency can also Other countries have since enacted similar legislation, help limit the degree to which policies are biased especially following the adoption of the OECD in favor of certain groups, firms or individuals. When Convention Against Bribery in 1998. The UK Bribery working in concert, transparency and participation Act is even more stringent, and enforcement has also can help limit state capture. Based on a study by been increasing. While universal enforcement of such the World Bank, between 2001 and 2016, about 60 laws is still a long way off, some progress has been countries had adopted regulatory impact assessment made in the past decades. 20 The passage in 2003 of (RIA) frameworks17 that were publicly available. As the United Nations Convention Against Corruption with access to information laws, however, developing (UNCAC), which obligated signatory countries to systems to implement RIAs as part of the legal and criminalize behaviors widely viewed as “corruption”, regulatory drafting processes is not trivial. Among the was an important milestone. While legal frameworks 57 countries whose reforms could be tracked, only 20 have moved closer to criminalizing the behaviors had operational and functional systems two years into widely seen as corruption, data on enforcement implementation. The authors noted that public officials is not easily available and most observers see a may resist RIA systems either because of the disruption large gap between de jure provisions and de facto to established processes and work patterns or because implementation. Internationally, efforts to rein in the associated transparency may expose practices overseas jurisdictions are bearing fruit, as the chapter which are not ethical or legal. The study argues that on beneficial ownership transparency (chapter 9) flexibility and patience are needed for the successful explains. Pressure has also been increasing through the building of reform constituencies inside and outside debarment processes of the multilateral development government. banks, including agreements to cross-debar firms and individuals that violate policies related to fraud and Accountability Mechanisms. Several accountability corruption. By the end of June 2019, more than 200 tools, such as income and asset declarations and firms or individuals had been debarred by the World conflict of interest disclosures for public officials Bank. 21 are being more widely applied across governments. The percentage of jurisdictions with disclosure requirements has grown from 43 percent in the Measuring impact: Does the data help 1990s to more than 90 percent today. Many are us? taking advantage of electronic means for making and verifying the disclosures.18 These are discussed Has the progress in improving policies and in greater detail in the case studies in chapters 8 and institutions for controlling corruption been 9 of the report. Indeed, technological advances are matched with progress in reducing corruption? strengthening mechanisms of accountability in many Have the tools and strategies adopted by countries ways. These include the use of biometrics to eliminate been effective? Have the anti-corruption agencies, tax ghost workers, e-GP for efficiency and integrity, public and audit institutions, CSOs and other institutions of audit tools and beneficiary feedback mechanisms, accountability been effective in reducing corruption? and the use of drones and remote sensing to monitor The answers are not straightforward as they depend progress on infrastruc ture projec t s. CivicTech on the availability of indicators that robustly measure and GovTech are providing promising avenues for trends in different types of corruption over time. While accountability and have shown some positive results the pros and cons of different measures—surveys on in conjunction with other tools. Chapter 7 discusses experiences, perceptions of experts, and indexes of the latest trends in technology and their use to deliver both—have been written about before, a brief review services and detect fraud and corruption. may be useful.22 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 7 SETTING THE STAGE It is important to distinguish between measures but is much more systemic since 57 percent of the that are based on the perceptions of experts and underlying data points are missing. A second reason those that track actual prevalence of corrupt is more direct. The WGI-CC is rescaled each year to behaviors over time. The former may have limited have a mean of zero and this reason alone means that it usefulness in tracking actual levels of corruption over cannot be used to track progress over time. Using these time since perceptions may be biased by perceived composite indicators to assess changes over time, while correlates, such as poverty or form of political system. commonly done, should be avoided. In addition, they tend to adjust slowly to changing realities. A range of biases can cloud perceptions of how Well-designed surveys, on the other hand, tend good or bad things were in the past, making questions to provide a more accurate understanding about perceived trends (“is corruption getting better of corruption trends over time, but they are or worse?”) poor proxies of actual trends.23 In contrast, intentionally narrower in scope. The World Bank’s surveys about contemporaneous experiences (“have Enterprise Surveys since the early 2000s have allowed you paid a bribe in the past year?”), evaluated at for systematic tracking of direct experiences with different points in time, provide better measures of corruption in business enterprises, using a consistent actual trends. Even if they are well designed, however, methodology (the same questionnaires and sampling). surveys on corruption experiences may not always get To track and understand trends, one needs to focus on honest answers, leading to underestimations of the the countries that were in at least two rounds of the extent of corruption.24 Enterprise Surveys. In the Europe and Central Asia region, such surveys have been carried out every three While index-based measures have helped raise to five years since 1999, and each round has showed general awareness of the magnitude of corruption, generalized reductions in administrative corruption.29 A they have limited usefulness for tracking changes global approach would need to focus on the years since over time. Two of the most well-known and widely used 2006 when survey questionnaires were harmonized indexes are Transparency International’s Corruption across regions.30 Perceptions Index 25 (TI-CPI) and the Control of Corruption measure in the Worldwide Governance One benefit to working with certain survey data is Indicators 26 (WGI-CC). Both of these use composites the ability to focus on specific types of behaviors, made up of more than one indicator, combining rather than the generic term “corruption.” Indeed, information based on availability. The TI-CPI continues speaking too generically about “corruption” not only to be influential in raising awareness about corruption, risks mashing up genuine successes and failures, but and the WGI-CC is often used for statistical analysis makes it hard to learn from either.31 The key corruption- given its long time series and broad country coverage. related questions on the Enterprise Surveys concern They both have their limitations, 27 however, when it taxes, government procurement, operating licenses, comes to tracking progress over time. One reason has and import licenses. There is also a more subjective to do with the lack of conceptual clarity of the indexes. question about how much corruption is an obstacle to Imagine, for example, an index that comprises three doing business. sources of data: enterprise survey data on experiences with corruption at customs, expert perceptions of the The World Bank’s Enterprise Surveys show a decline, overall prevalence of “corruption”, and household on average, in administrative corruption on the surveys about informal payments and gifts for services. whole, even though the individual country results Such an index would have no natural units, a problem vary. Global results suggest a decline in corruption on that is exacerbated when the data is patchy. Only one bribes paid to tax officials at an annual rate of decrease or two of these may be available in some countries, of 3.7%. Among firms that made any informal payment leading to an index with many missing data points for a government contract in the past 12 months, the and making it inconsistent across countries or even annual decline was 6.6%. The estimated annual rate of within a country over time. 28 In practice, the amount decline in the percentage of firms indicating corruption of missing information is huge. For the 210 countries as a major obstacle is 5.4%. The estimates of the annual covered by the WGI-CC in 2018, there are 127 different rate of change in the various measures of corruption are combinations of the sub-indicators—and, one may consistently negative, implying improvement over time, argue, 127 different definitions of “corruption”. The and most of them are highly statistically significant. issue is not a matter of a few missing observations (Figure A shows the percentage of firms that made 8 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption SETTING THE STAGE FIGURE A Percentage of Enterprises making Informal Payments (Gifts) to Tax Inspectors, among those with Contact (89 Countries) 70% 60% 50% Each line segment connects the endpoints for one country 40% 30% 20% The heavy black line shows the overall trend 10% 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Note: Based on the 89 countries that had at least two rounds of the Enterprise Surveys between 2006 and 2018. For each country the implicit annual rate of change was calculated. (The average rate of change is negative and significant.) These were then averaged and applied to respective variables. The year with the most observations was used to benchmark the trend lines, and the growth was projected forward and backward. informal payments to tax inspectors for all countries surface, but the magnitudes are not known in a way that with at least two observations. Each line represents one facilitates comparison over time. It is clear that when country. The heavy black line is the average trend.) such cases do come to light, they are often massive— and consequential. Transparency International’s 25 It is worth noting that while administrative Corruption Scandals that Shook the World lists scandals corruption on average is declining, the pace of in football and jade mining, leaks that brought down decline is slow. At these rates of change it would take presidents, death squads and Hollywood parties. The nearly three decades (27 years) to reach a position imperative to address corruption is as strong as ever.32 at which the average country would have fewer than 5 percent of firms report that corruption is a major problem for doing business. Since the approach used in From technology to behavioral science, this thought experiment is to calculate rates of change, other trends that impact corruption rather than absolute change, this approach is, perhaps, biased toward estimates of long convergence periods. Changing global trends and some additional factors Even so, it is clear that while the general trend is in the present opportunities to address corruption but also right direction, the pace is slow and progress is not create some challenges. Despite the improvement in universally present in all countries. reducing the prevalence of administrative corruption in many places, the spotty record and continuous stream Some forms of corruption, particularly corruption of scandals suggest the need for a re-examination that is less frequent but of large magnitude, are of approaches to controlling corruption. In addition, not well measured by surveys or any other existing other factors have changed and continue to change method. Such grand corruption scandals routinely rapidly, calling for a realignment of approaches. While Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 9 SETTING THE STAGE by no means exhaustive, a few of these changes, remain hidden and others, such as distributed ledger including technology, globalization, human behavior, technologies, can also prevent fraud. E-GP can level politics and power, and the issue of incentives, are the playing field for bidders and facilitate the collection worth a mention. of data, which itself can help identify red flags that signal corruption risks.34 While the rapid advance of GovTech can be a game changer for strengthening technology holds great promise, it also poses cause for various aspects of governance and control of concern. The explosion of data and transparency needs corruption, but technology can also pose risks. 33 to be met with a massive expansion in data literacy Online platforms can be used to enhance transparency, and analog complements, such as skills, infrastructure strengthen citizen engagement, and establish grievance and institutions, to reap the full potential of digital redress mechanisms, including whistleblower systems. dividends.35 At the same time, digital technologies can Digital technology can also speed up government also be abused to repress human rights or to transfer services and facilitate monitoring of service quality, and disguise large amounts of stolen assets. The role of obviating the ability to demand certain bribes. The GovTech is discussed later in the report (chapter 7) as ready availability of some technologies, such as mobile a thematic area with several country examples covering phone cameras, can make it harder for abuses to a wide range of services where technology is playing 10 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption SETTING THE STAGE a key role. Indeed, technology features throughout A deeper understanding of the power and this report for applications in procurement (chapter 1), political landscape of a country helps in designing customs (chapter 4), service delivery (chapter 5), open interventions that not only address corrupt government (chapter 6), asset and income declarations practices but also tackle resistance to their (chapter 8), and others. implementation due to a preference to maintain the status quo. As pointed out in World Development Increasing globalization has facilitated the Report 2017—Governance and the Law, approaches movement of people and assets across borders, that focus on transactions, without sufficient attention leading to expansion of cross-border illicit financial to context and history, or those that focus on particular flows. As discussed earlier, offshore financial centers forms of institutions, rather than the functions they have long been available as safe havens for illicit assets, perform, can have limited traction at best.41 In addition, but their use has expanded in recent decades with easy since advanced economies are significantly more access to services of lawyers and bankers that specialize “rule-following” than developing countries, powerful in cross-border financial dealings. At the same time, organizations benefit from rule of law and may work to stricter enforcement of laws against overseas bribery keep it because it is in their own interest to do so. In is increasing the risk to international investors that do countries where rule of law is weak, in contrast, powerful business with countries with endemic corruption, with organizations rely less on complex market contracts for fines running into the billions of dollars. Tools like their prosperity and are less interested in a generalized asset and interest declarations (chapter 8), beneficiary rule of law, making it harder for such reforms to stick.42 ownership transparency (chapter 9) and sharing of tax From a practitioner’s perspective, the “political administration data (chapter 10) are useful in addressing settlements” concept forces deeper thinking beyond some of these. specific transactions to the constellations of interests that may be benefiting from the extant situation. A more systematic understanding of behavioral patterns, and experiments with innovative Finally, a closer look is needed to consider how best approaches, can make anti-corruption efforts more to address incentives and influence the behaviors effective. Conceptual approaches have long viewed of individuals through reforming policies and corruption as a reflection of underlying governance institutions, with a view to reducing corruption. Much weaknesses. 36 In the past decades, advances of the academic literature views corruption as the result in behavioral social science have revolutionized of a “principal-agent” problem. The principal, say the economics and are being harnessed for development legislature or even the general public, cannot perfectly work.37 However, the implications for anti-corruption control the behavior of the agent, say the public official, are just beginning to be explored. Social norms can who has different incentives. Changing the misbehavior sometimes explain the effectiveness or lack thereof of the agent, then, entails stronger oversight and of anti-corruption interventions.38 For example, in an accountability for misbehavior, using principled tools environment of systemic patronage, increases in salaries like greater transparency as well as instrumental ones have been argued to increase the expected payout like asset and income declarations, discussed later in to benefactors who provided the jobs. Such cultural the report. A second school of thought, however, looks expectations of reciprocity could fuel corruption as at individual instances of corrupt behavior as part of a pressure to conform to the average behavior can broader system. In places where corruption is systemic, override or redefine one’s personal integrity. Social it is argued, trying to alter the behavior of individuals norms and culture work the same way for those who is challenging and slow, and it is best approached as pay bribes. When individual citizens are asked “why a collective action problem. For practical purposes, they pay bribes”, many respond that “everybody does the different paradigms complement each other and it.”39 Changing perceptions of what is “normal” and should not be seen as substitutes.43 In this report, these shifting social norms and behaviors is challenging and paradigms are not purely theoretical, but have practical takes time. Many anti-corruption-oriented civil society implications. organizations at the national level are focusing on shifting behavior, and finding it a slow process.40 Social norms are prominent in the discussion of corruption in customs (chapter 4). Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 11 SETTING THE STAGE Notes 1. The literature on the costs of corruption is vast. Useful 11. See Emile van der Does de Willebois, Emily M. Halter, Robert summaries can be found in the WBG Governance and Anti- A. Harrison, Ji Won Park, J.C. Sharman (2011). The Puppet corruption Strategy (2007), and Sofia Wickberg (2013), Masters: How the Corrupt Use Legal Structures to Hide Stolen “Literature review on costs of corruption for the poor”, U4 Assets and What to Do About It. Washington: World Bank. Expert Answer 382. The April 2019 Fiscal Monitor from the Nicholas Shaxson (2011). Treasure Islands: Uncovering the IMF examines the fiscal costs of corruption. Damage of Offshore Banking and Tax Havens. New York: St. Martin’s Griffin. Oliver Bullough (2019) Moneyland: The Inside 2. Mogens K. Justesen and Christian Bjørnskov (2014). Story of the Crooks and Kleptocrats Who Rule the World. New “Exploiting the Poor: Bureaucratic Corruption and Poverty York: St. Martin’s Griffin. in Africa.” World Development. Vol 58, June 2014: 106-115. Caryn Peiffer & Richard Rose (2018). “Why Are the Poor More 12. Rankings of countries according to financial secrecy are Vulnerable to Bribery in Africa? The Institutional Effects of provided by the Tax Justice Network, although the rankings Services.” The Journal of Development Studies, 54:1, 18-29. do not facilitate comparisons in absolute levels of secrecy over time. 3. Fried, Brian J., Paul Lagunes and Atheendar Venkataramani (2010) “Corruption and Inequality at the Crossroad: A Multi- 13. Open Government Partnership factsheet. Method Study of Bribery and Discrimination in Latin America.” Latin American Research Review, 45(1): 76-97. 14. The original seven international development par tners were: The European Commission, International Monetary 4. Hyll-Larsen, P. 2013. “Free or Fee: Corruption in Primary School Fund, World Bank, and the governments of France, Norway, Admissions.” In Global Corruption Report 2013: Education, by Switzerland, and the United Kingdom. Transparency International, 52-59. Transparency International; Chow, S., and D. T. Nga. 2013. “Bribes for Enrollment in Desired 15. Knack, Stephen; Biletska, Nataliya; Kacker, Kanishka. Schools in Vietnam.” In Global Corruption Report 2013: 2017. Deterring kickbacks and encouraging entry in public Education, by Transparency International, 60-67. Transparency procurement markets: evidence from firm surveys in 88 International; Corruption Watch. 2013. “Low-Income Housing: developing countries (English). Policy Research working paper; More Transparency Needed.” https://www.corruptionwatch. no. WPS 8078. Washington, D.C.: World Bank Group. http:// org.za/low-income-housing-more-transparency-needed. documents.worldbank.org/curated/en/817871496169519447/ Deterring-kickbacks-and- encouraging- entr y-in-public- 5. This section draws on World Bank (2019) Anti-corruption procurement-markets-evidence-from-firm-sur veys-in-88- Initiatives—Reaffirming Commitment to a Development developing-countries. Priority. 16. Other sources tell a similar story: The Open Budget Survey 6. As noted in the groundbreaking The Many Faces of Corruption, (OBS), produced by the International Budget Partnership “in a surprisingly large number of countries in all regions of the (IBP), shows the general trend toward greater openness of world, corruption is pervasive at all levels of education, from budgets. “OBS 2019 finds a modest global improvement in primary schools through tertiary institutions. It can occur at budget transparency, which is consistent with the overall trend any stage and among any group of actors from policy makers measured by the survey over the past decade..” A recent paper at the ministerial level to providers at the school level such by the IMF draws on government finance statistics and tracks as teachers and contractors to beneficiaries of education changes for 186 countries in 2003–13. The authors found a such as students and parents. Corrupt practices in education gradual improvement in the overall comprehensiveness of can include bribes and illegal fees for admission and fiscal statistics, specific indices of the coverage of public examination; academic fraud; withholding teacher salaries; institutions, fiscal flows, and fiscal stocks. They also found that preferential promotion and placement; charging students for most countries’ reporting remains far from comprehensive. “tutoring” sessions to cover the curriculum needed to pass Rachel F. Wang, Timothy C. Irwin, and Lewis K. Murara mandatory examinations and that should have been taught (2015) “Trends in Fiscal Transparency: Evidence from a New in the classroom; teacher absenteeism; and illegal practices Database of the Coverage of Fiscal Reporting”. IMF Working in textbook procurement, meal provision, and infrastructure Paper WP/15/188. contracting.” Harry Patrinos and Ruth Kagia, 2007, “Maximizing the Performance of Education Systems: The Case of Teacher 17. Peter Ladegaard, Petter Lundkvist, Jonathan Kamkhaji (2018). Absenteeism,” in J. Edgardo Campos and Sanjay Pradhan “Giving Sisyphus a Helping Hand—Pathways for Sustainable (eds), The Many Faces of Corruption--Tracking Vulnerabilities RIA Systems in Developing Countries” World Bank Policy at the Sector Level. The World Bank. Research Working Paper 8367. March 2018. 7. Collignon P, Athukorala P-c, Senanayake S, Khan F (2015) 18. Ivana M. Rossi, Laura Pop, and Tammar Berger (2017) Getting Antimicrobial Resistance: The Major Contribution of Poor the Full Picture on Public Officials a How-to Guide for Effective Governance and Corruption to This Growing Problem. PLoS Financial Disclosure. Stolen Asset Recovery Initiative, UNODC, ONE 10(3): e0116746. and World Bank. 8. Goldstein, Markus, Joshua Graff Zivin, James Habyarimana, 19. United States of America Department of Justice. Cristian Pop-Eleches, and Harsha Thirumur thy. 2013. 20. Transparency International (2018). Exporting Corruption - “The Effect of Absenteeism and Clinic Protocol on Health Progress Report 2018: Assessing Enforcement of the OECD Outcomes: The Case of Mother-to-Child Transmission of HIV Anti-Bribery Convention. in Kenya.” American Economic Journal: Applied Economics, 5 (2): 58-85. 21. See World Bank Group Sanctions System Annual Report FY19. Some countries have adopted similar systems. 9. Hanf M, Van-Melle A, Fraisse F, Roger A, Carme B, Nacher M (2011) Corruption Kills: Estimating the Global Impact of 22. Stephen Knack (2006), “Measuring Corruption in Eastern Corruption on Children Deaths. PLoS ONE 6(11): e26990. Europe and Central Asia : A Critique of the Cross-Country Indicators.” Policy Research Working Paper; No. 3968. World 10. For a summary see Talha Burki (2019), “Corruption is an Bank. Christiane Arndt and Charles Oman (2006), Uses and ‘ignored pandemic’”. The Lancet. Vol 19, p 471, May 2019. Abuses of Governance Indicators, Development Centre http://www.thelancet.com/infection Studies, OECD Publishing, Paris. James Anderson (2009), 12 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption SETTING THE STAGE “A Review of Governance and Anti-corruption Indicators uploads/2019/02/ICT-corruption-24Feb19_FINAL.pdf, p. 35. in East Asia and Pacific”. World Bank. Charles Kenny (2017) Results Not Receipts—Counting the Right Things in Aid and 34. Liz David-Barrett and Mihály Fazekas (2019) “Using ‘red flag’ Corruption, Center for Global Development, Washington, DC. indicators to identify corruption and analyse reform efforts in the procurement process,” ACE Anti-Corruption Evidence 23. For an exposition about the biases that lead us to remember Research Program. July 8, 2019. the immediate past most prominently, and other biases, see Daniel Kahneman (2011). Thinking, Fast and Slow. Farrar, 35. World Bank (2016). World Development Report 2016, Digital Straus and Giroux, New York. For other excellent reviews of Dividends. how wrong perceptions can be see: Hans Rosling with Ola 36. This point was made in World Bank (1997), Helping Countries Rosling and Anna Rosling Rönnlund (2018) Factfulness: Ten Combat Corruption: The Role of the World Bank, published Reasons We’re Wrong About the World—And Why Things are soon after it began to work more directly on anti-corruption. Better Than You Think. Flatiron Books, New York. Stephen “Corruption is a symptom of deeper-seated factors. The Pinker (2018). Enlightenment Now: The Case for Reason, causes are complex, and the means to control it are not Science, Humanism and Progress. Allen Lane, UK. fully understood. Corruption thrives when economic 24. See, for example, Omar Azfar and Peter Murrell, (2009), policies are poorly designed, education levels are low, civil “Identifying Reticent Respondents: Assessing the Quality society is underdeveloped, and the accountability of public of Sur vey Data on Corruption and Values,” Economic institutions is weak—conditions that exist in many settings Development and Cultural Change 57, no. 2 (Januar y but are particularly prevalent in some developing countries. 2009): 387-411; and Aart Kraay and Peter Murrell (2013), Corruption often has a political dimension and reflects the way “Misunderestimating Corruption”, World Bank Policy Research power is exercised in a country. And it is constantly changing Working Paper 6488. its form in response to changes in the global economy and technical innovation.” (p. 5.) 25. Corruption Perceptions Index. 37. World Bank (2015). World Development Report 2015: Mind, 26. Worldwide Governance Indicators. Society, and Behavior. 27. See footnote 31 for some critiques. Responses to some of 38. See, for example, Cheyanne Scharbatke-Church and Diana the criticisms of the Worldwide Governance Indicators can be Chigas (2019), Understanding Social Norms: A Reference found here. Guide for Policy and Practice. The Henry J. Leir Institute of Human Security. The Fletcher School of Law and Diplomacy, 28. Anderson (2009), op. cit. Tufts University. David Jackson and Nils Köbis (2018). “Anti- 29. These findings based on the WBRD-World Bank Business corruption through a social norms lens”. U4 Anti-Corruption Environment and Enterprise Performance Survey (BEEPS) have Resource Centre, Chr. Michelsen Institute (U4 Issue 2018:7). been reported in the EBRD Transition Report, the World Bank’s Hope Schaitkin (2018) “Changing Social Norms: What Anti- Anti-corruption in Transition series, and other publications. Corruption Practitioners Should Read.” Corruption in Fragile States Blog. Tufts University. November 27, 2018. 30. As noted already, surveys on corruption experiences have been subject to criticism because some people do not 39. For example, Corruption According to Citizens, Firms, and participate honestly. To the extent that the rate of being Public Officials—Results of Sociological Surveys, World Bank, candid does not greatly change with time, this criticism Government Inspectorate of Vietnam, UK-DFID, and UNDP. would not have much of an effect on our understanding of Hanoi, Vietnam: National Political Publishing House, 2012. trends. In addition, the same studies argue that questions 40. An example of an attempt to systematically shape social on perceptions of corruption face similar challenges. See, for norms at the country level is Accountability Lab’s Integrity Idol example, Omar Azfar and Peter Murrell, (2009), op cit., and competitions. Aart Kraay and Peter Murrell (2013), op. cit. 41. World Bank. 2017. World Development Repor t 2017: 31. While this section has focused on what is known about trends governance and the law: Main repor t (English). World corruption in the past, an even more challenging set of Development Repor t. Washington, D.C.: World Bank questions centers on predictions of changes of corruption in G r o u p . h t t p: //d o c u m e n t s .w o r l d b a n k . o r g /c u r a t e d / the future. A current research project attempts to do just that: en/774441485783404216/Main-report.; Mushtaq H. Khan Alina Mungiu-Pippidi and Lucia Cizmaziova (2020) “Beyond (2018), “Political settlements and the analysis of institutions”, the lag. How to predict and understand evolutions towards African Affairs, Volume 117, Issue 469, October 2018, p. good governance?” European Research Centre for Anti- 636–655. Alina Mungiu-Pippidi. 2015. The Quest for Good Corruption and State-Building, Hertie School of Governance, Governance: How Societies Develop Control of Corruption. ERCAS Working Paper No. 61. May 2020. Cambridge, U.K.: Cambridge University Press. 32. While this section has focused on what is known about 42. Mushtaq H. Khan (2018), op. cit. corruption trends in the past, an even more challenging set of questions centers on predictions of changes of corruption in 43. See the debate on the pages of Governance. Anna Persson, the future. A current research project attempts to do just that: Bo Rothstein, and Jan Teorell (2013), “Why Anti-corruption Alina Mungiu-Pippidi and Lucia Cizmaziova (2020) “Beyond Reforms Fail—Systemic Corruption as a Collective Action the lag. How to predict and understand evolutions towards Problem,” Governance, Volume 26, Issue 3, July 2013, p. 449- good governance?” European Research Centre for Anti- 471. Heather Marquette and Caryn Peiffer (2018), “Grappling Corruption and State-Building, Hertie School of Governance, with the ‘real politics’ of systemic corruption: Theoretical ERCAS Working Paper No. 61. May 2020. debates versus ‘real-world’ func tions,” Governance , Volume31, Issue3, July 2018, p. 499-514. Anna Persson, Bo 33. For a review, see Adam, I., and Fazekas, M. (2019). Are Rothstein, and Jan Teorell (2019), “Getting the basic nature of emerging technologies helping win the fight against systemic corruption right: A reply to Marquette and Peiffer,” corruption in developing countries? Pathways for Prosperity Governance, Volume 32, Issue 4, October 2019, p. 799- Commission Background Paper Series; no. 21. Oxford, United 810. Heather Marquette and Caryn Peiffer (2019), “Thinking Kingdom, ht tp://w w w.gov transparency.eu/wp-content / politically about corruption as problem-solving: A reply to Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 13 SETTING THE STAGE Persson, Rothstein, and Teorell”, Governance, Volume 32, Issue Goldstein, Markus, Joshua Graff Zivin, James Habyarimana, 4, October 2019, p. 811-820. See also Alina Mungiu-Pippidi Cristian Pop-Eleches, and Harsha Thirumurthy. (2013). “The and Till Hartmann (2019). “Corruption and Development: A Effect of Absenteeism and Clinic Protocol on Health Outcomes: Reappraisal”. Oxford Research Encyclopedia, Economics and The Case of Mother-to-Child Transmission of HIV in Kenya.” Finance. March 2020. American Economic Journal: Applied Economics, 5 (2): 58-85. Hanf M, Van-Melle A, Fraisse F, Roger A, Carme B, Nacher M (2011) Corruption Kills: Estimating the Global Impact of Corruption on Children Deaths. PLoS ONE 6(11): e26990. Hans Rosling with Ola Rosling and Anna Rosling Rönnlund (2018) References Factfulness: Ten Reasons We’re Wrong About the World—And Why Things are Better Than You Think. Flatiron Books, New York. Aar t Kraay and Peter Murrell (2013), “Misunderestimating Harry Patrinos and Ruth Kagia, (2007), “Maximizing the Performance Corruption”, World Bank Policy Research Working Paper 6488. of Education Systems: The Case of Teacher Absenteeism,” in J. Edgardo Campos and Sanjay Pradhan (eds), The Many Faces Adam, I., and Fazekas, M. (2019). Are emerging technologies of Corruption--Tracking Vulnerabilities at the Sector Level. The helping win the fight against corruption in developing countries? World Bank. Pathways for Prosperity Commission Background Paper Series; no. 21. Oxford, United Kingdom, http://www.govtransparency. Heather Marquette and Caryn Peiffer (2018), “Grappling with the eu/wp-content /uploads/2019/02/ICT-corruption-24Feb19_ ‘real politics’ of systemic corruption: Theoretical debates versus FINAL.pdf, p. 35. ‘real-world’ functions,” Governance, Volume31, Issue3, July 2018, p. 499-514. Alina Mungiu-Pippidi. (2015). The Quest for Good Governance: How Societies Develop Control of Corruption. Cambridge, U.K.: Heather Marquette and Caryn Peiffer (2019), “Thinking politically Cambridge University Press. about corruption as problem-solving: A reply to Persson, Rothstein, and Teorell”, Governance, Volume 32, Issue 4, Anna Persson, Bo Rothstein, and Jan Teorell (2013), “Why October 2019, p. 811-820. Anticorruption Reforms Fail—Systemic Corruption as a Collective Action Problem,” Governance, Volume 26, Issue 3, Hyll-Larsen, (2013), Free or Fee: Corruption in Primary School July 2013, p. 449-471. Admissions, Transparency International, Global Corruption Report 2013: Education Anna Persson, Bo Rothstein, and Jan Teorell (2019), “Getting the basic nature of systemic corruption right: A reply to Marquette Hope Schaitkin (2018) “Changing Social Norms: What Anti- and Peiffer,” Governance, Volume 32, Issue 4, October 2019, p. Corruption Practitioners Should Read.” Corruption in Fragile 799-810. States Blog. Tufts University. November 27, 2018. Anne O. Krueger (1974). The Political Economy of the Rent-Seeking Ivana M. Rossi, Laura Pop, and Tammar Berger (2017) Getting Society. The American Economic Review.Vol. 64, No. 3 (Jun., the Full Picture on Public Officials a How-to Guide for Effective 1974), p. 291-303 Financial Disclosure. Stolen Asset Recovery Initiative, UNODC, and World Bank. Cheyanne Scharbatke - Church and Diana Chigas (2019), Understanding Social Norms: A Reference Guide for Policy and James Anderson (20 09), “A Review of Governance and Practice. The Henry J. Leir Institute of Human Security. The Anticorruption Indicators in East Asia and Pacific”. World Bank. Fletcher School of Law and Diplomacy, Tufts University. Charles Kenny (2017) Results Not Receipts—Counting the Right Things in Aid and Corruption, Center for Global Development, Chow and Nga (2013), Bribes for Enrollment in Desired Schools in Washington, DC. Vietnam, Transparency International, Global Corruption Report 2013: Education. Knack, Stephen; Biletska, Nataliya; Kacker, Kanishka. (2017). Deterring kickbacks and encouraging entr y in public Christiane Arndt and Charles Oman (2006), Uses and Abuses of procurement markets: evidence from firm sur veys in 88 Governance Indicators, Development Centre Studies, OECD developing countries (English). Policy Research working paper; Publishing, Paris. no. WPS 8078. Washington, D.C.: World Bank Group. http:// Collignon P, Athukorala P-c, Senanayake S, Khan F (2015) documents.worldbank.org/curated/en/817871496169519447/ Antimicrobial Resistance: The Major Contribution of Poor D eter r ing - k ic k b ac k s - an d - e nco ur aging - e nt r y- in - p ublic- Governance and Corruption to This Growing Problem. PLoS procurement-market s-evidence-from-firm-sur veys-in- 88 - ONE 10(3): e0116746. developing-countries. Daniel Kahneman (2011). Thinking, Fast and Slow. Farrar, Straus Liz David-Barrett and Mihály Fazekas (2019) “Using ‘red flag’ and Giroux, New York. indicators to identify corruption and analyse reform efforts in the procurement process,” ACE Anti-Corruption Evidence David Jackson and Nils Köbis (2018). “Anti-corruption through a Research Program. July 8, 2019. social norms lens”. U4 Anti-Corruption Resource Centre, Chr. Michelsen Institute (U4 Issue 2018:7). Mauro, (1995). Corruption and Growth. The Quarterly Journal of Economics, Vol. 110, No. 3 (Aug., 1995), p. 681-712. Emile van der Does de Willebois, Emily M. Halter, Robert A. Harrison, Ji Won Park, J.C. Sharman (2011). The Puppet Masters: Mogens K. Justesen and Christian Bjørnskov (2014). “Exploiting How the Corrupt Use Legal Structures to Hide Stolen Assets and the Poor: Bureaucratic Corruption and Poverty in Africa.” What to Do About It. Washington: World Bank. World Development. Vol 58, June 2014: 106-115. Caryn Peiffer & Richard Rose (2018). “Why Are the Poor More Vulnerable to Fried, Brian J., Paul Lagunes and Atheendar Venkataramani (2010) Bribery in Africa? The Institutional Effects of Services.” The “Corruption and Inequality at the Crossroad: A Multi-Method Journal of Development Studies, 54:1, 18-29. Study of Bribery and Discrimination in Latin America.” Latin American Research Review, 45(1): 76-97. 14 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption SETTING THE STAGE Mushtaq H. Khan (2018), “Political settlements and the analysis World Bank (2016). World Development Report 2016, Digital of institutions”, African Affairs, Volume 117, Issue 469, October D i v i d e n d s . h t t p s : //o p e n k n o w l e d g e .w o r l d b a n k . o r g / 2018, p. 636–655. handle/10986/23347. Nicholas Shaxson (2011). Treasure Islands: Uncovering the Damage World Bank (2019) Anticorruption Initiatives— Reaf firming of Offshore Banking and Tax Havens. New York: St. Martin’s Commitment to a Development Priority. Griffin. Oliver Bullough (2019) Moneyland: The Inside Story of the Crooks and Kleptocrats Who Rule the World. New York: St. World Bank (2019). World Bank Group Sanctions System Annual Martin’s Griffin. Repor t F Y19. ht tp://document s.worldbank.org/curated/ en/782941570732184391/pdf/World-Bank-Group-Sanctions- Omar Azfar and Peter Murrell, (2009), “Identifying Reticent System-Annual-Report-FY19.pdf. Some countries have adopted Respondents: Assessing the Quality of Sur vey Data on similar systems. Corruption and Values,” Economic Development and Cultural Change 57, no. 2 (January 2009): 387-411. World Bank. 2020. Ensuring Integrity in Governments’ Response to COVID-19 (English). Washington, D.C.: World Bank Group. http:// Open Government Partnership (2019). Right To Information documents.worldbank.org/curated/en/801501588782665210/ Factsheet. https://www.opengovpartnership.org/wp-content/ Ensuring-Integrity-in-Governments-Response-to-COVID-19. uploads/ 2019/07/Right-to-Information-Fact-Sheet-May-2019. pdf. Peter Ladegaard, Petter Lundkvist, Jonathan Kamkhaji (2018). “Giving Sisyphus a Helping Hand—Pathways for Sustainable RIA Systems in Developing Countries” World Bank Policy Research Working Paper 8367. March 2018. Rachel F. Wang, Timothy C. Irwin, and Lewis K. Murara (2015) “Trends in Fiscal Transparency: Evidence from a New Database of the Coverage of Fiscal Reporting”. IMF Working Paper WP/15/188. Shleifer and Vishny 1993. Chuah, Lay Lian; Loayza, Norman V.; Myers, C. Bernard. 2020.  The Fight against Corruption: Taming Tigers and Swatting Flies (English). Research & Policy Briefs; no. 27. Washington, D.C. : World Bank Group. Stephen Knack (2006), “Measuring Corruption in Eastern Europe and Central Asia : A Critique of the Cross-Country Indicators.” Policy Research Working Paper; No. 3968. World Bank. Stephen Pinker (2018). Enlightenment Now: The Case for Reason, Science, Humanism and Progress. Allen Lane, UK. Talha Burki (2019), “Corruption is an ‘ignored pandemic’”. The Lancet. Vol 19, p 471, May 2019. http://www.thelancet.com/ infection. Transparency International (2018). Exporting Corruption - Progress Report 2018: Assessing Enforcement of the OECD Anti-Bribery Convention. https://www.transparency.org/en/publications/ exporting-corruption-2018. Transparency International. (2019). 25 Corruption Scandals that Shook the World. https://www.transparency.org/en/news/25- corruption-scandals. United States of America Department of Justice. Foreign Corrupt Practices Act. https://www.justice.gov/criminal-fraud/foreign- corrupt-practices-act. World Bank (1997). 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Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 15 PART I Confronting Corruption in Sectors and Functions Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 17 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 Public Procurement PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT Introduction Public procurement is often placed at the epicenter efficiency. These principles are reflected in easily of discussions of corruption. Procurement features available and frequently utilized model procurement prominently in corruption scandals in developed laws, such as the UNCITRAL Model Public Procurement countries as well as developing countries, suggesting Law. Implementation of procurement laws are supported that procurement has characteristics that make it by a host of international agreements that create legally uniquely vulnerable to corruption and that corruption enforceable commitments, including UNCAC and the in procurement is particularly resilient. This chapter World Trade Organization’s Agreement on Government examines the nature of corruption in public procurement Procurement. Much less information exists on how to and explores efforts and initiatives to reduce corruption establish well-functioning procurement systems in the in state contracting.1 There is an abundance of face of opposition by individuals and groups benefiting information on principles of good practice in public from existing practices. procurement relating to transparency, equity, and Why is it important to tackle corruption in public procurement?2 Corruption in public procurement has wide-ranging consistently identify corruption in public procurement ramifications for the economy and delivery of as among the major constraints to doing business.5 public services. The need to tackle corruption in Corruption in public procurement continues to be a public procurement is based on the importance of substantial issue in developed as well as developing public procurement in public spending and economic countries and large public scandals involving firms activity, the prevalence of corruption in procurement such as Odebrecht, 6 Siemens, 7 and Airbus 8 have and its impact on how public money is spent, private demonstrated that corruption in public procurement sector investment, and the availability and quality of happens in some of the most advanced economies. public services. Moreover, international and global distortions are sometimes caused by corruption in public procurement Public procurement constitutes a significant transactions. proportion of public spending. It accounts for between 10-25% of public spending globally. 3 This figure is The costs and societal damage caused by corruption often substantially higher in countries where the state in public procurement extend far beyond the price participates significantly in economic activity and tag of capital projects. Corruption leads governments directly provides services. Public procurement is often to overinvest in capital projects, given the ease of the single largest channel for government spending, capturing rents from public procurement, and reduces the single largest source of commercial spending in a their return on investment.9 It also robs school children country, and the dominant means for translating public of safe and well-built classrooms, reduces the quality money into public services. of their education by limiting their access to textbooks and school supplies, and endangers their health and Estimates from a variety of sources indicate the health of their communities as publicly procured that corruption in procurement is frequent and medicines are privatized and become inaccessible to extraordinarily costly. Over the years, international the poor. Corruption also results in the provision of organizations have consistently suggested that sub-standard infrastructure, which increases accidents between 10-30% of the cost of capital investment and wear and tear costs, inflates the user-charges projects is consumed by corruption.4 More than one- required to pay for services, and acts as an extra tax half of the cases relating to foreign bribery involve on the citizens. The cost of corruption is then borne by public procurement, and surveys of business owners the poorest citizens who are most dependent on public Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 19 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT resources for access to life-sustaining medicine, public procurement enables well-positioned firms to dominate shelter, or the knowledge and expertise required for markets and restrict the ability of new firms to obtain modern economic activity. contracts and access markets through innovation, creating competitive imbalances with lasting impact for At the same time, corruption in public procurement economic growth.10 The firms that lose out are often creates noxious incentives for firms and distorts those who do not have the financial or political means economic development. Private sector firms are to access public procurement opportunities, but who, encouraged to invest in building networks of influence paradoxically, could have been the prime drivers for instead of investing in skills and expertise, to the the creation of local jobs, thus reducing inequality and detriment of increased efficiency. Corruption in public poverty. What are the characteristics of corruption in public procurement? Although procurement covers a wide range of discretionary nature of the activity. Discretion, and actions, certain characteristics remain the same. the use of professional judgement, is at its highest in In most countries, public procurement takes the form of cases of high-value sophisticated procurement, where a vast number of contracts signed by a broad collection the state invites private parties to propose methods to of government agencies for an extraordinary variety of achieve the specified outcomes. goods, services, and projects.11 The single term, public procurement, encompasses the purchase of office By its very nature, public procurement is highly paper in a small village, contracting for the regular vulnerable to corrupt activity. Given that public maintenance of roads across a district for a period of procurement requires multiple discrete decisions, which years, investment projects supported by development take place in decentralized settings involving public and partners, as well as the acquisition and deployment of private actors and large sums of money, the frequent an advanced military defense system to protect the association between corruption and procurement security of the nation. While these actions could not comes as no surprise. There is a tendency for the analysis be more different in regard to scale, complexity, and of corruption vulnerabilities to concentrate on the risks cost, they share common features. They are the result relating to the selection of a contract award winner, and of choices about what to purchase, from whom, and a very rich literature has developed detailing different at what price. They require an act of purchasing often bribery, extortion, and collusion schemes used to via a contract, and a determination by the purchaser of capture contracts.12 It is clear, however, that corruption whether the contract terms have been properly fulfilled occurs not just around the selection of an award winner, and payment is warranted. but at every stage in the procurement process, from the selection of what to buy to the determination Despite the development of useful tools, discretion that a contract has been fulfilled and the receipt of remains at the core of procurement. Each step final payment. In a compromised process, each stage along the process requires government officials to is engineered to increase the chances of a preferred perform activities that involve the implementation of contractor obtaining the contract. policy choices necessitating extensive interpretation and often substantial discretion. A large number of Corruption risks are as deep as they are broad. tools have been developed to guide procurement, Corruption can take the form of an individual paying including detailed processes to determine capital a bribe to win a contract in a single transaction. In investment decisions, standard bidding documents, other instances, corruption in procurement takes place explicit rules on the evaluation of bids, and exhaustive systematically via a network involving multiple firms price lists for products purchased by the state. Each and individuals both inside and outside of government. of these instructs officials on how they are expected Corruption networks can be strong and entrenched, to make choices, but they do not alter the inherently lasting many years and involving the entire market 20 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT for a good or service.13 In these instances, corruption Corruption risks are also multifaceted. Corruption is systematic and is a function of the relationships risks in public procurement can be driven by the type among parties. In some countries, the money obtained of procurement process (open versus closed), the through systematic relational corruption in public processes used by the ministry and agency responsible procurement fuels political parties and plays an for executing procurement, and the type of contractor essential role in financing politics. In these situations, and his/her network of connections. Other drivers public procurement serves as a way for economic elites include the mechanisms for paying contractors and to capture contracts and public funds and for political managing the assets that have been created, and elites to finance their continued power and authority.14 the interests of those parties with responsibility and Network domination of procurement is not exclusive to authority for overseeing the procurement process. The high-value national markets. It can be found at all levels multifaceted nature of these risks creates extraordinary where power and the authority to spend public money challenges in improving accountability and integrity in through procurement exist. impactful ways. What do we know about fighting corruption in public procurement? A vast and growing literature provides guidance on monitoring of procurement transactions and contract fighting corruption in standard public procurement implementation; mechanisms for raising and addressing transactions. This includes guidance on bidding complaints; Whistleblower statutes to encourage and documents that define the required technical protect informants; and clarity in the prosecution and specifications, design elements, and inputs required. sanctioning of individuals when corruption is identified. The Methodology for Assessing Procurement Systems In addition to these technical aspects, rule-based (MAPS), an internationally developed standard for procurement systems have well-defined roles for evaluating procurement systems, identifies the features citizens, communities, civil society organizations, and of procurement systems that operate with integrity, the private sector in the monitoring and oversight of and allows countries to determine what needs to procurement transactions and outcomes.18 be put in place to address corruption vulnerabilities. Core principles to inform the fight have been set Increasingly, e-GP is identified as the key platform out in publications, such as the OECD’s Preventing for delivering change and addressing corruption Corruption in Public Procurement.15 The guidance vulnerabilities. Buoyed by the positive impact of the provided in this and other similar publications primarily implementation of fully functional systems in Ukraine restates the stipulations on procurement in the UN and Rwanda, policy makers, advisors, and other Convention against Corruption and the OECD’s own stakeholders look to solve their procurement efficiency Convention on Combating Bribery of Foreign Public and corruption issues by rolling out end-to-end e-GP Officials in International Business Transactions (OECD, solutions.19 Such systems, especially when their use is 1997).16 Books and papers by groups like Transparency mandatory, could standardize processes for carrying out International provide complementary pointers and procurement, and at the same time they might radically lessons on using particular tools in fighting corruption, enhance transparency around bidding opportunities, such as integrity pacts or participatory governance.17 bid evaluation, and contract award winners. The shift from paper to a digital platform can allow for the While differences in emphasis certainly exist in collection, sharing, and analysis of outcomes across these materials, there is a general consensus on the vast range of individual procurement transactions. the features of procurement systems that operate Real-time monitoring could identify corruption risks as with high degrees of integrity. Such features include a procurement transaction goes through its different transparency; procedural standardization that reduces phases, allowing officials the possibility of intervening the need for interpretation or human interaction; when red flags are triggered in the process to prevent detailed and inclusive control; oversight and corruption from ever taking place. The analysis of large Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 21 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT volumes of transactions over time could enable the and a reduction in the time required to process a identification of subtle corruption patterns and trends transaction, no statistically significant changes in cost that might otherwise avoid detection, uncovering and time overruns appear to have occurred.22 hidden corruption networks. Several reasons have been put forward to explain The power of e-GP to combat corruption may the difference between the expected impact of be fully activated when the data that is being e-GP on corruption and the actual results. collected is put into a machine-readable format, made publicly accessible, and linked with other • Low capacity. The primary reason may be the data sets. Linking data on contract award winners low capacity of the institutions and individuals with emerging databases on beneficial ownership may responsible for executing procurement and for allow public and private parties to know who is really managing the switch to e-GP systems. Studies competing for and winning procurement contracts and have repeatedly revealed the limited expertise could identify previously hidden networks and conflicts and functionality of procurement officials and of interest. Linking procurement data with data from organizations, who frequently have received little integrated financial management systems can create or no training in how to carry out their current jobs, the opportunity to systematically track physical and much less manage the implementation of an entire financial progress and may create the potential to new system.23 intervene where corruption vulnerabilities appear to be substantial before the loss of public funds happens. • Differences in technology. e-GP systems differ However, there is limited attention and/or guidance greatly regarding their functionality. In many on how initiatives might be designed or sequenced jurisdictions, including in large economies, in jurisdictions without well-functioning systems for technology is used only to switch manual transparency, public administration, law enforcement, processes into automated ones. This, while and judicial decision-making, or where corruption is improving transactional efficiency, is unlikely to relational and systemic. achieve much else. Similarly, limited change is likely to be generated if barriers to registration W hi le ex p ecta tion s a re hi g h t h a t t he are retained even in an e-GP system. Performance implementation of e-GP will be associated with changes would, perhaps, be more easily captured dramatic reductions in corruption in public by considering only those systems that involve in- procurement, the experience to date is decidedly depth modification of practices, and not simply the more mixed. Cross-country analysis was unable to introduction of technology into the process. detect a relationship between the adoption of e-GP and the level of bureaucratic corruption or the willingness • Lack of corruption baselines. The lack of useful of firms to bid for procurement contracts. 20 In more corruption baselines established prior to the developed countries, the adoption of e-GP was found implementation of an e-GP system prevents to increase the likelihood of firm bidding. research from measuring change and detecting an empirical relationship between performance and Country-level studies of the impact of e-GP present the move to e-GP. Without a robust corruption highly variable results. e-GP in India and Indonesia baseline, researchers sometimes place excessive was found to be associated with positive changes in a reliance on measuring changes in cost savings, number of variables that may be linked with corruption— namely the difference between the cost estimate the percentage of contracts awarded to non-local firms, for the procurement and the cost obtained at a reduction in contract delays in Indonesia, and an the end of the tendering process. However, such improvement in the quality of construction in India. 21 calculations are difficult and subject to a wide At the same time, the research was unable to detect range of influences and biases. a relationship between e-GP and the cost of contracts at the time of signing, or the final amount paid to the The expected relationship between corruption contractor. Ongoing and preliminary analysis of the and e-GP has so far eluded detection, perhaps influence of e-GP in Bangladesh suggests similar mixed due to a combination of the above reasons. While findings; while the reform is associated with a rising theories of change explain why an intervention should number of tenders, an increasing number of bidders, reduce corruption, the impact of actual reforms often 22 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT falls short of expectations or results in a number Before concluding this section, it is important of unexpected consequences. 24 For example, the to discuss an important caveat on the features introduction of e-GP in Albania significantly reduced a s s o c i a te d w it h we l l - p er for m in g p u b l ic personal contact with officials, but at the same time it procurement systems that operate with high led to a surge in the number of unpublished, negotiated integrity. Recommended practices on confronting procedures done outside of the system.25 In Chile, the corruption are likely to generate large costs for output- expansion of external audits of public procurement was oriented, high-value contracts. In these contracts, closely associated with an increase in the use of direct where the government defines the outputs it desires contracting.26 without prescribing inputs or specific designs, actions that focus on standardization of processes, reduction An efficient and rule- ba sed procurement of discretion, and extensive auditing and oversight system, based on an e-GP platform, is strongly may perversely end up reducing the benefits obtained associated with high performance and low levels through contracting with the private sector. of corruption. Similarly, the successful prosecution of individuals who engage in corrupt actions in public Large capital projects are not efficiently purchased procurement is a feature of most systems that maintain through rigid processes for evaluating bids high standards of integrity. However, the history of submitted in accordance with specified designs efforts to establish effective systems for sanctioning and inputs. In many cases, shifting the responsibility corrupt officials or to drive out corruption by moving of innovation to the private sector unleashes efficiency to e-GP demonstrates the space between inputs and and effectiveness, creates the right incentives and more outcomes. Many countries, especially those with poorly effectively shapes markets. It creates a body of the sub- performing procurement systems that are assessed to contracting industry that is driven and regulated by the be systemically corrupt, can point to an extensive list of market and survives by its capacity to deliver value. This failed efforts designed to fill “gaps” in accountability reduces government intervention (except at the initial by importing best practice models of transparency, procurement stage) and corruption possibilities. participation, and efficiency. Output-based contracts, whether they are The mixed impact of such initiatives appears structured as public-private partnerships or as more to often reflect the degree to which initial traditional procurement, are negotiated, multi- assessments appreciated how accountability stage contracts that often adapt over time as new worked or did not work around procurement, and innovations are identified, and both the contractor the formal and informal mechanisms underpinning and the state develop a richer understanding existing practices. Assessments that provide useful of their objective. Such contracts require a strong inputs for reform are designed to capture the nature of foundation of trust among all parties in order to enable the corruption problem, the capabilities of the parties the best options to come to the fore. They also require responsible for managing change, and the ability of a high degree of expertise and sophistication across those who benefit from existing practices to subvert or all parties in order to ensure that the parties have the circumvent the efforts. ability to detect honest experimentation from strategic behavior. Experience in confronting corruption in public procurement demonstrates the importance of For output-based contracts of this sort, approaches resilience in the pursuit of reform, and the continued to integrity that emphasize extensive systems of use of authority to maintain change. The response internal and external reviews to test compliance to an anti-corruption initiative, especially one that is with standard requirements are likely to be at powerful, has often been to wait out the reform until odds with achieving best value. Multiple review political attention shifts to another issue or politicians and oversight processes generate large time and can be co-opted. Alternatively, they shift the locus of cost delays and reduce the space for innovation and corruption, moving from influencing the contracting experimentation as contractors are forced to justify their process to distor ting contract implementation. actions before they can determine their effectiveness. Countries are successful when they develop and sustain The best firms are likely to be discouraged from bidding reforms over time in ways to counter adaptations and in environments where oversight and accountability is defeat efforts to circumvent change. structured in ways that are inimitable to trust. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 23 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT Complex output-based contracts remain the phenomenon. A recent study of the interactions exception rather than the rule and are found between audits and the complexity of procurement primarily in advanced and sophisticated markets. in Chile demonstrated the negative consequences At the same time, the tendency for accountability of this dynamic as officials relied upon less efficient processes to multiply as contracts become more contracting in order to reduce costs associated with complicated and more valuable is a more general heightened oversight and monitoring.27 What is needed to reduce corruption in public procurement? Research studies and country experience are the does not always appear. When audit agencies are two primary sources for learning what can reduce themselves corrupt, increased auditing serves to shift corruption in public procurement. The research studies the distribution of corruption or, in the worst-case examine the impact of different types of intervention scenario, increase rents.31 and the country experience focuses on those countries that have been successful in reducing such corruption. At a country level, many of the countries that Both sources have their limitations since many of the have succeeded in reducing corruption overall “experiments” on the impact of different interventions have undertaken major reforms of their public come from more developed countries with better procurement systems. 32 In countries such as South data sources, and there have been few efforts to track Korea, Georgia, Rwanda, and Estonia, changes in corruption indicators over time in public procurement procurement policies, which focused on increasing systems. Moreover, these sources provide little or no competition and transparency, have been reinforced information on addressing corruption in high-value by advanced e-GP systems that have standardized output-based public procurement. practices and increased efficiency. In a number of cases, provisions for meeting the Open Contracting Transparency is the sole factor that has been Data Standard have been built into the e-GP systems, demonstrated to reduce the risk of corruption in ensuring a high degree of transparency and information procurement across different jurisdictions and access. These efforts have led to substantial increases conditions. Analysis of cross-country data reveals that in the level of competition in procurement and much ex-ante transparency in regard to the completeness of greater transparency about the identity of contract information in the call for tenders reduces corruption award winners. risks substantially. 28 In this situation, transparency allows horizontal monitoring of insiders in the bidding Successful anti-corruption efforts that include process in ways that lead to lower levels of corruption. work on reducing corruption in public procurement share a number of core features. These include: Increased frequency of audits has also been identified in a number of settings as leading to • Strong leadership. Successful anti-corruption reduced levels of corruption. Studies in Brazil29 reforms are initiated and maintained through found a decrease in costs (of approximately 10%) and strong leadership from the highest political decreases in audited resources involved in corruption level. Political leadership creates an overall vision (of approximately 15 percentage points) linked with and orientation, while administrative leadership initiatives to increase the frequency of auditing by 20 establishes the necessity and the space within percent. A 2007 study of village-level procurement in institutions to introduce new processes and Indonesia found that increasing the frequency of audits systems. Finally, technical leadership within to 100% resulted in a decline in missing expenditures organizations establishes new behaviors and by 8 percentage points. 30 However, the relationship protocols that show others how to adopt new tools between increased audits and lower levels of corruption and methods. 24 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT • Problem-driven and outcome-oriented. Successful medium to long term and grow over time in order to initiatives to reduce corruption in public sustain change in the face of repeated opposition. procurement are problem-driven and outcome- Resilience is often built through producing concrete oriented. This requires careful analysis of the changes and establishing expanded coalitions specific mechanics of corruption, and often of support that include enhanced roles for the the development of sector or ministry-specific private sector, and for civil society/communities in approaches to reducing the problem. Problem- oversight and monitoring. driven approaches to corruption often result in distinguishing among types of procurement. • Complemented by other refor ms. P u b l i c Addressing corruption problems in local level procurement reforms that succeed in reducing procurement in small markets involves actions that corruption tend to draw support from other are different from those that would be employed complementary reforms. Most directly, such efforts to reduce corruption in the procurement of high- have been aided by the introduction of effective volume standardized goods. In the same vein, systems for asset declaration, prevention of outcome orientation means that efforts to confront conflict of interest, revealing beneficial ownership corruption in procurement are likely to be sector of firms, and enhanced efficiency in sanctioning specific, since corruption functions differently, for misbehavior. Concurrent reforms to improve public example, in a sector like irrigation than it does in financial management, introduce performance wastewater management or education. Outcome contracting, build skills and expertise within orientation also requires close monitoring not the civil service (including procurement skills), only of progress in implementing the reform but privatize and/or improve corporate governance also of outcomes. For example, establishing of state-owned enterprises, and remove barriers multiple points of control in order to prevent and to entry and competition can all contribute to reduce corruption in high-value procurement may strengthening accountability and integrity, and to perversely convince the most reputable firms to changing behavioral expectations and incentives. stay away if they determine that there is insufficient These broader changes are essential in addressing trust to enable creativity and flexibility in creating the systemic collective action problems that drive an asset.33 corruption in procurement in many jurisdictions and settings. • Sustainable. Successful efforts are built over the How to gain traction in fighting corruption in public procurement: Case studies Reforms have to be tailored to the prevailing and Chile—describe anti-corruption reforms in public environment. As with many reforms, much of the procurement that alternative emphasize changing challenge in fighting corruption in public procurement strategic transactions, systems for undertaking public revolves around defining an approach that is procurement, and the interactions between economic appropriate for the problem at hand and tailored and political elites. Differences in the focal point for around the authorizing environment for reform. Reforms reform occur along a governance continuum. that look good on paper often fail because they are not shaped and structured around the political and The Somalia case explores an effort to reduce administrative realities that exist. The three case studies corruption in a limited number of strategic high- that accompany this overview describe very different value procurement contracts, using a specially anti-corruption effor ts relating to procurement. designed mechanism established jointly by However, they were all designed to have traction development partners and the Government of and have been shaped by the broader governance Somalia. The intervention does not attempt to reform environment. The three cases—Somalia, Bangladesh, public procurement due to severe limitations on the Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 25 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT capacity and authority of the government to manage The final case, Chile, explores a reform effort large reforms and the systemic nature of corruption. where corruption issues in public procurement The initiative is confined to restricting corruption in a were understood to be symptoms of a larger number of transactions, using the combined authority problem in the relationship between economic of the government and international development and political power. The initiative, which was largely partners. Its success demonstrates the ability to achieve driven by an independent and non-political task force, results in even the most challenging of environments. recommended a number of steps to improve the coherence of the public procurement system, within The Bangladesh case explores an effort to reduce a larger program of reforms aimed at restructuring corruption as one dimension of an overall reform the role and transparency of the private financing of of the country’s public procurement system. In this political parties. In the context of a well-performing instance, anti-corruption efforts are closely intertwined state with a relatively high degree of capacity and with work on establishing new mechanisms for carrying integrity, addressing corruption in public procurement out public procurement utilizing an e-GP platform. was approached primarily by modifying the incentives Bangladesh officials included a number of measures to and dynamics in the overarching system of governance. proactively address corruption in public procurement, As with the other two examples, the patterns of success based upon their recognition of the impact corruption that were achieved demonstrate that progress can be has on outcomes and the risk that corruption poses to made in modifying relatively fundamental governance the implementation of the reform. The results to date issues, but the overall process of change is long and demonstrate both the progress that can be made as progress is not constant. well as the tenacity of the problem. Conclusion: What is realistic to expect? The major misconception is the assumption successes will face challenges and that reform progress that, as long as there is sufficient political will, will not be a straight and linear line. Demonstrating corruption can be solved by a technical fix done by concrete progress is an essential part of building the government to address an accountability gap reform momentum, just as learning from setbacks is or capacity weakness. Sometimes that fix is asserted fundamental to establishing sustained change. Anti- to be greater oversight, stronger sanctions, enhanced corruption reforms in public procurement that succeed transparency, or the introduction of e-GP. Reforms are designed to achieve concrete outcomes relating based on this approach often feature the adoption to a reduction in corruption and an improvement of “best practice” processes and practices that have in procurement outcomes. Such reform programs been demonstrated to be closely associated with well- invariably involve actors outside of government, and performing procurement systems that operate with are sustained through coalitions of government, private low levels of corruption. The track record of success sector, and civil society groups. of these efforts is not encouraging, especially in those environments where state capacity and authority are One corollary to the point above is that impactful weakest, where civil society and the private sector are efforts to reduce corruption make use of existing fractured and fragmented, and where corruption is resources. Countries should only attempt reforms that most systematic. are within their capacity; otherwise, they are likely to fail. Examples from countries that have reduced corruption Nonetheless, experience has demonstrated overall, as well as from the specific cases in this report, that it is possible to reduce corruption in public illustrate variations in the depth of those resources procurement regardless of the extent of corruption and the strength of the forces opposing change. and the overall governance environment. To achieve Some circumstances, such as those found in countries progress in this regard, effective approaches are built emerging from conflict, may only allow for initiatives for the long haul, with the expectation that initial to reduce corruption in certain transactions. In other 26 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT cases, anti-corruption work can be woven into systemic ways to address corruption in how procurement procurement reforms in ways that tackle corruption and functions. The development of new tools, like increase the probability of reform success. e-GP and the broad range of other information technologies, greatly expands oppor tunities for A second corollary is that anti-corruption changes that strengthen accountability and oversight. initiatives in public procurement must consider To be effective, efforts to reduce corruption in public their overall impact on procurement performance. procurement need to identify ways to harness the power This point is most evident in relation to output-oriented of technology to help drive fundamental changes in high-value contracts that are not amenable to strict expectations, incentives, and authority, which form the rules of the pass-fail variety. Obtaining best value basis for better outcomes. in output-based procurement requires developing a deeper engagement with the industry both at the In sum, successfully reducing corruption in public pre-tender stage as well as during the procurement procurement requires a country-specific approach process. In addition, it requires government officials to that pays as much attention to the incentives use professional judgment in applying principles that and capabilities of the institutions responsible for are clearly defined ex-ante. For procurement of this executing procurement as it does to improving the type, constructive anti-corruption actions will involve transparency and efficiency of the procurement defining very tight and verifiable boundaries, investing system. Overcoming repeated opposition to change in professionalization of officials entrusted with requires harnessing forces in the private sector and responsibilities for executing procurement, creating civil society who have a strong interest in improving the right incentive structure, and developing a more procurement outcomes through greater integrity and active engagement with industry while maintaining a accountability. These opposing forces are likely to be level playing field. A more difficult process will be the stronger in high-corruption environments than they are professionalization of the oversight bodies, so that in jurisdictions with lower levels of malpractice. New procurement officers are not penalized for their bona- technologies, like e-GP can dramatically improve the fide decisions. effectiveness and efficiency of public procurement systems, but their potential will only be fully realized T he centra lity of public procurement for when combined with work to deal with the causes of development means that it is essential to find corruption and not just the symptoms. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 27 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT CASE STUDY 1 CASE STUDY 1 PUBLIC PROCUREMENT Strengthening Competitive Procurement in Somalia Strengthening procurement of high-value contracts in Somalia’s security sector Overview Introduction After years of state collapse, a new Federal Government The new Federal Government of Somalia took office administration took over in Somalia in 2012 and began in September 2012 amidst strong support from the to try to regain the confidence of the Somali public, international community, but with lingering doubts its semi-autonomous regions and the international about its ability to rein in the corruption that had community. Against a backdrop of conflict, warlordism been considered to be endemic during previous and corruption, improving national security and re- transitional administrations. Some ac tors in the establishing good financial governance practices were international community wanted to establish direct central to the new administration’s credibility. This control over government finances through a joint- nascent credibility received an early blow when the signatory arrangement analogous to the approach Governor of the Central Bank resigned in 2013, citing previously used in Liberia. However, President Hassan concerns over corruption. In 2014, the government Sheikh Mohamud argued that this would impinge and international community established an innovative on the new government’s sovereignty, and asked joint body called the Financial Governance Committee that the administration be given space to prove its (FGC), whose purpose was to provide confidential commitment to better management of government expert advice to the government on strengthening resources. financial governance. The FGC identified improved procurement practices as central to the credibility of In November 2013, the Governor of the Central Bank government expenditures, and in particular noted the of Somalia resigned after only seven weeks in the corruption and security risks associated with sole- job, dealing a blow to the administration’s credibility. source contracting of rations supplies in the security “From the moment I was appointed, I have continuously sector. Rations procurement was not under heavy been asked to sanction deals and violate my fiduciary scrutiny from international actors, despite being the responsibility to the Somali people as head of the government’s largest non-wage recurrent cost. As nation’s monetary authority,” said Yussur Abrar in a result of sustained attention from the FGC over a her resignation letter. 34 Abrar alleged that she had number of years, and convening and maintaining a come under pressure to open an account outside the reform coalition at the center of government, rations Central Bank of Somalia to divert recovered assets.35 have finally been competitively tendered and large It also came to light that the government had signed fiscal savings have been realized. a contract with an American law firm on questionable 28 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT terms to assist with the recovery of Somalia’s frozen public concessions and contracts and a Secretariat. The assets abroad. FGC has met on an almost monthly basis for the past six years since its inauguration in early 2014. International partners’ confidence in the federal government was dented, and it became accepted that One of the FGC’s most pressing goals was to reintroduce a new approach to strengthening financial governance competitive procurement practices, especially for major was needed to restore confidence: ‘business as government expenses like security sector food rations. usual’ would not suffice. The government needed to Security as a whole accounted for approximately 42% of implement concrete measures to strengthen financial the federal government’s operational expenditure, and governance, in particular in asset recovery, Central Bank other than wages, food rations for security personnel governance, and government procurement of contracts were the security sector’s biggest expense.36 In 2018, and concessions, in order to restore the confidence security sector food rations accounted for about 20% of of the international community and the Somali public total government non-wage recurrent costs, or USD14 more broadly. million. President Hassan Sheikh Mohamud knew he needed A lack of transparency and competition in the supply help to implement those reforms. Mohamud called of ‘dry’ rations (beans, cooking oil, sugar, etc.) was for measures that would provide him and his team suspected to be fueling corruption and patronage in with confidential expert advice to help make informed the sector, as contracts were directly awarded to well- decisions on sensitive financial governance matters, connected local business people without scrutiny of unit while also respecting Somali sovereignty. costs or justification of volumes. It was also suspected that misallocation of the rations was compromising the Led by the World Bank, the federal government and effectiveness of the security forces, as the rations either the international community reached an agreement did not necessarily reach the fighting forces, or were in early 2014 on the establishment of a Financial being purchased in excess of need, diverting scarce Governance Committee (FGC) to provide a forum for resources away from other expenditures. In addition, a dialogue on strategic financial governance issues. The large proportion of the security sector’s expenditures FGC’s formation was a direct response to the crisis of was transacted in cash, as the commanders were given confidence that followed Abrar’s resignation. It aimed to funds to purchase ‘wet’ (fresh) rations for their units enable the federal government to access independent and to pay individuals’ salaries, creating high potential and confidential international advice on important for corruption and limited accountability. FGC advice areas of financial governance, while also building the consistently flagged the need for rations contracts to international community’s confidence in the federal be competitively procured to improve transparency and government. The FGC’s initial terms of reference reduce costs, and for salaries and fresh food allowances required it to “provide advice on existing concessions to be paid direct to individuals’ accounts, to limit the [and] contracts the Federal Government of Somalia has scope for diversion of funds. entered into.” This remit was subsequently extended by the federal government to include reviewing all draft concessions and contracts worth over USD5 million, until such time as capable new national institutions The implementation process could take over the review function. Since security sector rations constituted the single The FGC is chaired by the Minister of Finance and its largest goods purchase within the federal budget, the membership includes the Governor of the Central Bank, FGC sought to promote improved transparency and representatives from the Office of the President and competition in the award of rations contracts. At first, Office of the Prime Minister, the State Attorney General, the FGC found it difficult to obtain any pre-existing and the Chair of the Parliamentary Finance Committee. rations documentation from security sector institutions, The international community is represented by and it appeared that supplies were being delivered and delegates from the World Bank, African Development payments made without formal contracts. Somalia’s Bank, and the International Monetary Fund and a legal framework for procurement dated back to the delegate appointed by the EU to represent bilateral 1960s, and was no longer used to govern government donors. The FGC is supported by a specialist adviser on purchases. However, FGC’s advocacy for improved Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 29 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT transparency and competition in the sector received 2017 that the contract should be retendered. the support of the President, who announced in September 2015 that food and logistics contracting It took a year of sustained follow-up by the FGC before for security sector institutions would be managed on a the contractor was finally served a termination notice by competitive basis. the Minister of Defense in September 2018. During this period, there were several changes in both the Minister At the time, a new legal framework for procurement had of Defense and the army commander, which delayed been submitted to Parliament and was subsequently the termination process. The Ministry of Finance finally passed in 2016. However, it established a decentralized launched a fresh tender process in October 2018, approach to public procurement, which was not well covering the supply of dry and fresh rations to all army aligned with existing institutional capacities. Line units. However, during bid evaluation it became clear ministries lacked procurement expertise, and the that the contract scope provided by the army had not Procurement Authority—whose role it was to certify been well specified. It proved too ambitious to expect line ministries’ procurement units—had not been a single contractor to deliver dry and fresh rations to established. The FGC therefore recommended that the all army units (‘sectors’) across a wide geographic area, government adopt a set of Interim Public Procurement encompassing both Mogadishu, the capital city, and the Requirements that required all procurements above rest of Somalia. This demonstrated that, in addition to USD100,000 in value to be conducted by the Ministry overcoming overt resistance, the procurement reform of Finance’s Procurement Department until such a time process also needed to address the limited capabilities as line ministries had certified procurement units. of key institutions. The Ministry of Finance launched an open tender for In February 2019, the Cabinet issued a set of financial the supply of dry rations to the Somali National Army management procedures for the security sector, which in 2016, and, following FGC review, the contract was required immediate competitive retendering of all awarded in February 2017. The FGC also reviewed the rations contracts. It also required payment of salaries outcomes of rations tender processes for the police and direct to individuals’ bank accounts, following the the National Intelligence and Security Agency (NISA). completion of a security sector personnel biometric In line with FGC advice, the government began to strip registration process, which had been initiated in out the cash components that had been included in the the second half of 2018. The Ministry of Finance contracts; the intention had been to require contractors subsequently launched four separate tenders in April to provide cash to the force commanders for fresh 2019 for one-year delivery of dry rations to two army rations purchases, in addition to delivering dry rations. units (‘sectors’) located in Mogadishu, 37 the police The FGC argued that paying contractors to deliver cash and NISA. Twenty-one different firms submitted bids was not good practice, and that cash requirements for for the various contracts. The FGC reviewed each fresh rations purchases should be regularized through tender process and was satisfied that each had been the payment system and paid to the bank accounts of sufficiently competitive and transparent to justify individual security personnel. contract award. Following the competitive re-tenders, the government’s monthly expenditure obligations on However, following elections in early 2017 the rations contracts nearly halved, generating an annual incoming army commander summarily cancelled the saving of USD6.7 million.38 competitively awarded contract and issued a new contract to a different contractor without following A significant portion of the savings was driven by a due process. This reversion to nontransparent direct reduction in the volume of rations purchased. The contracting, with associated implications of patronage, security sector personnel biometric registration presented a test of resolve for the FGC and the center process, coupled with a re-organization of the security of government more generally. The supplier whose forces, enabled the leadership of each force to provide contract had been cancelled raised a formal complaint, more accurate specifications for its required rations and the Ministry of Finance, at the recommendation of volumes, based on the actual number of personnel that the FGC, responded by conducting a legal review in July required feeding. NISA saw the greatest reduction in its 2017, which determined that the contract cancellation rations volumes (78%), followed by the army (36%). The and re-award was irregular. The Economic Committee re-tendering also enabled the government to achieve a of the Council of Ministers then resolved in September significant reduction in the unit prices of most goods, 30 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT which were reduced by at least 10% in most cases. In general, the government was able to achieve the lowest Reflections unit prices for the larger contracts which attracted the most bids (army and police), demonstrating that The case study highlights how the FGC has been competition helps lower prices. The unit prices achieved successful in Somalia, and how its approach might be under the smaller NISA contract, which attracted fewest applied to other settings. At a strategic level, the FGC bidders, were in most cases higher than for the larger helped draw key decision makers’ attention to Somalia’s contracts.39 procurement problem and suggested a pragmatic approach to solve it. The committee’s regular meetings In parallel to reforming security sector rations generated reform momentum among a coalition of top procurement, the successful completion of the officials, establishing a common problem definition and biometric registration exercise for national security achieving consensus in an environment beset by low sector personnel enabled the government to create a intra-governmental levels of coordination and technical comprehensive payroll register for each force, linked to capacity. Vested interests and institutional fragility, the Somalia Financial Management Information System. including frequent personnel changes, meant the issue As a result, the salaries of security personnel are now required sustained attention and follow-up over a five- paid direct to their bank accounts, instead of being year period. distributed to them in cash by their commanders. This reform was able to overcome vested interests within the Competitive tendering combined with a better higher ranks of the security forces and has significantly specification of needs cut costs by USD6.7 million per improved the accountability and transparency of year.40 The clear return on investment fostered wide security sector wage payments. It has also had a support for competitive tendering, illustrating how positive impact on the transparency and accountability concrete results can generate a push for expanding the of fresh rations payments, since all registered soldiers effort to other sectors. are now paid a USD30 stipend for fresh rations direct to their bank account, whereas previously this cash had The new procurement policy was implemented in been received and managed on their behalf by their tandem with other inter-related reforms, including commanders. the comprehensive biometric registration exercise of security personnel and moving from cash to electronic Despite these achievements, major gaps remain. payments for salaries and fresh rations. However, For example, significant effort needs to be put into key challenges remain, including the need to sustain verifying the delivery of goods and services. The gains competitive tendering going forward, to improve made in improving the tendering and transparency of capacity within the security sector for specifying their rations contracts will count for little if there is limited procurement needs, and to strengthen the process for visibility on whether goods and services are delivered. rations delivery verification. Given the public mistrust of the government’s financial management, it may not be sufficient at this stage to The FGC used its reputational credibility, which came rely solely on inspection reports from the receiving from the expertise and experience of its international spending agency as proof of delivery. The FGC has members, as a lever to promote the reintroduction recommended that the Ministry of Finance establishes of due process in procurement. While the FGC was a an inspection function responsible for verifying the voluntary arrangement, the international community delivery of goods and services. In addition, to date closely monitored the extent to which the federal rations delivery to the prisons service has remained government adhered to FGC advice, making it difficult outside of the reform process, as prisons already had for the government to leave FGC recommendations an ongoing five-year rations supply contract. However, unaddressed. By combining representatives of the this contract expires in 2020 and it is anticipated that World Bank, IMF, and AfDB in its membership, the a tender process for prisons’ rations will commence FGC brought together the key institutions with which alongside a new tender process for the army, NISA, and the federal government was seeking to re-engage, the police, to replace the contracts awarded in 2019 at and hence that had most weight in the domain of the expiry of their one-year term. economic governance. This is given added weight by the support of an expert FGC Concessions Advisor to provide detailed technical review and advice on Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 31 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT BOX 1.1 Timeline on Somali National Army Rations Re-tendering • Presidential Press Release commits that “All tenders for logistic supplies will be carried out through the Interim Procurement Board ”, 9 September 2015. • FGC asserts that it should review any draft contracts before signing and seeks to obtain copies of legacy contracts, Ministry of Finance concludes there are no formal contracts by August 2016. • The federal government launches a competitive tender for army rations in September 2016. • FGC reviews the tender process in February 2017. • Competitively tendered army rations contract with new supplier signed 13th March 2017. • The army cancels the contract in May 2017 and makes arrangements with another provider non-competitively. • Competitively awarded supplier complains in June 2017. • The Ministry of Finance reviews the case in July 2017 and writes to Ministry of Defence to say that the competitively procured contract should stand. Ministry of Defence agrees. • Economic Committee of Cabinet determines in October 2017 that the non-competitive contract should be cancelled, and a competitive re-tender process commenced. • Army rations contractor is served a termination notice by the Minister of Defence in October 2018. • A new army rations tender process is launched in October 2018, but is not concluded. • February 2019, federal government issues a set of financial management procedures for the security sector which also required immediate competitive retendering of all rations contracts. • The government issued a tender for two army rations contracts, for supply of dry rations in two army sectors in April 2019. • The bid submission deadline passed by May 2019, and bids were opened by June 2019. • The government completed the procurement process for supply of dry rations in two army sectors (12 April and Hamar), Police and NISA by September 2019. • The FGC reviewed all four processes and advised that they are an appropriate basis for contract award by September 2019. 32 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT procurement processes in a confidential manner. manner that explicitly acknowledged both the politics The FGC also derived credibility from its reputation and the multi-dimensionality of the reform effort) among major bilateral actors, many of whom were with hands-on expert confidential advisory support. major security sector actors in Somalia. These actors In so doing, the FGC’s attention to procurement could follow FGC deliberations—without confidential has cut through the “form over function ” problem details—at bi-monthly informal briefings led by the often prevalent in procurement reforms, where the FGC’s international delegates. appearance of best practice rules and systems often conceals the underlying true practices.41 In comparison with more standard internationally supported procurement reform efforts, the FGC Sustained focus over a long period, with multiple approach has been unusual in two ways. First, it is often incremental reform steps and willingness to persevere widely assumed that adopting a “best practice” legal in the face of setbacks, was crucial given the challenging and regulatory framework is the essential foundation and fragile environment. By maintaining government for procurement reform, and that the adoption of good attention on this complex problem over a long period, rules (usually defined as those applied in other places) as well as raising the issue with the international will alone drive out bad practices. By contrast, part of community, the FGC kept actors focused on the matter the FGC’s work has entailed reviewing and supporting over a period of six years. By consistently coordinating the revision of the Procurement Act (which was passed key economic agencies at the center of government as in 2017 and heavily mirrored Liberia’s decentralized well as international partners, the FGC was able to build procurement law) to better adapt it to the Somali and maintain a sufficiently powerful reform coalition context and government capabilities. to overcome security sector actors seeking to revert to non-competitive practices, as well as to provide Second, procurement reforms often push for Ministry technical advisory support to help rectify procurement of Finance-centered reforms of business processes missteps resulting from weak government capability. to be applied to all government procurements, often As a result, the FGC helped the federal government to involving adoption of an e-GP system as a necessary manage the transition from a period of non-adherence reform step. By contrast, the FGC has focused on to due process in public procurement, to gradually a specific set of contracts over a sustained period, establish high-level commitment to and some of the combining high-level engagement with a key coalition institutional underpinnings for due process in public of institutions at the center of government (and in a procurement. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 33 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT CASE STUDY 2 CASE STUDY 2 PUBLIC PROCUREMENT e-Procurement Reform in Bangladesh a symptom of failings in the procurement processes, Overview and an impediment to achieving more competitive, transparent, and value-adding procurement. The Bangladesh’s public procurement system long success that Bangladesh has achieved in marginalizing constrained the nation’s economic development corruption in the contracting process demonstrates and the performance of the public sector. In 2000, the benefits of confronting corruption as one aspect approximately 80% of Bangladesh’s developmental of a larger systemic reform effort. The Bangladesh budget and one-third of public spending occurred experience also highlights the ways that implementing through state contracting, using a range of mechanisms a comprehensive e-GP platform can help drive stipulated in a variety of laws and regulations. While standardization of practices and increased transparency. the public procurement system had the capacity to At the same time, the indication that some corruption conduct numerous transactions and spend large sums may have shifted towards contract implementation in of money, its ability to deliver value to the citizens of Bangladesh indicates the tenacity and resilience with Bangladesh was questionable. Opaque accountability which groups fight to maintain their corrupt income. arrangements created a system that favored some at enormous public cost. The economic loss due to inefficient procurement and misappropriation of funds was estimated at over 1.5% GDP growth per year. Introduction In two decades of sustained effort, the government In 2011, Bangladesh was at a crossroads in its efforts es tablished a moder n, well-func tioning, and to improve public procurement. Procurement reform transparent public procurement system. The country had started almost a decade earlier with the Public developed its own Public Procurement Act and Procurement Reform Project.42 In 2003, the government Rules, including tender documents, a nodal agency introduced a Public Procurement Regulation to start to regulate procurement, a comprehensive capacity practicing procurement under a single framework, development program, an integrated e-GP system, although with limited legal enforcement. To further an on-line procurement performance measurement consolidate the legal framework, the government system, citizen engagement, and social accountability introduced a Public Procurement Act in 2006 and the with a strategic communication framework. A corrupt Public Procurement Rules in 2008. These laws adopted system has been reformed and corrupt practices have the principles of the UNCITRAL model in the core become the exception instead of the rule. procurement functions, introducing modern regulations on eligibility of tenderers, procurement planning, This case study examines the steps that Bangladesh preparation of tenders and evaluations, tender has taken to address corruption within the context of submission and approval procedures, an independent its overall reform of its public procurement system. complaint review mechanism, professional misconduct, In Bangladesh, corruption was recognized as both and sanctions, including anti-corruption measures. 34 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT This first wave of reforms produced little in the way contracting for a wide range of goods, works, and of improved outcomes and performance. The highly services.43 decentralized paper-based procurement process remained prone to corruption, collusion, and coercion The e-GP platform brought ever y step of the at the local level. Perverse practices, like the physical procurement cycle online: registration (public agencies/ intimidation of potential bidders and non-competitive bidders/ banks), procurement planning, tendering processes for awarding contracts continued as the (invitation, preparation, submission of bids, including legal changes failed to translate into new processes bid security), evaluations, award, contracting and and behaviors. Bureaucratic resistance to introducing payments. Additional features were added over time new practices was substantial, especially among those to further enhance transparency, including the creation officials who obtained the greatest private benefit from of a citizen portal to disclose procurement and contract the way the existing system functioned. Procurement management data using the Open Contracting Data staff lacked the capacity and incentives to change Standard, as well as procurement per formance practices and processes and there was scant evidence to information.44 suggest that new bidders were competing and winning tenders. Procurement volumes and values remained The introduction of the e-GP system presented various high, but the system continued to be characterized by challenges on the ground, mainly related to system inefficiencies, incapacity, and wastage. security, poor connectivity, inadequate IT infrastructure at rural levels, and a lack of knowledge skills among Starting in 2011, the Government began the roll-out users. The roll-out of the e-GP system was enabled by of a comprehensive e-GP system. Through e-GP and the IT infrastructure support created by Bangladesh related reforms, the government aimed to reduce Telephone Company Limited and Power Grid Company corruption in the procurement process and shift to a Limited supported by some private network providers. system that delivered better value for money for the A significant effort was made in ensuring network country’s citizens. The Ministry of Planning’s Central coverage and providing the pilot agencies with the Procurement Technical Unit (CPTU) oversaw public computers and IT equipment necessary to conduct procurement and managed the reform process. all procurement operations on the online platform. Recognizing a lack of existing IT and computer knowledge among the procurement staff and the tendering community, CPTU created a help desk for The implementation process e-GP and made a comprehensive effort to organize technical trainings for procurement officials as well as The government’s second wave of reforms to improve for suppliers and stakeholders at large. public procurement performance began in 2011. The reforms had three major elements: introducing an After the pilot, the CPTU expanded coverage across electronic procurement system, training people how to government. The steady expansion of e-GP reshaped use the new system, and strengthening monitoring and the mechanics of the procurement process. Digital oversight. platforms eliminated the need for a range of face- to-face interactions. Adopting e-GP also fostered a high degree of procedural standardization, including Rolling out an electronic procurement in the forms and documents used, the publishing of system information on contract opportunities and awards, and the recording and filing of information relating to After completing a readiness assessment for the each transaction. As a result, e-GP led to increased introduction of e-GP, the CPTU implemented e-GP in procedural regularity as well as increased ability to four pilot agencies: the Local Government Engineering identify when and where non-standard processes Department, the Roads and Highways Department, the occurred. Water Development Board, and the Rural Electrification Board. The four pilot agencies accounted for By starting with a pilot, observers inside and outside the approximately 40% of the national procurement budget government could track the procurement performance and included both high-value central procurement of the pilot group versus agencies still operating under transactions as well as smaller value decentralized the paper-based system. This required an extensive Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 35 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT effort to collect and harmonize transaction-level data practices and processes. from the e-GP system as well as from the paper-based system. The CPTU conducted a comprehensive communication campaign in order to promote public awareness, knowledge sharing, advocacy, stakeholder engagement, Building procurement capacity in the and behavior change. This included communication public and private sectors support for and around the CPTU, expansion of e-GP, open contracting efforts and two-way communication The second key element of the procurement reform among multi-stakeholders, including procuring entities, was an extensive and intensive program of training in line ministries, oversight agencies, businesses, media, basic procurement skills and in navigating the e-GP academia, and beneficiaries. Activities included: social platform. The emphasis placed on training responded media campaigns, engagement of beneficiary groups, to a need to raise the skill level of officials responsible public debates, education programs, awareness for procurement and enable new and dynamic private campaigns, e-GP orientation for different stakeholder sector firms to participate and win procurement groups, including media and community support tenders. organizations, media awards and fellowships, and collaboration with other governmental organizations The training program was designed to spread expertise involved in increasing information flows.45 widely and to allow training to take place on a continuous basis. The CPTU managed the training of approximately The stakeholder engagement program targeted 37,000 people, which included creating a crucial mass political leaders, implementers, bidders, bankers, civil of 60 nationally certified trainers. The trainings ranged societies, academia, journalists, and, most importantly, from procurement awareness and orientation to more citizens. The forums at policy level and district levels, in-depth training on different dimensions of planning combined with numerous workshops and deeper and executing procurement transactions. That number dialogues directly with the field level officials, tendering included at least one procurement officer from each community, and journalists across the country, created of the procuring entities in the pilot agencies. Over visible momentum. Partnership with a communication 6,000 private firms interested in participating in future firm and the BRAC Institute of Governance and procurements were also provided instruction in how to Development46 effectively moved the reform beyond learn of contract opportunities and submit bids. simplistic technical ‘solutions’, reflecting an integrated approach that explicitly addressed both supply and Through the training program, a cadre of procurement demand issues. officials gained the knowledge and expertise needed to procure goods, works, and services efficiently The CPTU recognized that social accountability could and in accordance with the rules. The procurement help motivate public sector employees’ performance officials were distributed within key sectoral agencies. and that citizen engagement could contribute to Equally important, the training programs produced a monitoring the execution of public contracts. In order community of informed bidders eager to compete for to institutionalize citizen engagement, encourage contracts and armed with knowledge and expectations dialogue and social accountability, and enable about how public procurement transactions should be citizens to participate in the procurement cycle, four organized and executed. platforms were formed: (i) Public Private Stakeholders Committee comprising representatives from think- tanks, non-profit organizations, academia, and senior Strengthening oversight and monitoring officials/ civil servants from the key ministries/ sector organizations; (ii) Government-Tenderers’ Forum The final reform element was to increase transparency with representatives from both the public sector in procurement processes and greatly expand the implementing agencies and the tender community;47 amount of publicly available information concerning (iii) Site-Specific Citizen Monitoring activities to monitor individual transactions and overall system outcomes. implementation of procurement contracts at the rural In addition, the CPTU undertook a determined effort to level; and (iv) a citizens’ portal for monitoring public increase citizen awareness of public procurement and spending with appropriate disclosure of procurement community participation in monitoring procurement information to the public and a feedback portal that 36 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT would help promote dialogue to ensure transparency improved efficiency in terms of timeliness of award and accountability in public spending vis-à-vis better of contracts (award within the initial tender validity service delivery. period), drastically decreasing the cost of accessing information on tendering opportunities, and enhanced From the start, the reform effort was designed to build competition through an increase in participating support and momentum over time. The changes to tenderers. The number of registered tenderers and procurement practices faced strong opposition from the value of invited tenders also increased (Figure 1.1). vested interests in the private sector and the parts of the Quasi-experimental analysis by Blum et al49 suggests bureaucracy that benefited from the existing system. that improvements in the performance of pilot agencies Political support for additional reforms to procurement relative to agencies that remained in the paper-based in 2011 was limited, as politicians were hesitant to system were substantial in terms of lowering corruption become too closely associated with a reform viewed risks. as having limited chances of delivering results. The bureaucratic hierarchy and procurement officials were The effort to engage stakeholders created ownership also among the actors opposed to the introduction of of the reform agenda both among the procuring the e-GP system, concerned about the transformation organizations as well as the tendering community. of officials’ roles, functions, and responsibilities as well Procurement officials started to feel more comfortable in as the deep restructuring within their organization exercising their functions through the new e-GP portal, necessary to accommodate the e-GP adoption. and the private sector began to demonstrate increased interest in participating in tenders for state contracts. After seeing the benefits of e-GP through piloting, a The e-GP system changed the nature of competition in young group of public officials with expertise and public procurement and created demand for an army interest in IT became champions in carrying forward the of employees equipped with the newly necessary IT e-GP agenda within their respective agencies. As the and computer skills among the tendering community. initial successes of e-GP in curbing collusion, coercion, These dynamics opened the door for small and local tender rigging at the local level and improving the firms to win public procurement contracts while also economic efficiency of the procurement system started providing new job opportunities for well-educated to become apparent, the Bangladesh Prime Minster young professionals who could help small firms to bid extended unequivocal support for the total digitization on contracts using the electronic portal, thus ensuring of the procurement process. On October 21, 2015 the significant support for the reform even in rural areas Prime Minister announced that all public procurement and at the community level. would be conducted through the e-GP system by 2016, demonstrating the degree of political support for An on-line survey-based evaluation of officials, private procurement reform that built over time. sector firms, civil society members, media, and financial institutions conducted by the Nielsen Company in 2017 found that 79.3 percent of respondents were positive about improved transparency in public procurement Results due to the introduction of e-GP; 76.6 percent viewed procurement reforms as effective; 72.3 percent The reforms initiated since 2011 transformed the public recognized the e-GP system as efficient; and 81.9 procurement system in Bangladesh. Bangladesh stands percent mentioned that one of the benefits of reform out as a leader in the implementation of procurement has been improved accountability.50 reforms and in changing how procurement gets done, especially among countries at a similar level of Data on the impact of the reforms on procurement economic development.48 As of 2020, the e-GP system transactions are very encouraging but should be had been implemented in more than 900 public sector treated with care given the on-going nature of the organizations and local government municipalities, reforms.51 The reform’s direct impact on corruption covering about 13,000 procuring entities. is not possible to measure. However, corruption risk indicators associated with likely corrupt acts, which are The average length of time from tender invitation to particularly well suited for identifying systemic impacts, contract signing decreased from 95 days to 59 days can be tracked.52 Three corruption risk indicators were between 2011 and 2019. The new system demonstrated thoroughly evaluated by Blum et al53, using a quasi- Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 37 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT FIGURE 1.1 Trends of Electronically Administered Tenders and their Value Number of Registered Tenderers Growth of Value of Tender Invitations in e-GP (USD million) 80,000 20,000 60,000 15,000 40,000 10,000 20,000 5,000 0 0 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 experimental methodology: of successful anti-corruption interventions in public procurement indicates, reform of one procurement • Single bidding,54 phase is likely to induce corruption displacement to • Non-local suppliers,55 and other phases of the process.57 Initial analysis of existing • Winning rebates.56 data by Blum et al 58 has been unable to identify improvements in the final cost of capital investment All of these indicators showed a statistically significant projects or in the time it takes to complete such and sizeable improvement due to the switch from projects. Fully 70% of capital investment contracts are manual to electronic tender administration in the impact not completed on time, and there is no indication that evaluation (Figure 1.2). Throughout 2011-2016, the rate the quality of contract implementation has improved. of contracts awarded on a tender with only one bidder While the data is only suggestive, we cannot rule out practically halved, dropping from 33% to 17%. Similarly, that there is a considerable amount of corruption the rate of suppliers hailing from outside the district remaining in the contract implementation phase, which of the buyer increased from 13% to 21%. Furthermore, should be tackled in subsequent reforms. the average winning rebate the successful bidder offered (i.e., discounts) greatly increased, moving from about half a percent of the initial estimate to close to 7%. Taken together, these improvements in corruption Reflections proxies indicate that across the board, the likelihood of corruption declined as a result of the e-GP introduction. Bangladesh’s more than nine-year experience These quantitative results were also accompanied by implementing e-GP demonstrates the amount of effort anecdotal evidence on the disappearance of physical and dedication required to improve procurement violence around bid submission as reported in the local prac tices. Successfully reforming procurement, media. especially in the face of concerted efforts to maintain the status quo, is a long process. The resilience of At the same time, there is evidence that procurement the reform effort was a testament to the commitment reforms have not “solved” corruption. While the reforms to reform of officials in the Ministry of Planning and of the procurement process appear to have made a their ability to incrementally build support across difference in the integrity of the process of contracting, government through demonstrating their ability to it is less clear that the reforms have influenced the produce concrete and visible results. process of contract implementation. As the study 38 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT FIGURE 1.2 Change in Corruption Risk Indicators as a Result of the e-GP Intervention Panel A. Single bidding and non-local supplier rate Panel B. Winning rebate (percentage point) 0% 10% 20% 30% 40% 0% 2% 4% 6% 8% single bidder % manual non-local supplier % e-GP manual e-GP The more procurement performance improved in become one of the Prime Minister’s most prominent the select group of first movers, the more support political commitments. Key members of cabinet, like procurement reforms gathered. Effectively addressing the Minister of Finance and Planning, also supported corruption was fundamental to achieving early the roll-out of e-GP. successes, for example by preventing the physical intimidation of bidders by corrupt gangs by enabling the Beyond technic al content for laws, c apacit y electronic submission of bids. Concrete improvements development, and e-GP, the CPTU also undertook in procurement created an expanding constituency for a massive stakeholder engagement program that continued reform that was strong enough to overcome supported a range of activities in engaging and the initial opposition to reform from the entrenched sensitizing key stakeholders across the countr y vested interests in both the public and private sectors. on the impor tance of procurement reform and The initial adoption of the e-GP system in only the the benefits of efficient procurement. Increased four pilot agencies also allowed government officials transparency, combined with increased attention to to focus their efforts on implementing change across making information publicly accessible, was essential a limited number of entities. Ownership and support to generating interest in public procurement reforms for reforms was built over time thanks to a gradual inside and outside of government. Equally important, sequencing of the reform implementation. newly established mechanisms for capturing and analyzing information provided stakeholders with the Initially, government support for the e-GP reform was opportunity to examine procurement outcomes across weak. Instead, the implementation of the e-GP reform the four agencies, within specific procuring entities, was a bottom-up approach, mainly owned by mid- and in specific transactions. This new insight enabled level public officials of a few key agencies (who wanted officials, bidders, and communities to understand to see changes) and a relatively young tendering where progress was taking place, as well as where community. The project implementers, including CPTU problems persisted and where additional scrutiny and the four pilot agencies, leveraged the support of was needed. Transparency, information provision, and these enthusiastic officials and the young community active monitoring allowed government officials to of bidders as well as communities. Political will to manage procurement reform, while at the same time support procurement reform grew when leaders saw enabling outsiders to monitor and review progress and that new procurement practices and systems were behavior. This combination proved to be a vital source gaining popularity by reducing bid rigging, coercion, of energy and dynamism for reform. and collusion. Shortly thereafter, procurement reform Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 39 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT CASE STUDY 3 CASE STUDY 3 PUBLIC PROCUREMENT Reforming Procurement and Political Party Financing in Chile were financed, the internal rules by which political Overview parties operated, and the transparency of the public procurement system. Success in changing the rules of In 2014 and 2015, the authority of the Government of the game demonstrates the possibility of designing Chile was challenged by a string of scandals relating to reforms that address the symptoms and the underlying the relationship between economic and political power. causes of corruption. At the same time, the mixed impact While many of the “incidents” existed in a gray area of the reforms in reducing the power of economic and of questionable legality, the overall public discourse political elites is a reminder that the overall process of suggested that the bureaucratic reforms undertaken changing fundamental aspects of governance is long ten years prior had not succeeded in eliminating the and progress is neither linear nor constant. influence of elites on the workings of government. One of the scandals, which involved public procurement and the military, hinted at the role of procurement in the opaque flow of money among economic elites, political Introduction parties, and the government. Between September 2014 and March 2015, Chile—which In response, the government initiated an innovative had a reputation as one of the least corrupt countries reform process designed to define new norms and in Latin America—was rocked by a series of high-profile expectations for Chilean governance. At its center corruption scandals. Investigative journalists revealed was an independent and non-political commission how President Michele Bachelet’s son had allegedly entrusted with responsibility for making specific and engaged in insider trading and influenced peddling in concrete recommendations on restructuring the role a multimillion-dollar real estate play. Bachelet’s former and transparency of the private financing of political finance minister was investigated for alleged campaign parties. A number of proposed reforms focused on finance violations but not prosecuted. And executives improving transparency and consistency in public from one of Chile’s largest financial groups were procurement. In the context of a well-performing state arrested on charges of tax fraud, bribery, and money with a relatively high degree of capacity and integrity, laundering linked to an illegal scheme to finance the addressing corruption in public procurement was Independent Democratic Union, an opposition party.59 approached primarily by modifying the incentives and dynamics in the overarching system of governance. The scandals exposed how prominent Chilean politicians and business executives used connections The Chilean Government subsequently adopted a to exert influence and obtain wealth. While improper number of the commission’s recommendations, which links between business and politics sometimes resulted served to reshape the manner in which political parties in clearly fraudulent activities, such as tax evasion, 40 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT the role of money in politics more generally was a legal gray area. The links between private interests The implementation process and politics were systemic, with all political parties involved in funneling cash through opaque payment Dealing with the symptoms – proposals arrangements that had the veneer of legality. To the to reform procurement public, the scandals seemed to prove that the whole political establishment was corrupt. Confidence in Chile’s public procurement law had been revised political institutions dropped dramatically, and citizens in 20 03. 61 The restruc turing, which enhanced viewed corruption as one of the biggest problems of procurement rules and processes, established the country.60 ChileCompra, the Central Purchasing Body in charge of managing procurement, and Mercado Publico, Corruption in public procurement was another area of the online procurement platform.62 The new systems concern following the “Milicogate scandal” that was fostered transparency and increased competition exposed in 2014. Between 2010 and 2014, a group among bidders. While the 2003 reforms were a huge of military officers concocted a series of fake military step forward, the procurement system retained some procurement deals for goods and services that were features that enabled the manipulation of rules and never supplied, embezzling an estimated USD11 processes. The Commission analyzed the public million. At the time, the military procurement system procurement system with an eye towards identifying allowed off-budget funds to be transferred to secret the institutional weaknesses that created opportunities accounts, and there was no parliamentary scrutiny or for political influence and conflicts of interest. accountability for how that money was spent. While large parts of the procurement system operated The scandals in Chile revealed the continued existence under a common framework, the rules established of corruption in Chile and instilled in the public a sense special regimes for certain types of transactions, of urgency for reform. On March 11th 2015, Bachelet creating a degree of fragmentation (including some created the “Commission against Conflicts of Interest, transactions undertaken by state-owned enterprises Influence Peddling, and Corruption,” an independent and the military). Some branches of government— advisory body with a 45-day mandate to prepare the military, for example—were not required to use specific proposals for policy action. The commission ChileCompra. This fragmentation reduced the value of was composed of 15 independent and neutral members the standardization that had been introduced in most and chaired by economist Eduardo Engel. The “Engel of the procurement system, and increased corruption Commission,” as it became known, did not include vulnerabilities. When the Milicogate scandal broke in anyone who worked in politics or business, a crucial 2014, these vulnerabilities were exposed to the public. element for building credibility and being perceived as non-partisan. The Commission’s final report included various measures to address the weaknesses identified. It proposed the The Commission’s work was based on the understanding unification of the entire procurement system under the that the corruption scandals were symptoms of ChileCompra umbrella and further training for staff. much deeper problems—the relationships between It also proposed a series of measures to strengthen economic and political power and systemic institutional ChileCompra and extend its scope to coordinate, weaknesses in political parties. As a result, the anti- supervise, and support the entire integrated public corruption agenda proposed by the Commission was procurement system. In order to increase transparency comprehensive and ambitious, attempting to address in purchasing and reduce opportunities for elite both the symptoms and the causes of corruption. capture, the report also proposed strengthening of The agenda included both specific sectoral reforms reporting requirements and further standardization of (e.g., public procurement, market regulation, public public purchases that go across government agencies. employment, corporate governance) as well as broader The Commission also proposed that the “Copper reforms that sought to alter the dynamics around Law” be abolished. The law—which allowed a portion political party financing, governance, transparency, of revenue from the state-owned National Copper accountability of political parties, and conflicts of Corporation (CODELCO) to be transferred to secret interest. military bank accounts—had been exploited by those behind the Milicogate scheme. 63 The Commission Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 41 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT wanted to reduce the chances of that happening to enable effective oversight, and then periodically again through the introduction of a multi-year budget review and update their declarations. It proposed with greater planning and oversight capacity and by standardizing the declarations, ensuring they contained eliminating off-budget expenses. sufficient details to clearly determine an official’s wealth, and that declarations be published on Chile’s Transparency Portal in a reusable open data format. Addressing the causes – proposals to reform political party financing The report also addressed the lack of provisions to regulate revolving doors between the public and the The Commission’s work was based on the recognition private sector,64 recommending a one-year cooling off that Milicogate and the other scandals were period for former officials65 and the creation of a public manifestations of deeper problems related to the directory of all politicians and bureaucrats ineligible relationship between economic and political power. for certain contracts or functions upon leaving office. Improvements to ChileCompra and other technical Finally, it proposed several administrative rules to reforms were unlikely to achieve their objectives unless facilitate the application and enhance the effectiveness they were combined with actions to change the overall of the “Lobby Law”,”66 for example by introducing a incentives in the system. The set of reforms proposed code of conduct for lobbyists and creating a training by the Commission to shift the dynamics of elite plan and courses on the content and application of the capture had three pillars: reforming campaign finance, “Lobby Law”. strengthening the governance of political parties, and regulating conflicts of interest. Building support for reform In principle, the Commission determined that it was essential to regulate political parties as if they The Commission submitted its final report on April 24, were public institutions in order to achieve greater 2015. Acting on the Commission’s recommendations, equity and fairness in political and economic life. the government quickly formulated a comprehensive Recognizing that parties’ reliance on private funding set of reform measures. On April 28, President Bachelet had facilitated their capture by private interests, the announced the “Integrity and Transparency Agenda”, Commission proposed introducing public funding for and in May and June the government introduced 21 political parties. The Commission’s report also included legal and 14 administrative initiatives. The “Integrity proposals to improve the governance, transparency, and Transparency Agenda” consisted of a broad set and accountability of political parties, including stricter of medium- and long-term measures intended to regulations on private financing. improve anti-corruption laws and make transparency a centerpiece of the relationship between politics and At the time, most private donors gave money through business. “reserved contributions” where, in theory, neither the public nor the candidate knew the donor’s identity. Monitoring implementation of the anti-corruption As became clear with the 2014-2015 scandals, in agenda was an arduous task given the number of bills practice candidates knew exactly who was making and proposals promoted by the Commission, which large donations, and only the public was left in the had to make their way through Congress. In order to dark. In order to reduce the interconnections between keep citizens engaged during the legislative process politics and business and to increase transparency, the and facilitate the production of accurate and timely Commission’s report proposed allowing only individuals information, two civil society organizations created the (not private businesses) to finance political parties, and Anti-Corruption Observatory in November 2015.67 The the public disclosure of significant contributions. observatory evaluated the achievement of objectives and tracked the legislative process. During the The Commission’s proposals on conflicts of interest legislative process for the implementation of the reform had a similar focus on enhancing transparency. agenda, the Observatory published this information in The Commission proposed that asset declaration real time on its website, enabling citizens to validate requirements be enhanced so that officials should be progress and keep on pushing for completion of the mandated to declare all their interests before assuming reform agenda. public office, provide additional details on their assets 42 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT Progress on reforming procurement (iv) extend the use of Framework Agreements and establish objective criteria for their development;68 and Chile achieved mixed success in operationalizing the (v) cancel the “Copper Law” and provide Congress with recommendations of the Engel Commission in regard greater capacity to monitor military purchases. to reforming procurement. For example, there was no progress with respect to some of the proposals included In 2017, 99% of award contracts were published in the Commission’s final report, such as stronger according to the new standards of transparency and sanctions against irregularities in the procurement integrity promoted in the Commission’s final report process or the creation of a strategic unit to oversee and adopted in the “Integrity and Transparency special purchases. However, Congress approved bills Agenda”.69 The number of public agencies qualified to: (i) expand the scope of the public procurement to publish Bidding Requirements (Bases de Licitación) system to consider the entire procurement process, with advanced electronic signature in the ChileCompra including support in the development of the bidding online platform increased from 0 in 2014 to 17 in 2017. rules, the award and the execution of the contract; (ii) In the same year, 8.7% of the bidding processes used promote an anonymous system to report irregularities; advanced electronic signature. (iii) sanction the use of direct contracting for contracts whose characteristics, by law, do not justify its adoption; In May 2017, ChileCompra approved the Code of Ethics Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 43 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT in Public Procurement Processes, establishing the The impact of these reforms can be appreciated by reporting obligation of officials participating in public looking at the political donations in the presidential procurement. In 2018, a connection was developed election of 2017. Comparing the presidential elections between Mercado Publico and the National Financial immediately before and after the reforms (2013 Management System. This enabled the tracking of and 2017) the number of donors increased from government spending from the procurement process approximately 1,200 in 2013 (mostly firms) to close to to the payment of supplier invoices within the finance 8,000 in 2017 (only individuals), while both the average system and it strengthened ChileCompra’s ability and the median donation went down significantly.71 to monitor payments to suppliers that do not relate As intended, the proportion of public financing of to procurement activity conducted within Mercado campaigns increased, providing almost two-thirds of Publico. Finally, in 2019 ChileCompra launched the financial resources once the reform had been enacted. system for anonymously reporting irregularities in The reforms also had a positive impact on transparency government procurement on its website. regarding the wealth of public officials. The share of officials that submitted their declarations of interests The advancements related to the “Copper Law” and assets (among those obliged to do so by Law and transparency of military purchases were notable N° 20.880, 2016) increased from 90% in 2015 to 94% achievements given the history of attempted but failed in 2017 (95.4% in the Central Administration and 91% reforms. In 2015, a motion to make the content of the among municipal officials). “Copper Law” publicly available was approved and in December 2016, the complete content of Chile’s Progress continued after 2017, but at a slower pace. “Copper Law” and its amendments since 1958 became For example, in 2017 the OECD released a statement publicly available. In September 2019, Chile partially urging Chile to address the remaining weaknesses in replaced the “Copper Law” with new legislation that its frameworks to combat foreign bribery. In November ended the transfer of funds from the copper tax to 2018, Chile published a new law amending the Criminal the military, and instead directing those funds to the Code and providing a more complete Anti-Corruption regular state budget.70 Statute. Finally, in July 2018, President Piñera signed into law a widely-hailed Bill on Public Integrity, which regulates the hiring of relatives, the nature of lobbying Progress on overall “Integrity and and interest management, and conflicts of interest Transparency Agenda” between state officials and their ownership in entities that might be subject to audits by the state. When Bachelet left office in March 2018, Congress had already enacted 12 major anti-corruption-related bills, while the executive branch had implemented several administrative changes. A 13th bill was approved in late Lessons learned 2018 under Bachelet’s successor, Sebastián Piñera. Based on the last update (2017), the Anti-Corruption The Chilean case represents a relatively unique effort Observatory reported a 63% degree of progress in the to address the symptoms and causes of corruption by legislative process and 4.5/5 evaluation of achievement confronting the undue influence of economic elites of objectives. “Financing Politics to Strengthen on public sector decision-making. Reforms centered Democracy” was the area that registered most progress around changing regulations on the funding of political according to the Observatory, with a completion score parties and the rules by which they operated. Reform of 83%. actions also included a number of changes in regulations relating to public procurement, especially in relation to The reforms introduced public funding for political public finance and procurement in the security sectors. par ties in propor tion to their representation in Congress, an important step forward in reducing the The approach to reform was as creative as its substance. influence of money on politics, but one that was very The creation of a strict timeline for producing a unpopular with the public according to opinion surveys. national program injected a high degree of urgency In addition, the Electoral Service established limits on into the process and generated intense pressure to electoral spending as well as on maximum electoral negotiate and find consensus across groups, while contributions. the creation of an independent committee to lead the 44 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT strategy process established a high degree of public the outrage created by the scandals, public support legitimacy and independence into the proposed for the Commission’s work and President Bachelet’s changes. The Commission’s work was participatory, leadership made opposing the anti-corruption agenda seeking guidance from technical experts and support political suicide for legislators. Once bills were put to from citizens. Realizing the importance of building a vote, deputies and senators felt enormous pressure momentum and creating a common understanding in to vote in favor and not be perceived as undermining public opinion on the anti-corruption reform agenda, efforts to clean up the system. the Commission relied on civil society organizations and the media to inform and empower civil society In times of crisis, politicization of corruption scandals and build political capital to be spent during the can poison the political environment, impeding legislative process and implementation of the reform collaborative efforts and the creation of a shared agenda. Civil society and the media had a crucial role in reform agenda. In this case, because all parties had monitoring the implementation of the anti-corruption been involved in the corruption scandals and illicit agenda and holding the administration and Congress campaign finance schemes, there was no scope accountable. Because of the intense public scrutiny on for political shaming. Even further, the government the government and Congress, all political parties were understood that any proposals coming directly from under enormous pressure to embrace and support the the political establishment would be received by the ambitious and comprehensive anti-corruption agenda public with enormous skepticism—and that a more pushed by the government. neutral agent would have to initiate the process. The Engel Commission’s neutrality and independence The Engel Commission’s work and the reform agenda earned it high credibility in public opinion, allowing it promoted by the government were based on the to elaborate concrete proposals that gained unanimous understanding that corruption in the public sector in consensus. Chile was the symptom of much deeper problems—the relationships between economic and political power At the same time, it is important to recognize that the and systemic institutional weaknesses. Earlier reforms reforms of 2015 represent a step in Chile’s development had already created the regulatory foundations for a and not an end point in its national development nor transparent, meritocratic, and well-performing state. the end of corruption in the country. In 2019-2020, The intervening years had demonstrated the ability Chile has experienced a round of protests relating to of economic elites to find ways to circumvent some of issues of inequality and elite privilege. the technical solutions that had been implemented. As a result, the specific technical or sectoral reforms that had been enacted were at risk unless they were buttressed by actions to change the overall incentives in the system, and the dynamics between economic and political power. This case provides an example of how, by recognizing and acting when a window of opportunity emerges, a broad and non-partisan coalition can make progress on previously intractable problems. Until scandals erupt, citizens and politicians may not perceive the importance of anti-corruption reforms and affected groups may have veto power, resulting in reforms being blocked. The corruption scandals that occurred in Chile in 2014 and 2015 created a window of opportunity, and citizens demanded strong, clear and prompt actions by the government and Congress to introduce significant anti-corruption reforms. Congress was initially reluctant to embrace the anti-corruption agenda, with senior lawmakers and party bosses fearing the impact of stricter campaign finance and transparency norms. But Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 45 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT Notes 1. For the purposes of this chapter, the terms “public 13. Network analyses show that public procurement markets p r o c u r e m e nt ” a n d “s t ate c o nt r a c t i n g” a r e u s e d are dense and well-connected (Fazekas, Skuhrovec and interchangeably to indicate that the discussion of corruption Wachs, 2017), high corruption risk organizations are clustered applies broadly, and includes traditional public procurement, (Fazekas and Tóth, 2016) and corruption in public procurement public-private partnerships, as well as contracting by state- is predominantly about the exclusion of suppliers (Fazekas, owned enterprises. We differentiate between input-oriented Skuhrovec and Wachs, 2017). public procurement (where state contracting occurs on the basis of clear technical specifications, designs, and 14. Balrunaite (2019) demonstrates that banning political enumerated inputs) and output-oriented public procurement contributions to party campaign financing reduces corruption (where state contracting happens on the basis of specified risks in public procurement. Fazekas, Skuhrovec and Wachs outcomes/functionalities), since anti-corruption activities (2017) show that captured buyers (buyers with high corruption differ depending on this distinction. risk and denser networks) are significantly less stable around changes of government, supporting the theory that political 2. Public procurement is defined as the purchase by government connections shape markets and are key drivers of corruption of goods, services, and works. There are four main phases: patterns. These papers show that public procurement can project identification and design; advertising, prequalification, be a vehicle for the connections between economic and preparation of bid documents, and submission of bids; bid political interests, in an implicit quid-pro-quo where firms evaluation, post qualification, and award of contract; and contribute to party financing, the political elites disburse contract performance, administration, and supervision. compensations through public contracts and money obtained thanks to political favoritism are reinvested to reinforce these 3. World Bank. (2020). Doing Business 2020. Washington D.C.: relationships. The World Bank. https://www.doingbusiness.org/en/reports/ global-reports/doing-business-2020. 15. OECD (2016), “Preventing Corruption in Public Procurement”. h t t p: // w w w.o e c d .o r g /g o v/e t h i c s /C o r r u p t i o n - P u b l i c - 4. See G. Ware, S. Moss, J. Campos, and G. Noone, Corruption Procurement-Brochure.pdf in Public Procurement: A perennial Challenge, in J. Campos and S. Pradhan, The Many Faces of Corruption: Tracking 16. OECD (1997), “OECD Convention on Combating Bribery of Vulnerabilities at the Sector Level, World Bank, 2007. Foreign Public Officials in International Business Transactions”. http://www.oecd.org/corruption/oecdantibriberyconvention. 5. Corruption in public procurement leads to distortion of htm. competition, limited market access and reduced business appetite for foreign investors. Not surprisingly, companies 17. See, for example, “Model Monitoring Agreements on Integrity increasingly demand for improved fairness in public Pacts for Infrastructure: An implementation guide for Civil procurement procedures. The 2014 Business and Industry Society organizations,” Transparency International, 2018. Advisory Committee to the OECD (BIAC) Economic Survey indicates that among business leaders, enhancing efficiency 18. See Knack, Stephen; Biletska, Nataliya; Kacker, Kanishka. and transparency in public procurement is the top priority for 2017. Deterring kickbacks and encouraging entry in public public sector reforms. procurement markets: evidence from firm surveys in 88 developing countries (English). Policy Research working paper; 6. Chavkin & Shiel (2019). Bribery Division: What is Odebrecht? no. WPS 8078. Washington, D.C.: World Bank Group. http:// Who is Involved?. International Consortium of Investigative documents.worldbank.org/curated/en/817871496169519447/ Journalists. https://w w w.icij.org/investigations/briber y- Deterring-kickbacks-and- encouraging- entr y-in-public- division/bribery-division-what-is-odebrecht-who-is-involved/. procurement-markets-evidence-from-firm-sur veys-in-88- developing-countries. 7. Berghof (2018), “Organised irresponsibility”? The Siemens corruption scandal of the 1990s and 2000s”, Business History. 19. For example, the OECD report on “Preventing corruption in public procurement” and the 2015 OECD “Recommendation 8. United States Department of Justice. Airbus Agrees to Pay of the Council on Public Procurement”. over $3.9 Billion in Global Penalties to Resolve Foreign Bribery and ITAR Case. https://w w w.justice.gov/opa/pr/airbus- 20. Kochanova, Anna, Zahid Hasnain & Bradley Robert Larson agrees-pay-over-39-billion-global-penalties-resolve-foreign- (2016), “Does E-Government Improve Government Capacity? bribery-and-itar-case. Evidence from Tax Administration and Public Procurement,” World Bank Policy Research Working Paper Series. 9. See V. Tanzi and H. Davoodi. 1998. Roads to Nowhere: How Corruption in Public Investment Hurts Growth, IMF Economic 21. Lewis-Faupel, Sean, Yusuf Neggers, Benjamin A. Olken & Issues, No. 12, March 1998. Fazekas and Tóth (2018): “In Rohini Pande (2016), “Can Electronic Procurement Improve transport infrastructure, corruption steers infrastructure Infrastructure Provision? Evidence from Public Works in India spending towards high value as opposed to small value and Indonesia”, American Economic Journal: Economic Policy. investment projects. It also inflates prices by 30–35% on average with largest excesses in high corruption risk regions.” 22. Blum, et. al. 2019. 10. Knack, Biletska and Kacker (2017) show that in countries with 23. For example, an OECD study on the Latin American region more transparent procurement systems, where exceptions to revealed that a common challenge faced by both procuring open competition in tendering must be explicitly justified, entities (47%) and potential users of e-GP systems (57%) are firms are more likely to participate in public procurement low knowledge and skills of ICT. Lack of innovative culture markets. (47%) and limited knowledge of the economic opportunities raised by e-GP systems (38%) were identified as additional 11. The term “agencies” includes all enterprises where the challenges for procuring entities. government or state has significant control through full, majority, or significant minority ownership. 24. There is limited evidence that increased prosecutions for corruption in public procurement leads to lower levels of 12. For an extensive discussion of corruption vulnerabilities and corruption. Researchers have been unable to detect the corruption schemes across the entire procurement process, influence of legal rules and legal enforcement on corruption see G. Ware, et al., 2007. levels in general, or in procurement, despite regular repetition 46 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT of the importance of active policing in deterring corruption 37. Sectors outside of Mogadishu were covered by in-kind and extensive efforts to stamp out corruption. See Minxin Pei, support from the international community. China’s Crony Capitalism: The Dynamics of Regime Decay, 2016 for an extensive discussion of the impact of China’s 38. FGC Advisory Note. (2020, Jan). “Gains from competitive punishment-led anti-corruption efforts. Some countries, like rations tendering in the security sector”. Indonesia, have sought to prevent corruption by criminalizing 39. FGC Advisory Note. (2020, Jan). activities that might reflect misbehavior, such as contract modifications and cost overruns. There is no evidence that 40. FGC Advisory Note. (2020, Jan). these efforts contribute to solving the problem, and many 41. This “form over function” problem is sometimes also referred anecdotal stories indicate that criminalization slows down to as isomorphic mimicry, see for example “Building State decision-making as officials are disinclined to make decisions Capability: Evidence, Analysis, Action,” Matt Andrews, Lant that expose them to risk. Pritchett, and Michael Woolcock. 25. Transparency International (2014), “The Role of Technology 42. The Public Procurement Reform Project (2002-2007 was in Reducing Corruption in Public Procurement”. https:// initiated, with the support of the World Bank, and designed knowledgehub.transparenc y.org/helpdesk /the -role - of- to implement the recommendations of the 2002 Country technology-in-reducing-corruption-in-public-procurement. Procurement Assessment Review. See World Bank. 2002. 26. Gerardino, Maria Paula, Stephan Litschig & Dina Pomeranz Bangladesh - Countr y procurement assessment repor t (2017), “Can Audit s Back fire: Evidence from Public (English). Washington, DC: World Bank. http://documents. Procurement in Chile”, CEPR Discussion Paper. w o r l d b a n k . o r g /c u r a t e d /e n / 8 12 0 414 6 8 74 3 6 5 6 4 8 6 / Bangladesh-Country-procurement-assessment-report. 27. Gerardino, Litschig, Pomerantz, 2017. 43. The e-GP system was initially piloted only in four procuring 28. Bauhr, Monika, Agnes Czibik, Jenny de Fine Licht & Mihály entities of the four “pilot agencies”, then in 50 procuring Fazekas. 2019. Lights on the Shadows of Public Procurement: entities, then in 308 procuring entities, and eventually in all Transparency as an Antidote to Corruption. Governance: procuring entities within the four “pilot agencies” (about An International Journal of Policy, Administrations and 1300). Institutions. 44. The Open Contracting Data Standard, developed by the 29. Schargrodsky, Ernesto & Tella, Rafael Di (2003), “The Role Open Contracting Partnership, defines what procurement of Wages and Auditing During a Crackdown on corruption information should be made publicly available, and the form in the City of Buenos Aires”, Journal of Law and Economics; the information should take in order to enable civil society Zamboni, Yves & Litschig, Stephan (2018), “Audit Risk and Rent oversight and monitoring. See Open Contacting Partnership. Extraction: Evidence from a Randomized Evaluation in Brazil”, org for additional information on the OCDS. Journal of Development Economics. Volume 134, September 2018, p. 133-149. 45. The key activities for the communication campaign included: conducting 99 events on procurement reforms covering over 30. Olken, Benjamin A. (2007), “Monitoring Corruption: Evidence 5,700 participants, convening 64 e-GP awareness workshops from a Field Experiment in Indonesia”, Journal of Political at district level with over 2,400 participants, establishing 64 Economy. Government and Tenderers’ Forums covering 3,300 procuring 31. See Bandiera, Best, Khan, and Pratt, 2019 for findings from a entities, and organizing four e-GP workshops including one at complex random control trial experiment in Pakistan relating the national level for 44 registered banks in the e-GP system. to the impact of auditing, performance pay, and discretion on Also, it developed a mobile app, produced an e-GP theme corruption in public procurement. song, videos, radio and television commercials and success stories, and created two digital billboards in Dhaka that 32. For a review of countries that have successfully reduced displays on-line live procurement data with a direct feed from corruption, see A. Mungiu-Pippidi, A., & Hartmann, T. (2019). the e-GP platform. Corruption and Development: An Over view. In Oxford Research Encyclopedia of Economics and Finance. Oxford: 46. The BRAC Institute of Governance and Development, Oxford University Press. operated by the internationally recognized Bangladesh NGO – BRAC – undertakes work in support of governance 33. For a discussion of the South Korean experience in addressing improvements in Bangladesh and across South Asia. For more corruption at the sector level, see Arsema Tamyalew, A information See www.Brac.net/ Review of the Effectiveness of the Anti-corruption and Civil Rights Commission of the Republic of Korea, World Bank. 47. The GTF provided an informal platform for government For Rwanda, see Addressing Administrative Corruption in officials and bidders to share information and experience Rwanda, World Bank, 2020, forthcoming. including issues and resolutions about procurement and the e-GP system. 34. Manson, Katrina (2013, Nov 3). “Somalia central bank governor resigns after seven weeks”. Financial Times. https://www. 48. See Zafrul Islam, “Bangladesh’s Success in Public Procurement: ft.com/content/5bf9ac6c-4319-11e3-8350-00144feabdc0. Sustained reform really pays off,” World Bank Governance of Development Blogs, Nov 19, 2018. 35. Jorgic, Drazen (2014, Feb 14). “Insight: Graft allegations test West’s ties to Somali president”. Reuters. https://www. 49. Blum et al, 2020, forthcoming. reuters.com/article/us-somalia-corruption-insight/insight- 50. See Islam, 2018 for additional information on the survey gr af t-allegations -tes t- wes t s -ties -to - s omali- president- methodology and findings. idUSBREA1D08P20140214 51. A detailed analysis of the transaction-level data is presented in 36. 2020 Appropriation Act allocated USD146 million for security Blum et al, 2020, forthcoming. sector operational costs out of a total operational budget of USD349 million. Rations spending was budgeted at USD15 52. Mungiu-Piuppidi, A. and Fazekas, M. (2020). “How to define million in 2020, around 11% of security sector operational and measure corruption.” Mungiu-Piuppidi, A., & Heywood, spending. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 47 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT P. M. A Research Agenda for Studies of Corruption. Elgar. a Consultant Office on Public Affairs, a lobby firm dedicated Chapter 2, p. 7-26 to helping energy companies prevent and solve conflicts with local communities. 53. Blum et al, 2020, forthcoming. 65. Cooling-off periods are minimum time intervals restricting 54. Mihály Fazekas and Kocsis, Gábor, (2020), Uncovering High- former public officials from accepting employment in the Level Corruption: Cross-National Corruption Proxies Using private sector. Cooling-off period regulations are a common Public Procurement Data. British Journal of Political Science, measure to prevent conflicts of interest. 50(1), p. 155-164. 66. The main provisions of the Lobby Law (Ley N° 20.730, 2014) 55. Mihály Fazekas, Luciana Cingolani, & Bence Tóth (2018), included: (i) The establishment of legal definitions for lobbying, Innovations in Objectively Measuring Corruption in Public activities and actors; (ii) The creation of public registers Procurement. In Helmut K. Anheier, Matthias Haber, and Mark where authorities must disclose information regarding A. Kayser (eds.) Governance Indicators. Approaches, Progress, regular meetings and individuals/lobbyists who attended Promise. Ch. 7. Oxford University Press, Oxford. those meetings; (iii) Sanctions and fines for infractions; (iv) A 56. Decio Coviello and Stefano Gagliarducci, (2017), Tenure in O mandate for the Council for Transparency to consolidate data ffice and Public Procurement.” American Economic Journal: on lobbying activities and make that information public via a Economic Policy 9(3), p.59-105. website. 57. Elizabeth Dávid-Barrett and Fazekas, Mihály (2020) Anti- 67. The t wo organizations were Espacio Público (Public corruption in aid-funded procurement: Is corruption Space in Spanish) and Fundación Ciudadano Inteligente reduced or merely displaced? World Development. (Intelligent Citizen Foundation in Spanish). The results from ht tps://w w w.sciencedirec t.com/science/ar ticle/abs/pii/ the Anti-Corruption Observatory can be found at: https:// S0305750X20301261 observatorioanticorrupcion.cl/ 58. Blum et al, 2020, forthcoming. 68. Framework agreements are arrangements between one or more buyers and one or more suppliers that provide the terms 59. See Kevin Casas-Zamora and Miguel Carter, Beyond the governing contracts to be established for a certain period of Scandals: The Changing Context of Corruption in Latin time, in particular with regard to price and, where necessary, America, Inter-American Dialogue, Rule of Law Report, Feb the quantity envisaged. Other repetitive conditions known 2017 for additional information. in advance, such as the place of delivery, may be included. They are intended to provide expeditious ordering of 60. A national opinion survey by the Research Center of Public commonly used, off-the-shelf goods, purchased on the basis Studies (CEP) shows that between 2012 and 2015 public of lowest price. Examples of such goods are printing supplies, confidence in the government, the National Congress of stationery, computers and software, and pharmaceutical Chile (Congress) and political parties fell, respectively, by 19 supplies (UNECE, Trade Facilitation Implementation Guide). percentage points, 10.5 percentage points and 5.5 percentage points. In just five months prior to April 2015, the share of 69. IDB (2019), “Bankability through the Lens of Transparency, the population considering corruption one of the top three Increasing Private Investment in Latin American Infrastructure”. problems of the country tripled from 9% to 28%, while support https://publications.iadb.org/en/bankability-through-lens- for Bachelet dropped by almost 10 percentage points. transparency-increasing-private-investment-latin-american- infrastructure. 61. Public Procurement Act (Law n° 19.886) 70. According to the new legislation, the Chilean National 62. www.chilecompra.cl Congress must approve allocations for arms acquisitions 63. The Milicogate scheme was abetted by the “Restricted and military investment, thus officially ending the use of off- Copper Law” (Ley Reservada del Cobre), which required the budget funds, and the Comptroller General (the government state-owned National Copper Corporation (CODELCO) to audit office) has now oversight powers on all financial activities transfer 10% of revenues from its copper exports to pay for involving these funds. The derogation of the “Copper Law” arms acquisitions and equipment maintenance for the armed and the enactment of the new funding system involve a forces. The “Copper Law” was restricted in the sense that transition plan until 2032. Funds from the copper tax will be its full text was secret and the funds were transferred every gradually phased out over 12 years: the 10% tax on copper year to secret military accounts. This off-budget system led exports will remain until 2028 and will then decrease by 2.5% to military spending unrelated to any assessment of actual each year until it disappears in 2032. During this period, defense needs, unplanned and uncoordinated spending, and however, copper revenues will no longer be transferred no parliamentary scrutiny or accountability for how money was directly to funds for arms acquisitions controlled by the armed spent, opening the door for corruption. The inadequacy of forces; instead, they will be made available to all sectors of the “Copper Law” had been discussed since Chile’s return to government through the regular state budget. democracy in 1990, and in 2011 the Congress introduced a bill 71. Engel, Eduardo (2019), “Money and Politics: Recent Reforms in to abolish the “Copper Law” and allow Congress to oversee Chile”, Espacio Público and University of Chile. arms acquisitions and the military budget. The bill reached the Senate in 2012, where it stalled. 64. For example, Rodrigo Hinzpeter was the Interior Minister from 2010 to 2012 and Defense Minister from 2012 to March 2014, and only one month later he was hired as General Manager at Quiñenco, which holds stakes in companies that engage in a wide array of business activities related to regulated industries, including oil imports-exports and the transport sector. Andrés Chadwick Piñera was the Interior Minister from 2012 to March 2014 and in June 2014, three months after handing over power, announced his decision to create 48 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT References Baldi, Simona, Anna Bottasso, Maurizio Conti & Chiara Piccardo Rent Extraction”, Working Paper. (2016), “To Bid or Not to Bid: That is the Question: Public Procurement, Project Complexity and Corruption”, European G. Ware, S. Moss, J. 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Chiappinelli, Olga (2017), “Decentralization and Public OECD (2017), “Government at a Glance: Latin America and the Procurement Performance New Evidence from Italy”, DIW Berlin Caribbean”. https://w w w.oecd.org/gov/government-at-a- Discussion Paper. glance-latin-america-and-the-caribbean-2017-9789264265554- en.htm#:~:tex t=It%20contains%20new%20indicators%20 Coviello, Decio & Mario Mariniello (2014), “Publicity Requirements on,special%20feature%20on%20health%20budgeting. in Public Procurement: Evidence from a Regression Discontinuity Design”, Journal of Public Economics. Olken, Benjamin A. (2007), “Monitoring Corruption: Evidence from a Field Experiment in Indonesia”, Journal of Political Economy. Coviello, Decio, Andrea Guglielmo & Giancarlo Spagnolo (2016), “The Effect of Discretion on Procurement Performance”, CEPR United States Department of Justice. Airbus Agrees to Pay over Discussion Paper. $3.9 Billion in Global Penalties to Resolve Foreign Bribery and ITAR Case. https://www.justice.gov/opa/pr/airbus-agrees-pay- Decarolis, Francesco (2014), “Awarding Price, Contrac t over-39-billion-global-penalties-resolve-foreign-bribery-and- Performance, and Bids Screening: Evidence from Procurement itar-case. Auctions”, American Economic Journal: Applied Economics. Tella, Rafael Di & Schargrodsky, Ernesto (2003), “The Role of Fazekas, Mihály, Jiri Skuhrovec & Johannes Wachs (2017), Wages and Auditing During a Crackdown on corruption in the “Corruption, Government Turnover, and Public Contracting City of Buenos Aires”, Journal of Law and Economics. Market Structure”, Government Transparency Institute Working Paper. Tran, Anh (2008), “Can Procurement Auctions Reduce Corruption? Evidence from the Internal Records of a Bribe-Paying Firm”, Fazekas, Mihály & Bence Tóth (2018), “The Extent and Cost of Working Paper. Corruption in Transport Infrastructure. New Evidence from Europe”, Transportation Research Part A: Policy and Practice. Transparency International (2014), “The Role of Technology in Reducing Corruption in Public Procurement”. https:// Fazekas, Mihály & István János Tóth (2013), “Corruption Manual for k nowle dge hub.tr ans parenc y.org / help d es k /t he - role - of- Beginners: Corruption Techniques in Public Procurement with technology-in-reducing-corruption-in-public-procurement. Examples from Hungary”, Working Paper. V. Tanzi and H. Davoodi. 1998. Roads to Nowhere: How Corruption Fazekas, Mihály, Luciana Cingolani & Bence Tóth (2016), “A in Public Investment Hurts Growth, IMF Economic Issues, No. Comprehensive Review of Objective Corruption Proxies in 12, March 1998. Public Procurement: Risky Actors, Transactions, and Vehicles of Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 49 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT World Bank. (2020). Doing Business 2020. Washington D.C.: The Transparency International (2019), “Global Corruption Perception World Bank. https://www.doingbusiness.org/en/reports/global- Index Report”. https://www.transparency.org/en/cpi/2019. reports/doing-business-2020. World Bank. (2002). Bangladesh - Country procurement assessment Zamboni, Yves & Litschig, Stephan (2018), “Audit Risk and Rent repor t (English). Washington, DC: World Bank. ht tp:// Extraction: Evidence from a Randomized Evaluation in Brazil”, documents.worldbank.org/curated/en/812041468743656486/ Journal of Development Economics. Volume 134, September Bangladesh-Country-procurement-assessment-report. 2018, p. 133-149. Zafrul Islam, (2018), Bangladesh’s Success in Public Procurement: Sustained Reform Really Pays Off, World Bank, Governance for Development Blogs, Nov 19, 2018. Case Study 1: Strengthening Competitive Procurement in Somalia FGC Advisory Note. (2020, Jan). “Gains from competitive rations Case Study 3: Reforming Procurement and Political tendering in the security sector”. Party Financing in Chile Jorgic, Drazen (2014, Feb 14). “Insight: Graft allegations test West’s Consejo Asesor Presidencial contra los Conflictos de Interés, ties to Somali president”. Reuters. https://www.reuters.com/ el Tráfico de Influencias y la Corrupción. (2015). Informe article/us-somalia-corruption-insight/insight-graft-allegations- Final, p. 110. http://consejoanticorrupcion.cl/wp-content/ test-wests-ties-to-somali-president-idUSBREA1D08P20140214. uploads/2015/04/Consejo_Anticorrupcion_Informe_Final.pdf. Manson, Katrina (2013, Nov 3). “Somalia central bank governor Ellie, Matteson (2016). How Chile’s Recent Political Scandals Led resigns after seven weeks”. Financial Times. https://www.ft.com/ to Reforms. https://www.corporatecomplianceinsights.com/ content/5bf9ac6c-4319-11e3-8350-00144feabdc0. chiles-recent-political-scandals-led-reforms/. Engel, Eduardo (2016), “From Corruption Scandals to Reforms: The Work of Chile’s Anti-Corruption Commission”, presentation Case Study 2: e-Procurement Reform in Bangladesh 2016 Decio Coviello and Stefano Gagliarducci, (2017), Tenure in O Engel, Eduardo (2019), “Money and Politics: Recent Reforms in ffice and Public Procurement.” American Economic Journal: Chile”, Espacio Público and University of Chile. Economic Policy 9(3), p.59-105. IDB (2015). Chile pushes integrity and transparency agenda Elizabeth Dávid-Barrett and Fazekas, Mihály (2020) Anti-corruption with help from the IDB. https://www.iadb.org/en/news/news- in aid-funded procurement: Is corruption reduced or merely releases/2015-12-14/chile-anti-corruption-and-transparency- displaced? World Development. https://www.sciencedirect. loan%2C11366.html com/science/article/abs/pii/S0305750X20301261 IDB (2015), “CHILE’S INTEGRITY AND TRANSPARENCY AGENDA Jurgen Blum, Mihaly Fazekas , Sushmita Samaddar , Ishtiak Siddique SUPPORT PROGRAM II” https://ewsdata.rightsindevelopment. (2018). Evaluating the Impact of Introducing E-procurement in org/files/documents/11/IADB-CH-L1111_mgRsAhC.pdf Bangladesh. Policy Note. Washington, DC. IDB (2019), “Bankability through the Lens of Transparency, Jurgen Blum, Mihaly Fazekas, Sushmita Samaddar, Ishtiak Increasing Private Investment in Latin American Infrastructure”. Siddique. (2019). Introducing e-procurement in Bangladesh: https://publications.iadb.org/en/bankability-through-lens- The promise of efficiency and openness. Working Paper. World transparency-increasing-private-investment-latin-american- Bank, Washington DC. infrastructure. Mihály Fazekas, Luciana Cingolani, & Bence Tóth (2018), Innovations IDB (n.d.), “Programa de Apoyo a la Agenda de Probidad y in Objectively Measuring Corruption in Public Procurement. In Transparencia de Chile I y II (CH-L1110; 3617/OC-CH) (CH-L1111; Helmut K. Anheier, Matthias Haber, and Mark A. Kayser (eds.) 3748/OC-CH), Informe de Terminación de Proyecto (PCR)” Governance Indicators. Approaches, Progress, Promise. Ch. 7. https://ewsdata.rightsindevelopment.org/files/documents/10/ Oxford University Press, Oxford. IADB-CH-L1110.pdf Mihály Fazekas and Kocsis, Gábor, (2020), Uncovering High-Level Kevin Casas-Zamora and Miguel Carter (2017). Beyond the Corruption: Cross-National Corruption Proxies Using Public Scandals: The Changing Context of Corruption in Latin America, Procurement Data. British Journal of Political Science, 50(1), p. Inter-American Dialogue, Rule of Law Report, Feb 2017. 155-164. Kurtenbach, S., & Nolte, D. (2017). Latin America’s Fight against Mungiu-Piuppidi, A. and Fazekas, M. (2020). “How to define and Corruption: The End of Impunity. GIGA German Institute measure corruption. Mungiu-Piuppidi, A., & Heywood, P. M. A of Global and Area Studies - Leibniz-Institut für Globale und Research Agenda for Studies of Corruption. Elgar. Chapter 2, Regionale Studien, Institut für Lateinamerika-Studien. https:// pp 7-26 nbn-resolving.org/urn:nbn:de:0168-ssoar-52149-6. S.R. Croomand Brandon-Jones, A. (2005), “Key Issues in OECD (2019), “Repor t on The Implementation of the E-Procurement: Procurement Implementation and Operation in Recommendation of the Council on Public Procurement”. the Public Sector”, Journal of Public Procurement, 5(3), 367–387. https://one.oecd.org/document/C(2019)94/FINAL/en/pdf S. Lewis-Faupel, Y., Olken, B. A., & Pande, R. (2016), “Can Electronic OECD (2019), “Productivity in public procurement, A Case Study Procurement Improve Infrastructure Provision? Evidence from of Finland: Measuring the Efficiency and Effectiveness of Public Public Works in India and Indonesia”, American Economic Procurement”. https://www.oecd.org/gov/public-procurement/ Journal: Economic Policy, 8(3), 258–283. publications/productivity-public-procurement.pdf Transparency International (2005), “Global Corruption Perception OGP (2001), “Lobby Law in Chile: Democratizing Access to Index Report”. https://www.transparency.org/en/cpi/2005. Public Authorities”. https://www.opengovpartnership.org/wp- content/uploads/2001/01/report_Lobby-law-in-Chile.pdf. 50 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 1 PUBLIC PROCUREMENT Romero (2015). Chile Joins Other Latin American Nations Shaken by Scandal. The New York Times. https://www.nytimes. com/2015/04/10/world/americ as /chile -joins- other-latin- american-nations-shaken-by-scandal.html Simon (2019). From Scandal to Reforms: Chile’s Unusual Breakthrough. https://www.americasquarterly.org/content/ when-reforms-happen-chile. SIPRI (2019). Ending off-budget military funding: Lessons from Chile. https://www.sipri.org/commentary/topical-backgrounder/2019/ ending-budget-military-funding-lessons-chile Tufts (n.d.) Chile’s Milicogate Scandal. Compendium of Arms Trade Corruption. https://sites.tufts.edu/corruptarmsdeals/chiles- milicogate-scandal/. Weller, Claro & Blanco (2008). Sustainable Public Procurement: Where do we Stand in Chile?. https://www.iisd.org/pdf/2008/ spp_chile.pdf Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 51 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 Public Infrastucture PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE Introduction Why does corruption in public civic engagement and leads to low-quality results. infrastructure matter? Malfeasance and mismanagement along the project lifecycle result in transactions that have high external The world’s infrastructure needs are huge. Globally, costs and low public benefit. These results tend to an estimated USD3-4 trillion on an annual basis through repeat themselves, not least when corruption goes 2030 is required to meet the infrastructure needs of the unchallenged, but risk management is a persistent 1.2 billion people who lack electricity; the 663 million challenge facing public entities. who lack adequate drinking water sources; the 1 billion who live more than two kilometers from an all-weather Risk management is complicated by the many road; and the many millions who are unable to access possible entry points for corruption. Projects often work and educational opportunities due to the absence cut across several institutions, jurisdictions, levels or high cost of transportation services.1 of government, and policy areas on their long-run path to delivery. This complexity makes corruption Corruption exists in all sectors and its impacts tricky to detect. Infrastructure is also often subject are universally negative, but corruption in public to considerable local influence on topics such as infrastructure has particularly serious implications land use and access to services leading to many for low-income countries where infrastructure opportunities for rent extraction. Finally, the corruption accounts for a higher share of GDP and institutional risks in infrastructure development are inextricably structures may be less stable. Inappropriate project linked to those in government contracting. As such, preparation and selection, poor price forecasting, the preceding chapter on public procurement draws limited competition, and badly designed tenders complementary lessons and insights. lead to excessive time and cost overruns, inadequate maintenance, and low-quality end results. This all World Bank experience shows that the stakes impacts negatively on economic growth and poverty are high in infrastructure, but mitigation efforts alleviation. matter. The World Bank’s infrastructure lending portfolio represents a significant portion of its activities. Private sector funding is urgently needed, but In 2014 alone, the World Bank allocated USD24 billion corruption makes investors reluctant. Given the so- to infrastructure, amounting to roughly 40 percent of its called infrastructure gap, the growing need to attract total lending that year. A project mainstay of the World financing from a nuanced range of new and conventional Bank through the years has been road construction. sources is evident. Yet surveys conducted among the Between 2000 and 2010, USD56 billion was directed private sector unanimously show that corruption risks are to roads and road maintenance projects. The Bank’s among the top barriers to investment in infrastructure Independent Evaluation Group (IEG) reports that roads and auxiliary sectors. The size, complexity and long-run and other transport projects consistently score higher nature of infrastructure projects leaves them vulnerable on measures of outcomes, institutional development, to corrupt practices and, as a result, the prospect of and sustainability than non-transport projects. Yet, exposure to criminal or ethical misconduct functions as one quarter of the more than 500 projects with a Bank- a deterrent to investors. funded roads component during that decade drew one or more allegations of corruption-related activity. In In addition to large financial losses, the cost comparison to non-Bank projects or projects with no of corruption to governments is reputational. corruption mitigation efforts, this number is low, hinting Diminished public trust and disinterest in public- at the true extent of the problem. private cooperation from quality contractors decreases Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 53 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE Identifying corruption risk: Targeting the whole project cycle Research consistently shows that corruption in a lack of data on other phases. Estimates of losses occurs at every stage along the project lifecycle. to bribery in construction, which lies downstream Every phase in an infrastructure project involves from procurement, are as high as 45 percent of distinct combinations of institutions and stakeholders, construction costs.3 To illustrate, more than a quarter each with their own vulnerabilities to particular types of the allegations against the road projects with World of misconduct. The interaction of country specific Bank involvement, mentioned above, concerned fraud circumstances, market conditions, and projec t during the construction phase.4 Better oversight of the particulars determine where the dark corners are.2 entire project cycle is essential: If an economically viable project is selected in the initial phase, and the quality Overlooking early and late stages is detrimental and maintenance of the end-product is ensured, the to fiscal prudence. Attempts to measure corruption potential impact of corruption is already substantially in the infrastructure sector have tended to focus reduced. predominantly on the procurement phase, resulting Corruption entry points by phase To understand which types of corruption most places some parties at an advantage to others. commonly afflict the infrastructure sector, it can be helpful to simplify the corruption challenge In the absence of fair competition, project value is by breaking it down into stages. This section compromised. In many jurisdictions, bribery is plainly describes some examples of the most common types unlawful, while lobbying might happen legally in ways of misconduct as they might occur in the early, middle that cause information asymmetry between bidders and late project stages. and undermine competitive procedures. However, the result of the two scenarios can be the same: financial pressure or lobbying power wins out over public 1. Needs identification, appraisal and interest in project selection. The cost of this bias in project planning: Bribery and undue project selection is cumulative. For governments and influence end users, overall project value is negatively impacted when funds are directed to projects that are not T he hig h sta kes and outsized profits of selected based on fair competition. multimillion-dollar contracts provide an alluring incentive to influence the identification, selection The size of bribes has a significant impact on and planning process. Early project stages involve procuring entities. Statistics show that bribes during multiple actors with competing agendas, such as the submission, evaluation and awarding of contracts potential contractors, lobbyists, and regulators. The are between 10 to 15 percent of the contract value. bribery of officials, driven by the potential returns One well-known and recent example of grand on misconduct, is aimed at gaining connections or corruption is the Odebrecht scandal, which saw the undermining merit-based procedures for project or Brazilian infrastructure giant bribe its way to contracts contractor selection, for example through access to in otherwise largely competitive auctions across two confidential information such as financial or commercial continents for more than a decade. Between 2005 and project details. Similarly, policy capture, whereby the 2015, the equivalent of Odebrecht’s entire profit was government body responsible for project selection is made from infrastructure contracts won from bribes. subject to undue influence—concealed as lobbying— By Odebrecht’s admission in a U.S. District Court, 54 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE the company paid about USD788 million in bribes in awarded to the bribe-paying firm, whose prices are Brazil and 11 other countries, securing more than 100 now inflated to cover the cost of the bribe. It is done contracts that generated USD3.3 billion in profit for the by limiting calls for bids, skimping on advertisements or company. Typically, bribe payouts are recovered in the setting unrealistically short timeframes with specifically mark-up placed on the unit prices of the procurement tailored requirements. A study of more than 3.5 million items, driving up costs for procuring entities who end government contracts across Europe showed that up paying the price, twice. publishing more information about contracts decreases the risk of single bid tenders. This matters because Bribery aside, the early project stages are sensitive single bid contracts are a governance risk and are over to several types of misconduct. For example, bidders 7 percent more expensive. Publishing five more pieces may present fraudulent information to pass technical or of information, or data points, about each tender would other assessments, potentially prompting serious safety save up to USD3.9 billion in Europe.6 hazards to people and the climate, not to mention the costs tied to fixing defunct infrastructure at a later Nepotism occurs when decision makers influence date. Proposed budgets that either overestimate the processes of procurement to favor bidders outcomes or underestimate costs are another example who are connected to them via professional or of misreporting that intentionally skews competition. familial networks. This is done by either limiting the These types of misreporting can be difficult to detect set of bidders in the advertisement phase or unfairly in time and, because the cost of re-contracting for assessing bidders in the assessment phase. The payoff governments is prohibitively high, they can lead to a for this can come in the form of kickbacks or political pernicious outcome of rewarding fraud. campaign support in a textbook example of corruption as the misuse of public office for private gain. 2. Procurement: Collusion and nepotism 3. Construction, operation and maintenance: Fraud and The procurement phase may hold the highest risk of renegotiation corruption. Compared with other areas of development lending, large-scale, technically elaborate infrastructure Years of construction lead into decades of operation projects require more specialized contractors and and maintenance (O&M), yet PPP regulations tend consultants and more capital input, leading to complex to neglect the long tail-end of projects. Too often contractual procedures throughout. The procurement there is no robust evaluation plan in place, nor a clear phase may indeed be where this complexity creates procedure for dealing with unexpected risks. As a the most entry points for corruption, and the biggest result, contract execution and infrastructure operations chance of rewards for misconduct. A study showed that are vulnerable. While mechanisms to ensure the quality government procurement worldwide was worth around of outcomes are key to long-range project success, USD9.5 trillion in 2014.5 Due to the size of the market, there is a lack of ready tools to help governments even low percentage levels of corruption account for evaluate and manage indicators of corruption through enormous financial losses. construction and O&M. This gap is compounded by the fact that O&M is often underfunded: The average cost Collusion occurs when bidders conspire to for road rehabilitation across 18 countries with good limit competition through schemes, including data on both bribes and costs was USD36 per square complementary bidding, market division, and bid meter in 2010. In countries with a low risk of bribery, it suppression. This type of cartelization defeats the was USD30 and in those with a high risk it was USD46, a competitive bidding process in order to inflate prices to spread of more than 50 percent.7 artificially high levels. Contractors may also act alone, offering payments for contract awards or facilitation One of the most common risks during the payments to circumvent taxes and customs. construction phase is ex-post renegotiation of performance requirements in the contract details. 8 Or, the g overnment contracting authority When contractors’ terms begin to deviate substantially manipulates the bidding process to exclude other from initial requirements, it can be an indication that competitors. This ensures that the contract will be the contract was won through intentional under- Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 55 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE bidding. Renegotiations reflect the fact that PPPs guidance on how countries can protect themselves suffer from chronic cost overruns, and recurrent from disingenuous contract offerings that lead to renegotiations are a likely outcome of the incentive renegotiation attempts. structure in place. Recent evidence shows that when firms pay bribes, renegotiated amounts and cost The operational, audit and evaluation phases are overruns are substantially larger,9 yet renegotiations also particularly sensitive to fraudulent results continue because the financial and reputational cost reporting. Auditors play an important role, but to be to government of returning to the tendering process is efficient they need to be sufficiently resourced and likely perceived to be too high. Case Study 5 provides siloed from situations where they may be exposed to more insights into how renegotiation affects PPPs in attempts at facilitation payments to overlook violations particular, and, using country-level examples, gives of controls. Policy actions: Integrity and transparency in governance Planning is an essential part of protecting against inception to project closure. IEMs should be financial and reputational losses. Measurements required to monitor objectively and may have of losses to corruption in the infrastructure sector administrative or enforcement responsibilities, for are open to wide margins of error, but a comparison example the power to halt a project in the case of of World Bank supported projects with non-Bank allegations of wrongdoing. related projects shows that the mere presence of a risk management strategy results in fewer allegations of • Digitization of information and dissemination for corrupt activity overall.10 equal access by all stakeholders. This includes the public and civil society organizations, which play a The best prevention is a whole-of-government key role in successful oversight. approach. Neither increasing the costs associated with misconduct, nor adding time-consuming layers • Integrating PPPs into a broader public investment of due diligence has proven to be a catch-all defense. management process as well as ensuring sign- Corruption is a human incentive-based behavior with no off from the Ministry of Finance at key points can archetypal villain, and prevention, as ever, is preferable reduce the scope for poorly prepared projects. to treatment. Best practices for governments entail formalized criteria to guide the prioritization, approval, Other efforts that are shown to make a difference: and funding of projects. • Risk mapping. Understanding who is involved At the project level, policy measures to encourage at each step of the procurement process, and integrity can include requirements for: the links between people and entities is key to limiting losses. First steps to formulating a policy • Mandatory conflict of interest disclosure for all response could include a ‘risk map’ for relevant persons who come into contact with the project government bodies to identify official positions at the government level. This is a key part of risk that are vulnerable to outside influence, and to planning that helps prevent incentives for corrupt set a threshold for determining which types of behavior by limiting the possibility for persons to projects are particularly risk prone, based on costs make project related decisions that benefit them and complexity. Building a risk map helps establish personally. a clear view and open lines of communication between all relevant government departments. • Systematic controls via Independent External Monitors (IEMs) who review the process from • Codes of conduct and training. This should include 56 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE provisions on asset declaration and whistleblower ownership is attempted for several reasons, procedures including, importantly, whistleblower including to hide connections or collusion between protections. Training relevant officials on how to government officials and owners. See Chapter 9 avoid corruption and providing general ethics for more information on how beneficial ownership and integrity training raises awareness, builds registries are being implemented globally. commitment and opens up space to discuss wrongdoing and bring it to light. • Cross-government reporting and monitoring. Monitoring cash payments and ensuring that • Multi-stakeholder agreements. In places where financial transactions are sufficiently tracked and the whole-of-government approach is untenable, recorded facilitates the detection of irregularities. risk mitigation instruments can be put in place on Following the whole-of-government ideal, this a case-by-case basis. One way to do this is for all includes cross-referencing public expenditure stakeholders—government, potential contractors, information within and across sectors. and civil society—to sign a binding agreement mutually pledging to avoid corrupt practices and • Encourage integrity among potential project ensure enhanced disclosure, including to the partners. Even when governments have sound public. This type of contract can be implemented regulations in place, compliance monitoring is on all or parts of a project and adapted to the never failproof. A lot of risks come from working context at hand. For example, agreements can with third parties who, directly or indirectly, stipulate requirements for an IEM, such as a relevant pose a threat. Some partners might obscure civil society group, and sanctions for transgression, ultimate beneficial ownership details that can hide including contract cancellation. important conflict of interest information. Others may not have any screening measures in place for While being a good preventive tool, this type of subcontractors or, indeed, any risk management at agreement is limited in scope. Like any strategy, all. To avoid doing business with companies that do if not carefully managed, it can be merely window not actively manage risk in their own operations, or dressing. It works best as a supporting mechanism in their sub-contractors, is a crucial step in avoiding to weak regulations but requires complementary external risk. approaches, such as effective intervention of control agencies and the timely prosecution of Box 2.1 is an example of the types of internal criminal offenses in order to be most efficient. policies and practices that a project owner should be screening for in partners on major Introducing a multi-stakeholder approach to infrastructure contracts. It draws on the experience accountabilit y can involve par tnering with of the International Finance Corporation (IFC), initiatives, such as Transparency International, which the largest global development institution has created the Integrity Pact for this purpose; the focused exclusively on the private sector. Early Open Government Partnership; Open Contracting identification of corruption and other integrity risks Partnership; or, the Infrastructure Transparency is an essential component of IFC’s overall project Initiative (CoST). See Case Study 4 of this report risk management. Through due diligence, IFC aims to read more about how CoST uses a four-pillar to identify likeminded clients and partners who approach to improve service delivery and value for are committed to transparency, sustainability and money in public infrastructure spending. good business practices. IFC’s methodology is relevant for practitioners from all sectors, including • Beneficial ownership disclosure laws. Beneficial SOEs, investors, and government procurement owners are natural persons who effectively own bodies, because it sets a standard at the project or control a legal entity, in this case the bidder. level for all stakeholders, equally. It mirrors the rise Preventing their anonymity complicates the of environmental, social and governance standards process of illegal practices, including money that large institutional investors and corporates laundering and corruption, by blocking attempts increasingly apply to their own decision-making. to obscure ownership through layers of entities across several jurisdictions. Concealing beneficial Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 57 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE BOX 2.1 IFC’s Integrity Due Diligence (IDD) The purpose of the IDD process is to understand the ownership structure of the client and partners, determine the ultimate beneficial owners, and identify integrity risks, such as corruption, fraud, money laundering, tax evasion, lack of transparency and undue political influence associated with the project. Mapping the underlying ownership structures and networks of the parties involved helps the IFC gain a view of the potential risks of engaging with parties who are sanctioned or have a known history of misconduct; or of engaging with unknown third parties who could present other risks. Opaque structures may be used to evade taxes, hide ownership and wealth, facilitate criminal activity and launder the proceeds of crime. For these reasons, as part of its IDD process, IFC is required to conduct due diligence to understand the structures used by its clients. Enhanced due diligence is required for investments involving intermediate jurisdictions (broadly defined as jurisdictions other than those of transaction sponsors or project companies and sometimes referred to as offshore financial centers). IDD also covers other entities and individuals whose role in a project could potentially have a material adverse reputational or financial impact. Policy articulation: Drawing on the experience of multilateral organizations Competition is cleaner and kickbacks are fewer and awareness-raising amongst public officials; and human smaller in places where transparent procurement, resources management. independent complaint procedures and external auditing are in place. These findings of a World Bank Multilateral institutions have followed the OECD’s survey of 34,000 companies in 88 countries are in line example. The OECD may currently take intellectual with today’s standards for best practice, as formulated leadership in its work with corruption related issues, by a handful of multilateral organizations.11 but a large number of multilateral institutions have similar initiatives in place. These include regional The OECD takes intellectual leadership in this area. partnerships, such as the African Union’s Convention The OECD’s work on anti-corruption is a diverse toolbox on Preventing and Combating Corruption and the that includes frameworks for developing standards and Economic Community of West African States’ Protocol best practices on issues such as bribery, procurement, on the Fight Against Corruption; economic and and public financial management.12 The G20 also political organizations such as the World Economic takes a leading role. The G20 High-Level Principles Forum’s Principles for Countering Corruption, which (2017) take a narrower approach, concentrating on the builds on its early work on countering bribery; and structural organization of public administration against the United Nations Convention Against Corruption corruption.13 They are divided into organizational (UNCAC), which is the only legally binding and universal measures that focus on administrative procedures; instrument. 58 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE Across these frameworks, the following common directives on what constitutes ethical behavior. principles emerge: Governments should establish and disseminate a chain of responsibility and obligations for internal • Openness/Transparency repor ting with well-defined responsibilities Countries where information about contracting for designing, leading and implementing is made public have reduced prices, increased corruption prevention measures across the public competition and better ser vices.14 Potential administration at all levels. Guidelines and regular suppliers, contractors and the public should be integrity training go even further in helping to provided with consistent information so that the ensure impartiality, manage conflicts of interest, public procurement process is clear and the and give directives for how to handle suspicions of outcomes are equitable. Governments should misconduct. promote transparency for and among relevant stakeholders, such as the public and oversight • Monitoring and accountability institutions, across the entire public procurement Governments should provide mechanisms to cycle. monitor public procurement as well as detect misconduct and apply sanctions accordingly. This Transparency is not just a trendy term for keeping can include an independent monitoring body governments honest and citizens happy. A with the power to halt projects on the basis of growing body of academic research shows that suspicions of foul play or an ombudsman that a certain level of disclosure by companies is reviews department practices and complaints and strongly correlated with lower cost of capital, ensures alternative dispute resolution processes. improved capital allocation, enhanced earnings, and increased company valuation.15 This is true As described in the following section, citizen for companies across markets and includes m o ni to r i n g c a n c o m p l e m e nt t r a d i t i o nal financial and non-financial disclosure on social and accountability measures and the positive effects environmental factors. of empowering the public are well documented. A randomized control study of roadworks projects • Coordination, code of conduct, and training in Afghanistan, for example, found that new roads A code of conduct for all government officials in were of significantly higher quality and more touch with the planning, procurement or execution durable in neighborhoods where the community processes builds cohesion and trust and gives clear had monitored the implementation of the project.16 Using data and citizen monitoring Good g over nance , ris k mana g ement and practice, project data helps decision-makers identify transparency go hand in hand. End-to-end vulnerabilities and plug these gaps; for example, by monitoring of public spending contributes to good generating probability scores for the risk of bid rigging governance objectives by strengthening public sector or mining e-GP systems for patterns that indicate efficiency, while policies that promote transparency favoritism or collusion. impact citizen trust, value for money and competition.17 Bringing procurement processes online has large One of the most convincing trends in cost-efficient payoffs, not only in terms of streamlining data and effective risk mitigation is the technology- points. E-GP systems are not only less prone to human driven use of data collection, storage, and analytics error than manual ones, but also lower the barrier of to promote these goals. This implies gathering, entry to smaller companies. On average, more than inspecting, and modeling data on, for example, four times more firms bid for e-GP tenders than for transactions or networks in government spending, in manual ones (5.2 versus 9.4, respectively).18 Moreover, order to inform current and future decision-making. In market participants’ perception that data is timely and Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 59 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE accurate is a precondition for capital market financing of Of course, transparency requirements must be infrastructure and for the development of infrastructure balanced by procedures for safeguarding privacy, as an asset class. such as information relating to national safety or commercial and competitive information. Transparency Eng aging citizens in the monitoring process requirements that are untimely or overreaching can provides a feedback loop of valuable information allow competitors to monitor each other’s pricing and for governments to act on. A growing body of bidding strategies. For example, revealing companies’ evidence supports the theory that citizen monitoring bids for a sequence of similar contracts might facilitate reduces corruption, improves the quantity and quality anti-competitive agreements – collusion – as companies of public services, and strengthens the demand for can observe if competitors submitted their bids as long-term reforms. In Colombia, for example, an app illicitly agreed. Requirements to disclose ultimate was introduced in 2013 that allows citizens to flag beneficial ownership information, on the other hand, is over-priced, neglected or incomplete public works an efficient, low-cost way to avoid conflicts of interest. (so-called white elephants) to the government’s Ensuring a reasonable balance requires regulations transparenc y secretariat. Colombians use the to determine levels of transparency and channels for app to upload photos of construction projects in reporting suspicions related to leaks of confidential municipalities across the country. Users cast votes for information. the most disliked projects and the app collects data on where the white elephants are located and which Organizations are pushing for greater transparency are most frequently reported, allowing government of administrative data on government tenders. to prioritize its investigations. Once the secretariat One of these organizations is the Open Contracting receives a report, it begins assessing the case for Partnership (OCP), initially hosted by the World Bank. corruption. By the end of 2017, the secretariat had OCP utilizes data analytics as a tool to promote pushed the government to finish 15 of more than openness and prevent corruption. OCP monitors public 50 projects, worth more than USD400,000. Citizens procurement by connecting stakeholders around a are stakeholders and their proximity to projects and standardized contracting platform designed with interest in seeing taxes efficiently spent makes them a the principles of transparency at its core. The Open valuable partner. Contracting Data Standard platform—and the OC4IDS platform designed specifically for infrastructure— When linked to regulations that grant public access tracks and logs spending while guaranteeing data to information on government spending, open data immutability and access to information for relevant can boost transparency, increase competition and stakeholders, including civil society, at various deter collusion. In Peru, a study found that monitoring project stages. In practice, it provides guidance to contracts in public infrastructure decreased costs by governments on what information to disclose at each up to 50 percent19 and multi-country studies show stage of an infrastructure project so that public money similar outcomes: adequate disclosure policies reduce is spent well from planning to completion. Case Study prices, increase competition, and result in better quality 6 is a concrete example of how open contracting and services.20 e-GP can benefit public infrastructure. Conclusions The key message is this: for integrity to overcome develop over time. In some situations, these practices the forces of corruption, a broad and vigorous may not even be considered particularly harmful or alliance is needed, using varied tools to foster wrong by the participants—as illustrated by the oft used transparency and openness. Corruption is a reflection term for corruption: the price of doing business. This of how things are currently done by certain officials, chapter argues that if the political level commits to the businesses, and politicians in specific situations. This systematic implementation of integrity measures across does not happen in a vacuum; corruption is enabled by the infrastructure cycle, it will make a difference on both conventions and approaches that have been allowed to a systemic and project level. In addition, and crucially, 60 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE mobilizing citizens and stakeholders and strengthening risk mitigation can be supplemented with project their hand through greater project transparency and level interventions on a case-by-case basis, using openness can build momentum and change the instruments that target particular types of corruption political economy and cultural considerations that along the project cycle. Because of the complexity of have allowed corrupt practices to happen. Through corruption in public infrastructure, there is no specific such a sustained and broad-based movement, country set of regulations or policy actions that is adequate for examples demonstrate that change can happen at both eliminating corruption risks. The menu of policy options the project and society level. described in this chapter aims at addressing multiple entry points and incentives that drive corruption. They There are considerable gaps in our practical can contribute together to a broader risk management understanding of how to anticipate and manage strategy, but their ultimate effectiveness will be corruption in the provision of public infrastructure, influenced by the support from the political elites who but the fight is worth joining. What we do know is may benefit from the existing system. that corruption occurs across the entire life of a project, from needs identification through procurement to The power of citizens makes the difference. construction, operation, and maintenance. Government Government plays a central role in prevention efforts, efforts to combat corruption pay off early and the but civil society and the private sector must be part of the benefits are long run. Studies by the World Bank, the solution because of the political economy constraints IMF, and the OECD show that the quality of governance to effective policy implementation. Involving the public of public investment is directly correlated with outcomes requires a willingness for transparency and disclosure, at the national and subnational levels.21 as well as timely incentives and opportunities for civil society to get engaged. When implemented correctly, Decades of research and experience indicate that transparency fosters better, fairer competition; and a whole-of-government approach presents the leads to lower prices and higher quality end-results. strongest barrier to corruption, but the political Counter to popular belief, principles of transparency landscape must allow for such policies to be also support private sector growth and development: implemented. Today’s best practices for tackling Good corporate governance based on principles of corruption at the policy level are founded on work from transparency helps companies operate more efficiently, a number of multilateral organizations: the strongest gain access to capital, mitigate risk, and safeguard defense against corruption is the integration of principles against mismanagement. By setting integrity and of integrity across all levels of government with clearly transparency standards for the types of companies they formulated and well-disseminated formalized criteria will do business with, governments can help facilitate a for prioritization, approval, and funding. In low capacity level playing field and reduce the avenues for corrupt or institutionally weak environments, traditional agents to benefit. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 61 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE CASE STUDY 4 CASE STUDY 4 PUBLIC INFRASTRUCTURE Accountability in Infrastructure: The CoST Approach (Thailand, Ukraine, Honduras) The Infrastructure Transparency Initiative When it was launched as a pilot project in 2008, 23 (CoST) is the leading global initiative working to the CoST initiative was one among a growing improve transparency and accountability in public number of public sector accountability initiatives infrastructure. By promoting accountability in the based on multi-stakeholder approaches. The CoST governance, planning and delivery of infrastructure, the initiative builds on the experience of earlier initiatives CoST initiative seeks to improve both the quality and (see for example a comparison with Integrity Pacts value for money of public infrastructure investments. In in Box. 2.1) and leverages the technical and policy doing so, it also aims to reduce risks for investors and contributions and the international convening roles of create a more level playing field for the private sector.22 accountability platforms, such as the Open Government FIGURE 2.1 Core Elements of the CoST FIGURE 2.2 CoST Goals Benefit from Approach Synergies with other Multi-Stakeholder Initiatives OGP EITI Multi- stakeholder Disclosure Working Better value for money & OCP GIFT better quality services Social CoST Accountability Assurance 62 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE Partnership, the Open Contracting Partnership, the that are complementary to these platforms. CoST Extractive Industries Transparency Initiative and also contributes to accountability goals in a range the Global Initiative for Fiscal Transparency. 24 CoST of areas, including in public procurement, public has benefited from a convergence of some of the investment programming, and strengthened audit goals shared by these platforms (see Figure 2.2), and capacity. While the effectiveness of multi-stakeholder contributes to enhancing public accountability in ways initiatives in confronting corruption is (as yet) hard to BOX 2.2 The Evolution of Multi-Stakeholder Approaches to Accountability in Infrastructure The Infrastructure Transparency Initiative (CoST) leverages the expansion of digital governance and data to enable a more participatory approach to public accountability in infrastructure than was possible two decades ago when Integrity Pacts were developed. CoST also works in conjunction with other accountability initiatives, like the Open Government Partnership (OGP) and the Open Contracting Partnership (OCP), to leverage the policy commitments made by governments as part of their membership of these platforms, including commitments in the adoption of open data standards. The expansion of digital government (GovTech) and open contracting data has been particularly useful in creating a more enabling environment for multi-stakeholder approaches to take effect. Integrity Pacts were pioneered by Transparency International in the 1990s. Key differences (in the table below) between Integrity Pacts and the CoST approach illustrate how much accountability structures and opportunities for multi-stakeholder working have evolved in the last two decades. Comparison of Integrity Pacts and the CoST approach Integrity Pacts CoST approach • Emphasis on the prevention and detection of • Emphasis on quality and value for money, corrupt practices in public contracts and the responsiveness of infrastructure investments to public interest and needs • Targeted to individual contracts • Applied to projects or sectors (multiple • Principle-based (a voluntary ethical contracts across project lifecycle) commitment) • Accountability-driven (through mandatory data • Two-party commitment (public sector agency/ disclosure, and the validation of data from a contractor) sample of projects) • Oversight by third parties (civil society) • Multi-stakeholder commitment to meeting and • Deterrent effect depends on credible working collaboratively (public sector agency consequences from oversight authorities / private sector associations / civil society organizations) but typically government-driven • Oversight by all stakeholders; data validation by industry experts • Publication of validation reports for review by policy makers (interactive data tools also supported) Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 63 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE establish or measure, 25 the CoST approach represents in different governance settings.26 a significant advance in applying multi-stakeholder working methods to strengthen governance in the This case study will explain the elements of the infrastructure sector through improved transparency, CoST approach and will describe the experience stakeholder engagement and accountability (see Box and results achieved in three country examples: 2.2). The growth in demand for CoST programming has Thailand, Ukraine and Honduras. Through country taken time to mature. After ten years of incremental examples, this case study will explore the reform growth in the number of CoST national and sub- paths, constraints and results achieved in infrastructure national programs and tools, evidence of positive transparency in different environments and will also impacts is now established. The country examples review CoST’s contributions to global tools and below describe the impacts and experiences of each standards and how these are playing a role in reform at country in achieving success as well as the constraints the national and sub-national levels. BOX 2.3 The Role of the CoST Secretariat The CoST Secretariat provides technical support to CoST members to set up and sustain these elements and develops technical and policy tools drawn from research to advance infrastructure transparency at the national and sub-national levels, and among international policymaking bodies. To become a CoST member, a national or sub-national authority submits an application to join to the CoST Secretariat. The merit of an application is evaluated on the basis of its commitment to CoST core principles, willingness to publicly announce CoST membership and commitments, and a concrete, detailed and budgeted implementation plan. The CoST Board makes the final decision on the approval of applications. The CoST Secretariat provides funding to support CoST programs. 27 Non-compliant CoST members or members who are persistently unable to implement the core elements of the CoST approach lose their membership status. 28 64 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE The CoST approach has four FIGURE 2.3 Increase in Number of Projects fulfilling CoST Data Disclosure Requirements core elements as shown in (2015-2019) Fig. 2.1 and described below: Number of projects disclosed (per FY April - March) »» Multi-stakeholder working: The star ting point 16,000 for a CoST program is the formation of a multi- 14,000 stakeholder working group (MSG), which comprises representatives from government, private sector, 12,000 academic experts, and civil society. The MSG is formed at the behest of the CoST host agency 10,000 (usually an infrastructure ministry, but sometimes the 8,000 Ministry of Finance, or a sub-national infrastructure sector authority.) The role of the MSG is to oversee, 6,000 set the strategy, and guide the implementation of the CoST program in the country (or in a mega- 4,000 project, or sub-national territory) through regular 2,000 meetings and collective decision-making. This approach to stakeholder engagement seeks to 0 promote meaningful participation by civil society 2015-16 2016-17 2017-18 2018-19 organizations and private sector associations by ensuring they have a seat at the table and a voice in structured procedures and decision-making. 29 »» Disclosure: Disclosure of infrastructure project data One key responsibility of the MSG is to approve is based on the CoST Infrastructure Data Standard the members of the assurance team, which needs (OC4IDS)30 (see Box 2.4). CoST programs require to include industry experts who are independent data disclosure in line with the OC4IDS and advocate from government. The fact that civil society and for the adoption of a legal mandate (act or decree) the private sector have a seat in the MSG helps to to remove legal barriers to disclosure. A CoST guarantee this independence and gives legitimacy program also builds the capacity of the responsible to the process. Effective multi-stakeholder working authorities to fulfill disclosure commitments.31 The therefore requires that participating authorities OC4IDS is also applicable to infrastructure projects enable officials to invest the time needed to under public-private partnerships (PPPs). participate and follow up on the activities of the MSG. • Key benefits of the CoST disclosure approach: Although not all CoST members have • Key benefits of the CoST MSG approach: the capacity to fully implement the OC4IDS, the Clarity about the composition and procedures of CoST secretariat supports authorities in forging MSGs is key to the success of this approach, as it a path towards sustainable implementation. reduces discretion and opportunities for powerful This may involve engagement with the relevant interests or actors to limit the participation of e-GP authority or support to a line ministry in others or to unduly influence decision-making. establishing an infrastructure data portal (or both), as the country examples below will show. • Key challenges to implementing the MSG Data standardization and publication in user approach: Ensuring that the right actors are friendly graphics and maps creates a powerful participating can be a challenge in practice. tool for implementers and policy makers to Alterations in the power and influence of a host identify and mitigate risks and track infrastructure agency or the leadership of a key stakeholder expenditures and results. group can alter the political economy of an MSG. Honest brokering by influential members of an • Key challenges to implementing disclosure: MSG and CoST national or sub-national teams can The adoption of a legal requirement for disclosure become essential to the success of the process. does not automatically lead to full compliance with Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 65 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE BOX 2.4 The Open Contracting for Infrastructure Data Standard (OC4IDS) A defining feature of the Open Contracting for Infrastructure Data Standard (OC4IDS) is that it combines data on projects with contract-level data across the lifecycle of large and complex public infrastructure projects. Currently this type and range of data is rarely collected systematically and publicly outside of a CoST program. CoST support to the implementation of the data standard provides a resource for governments to track expenditures and monitor results on public infrastructure investments. When published in user friendly formats and visualizations, the data also enables implementers and policy makers to compare the cost and efficiency of projects across sectors and regions. From an integrity standpoint, data disclosure supports accountability in project planning and implementation. The data standard enables the tracking of contract modifications (a common point of vulnerability for corruption) and reduces the discretion that can otherwise help conceal unwarranted cost overruns or substandard delivery. The OC4IDS includes 40 data points that must be proactively disclosed (published). These cover: • Project data: 20 data points related to the identification, preparation and the completion phases of projects (for e.g. project id, implementer, location, funding source(s), budget, approval date, completion cost, reasons for change to cost or scope). • Contract data: 20 data points related to the procurement and implementation phases of contracts, including any variations in contract price, duration and scope. Explanations for variations are also required. There are also 26 data categories that need to be made available upon request: for example (at the project level) project briefs and feasibility studies, environmental and social impact assessments, technical and financial audit reports; and (at the contract level) tender documents, registration and ownership of firms, quality assurance reports, disbursement records and contract amendments. A full list of the fields covered by the OC4IDS and a toolkit for implementers can be found here: http://infrastructuretransparency.org/resource/oc4ids-a-new-standard-for-infrastructure-transparency/ the OC4IDS. Ensuring implementation through sample of projects that are selected by the MSG policy and practice can require sustained support to be representative of the range of infrastructure and/or pressure from stakeholder groups. projects in a given context. The assurance team reviews the data disclosed, can request additional »» Assurance: Assurance is an expert driven approach data, and under takes site visits to selected to verify that disclosed data is accurate and complete infrastructure projects from among the sample. The (and ultimately also in compliance with the OC4IDS). assurance process helps identify issues that need Assurance teams also check for examples of good addressing at the project level or by policy makers practice in sample projects and for issues or red flags (such as construction quality issues, poor contract and make recommendations for addressing them. management, deficiencies in project preparation, Assurance reports are published in a non-technical tender and contract award irregularities, and safety format intended for a general audience. Assurance issues). The assurance team avoids duplicating the teams report to the MSG, which is expected to follow responsibilities of others, including, for example, up on issues raised and encourage the replication those of the supervising engineer in relation to of good practices. Assurance is undertaken on a quality. Observations from visual inspections are 66 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE noted so that any issues can be brought to the and Ukraine are good examples). CoST programs are attention of those responsible.32 also adapting to local preferences regarding public access to information (in Ethiopia the preferred • Key benefits of the CoST assurance medium for sharing CoST program information is approach: The highly technical and complex via the radio, based on a finding that 80 percent nature of infrastructure projects means that public of Ethiopians access information primarily via the monitoring or citizen audits and other non-expert radio and only 2 percent via the internet).33 CoST is accountability mechanisms will not be capable of also supporting social participation in monitoring identifying all issues or irregularities. The CoST infrastruc ture projec ts by sponsoring CoST approach is therefore built around validation of investigative journalism awards (Uganda, Honduras the data by assurance teams, who are contracted and Malawi); giving free SMS notifications about to undertake the validation for a sample of infrastructure project issues to local radio stations projects. Participation by some of these industry in Malawi and conducting live Q&As on the radio experts (often academic engineers) in the MSGs with government and civil society representatives; ensures expert participation in all discussions. and by providing a Transparency Monitoring Tool A key benefit of the CoST assurance process is (which can be used by citizens or contractors and prevention, since any project could potentially be consultants) to guide site visits and help in asking selected to undergo assurance. the right questions. Community meetings in Uganda and Thailand are also providing new avenues for • Ke y cha lleng es in implementing the raising issues to be acted on by the procuring assurance approach: Validating the accuracy authorities. of infrastructure project data requires the paid participation of expert assurance teams. This • Key benefits of the CoST social accountability is sometimes perceived as more burdensome approach: Advances in digital governance and than ‘citizen audit’ approaches, as it relies on the open data have demonstrated that transparency identification and availability of experts who are (access to information) alone does not necessarily independent from government or other vested lead to better policies or decision-making. interests. The selection of sample projects for Sustained attention by multiple stakeholders to validation could be vulnerable to manipulation, decision-making and results in a given sector and and the publication of assurance reports is not a the interpretation of published information are guarantee that appropriate remedial action will also necessary. CoST country programs support be taken, sometimes requiring advocacy and all of these accountability measures. In particular, follow-up. CoST programs are playing a vital role in building capacity and training civil society actors in how »» Social accountability: The CoST approach activates to use data to hold governments to account. informal (horizontal) accountability mechanisms In many contexts, CoST is the only program by supporting the structured participation of civil engaged in this kind of stakeholder capacity society representatives in MSGs, public access building, thereby closing the link between data to information about infrastructure projects, and disclosure and accountability. community engagement at the local level. Social accountability helps to exert pressure on official • Key challenges to implementing the CoST (vertical) accountability mechanisms to ensure socia l accounta bility approach: While that transparency and participation lead to better assurance reports are written for non-expert decision-making and improved outcomes. Key audiences, holding policy makers to account stakeholders in the social accountability process for necessary reforms or improvements often include communities who are affected by, or requires additional interventions by infomediaries are the intended beneficiaries of infrastructure (civil society or media groups able to interpret projects, media, policy makers and politicians, and data and extract their policy relevance and organized civil society groups. The development of social implications). This may involve support to infrastructure data portals is showing great promise or engagement with local community groups in as a tool for public accountability as well as for addition to the more structured support to the official tracking of infrastructure projects (Honduras core CoST features. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 67 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE Thailand: Evolution of Multi- FIGURE 2.4 Disclosure and Assurance of Infrastructure Projects in Thailand Stakeholder Working Number of projects covered Ministry of Finance takes the lead in 124 multi-stakeholder working 109 Thailand’s engagement with the CoST initiative was initially driven by civil society. The Anti-Corruption Organization of Thailand (ACT)34 submitted a letter of engagement to the CoST Secretariat in 2014. The CoST Board approved Thailand’s membership following a scoping visit by the International Secretariat to determine the viability and potential sustainability of a CoST program in Thailand. This would depend on the willingness of a government agency to ‘host’ a Multi- 10 10 2 2 4 4 Stakeholder Group. Thailand’s Ministry of Finance took the lead and facilitated the involvement of other 2015 2016 2017 2018 2019 agencies, including naming the State Enterprise Policy Disclosed Assured Office (SEPO) as host of the CoST Program.35 The Multi- Stakeholder Group (MSG) was established only a few months later in early 2015, which was in part attributed to Thailand’s prior experience with Transparency A strong legal framework for International’s Integrity Pacts, and the CoST Program accountability but SOEs remain a blind was launched as a pilot with purview over a single spot megaproject.36 The CoST Program has evolved since then: the number of projects for which data has been Thailand has had a strong legal framework for disclosed has increased (see Figure 2.4), with 10 accountability in place for a number of years, with at projects undergoing assurance (in transport, aviation least eight laws and regulations focused on transparency and flood mitigation, at the national and sub-national and access to information. 37 This provided a strong levels). starting point for the CoST program. A fairly large proportion (62.5% (25 out of 40)) of the transparency Leadership of the MSG process has also evolved since requirements under a CoST program are already the CoST program was launched, with a more central mandated by law. Given the role played by Thailand’s role now played by the Ministry of Finance. To enable 56 SOEs in completing the government’s ambitious CoST disclosure to be extended to a larger number infrastructure plans (valued at 33 percent of Thailand’s of projects, the Cabinet approved a new operational 2015 GDP), data disclosure and accountability will be framework for the CoST program in 2017, naming the particularly important in supporting value for money Permanent Secretary of the Ministry of Finance as in infrastructure investments. CoST Thailand therefore Chair of the MSG. The two Vice Chair positions were has an active role to play in helping to expand existing assigned to oversight bodies: the Director General transparency requirements to align with CoST best of the Comptroller General’s Department (CGD)—a practices and to include additional data points relevant government entity and the Chairman of the Anti- to infrastructure accountability in the local context Corruption Organization of Thailand (ACT)—an NGO. (including for instance on road safety statistics). Under this revised framework, the CoST approach was mandated to apply to infrastructure projects valued at over THB5 million (USD150,000) or that are deemed Multi-stakeholder working at the to have significant public impact. The leadership role national and project level taken by the Ministry of Finance in Thailand suggests that infrastructure accountability and value for money An innovative aspect of the CoST program in Thailand are regarded as a public expenditure priority and not concerns the use of community engagement at the only a sector-level integrity related issue. project level. Community engagement was initially 68 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE proposed by the national MSG in 2018, with a view Making the case for the economic to enabling engagement through the CoST assurance impacts of accountability mechanisms: process. Since then, public meetings have been Evidence of efficiency gains in organized at the project level, bringing together infrastructure projects in Thailand representatives of the project owner/procuring entity, the contractor, and the local community to discuss Positive developments have been linked by the CGD and concerns, mirroring the multi-stakeholder working at ACT to the combined effects of the CoST program and the national or institutional level (see Figure 2.5).38 Thailand’s use of Integrity Pacts. The CGD has reported efficiency gains in budget utilization in infrastructure Key to the success of this approach has been the role projects since the CoST program began in 2015 in of the assurance team as mediator and validator of the amount of roughly THB11.5 billion, equivalent to issues or concerns, which are then addressed by the USD360 million.40 According to the CGD, the higher project and raised in assurance reports. This enables a levels of transparency and greater scrutiny have led possible response in ‘real time’ to issues raised by the to government officials reducing project budgets, to community. The work at project level is complemented which firms have reacted with lower bid prices. by ‘community surveys’ that help to capture local concerns and identify potential red flags. The surveys are used to inform discussions in the public forums. In some cases, public forum discussions and assurance team site visits are filmed and uploaded to CoST Thailand’s Facebook page.39 Ukraine: Strong institutional foundations support FIGURE 2.5 Multi-Stakeholder Working at actionable data disclosure in the Project Level the roads sector Ukraine stands out as a strongly performing CoST member despite the challenging political, social and economic context, including challenges associated NATIONAL LEVEL Government with corruption. The need for greater transparency and accountability in the roads sector was an urgent development priority when the CoST program was launched. A scoping study commissioned by CoST and published in 2015 found that up to 50% of the road sector’s budget was lost through unscrupulous financial management. Prior to that, in 2012, the State Financial Civil Society Private Sector inspection had found that the state lost the equivalent Organizations Associations of USD9.2 million from corrupt practices in the roads sector. In 2017, then President Petro Poroshenko stated that, thanks to CoST and a range of road sector reforms, the authorities were now able to build more with €30 Project owner/ billion than they had previously been able to do with PROJECT LEVEL procuring entity €50 billion.41 A commitment to join CoST was made by the State Road Agency of Ukraine (Ukravtodor, UAD) in 2013. Since then, the Ministry of Infrastructure (MOI) has played a key leadership role in establishing the program. An MOU between the CoST Secretariat, the Community Contractor MOI, Ukravtodor and TI Ukraine established these as the host organization for the MSG from 2016-2019. Relations between the CoST Ukraine office and the Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 69 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE FIGURE 2.6 Making Infrastructure Data Useful for Planners, Implementers and Policy Makers government remain strong. A new MOU was signed with The infrastructure data journey in the incoming government in 2019. Before that, an MOU Ukraine: from data disclosure to was also signed with the Kyiv City State Administration, actionable findings 10 regional state administrations (oblasts), and 3 additional regional-level cities (Lviv, Chernivtsy, and Ukraine has transitioned from a largely paper-based Khmelnitskiy), making Ukraine one of the few member system to one that is fully aligned with the Open countries where the initiative is implemented both at Contracting and Open Data standards. Against this national and local government levels. The endurance backdrop, CoST Ukraine developed an online disclosure of the CoST program through a significant government platform which was enhanced in 2019 with an analytics transition is a sign of strength and of non-partisan dashboard. The platform, which was recently handed support for the program. over to the Ministry of Public Works, automatically imports 40 percent of its data from the e-GP portal A key driver of early engagement with CoST in Ukraine (ProZorro) and the rest is populated by the procuring was the role played by the World Bank as convener entities responsible for the projects covered (currently and facilitator in the initial stages, bringing together more than 7,000 projects). The sixth CoST assurance key stakeholders from government, private sector report for Ukraine shows that the country is on the and civil society to meet with the CoST Secretariat to cusp of full compliance with the Open Contracting for learn about the initiative. This collaboration continued Infrastructure Data Standard (OC4IDS). The quantity with the Bank supporting training of more than 30 of projects for which data is now disclosed means that government bodies in data disclosure in 2016. The analyzing trends in the data is becoming more useful Bank has played this facilitator role in a number of for planners, implementers, and policy makers (see CoST countries based on a shared commitment to Figure 2.6). transparency and accountability for Bank-financed projects, domestically financed projects and public- The data platform enables the following views: private partnerships. • Detailed analysis of contractors in infrastructure 70 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE projects (which has been useful in overcoming team, for example by creating a new department to previous issues with contracts being awarded to improve quality assurance and verification of project firms with links to high-ranking public officials); documentation. The repor t also presented new recommendations concerning: • Disclosure, analysis, and comparisons of • Data gaps on the environmental impact of the project data across different regions (Oblasts), projects for example to assess comparative project performance in terms of price and cost overruns; • A low level of public participation and consultation • Missing information on the expected level of • Analysis on the average cost per km of road noise pollution according to different categories of road and terrain; and • Limited risk mitigation, leading to increased construction outside of the project design and a • General statistics on procurement in the road time overrun of five months sector (price changes, number of bidders, outlier contracts in terms of cost modifications etc.). The CoST program in Ukraine has also had successes in leveraging social accountability by building the capacity Advanced tools for data disclosure are an important of local civil society groups to monitor road sector element of the progress Ukraine has made on management and public spending on construction assurance (validation of data). While it took some and repairs. This involved a USAID-funded program to time for assurance processes to get underway (the build the capacity of 204 local officials representing 9 first assurance report in Ukraine was published only regional state administrations and 15 local communities in November 2016), by the end of 2019 Ukraine had to disclose data in line with the OC4IDS, and train a published its sixth report. The reports, which included network of civic monitors (69 activists and 7 CSOs key findings and recommendations, generated a lot of from 6 regions of Ukraine) in how to monitor road attention and were endorsed by the President of the construction works and public spending on roads, how Republic, the Minister of Infrastructure, and the Mayor to appeal to local governments about road quality, and of Kyiv. how to use citizen complaint mechanisms. The program also developed educational toolkits for governments Key findings included: and civil society. • Lack of competition in the market With the advanced use of open and independently reviewed data in Ukraine, a logical further step would • Lack of justification for funding distribution be to generate data-driven analysis on efficiency and • Poor quality works cost savings. In Ukraine this type of analysis should be possible for the roads sector as data has now • Pricing discrepancies been produced consistently over a number of years. • Lack of quality in medium-term planning and a Extending the CoST approach beyond the roads sector complete lack of strategic planning to other kinds of infrastructure projects would also be beneficial (a power sector project was covered under • Lack of data on the condition of roads and, the fifth assurance report). accordingly, incorrect choices regarding repairs • Management problems in the implementation of donor-funded projects, and incorrect use of FIDIC standards (FIDIC: International Federation of Consulting Engineers) • Lack of independent quality control Importantly, the latest assurance report also found that the Road Agency of Kyiv City State (Kyivavtodor) had implemented the recommendations of the assurance Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 71 72 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE Data disclosure creates a path to social Honduras: International accountability support meets local The experience of the CoST program in Honduras is leadership ensuring reforms noteworthy for its success in implementing the social take root accountability elements of the CoST framework in addition to the multi-stakeholder working, disclosure, The results achieved by CoST in Honduras are the and assurance elements. This was largely due to the product of two elements: government leadership in emphasis given in the early stages of the program both support of the CoST approach and the government’s to the disclosure of infrastructure project data but also collaboration with international financial organizations to building the capacity of civil society to use data and and international good governance initiatives. The monitor projects through a structured process with a genesis of the CoST country program in Honduras clear strategy. in 2014 was linked to a World Bank-financed roads infrastructure project with a strong focus on Honduras was the first CoST member country to develop governance. The project, implemented by the Ministry an electronic platform for publishing data on public of Infrastructure and Public Services, created an infrastructure projects. Launched in 2015, the “Sistema opportunity and provided the necessary resources to de Información y Seguimiento de Obras y Contratos introduce CoST in the country and provide it with a de Supervisión” (SISOCS: https://sisocs.org) 43 began strong institutional footing from the start. by publishing data on 13 projects under one procuring entity. This was followed by a Presidential Decree 44 Political support for the CoST approach, headed by the creating the obligation for all infrastructure procuring President and with strong backing from the Minister agencies to publish the 40 data points of the CoST of Infrastructure and Public Services, among others, infrastructure data standard (IDS).45 CoST Honduras has was a key factor. Most importantly, the sustained also developed, with support from the World Bank, a leadership of a government champion (initially advisor sister platform (SISOCS APP), which discloses data on to the President and later Minister of Transparency) 21 public-private partnerships (PPPs). who took on this initiative as his top priority, giving it visibility at national and international levels, made Data disclosure alone is not sufficient for social it possible to deliver results in a relatively short time. accountability to take ef fec t, however. Exper t Honduras positioned itself as an example to follow. The interpretation and assessment of the data through appointment of Honduras’s government champion to assurance reports is a key ingredient, particularly for the CoST International Board helped draw attention specialized sectors like infrastructure. CoST Honduras in other CoST country programs to the important role has produced at least one assurance report per year of political leadership in introducing transparency (6 assurance reports between 2015 and 2019, covering and accountability mechanisms in infrastructure 71 infrastructure projects, three of them developed governance.42 under PPP arrangements). These reports have provided an opportunity for evidence-based discussion of the Another important feature of the CoST experience findings of the reports and, importantly, have kept the in Honduras was the combined leadership in setting issue in the public eye. up the national multi-stakeholder forum (comprising representatives of government, the private sector and civil society). This leadership, which involved a Training in social audit widens the key sector ministry (Infrastructure) and a government accountability net beyond sector experts accountabilit y champion, helped to es tablish trust among the par ticipants. The fairly rapid The CoST assurance process is typically undertaken by implementation of data disclosure, which created technical experts with experience in the sector. This opportunities for active monitoring of projects and enables detailed oversight of a sample of projects as public discussion of results, helped to keep the trust part of the structured CoST multi-stakeholder group alive, despite the challenging governance conditions approach. Social audit expands the accountability in the country. net beyond sample projects and engages local Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 73 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE communities, who may also be project beneficiaries, Institutional reform and project in monitoring. The CoST program in Honduras has modifications provide some signs of invested in creating the conditions for citizens and impact community actors to get involved in the monitoring of infrastructure projects by training them in how to use Progress in infrastructure governance is difficult to the information published on the SISOCS platform measure, and the impacts of accountability measures and in other sources, and to engage with the project may be uncertain, but some of the results achieved owners and contractors to hold them accountable for by CoST Honduras are undoubtedly significant. The project results. CoST Honduras has trained more than CoST country program has helped usher in a complete 600 ‘social auditors’ since 2017, including students, overhaul of the old road maintenance agency (Fondo teachers, and university professionals, as well as Vial) and the creation of a new Directorate operating journalists who are key users of the SISOCS data and of under a new agency (Invest-H), where principles of the assurance reports. transparency have been applied and have demonstrated increased efficiency and better value for money in In 2017 CoST Honduras set up the Social Audit for operations compared to its predecessor. The CoST Infrastructure School (Escuela de Auditoría Social en approach has also enabled the identification of projects Infraestructura), aimed at building the capacity of local for which data was not being properly disclosed, which community members who are part of the Municipal helped the new administration look more closely and Transparency Commissions (created by Law) and giving take corrective measures to ensure that contractors them the skills to undertake social audits of publicly complied with the contract. In some cases, this resulted funded public infrastructure projects in their territories. in the cancellation of the contract. Community members use this training to (i) engage with local authorities, project owners, government Another example of impact is a CoST assurance report contractors and supervising engineers to verify whether focused on PPP infrastructure projects. Honduras was the infrastructure projects are properly advancing and the first CoST country to undertake such a report. As being delivered as agreed, and (ii) produce their own a result of the recommendations from the assurance reports with findings and recommendations to hold report, the government initiated a formal review of the the project owners accountable for the results. CoST country’s PPP portfolio, and has started a process of Honduras has signed agreements to train members institutional reform to replace the previous institutional of Transparency Commissions from 250 of the 298 framework which had come under much criticism. A municipalities in Honduras. To date 105 community new unit is being set in the Treasury supported by an members have graduated from the school and have inter-institutional council that will improve governance produced social audit reports on 21 infrastructure in the management of PPPs. projects. Impacts have also been seen in smaller value projects as a result of social audits. In one case, a social audit commission documented violations of the environmental provisions in a road contract. The commission found that the construction company was managing the building materials improperly, causing air pollution that was affecting the community. The report was shared with the supervision engineer and the problem was addressed with the construction company, who adjusted its operating procedures to comply with the agreed environmental standards. Members of Municipal Transparency Commissions undertaking Significant steps are still needed for social audit of the Siguatepeque road maintenance project, in meaningful and sustainable reform Jesús de Otoro La Esperanza Intibucá46 Despite the progress made in publishing data and promoting its use to highlight issues and results in 74 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE infrastructure projects, important limitations still need achieved. In Thailand, for example, the leadership to be overcome for these efforts to be sustainable exerted at the center of government by the Ministry and achieve long-lasting results in the sector. In terms of Finance, and the formal inclusion of governmental of access to data on government projects, there is and non-governmental accountability institutions were no reliable way for CoST Honduras to verify whether instrumental in establishing effective multi-stakeholder the digital platform (SISOCS) is publishing all of the working. In Ukraine, a leadership role played by sector infrastructure projects of the nine infrastructure agencies, combined with investments in data-driven procuring agencies currently publishing data. There visualizations, has helped ensure that the assurance is as yet no easy way of cross-checking infrastructure process captures public attention and provides project data with public procurement data (published actionable information. In Honduras, leadership from by Honducompras, the government e-GP system), the top and investments in social audit capabilities SIAFI (the public financial management system), or have been key drivers of accountability. These country with SNIPH (the public investment system), which is not examples are not intended as a blueprint for reform accessible to the public.47 In addition, other government but as illustrative guides of how the core elements agencies who procure and manage infrastructure of the CoST approach can be leveraged for results. projects are not publishing data in SISOCS, though The complementary roles played by CoST and other the Presidential Decree mandates the publication of accountability platforms are also an important factor IDS data for all institutions who contract public works to keep in mind, as these platforms provide different or supervision services.48 Among those are large urban entry points and opportunities for reform. The country municipalities, including Tegucigalpa and San Pedro examples in this chapter illustrate that significant Sula, that undertake significant infrastructure projects. hurdles and gaps in implementation are to be expected and that the reform path is of necessity incremental. Another big challenge is to create the mechanisms for actively following up on the recommendations produced by the assurance process and reports, and by the social audits, so that there is evidence of any measures taken by the project owners based on those recommendations. Monitoring and evaluation would help ensure that CoST is “closing the loop” to achieve its intended impact on the performance of infrastructure projects. This would also create an opening for policy adjustments or legal reforms where necessary, to address systemic issues or constraints detected by the different CoST monitoring mechanisms. Conclusion The examples of CoST member programs above demonstrate some of the impacts that have been achieved, using the CoST approach to strengthening transparency and accountability in the governance of infrastructure projects in a sample of country contexts. The core elements of the CoST approach—multi- stakeholder working, disclosure, assurance, and social accountability—provide the necessary framework for achieving results. What the above examples show, however, is that the path and sequence of reform may be very different in each context and may depend on a unique set of factors for progress to be Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 75 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE CASE STUDY 5 CASE STUDY 5 PUBLIC INFRASTRUCTURE Managing Public-Private Partnership (PPP) Renegotiation Introduction Opportunities and risks of Public-private partnership (PPP) renegotiations of using PPPs to finance public infrastructure projects have the potential for abuse, as infrastructure evidenced in Brazil, which was the epicenter of one of the largest corruption scandals in history. The scandal PPPs constitute a relatively small percentage of overall centered around bribes and the use of renegotiations. infrastructure investment. A recent World Bank paper50 The firm at the center of this scandal, Odebrecht, shows that the public sector clearly dominates, with obtained contracts through competitive processes but the private sector accounting for only 9 to 13 percent underbid the contracts. Once Odebrecht won with a of total infrastructure investments (14 to 31 percent lowball bid and came to commercial close, it was able to without China). However, there is considerable variation renegotiate the contracts. In fact, PPPs are not different across regions, from a low of 2 percent in East Asia and from traditional provision, but are renegotiated the Pacific to a high of 35-46 percent in South Asia. much more often than similar private contracts.49 PPP Even though private investment represents a relatively renegotiations can allow governments to elude spending low percentage of infrastructure investment, PPPs controls and defer costs to future administrations, while are often used in the larger and more complex and companies can use renegotiations and bribery to build strategically important projects, and therefore receive market share. While renegotiation should be avoided to more attention from policy makers than the actual the extent possible, it is likely that due to the long-term percentage of projects would suggest. Governments time frame of PPP contracts, renegotiations will from may also be tempted to use PPPs to get around the fiscal time to time be needed, and governments will benefit constraints of big and politically important projects by from understanding good policy for conducting them. not including PPP liabilities in the national accounts. The following examples of good practice demonstrate the importance of appropriate transparency and Renegotiation refers to changes in the contractual accounting for any additional fiscal costs related to provisions of a PPP contract, when these changes renegotiation in the public sector budget. Significant are negotiated between a project company and additional investment due to renegotiation should be the government 51 outside rather than through subject to an independent review outside the procuring the adjustment mechanisms contemplated in the agency and subject to cost benefit analysis like other contract. 52 Renegotiation is something to avoid public investment projects. where possible. Misuse of the renegotiation process 76 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE for corrupt purposes can be due to opportunistic transparency that existed during competitive behavior of the private sector with the collaboration bidding, which may also be controversial in terms of government officials who are complicit in this of public perception. behavior for personal gain. Good use of adjustment mechanisms within the contract can obviate the need • Competitive bidding may be distorted, and the for renegotiation. Renegotiations, however, will from most likely winner is not the most efficient company, time to time be needed, and governments will benefit but the one most skilled in renegotiation. from understanding good policy for conducting them. • Where a contract is renegotiated and the agreed PPPs are long-term contracts that are implemented risk allocation changes after the preferred bidder over a period of 20 years or more and are by their nature has been selected, it is no longer obvious that the incomplete. That is, PPP contracts are considered project company that was awarded the project incomplete in the sense that it is impossible to predict offers the most cost-effective solution. This is the range of possible risks and to allocate these risks because the originally tendered project and the over such a long period of time in a complex project renegotiated project are in essence two different and ever-changing social-economic environment. projects. Renegotiation may even have positive outcomes if it results in improved value for money. On the other • A project’s value for money becomes less clear hand, PPPs can be vulnerable to corruption leading to in the absence of competition for any additional inappropriate renegotiation, particularly in the absence works required. Renegotiations have the potential of fiscal transparency, public policies supportive of to reduce the overall economic benefits of PPP disclosure of project information throughout the arrangements by changing the tendered and project cycle, and sound project preparation capacity, agreed risk allocation and revenue. including for procurement. • A government is often under political pressure to Studies comparing PPPs and publicly procured or run deliver on the promised infrastructure, and a delay infrastructure have found that PPPs can achieve better in construction puts power into the hands of the results in both construction of new infrastructure assets, project company that can enable monopolistic and in infrastructure service delivery. 53 Achieving pricing. This pricing power can be exacerbated if these benefits, however, depends on the government PPPs are off-balance sheet transactions and not struc turing, procuring and implementing PPPs counted as public debt, thus less subject to public effectively. Good project preparation and identification oversight and accountability. and allocation of risk to the partner best placed to manage and mitigate the risks can help reduce PPP contracts typically include several mechanisms, such the occurrence of opportunistic renegotiation. The as scope change provisions for minor scope changes effectiveness of PPP governance could be undermined and claims procedures, to manage circumstances that where weak government or private sector capacity were not fully understood or envisaged at financial results in poorly-run tender processes or poorly drafted close, without the need for a renegotiation. Simple contracts, and frequent renegotiation. correction of errors or clarification of contract drafting can also typically be dealt with under existing provisions in the PPP contract and do not require renegotiation. The impact of contract The World Bank Guidance on PPP contrac tual renegotiations on good provisions 54 provides sample standard language for PPP contracts that govern change management. This governance includes best international practice for provisions While some renegotiations are efficient and carried related to force majeure, material adverse actions out for valid reasons and according to the change by government, dispute resolution and contract management provisions within the contract, others are termination. The actual provision will depend on the opportunistic. regulatory framework in each jurisdiction. Contractual clauses may specif y under what conditions a • Renegotiations have the potential to reduce the renegotiation takes place and what the process will be. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 77 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE Economic rebalancing refers to the practice of modifying the financial conditions (i.e. ‘economic equilibrium’) that were agreed as part of the original Global data on PPP contract, with the intention of preserving or restoring renegotiation the original economic equilibrium (rate of return) of the PPP contract. This can occur after a risk borne by The Global Infrastructure Hub (GIH) carried out a either party has materialized and is claimed to have global study on renegotiation and found 48 instances economic consequences. For example, a force majeure of renegotiation in the 146 projects for which data was event, a scope change, a change in macro-economic available, or approximately one in every three projects conditions, a change in law, or a major change to (see Table 2.1).56 Contract renegotiation is particularly demand. Rebalancing provisions may potentially be prevalent in Latin America (58%) and in the transport abused as it shifts demand risks to the government and sector (42%). The average period of time after financial private sector claims may be based on changes that close for renegotiation to occur was 3.6 years. Where are subject to change over the life of the contract.55 the renegotiation occurred during the construction The type of renegotiation is specific to some civil law phase, it occurred on average 2.5 years after financial jurisdictions (e.g. several countries in Latin America) close. Where it occurred during the operations phase, it and differs from the provisions of a typical common was on average 5.0 years after financial close. law PPP contract. In common law jurisdictions, events such as scope changes and changes in law are typically In addition, the most common cause of renegotiation managed under specific scope change provisions and was found to be increased costs in construction or claims procedures. Rebalancing may also be activated operations, while the most common outcome of in favor of the Procuring Authority. For example, if the a renegotiation was a change in tariffs. Given the construction of an adjoining bypass increases demand timeframe for the study (projects that reached financial and therefore toll revenue on a PPP road project, close between 2005 and 2015, inclusive), almost all the the PPP contract could be rebalanced in favor of the projects are still in progress, and therefore may incur government with reduced tariffs, sharing excess profits further renegotiations in the future. This suggests that with the government, or a reduction to the contract renegotiation is likely to be higher than was found in period. the study. TABLE 2.1 GIH Study: Prevalence of Renegotiation by Region Region Project with Data Renegotiation Events Percentage East Asia 17 2 12% Europe 43 12 28% Latin America and the Caribbean 43 25 58% Middle East and North Africa 8 1 13% North America 5 2 40% South Asia 14 5 36% South East Asia 8 1 13% Total 146 48 33% Source: Global Infrastructure Hub, PPP Reference Tool, Renegotiation, Chapter 4, 2018 78 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE FIGURE 2.7 Causes of Renegotiation, based on 48 Projects that experienced Renegotiation Delay in interface projects 4% Change in tariff/tariff regulation 16% Project company unable to raise finance 3% Wrong demand forecasts Modification of payment 7% mechanism 2% Other 5% Other incorrect forecasts Project company 9% surplus profit 2% Increased construction costs 21% Government policy change 19% Increased operation costs Increased design costs 9% 3% Source: Global Infrastructure Hub, PPP Reference Tool, Renegotiation, Chapter 4, 2018 These findings for Latin America in the GIH study renegotiations were favorable to the operator—for correspond to an earlier landmark study on PPP example, resulting in increased tariffs, or reduced or renegotiation, which also showed per vasive delayed investment obligations. renegotiation of PPPs in Latin American countries, particularly ones where the PPP model is that of In Figure 2.7, the GIH report shows that the reasons cited user-pays rather than government-pays PPPs. 57 Of for renegotiation vary, with the most frequent cause a sample of over 1,000 concessions granted in the being increased construction costs (21%) followed by Latin America and Caribbean region between 1985 government policy change (19%) and change in tariff or and 2000, Guasch found that 10 percent of electricity tariff regulation (16%). The reasons given in the figure concessions, 55 percent of transport concessions, and below for a renegotiation may be legitimate. While 75 percent of water concessions were renegotiated. not feasible within the scope of this paper to analyze These renegotiations took place an average of 2.2 individual contracts, it is reasonable to suggest that years after the concessions were awarded. Guasch at least some of the reasons given for renegotiation suggested the high rate of renegotiation so soon after may mask more opportunistic behavior by the private concession award may reflect poorly designed tender sector and their government counterparts to obtain processes, weak regulation, or opportunism on the an additional benefit not envisioned in the original part of the government or the private sponsors. Most contract approved by government. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 79 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE contract to enter into a stage of liquidation without the government stepping into the contract. The “let the Country experience in market work” approach enabled the lenders to step in managing renegotiation and sell the concession through competitive bidding risks rather than the government renegotiating the contract with the project company and bailing out shareholders. Brazil allows economic rebalancing to manage changes Never theless, if the PPP market is relatively in a PPP contract. While this allows a renegotiation undeveloped, as in many developing countries, there within the framework of a competitively bid contract, may not be other parties willing to take over the project it has the potential for abuse as evidenced in Brazil, through such a process, and it may be necessary for the which was the epicenter of one of the largest corruption government to take measures to prevent a complete scandals in history. The Odebrecht Construction failure of the project.61 Company scandal left one former president in jail; another is on the run; another resigned; and another Chile has one of the most developed regulations one committed suicide before he could be arrested. concerning renegotiations. It permits changes It affected a Vice President, ministers, senators, and to contracts for works and services that raise the billionaires. Around 200 politicians and public officials service levels and technical standards by up to 15% were bribed. It affected 12 countries in Latin America of the approved capital value. If there is no cost to and Africa and delayed many large infrastructure the government, then no agreement is necessary. projects. While the scandal relied on an elaborate If additional investment by the private partner is bribery scheme involving public officials and the media, required due to conditions that occur after contract the bribery is also linked to renegotiations. Odebrecht signing, the government and the private partner may obtained contracts through competitive processes but increase the additional investment value by 20 percent underbid the contracts, and in at least one case, its bid in terms of an amendment agreement that must be was under the next lowest technically qualified bidder approved by the Ministry of Finance. The Ministry of by 25 percent. Once Odebrecht won with a lowball Public Works must be able to justify the changes in bid and came to commercial close, it was able to a public report. To avoid monopolistic pricing by the renegotiate the contracts. In fact, PPPs are not different contractor, if the price increase exceeds 5 percent from traditional provision, but are renegotiated much of the approved capital works, it must be put out to more often than similar private contracts.58 open and competitive tender by the private partner. The private partner is then compensated by one or Some countries, such as Colombia and Peru find it a combination of subsidies provided by the state: a helpful to impose a moratorium on renegotiation during voluntary payment made directly to the concession the first three years of a project to address lowball holder by third parties interested in the development bids.59 India has few renegotiations due to a strict of the works, a modification to the current amount of framework for PPP contracts, which only allows changes the concession revenues, a change in the concession due to a defined change in law and force majeure term period, a modification to the rates of return, events outside the control of the concessionaire. South or any other factor of the concession’s agreed upon Africa has a robust PPP framework that requires the economic regime. procuring authority to obtain Treasury approval for any material amendment in terms of impact on value for During the construction phase, if a variation exceeds money, sustainability, and technical, operational, and 25 percent of the capital budget, the amendment financial risk transfer to the private party.60 agreement must be approved by the Ministry of Public Works and the Ministry of Finance. Conditions for the Under the PPP Guidelines of Australia, renegotiations amendment include that (i) the facts and circumstances of any significant part of a PPP contract after it has been causing the amendment to occur after contract award approved and signed by government must be approved could not have been foreseen upon its awarding, and by the Cabinet before negotiations commence. This (ii) awarding the new works to the original concession has led to the government taking a tough position to holder is more efficient than granting a new concession, ensure public interest is served before bailing out a for reasons including expertise, behavior, performance, project. For example, in the Cross-City Tunnel Project social and environmental impacts, management in New South Wales, the government allowed the PPP economies or economies of scale. The technical 80 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE BOX 2.5 Transparency in Renegotiation for Public-Private Partnerships Transparency in Renegotiation Many countries have access to information laws requiring public disclosure of contracts, project summaries and pipelines, but few publish information on contract variations that occur as a result of a renegotiation. Two notable cases are South Africa and the United Kingdom. South Africa provides full disclosure upon request of all documents in the possession of the government, except confidential information relating to trade secrets, proprietary information or other information which cannot be disclosed. Material changes to contracts are called “variations” and must be approved by the National Treasury and like all information in possession of government can be accessed by the public by making a request under the Promotion of Access to Information Act. In the United Kingdom, the public has access to all documents held by a public authority, under the provisions of the Freedom of Information Act of 2010. The transparency regime requires that variations to contracts, including for renegotiations need to be published when the variation changes the contract significantly resulting in a new contract. Source: Disclosure of Project and Contract Information in Public-Private Partnerships, World Bank Institute, January 2013 panel established in Concessions Law, comprised of of a new private partner would impose “significant independent experts, must verify that these conditions inconvenience or substantial duplication of costs” on are met. The compensation to the private partner is the government, and the modifications, irrespective of calculated and paid in such a way as to get the net their value, are not substantial.63 present value of the additional project to equal zero, considering the applicable discount rate and the economic effect the additional project may have on the original project, including the higher risk that may Practical guidance to occur.62 managing corruption risks The European Union (EU) is one of the most regulated in PPPs procurement environment s. Renegotiations of In general, the use of renegotiation should be avoided significant aspects of the PPP are in principle forbidden for any event the project company would encounter in under EU law, though certain exceptions are allowed. the course of its business, invalid assumptions made in The 2014 Directive on the Award of Concession its pricing of a bid or scope of work, issues arising from Contracts explicitly makes an exception to the ban poor performance with contractual provisions by the on renegotiation when the procuring authority can contractor, and failure by the project company to secure demonstrate that (i) the modifications, irrespective of financing. The government should distinguish between their monetary value, have been provided for in the the realization of a risk that was allocated to the project initial concession documents in clear, precise, and company, and a genuine change in circumstance that unequivocal review clauses and do not alter the overall was not contemplated at commercial close and could nature of the concession; (ii) additional works or services negatively impact the social and economic benefits of by the original private partner are necessary and the project. Ideally, the former should not trigg er the cannot be provided by a new private partner for valid need for a renegotiation. While changes to a long-term economic and technical reasons; and (iii) procurement PPP contract is to an extent inevitable, the following Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 81 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE BOX 2.6 Present Value of Revenue Contracts in Infrastructure Partnerships Present Value of Revenue Contracts In the standard fixed-term highway PPP contract with tolls, the concessionaire bears the risk if traffic volume is low. Low traffic volume often triggers renegotiations for increased tolls. On the other hand, a flexible- term contract, where the winning bidder proposes a fixed amount in user fees in present value terms, eliminates demand risk of the concessionaire. These Present-Value-of- Revenue (PVR) contracts are a type of built in renegotiation, extending the contract term when the traffic volume is lower than expected, thereby avoiding that source of opportunistic behavior. Chile began using PVR contracts for most transportation PPPs in 2007 and reformed its PPP legislation in 2010. The reform created the independent technical panel that reviews and authorizes renegotiations and requires the owners of the Special Purpose Vehicles to compete for additions to the initial project. The combination of both policy innovations was followed by a reduction in renegotiations, as a fraction of investment, of more than 90 percent. Source: When and How to Use Public Private Partnerships in Infrastructure – Lessons from International Experience, Eduardo Engel, Ronald D. Fischer, Alexander Galetovic, NBER Working Paper Series, National Bureau of Economic Research, February 2020 guidance is suggested to reduce the probability of liabilities without the knowledge of the budgetary opportunistic renegotiations. authorities. • Project contracts should provide mechanisms to Avoid renegotiation to the extent address conflict and changes. As noted above, possible: the World Bank publication entitled Guidance on PPP Contractual Provisions offers standardized • Good project preparation requires up to date contractual language based on international technical, financial and economic, environmental best practices for PPPs to cover areas that lead and social feasibility studies that can help avoid the to contractual changes, such as force majeure, need for renegotiation by identifying risks upfront material adverse actions by government, dispute and allocating these risks to the parties best able resolution, and contract termination. These clauses to manage or mitigate the risks. It is important that define under what conditions a renegotiation takes risks are identified and costed out upfront and place and what the process will be for resolution. updated as more information becomes available over the project cycle from planning and feasibility • Bids should be evaluated based on best overall to the design and structuring of the contract. This economic offer rather than the lowest price, taking goes hand in hand with the need for transparency, into account the overall lifecycle cost of the project. competition and public disclosure of the award of This will help avoid the problem of lowballing and all PPP contracts, as these can also help reduce deliver better value for money. renegotiation. • PPPs should be on the government balance sheet If significant changes are to be made in and not off-budget. This includes renegotiated the scope of works: amounts that should be accounted for as current public investment with a dollar for dollar impact • Significant works agreed to through a renegotiation on the deficit. This will help avoid incurring future must be tendered competitively, as in the case of 82 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE Chile, to avoid the private sector partner abusing and cause adverse outcomes for the public sector the renegotiation process to generate work for and/or users of the service. The final decision on a itself on a sole source basis. It has also started using renegotiation should be based on full disclosure of present value of revenue contracts for transport long-term costs, risks, and potential benefits. projects to automatically adjust the length of a contract when low demand reduces revenues and • In developing markets with weaker institutional shorten the contract period when demand exceeds frameworks, or where renegotiation is a persistent the contractual provisions for revenue. problem, the government should consider, as in the case of Colombia and Peru, banning renegotiations • The government should provide a full justification during the first few years after commercial close to and consider a forward-looking audit of the PPP avoid lowball bids. This approach, however, runs to avoid unforeseen effects on other contractual the risk of failing to address justifiable contract provisions that could affect the public interest. modifications that may occur and cannot replace the importance of sound project preparation and • The government should establish a defined risk allocation. and transparent process and framework for renegotiation subject to external audit. As we have • Involvement of independent monitors, such as a seen in the case of Chile, Australia and the EU, the technical panel of experts in the Chile case study or case for a renegotiation should be made explicit a requirement for Cabinet approval as in the case and recorded so that the decisions are made in a of Australia, can help the government respond to a rational and defensible manner. request for changes. If the private partner perceives the government as open to renegotiation, this may • The government should disclose evidence to encourage opportunistic private sector behavior, demonstrate that project distress is material and submitting low bids in the hope of renegotiation likely to result in default under the PPP contract after financial close. Key Messages for Policy Makers Fiscal Transparency Renegotiated amounts should be counted as current public investment and expenditure and accounted for in the budget of the country. Significant additional investment should be subject to an independent review outside the procuring agency and subject to cost benefit analysis like other public projects. Project Preparation Sound project preparation can mitigate risks through robust cost benefit analysis, social and environmental impact, economic and financial and technical feasibility studies. Project preparation should include a competitive and transparent procurement process based on value for money and not on the lowest cost bids. Expert Advice Renegotiations can cover complex financial and economic issues which can be a challenge for new PPP units and governments without the necessary experience and expertise. It is in the interest of the government to have the best expert advice for these negotiations with the private sector. Be Proactive Do not wait for problems to grow and become more costly. The procuring authority should establish mechanisms for two-way communication with the private partner to catch disputes as early as possible when the opportunity for resolution is higher. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 83 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE CASE STUDY 6 CASE STUDY 6 PUBLIC INFRASTRUCTURE Open Contracting Reforms in Colombia Overview half of all contractors that won government bids under the new, more open procurement platform after 2015 In 2014, concerns of corruption in Colombian public had never before participated in public contracting. procurement grew among the Society of Engineers (SCI). They were alarmed because tender specifications The Colombian government got this done in were so narrow that the SCI believed they were being collaboration with Open Contracting Partnership, an tailored to benefit particular bidders. international organization promoting openness and standardization of contracting in public procurement. Prompted by the potential for reputational risk, the The contracting process is now more transparent and organization began analyzing official data from the tender specifications are prevented from being tailored public procurement agency and discovered that the to favor particular bidders. majority of tenders for public transportation projects had only one bidder. At best, this is could be a symptom of an overly complicated tendering process that only few companies were equipped to manage, with the result that tenders were not conducted based on fair Introduction competition; at worst, it would indicate bid rigging or other types of collusion, a sign of underlying corruption In 2014, the  Colombian Societ y of Engineers that is both expensive and wasteful to the taxpayer. (SCI)  began  scrutinizing  government procurement. They were concerned that scandals involving corruption As a result of the organization’s findings, the national in the award of government contracts had tarnished government finally made it mandator y to use the reputation of the engineering sector. “Contractor standardized open tender documents for public had become synonymous with corruption,” explained transport works beginning in early 2019. In parallel, the SCI’s president, Argelino Durán Ariza, to Open a new, fully transactional e-GP platform, SECOP Contracting Partnership, the international organization II, first launched in 2015, began to gain users at all that has supported the Colombian government through levels of government procurement. SECOP II allows the process of opening up and standardizing tendering for accessible and clear standardized documents procedures. for bidders and buyers alike. It publishes data in the open, standardized, and reusable Open Contracting For years, Colombian civil engineers and other Data Standard (OCDS) format and will eventually be potential suppliers had voiced the problems they faced the principal procurement platform for all government in bidding for government contracts. Their firms rarely entities. met the requirements of the tender specifications, which were typically so specific that the SCI suspected Open contrac ting helps create a fair business they were being tailored to benefit particular bidders. environment and levels the playing field for suppliers: “The biggest blow was dealt to local small and medium- 84 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE sized companies [who didn’t win contracts] unless they low bidder numbers. Such findings could be indicative agreed to pay bribes,” Durán Ariza said. of potential corruption in the government procurement process. In theory, there can be several reasons for low participation in tenders, beyond specifications being The SCI analyzed data available on government websites manipulated: capacity can be an issue, particularly for to determine how many companies bid for contracting large and complex projects, such as infrastructure, processes. They initially focused on three competitive where specialized technical skills are required but are methods: open tenders, abbreviated open tenders, often difficult to find locally. But the SCI did not think and merit contests (in which quality is prioritized, e.g. this was the whole explanation. for consultancies). In 2016, they included analysis of reverse auctions (in which price is prioritized, e.g. for So the SCI began to gather data about the tendering standardized goods or services). process with the aim of assessing complaints about hiring practices for contractors within some They used data from Colombia’s SECOP I procurement municipalities, regional governments, and entities platform to do their calculations, manually checking the in Bogotá. They would analyze the data for patterns PDF documents of thousands of tenders, from small indicating unreasonable conditions in the tendering goods and services to large public works contracts. specifications and for evidence that this correlated with Launched in 2007 by the public procurement agency Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 85 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE Colombia Compra Eficiente, SECOP I stored PDFs Ultimately, the standard was clarified to stipulate that of tender and contract documents along with a very autonomy over tender specifications remains with limited set of data fields. The number of bidders per the local governments. The requirements are set tender had not historically been captured as a specific at the national level; they are written by the offices data field. that manage policy of the corresponding sector and refer to the type and amount of information required In 2017, the SCI made their findings public: there from bidders. The law stresses that the promotion was only one bidder on 56 percent of all regional of companies and people local to the regions will be government contracts awarded that year. This came prioritized, with the aim of promoting the economies out to more than 2,500 contracts worth over USD280 of the regional departments and municipalities. It million. At the municipal level, 21,500 contracts were also allows for a great deal of innovation, which has awarded, 94 percent of which had three or fewer resulted in buy-in from local leadership and boosted bidders. social growth, for example by adding requirements for gender parity among bidders in one municipality. SCI’s findings are supported by similar findings from studies conducted by the Colombian Chamber of Others argued that the scope was too limited and should Infrastructure, which represents larger companies, include all sectors, not only road works. This proposal lending further credibility to the results. was accepted, and new templates are currently being developed for other sectors, as mandated by Congress. In order to correct the problem, the national and regional governments needed to improve the quality While the documents were crafted by the National of published information, adequately alert the market Public Procurement Agency, Colombia Compra to its needs, and increase the participation of new Eficiente (CCE) with the technical advice of INVIAS, suppliers. the Ministry of Transport was crucial in forming an early coalition around the initiative. The ministry’s vice minister, Juan Felipe Sanabria Saetta, who is in charge of all major infrastructure works in the country, became The implementation process a key driver for the successful adoption of the law in Congress. The central government institution that contracts public road works (INVIAS) saw a surge in the number The new standard documents became mandatory of bidders when using standard tender documents for for all state governments as of April 1st, 2019. In the its own procurement processes; so when the SCI and days leading up to this, several states saw a run on Chamber of Commerce released their findings, there procurement systems, perhaps an early sign that the was a strong argument to expand the experience to the law goes part of the way to alleviating corruption in subnational level. Finally, the government made the use procurement. of standard tender documents mandatory in April 2019 with a six-month grace period for implementation. In tandem with the new law, the use of Colombia’s updated e-GP platform is spreading. SECOP I was But there was pushback from local governments over launched in 2015 and is managed by the CCE. SECOP concerns of loss of autonomy. Colombian regional II is a fully transactional e-GP platform and is gradually governments have a high degree of constitutionally becoming the principal platform for more and more granted independence with regards to expenditure government entities. The platform publishes data in the allocation, and they were concerned that the new law open, standardized, and reusable Open Contracting would change that. There were also concerns about the Data Standard (OCDS) format. It stores PDFs in real guidelines being too inflexible and technically narrow for time and now includes many more data fields, including a country as heterogenous and large as Colombia. This the numbers of bidders. Publishing to the OCDS debate became a major roadblock during deliberations ensures that all data is subject to the same quality in Congress: would the initiative move decision making control. When, eventually, every entity is obligated to power to the central government, shifting corruption use SECOP II, suppliers will be required to register to upward in the system rather than eliminating it? submit a bid in the system. The number of bidders will be calculated automatically from this data, as well as 86 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE other important statistics. the results on the infrastructure civil works sector, from implementation in April 2019 through August 2019. The documents set specific requirements that bidders They found that the number of bids went up at the must meet in order to participate in the tender process national and the regional level: At the national level, and win contracts. The new requirements relate to 61% of tenders received more than 20 bids while 20% of information, including transparency agreements; tenders received between 11 and 20 bids and only 19% basic bidding letters; prior experience; organizational received fewer than ten. At the regional level, results capacity; financial status; clauses for hiring local staff; were more muted but still impactful: 20% of tenders and more. Standard documents are important in received more than 20 bids, and 48% received between cases where there is a high risk of corruption, but they two and ten bids, while 32% received only one. The also boost accessibility for small entities with limited same analysis showed that the standard documents capacity who can file ready-made documents, saving were used in their original or a modified version in time and resources for every tender. more than 90% of tenders across national and regional cases.64 Data on these processes are accessible to anyone in the OCDS format and the specifications can be set The national public procurement open data policy by the procuring entity to match the size and kind of allows regional governments to update their processes; contract. This creates uniformity in the information, improve efficiency in the use of their resources; use while retaining regions’ administrative autonomy to public procurement as a vehicle for inclusion and carry out their own contracting processes and to be growth; communicate their needs more clearly to the innovative in doing so. market; and ultimately achieve better results for their citizens:65 The use of standard bidding documents and e-GP systems is not unique to Colombia, but the adoption • Thus far, reports show that contracts relating to of these measures has a timely relevance as the country infrastructure have seen an increase in the use of embarks on a major project to build tertiary roads public tenders to procure public works, rising from across the country. The Colombian case is interesting six percent in 2018 to nine percent in 2019. The not only because it is recent, but because of the median number of tenderers increased from five to positive knock-on effects that are already showing: nine. More data analysis is yet to be done. inspired by the demand for fair competition, the central government set a goal to increase the average number • INVIAS, the public roads agency, has seen a of bidders per tender for the central government by decrease in single bid tenders from 30 percent to five percent in 2019. Single-bid contracts are estimated 22 percent on its approximately 900 tenders yearly to be seven percent more expensive than contracts since the introduction of SECOP II. with two or more bidders, so increasing the number of bidders could lead to substantial associated annual • Many of the early results are measured at regional price savings for the government. or municipal level. For example, the city of Cali created an Administrative Public Procurement Depar t ment w hic h publis he d an A nnual Procurement Plan. By alerting the market to public Reflections needs, the new plan has improved transparency and efficiency in public purchases, increasing the Though the reform is recent, Colombia is already percentage of competitive processes from 31.1 beginning to see the positive impact of using both percent in 2017 to 55.9 percent in 2019. standardized documents and e-GP, and of utilizing data analytics to assess these reforms. Data will continue • The changes are also an opportunity to boost social to be analyzed and published in the future, a process change. Cali’s standardized contracts are designed which itself will be made easier when SECOP II becomes to promote inclusivity: a 2019 requirement the principal platform for all government entities. stipulates that 10 percent of suppliers who would be awarded departmental contracts that year The Contracting Obser vator y of the Colombian should be women-owned businesses. Chamber of Infrastructure conducted an analysis of Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 87 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE • Other results are showing up on the bottom line. platform that teaches users how to publish data and When the Caldas region began using the SECOP II documents at all stages of the contracting process. In platform in 2019, the region went from 53 digitally practice, it transfers previously paper-based processes registered processes worth USD2.8 million in 2018 into standardized, machine-readable, and interoperable to 209 digitally registered processes worth USD52.8 open data. million in 2019. That is a lot more transparency over a lot more projects. OCDS is currently the only international open instrument for the publication of information related Government-wide laws, policies, guidance and other to the planning, procurement, and implementation factors influence the use of data analytics on an of public contracts. As such, it is uniquely helpful for institutional and project level. In the case of Colombia, enhancing transparency in procurement. a combination of determination from the central government and buy-in from regional governments Strengthening the leadership of regional authorities was key to getting the law for standardized documents by making tendering open and accessible is making passed, and to seeing it implemented innovatively and the whole procurement process more competitive and with fast results. creating a broader and more diverse supplier base. Aside from commitment, a handful of requirements Public procurement can be a catalyst for social change facilitate the successful integration of data analytics by improving the goods and services that citizens into project management: receive and by expanding opportunities to participate in the market. Colombia is one example where regional • Culture and people play a pivotal role. governments are driving forces for change, and where Implementation requires the technical skills to use transparent and efficient public procurement is proving e-GP platforms and the data that they generate to be an effective tool for strengthening institutions correctly which, in turn, relies on a culture that and developing regions. understands the benefits of data gathering. The Colombian case is a good example of bottom- up driven change that was set in motion by the analytical skills of committed individuals and adopted into law by the commitment of leadership. • Processes and technology are equally important. The collection of data through e-GP and the continuous assessment of its reliability and validity are part of the process. Monitoring and evaluation of the per formance of SECOP II, based on objectives and metrics, is critical for understanding its effectiveness and adapting them into policy as needed. Not all environments or projects are equipped with these fundamentals. A project may be too small, or the resources and willingness to experiment with these types of ‘openness’-policies and tools may be lacking. Colombia partnered with Open Contracting Partnership (OCP), an international organization promoting open contracting in public procurement, in creating the right format for its law for standardized documentation. The national public procurement open data policy in Colombia is modeled on OCP’s Open Contracting Data Standard (OCDS). OCDS is a free and non-proprietary 88 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE Notes 1. Rozenberg, Julie; Fay, Marianne. 2019. Beyond the Gap: 13. The High-Level Principles build on the United Nations How Countries Can Afford the Infrastructure They Need Convention Against Corruption (UNCAC, 2005), which is the while Protecting the Planet. Sustainable Infrastructure;. only legally binding universal anti-corruption treaty. Washington, DC: World Bank. https://openknowledge. worldbank.org/handle/10986/31291 License: CC BY 3.0 IGO; 14. Center for Global Development, 2014. and OECD. 2007. Infrastructure to 2030 (Vol.2): Mapping 15. IFC. 2018. Beyond the Balance Sheet - IFC Toolkit for Policy for Electricity, Water and Transport. http://dx.doi. Disclosure and Transparency. https://www.ifc.org/wps/wcm/ org/10.1787/9789264031326-en. connect/topics_ext_content/ifc_external_corporate_site/ 2. OECD. 2015, Consequences of Cor r uption at the ifc+cg/resources/toolkits+and+manuals/beyond+the+ba Sector Level and Implications for Economic Growth and lance+sheet+-+ifc+toolkit+for+disclosure+and+transparen Development. OECD Publishing, Paris. ht tp://dx.doi. cy. org/10.1787/9789264230781-en. 16. Eli Berman, Michael Callen, Luke N. Condra, Mitch Downey, 3. OECD. 2014. OECD Foreign Bribery Report: An Analysis of the Tarek Ghanik & Mohammad Isaqzadeh. 2017. Community Crime of Bribery of Foreign Public Officials. OECD Publishing. Monitors vs. Leakage: E xperimental Evidence from ht tps://w w w.oecd.org/corruption/oecd-foreign-briber y- Afghanistan. Mimeo. report-9789264226616-en.htm.; and Hawkins, John, and Bob 17. Kenny, Charles. 2012. Publishing construction contracts McKittrick. 2012. Construction Sector Transparency Initiative: to improve efficiency and governance. Proceedings of the making construction more accountable. Proceedings of the Institution of Civil Engineers- Civil Engineering. Vol. 165. No. Institution of Civil Engineers-Civil Engineering. Vol. 165. No. 5. Thomas Telford Ltd. 2. Thomas Telford Ltd. 18. Jurgen Blum, Mihaly Fazekas, Sushmita Samaddar, Ishtiak 4. Messick, Richard. 2011. Curbing fraud, corruption, and Siddique. 2019. Introducing e-procurement in Bangladesh: collusion in the roads sector (English). Washington, DC: The promise of efficiency and openness. Working Paper. World Bank. ht tp://documents.worldbank.org/curated/ World Bank, Washington DC. en/975181468151765134/Curbing-fraud-corruption-and- collusion-in-the-roads-sector. 19. Lagunes, Paul. 2018. Guardians of accountability: a field experiment on corruption and inefficiency in local public 5. Center for Global Development. 2014. Publishing Government works. International Growth Center Blog. https://www. Contracts: Addressing Concerns and Easing Implementation. theigc.org/blog/guardians-accountability-field-experiment- CGD Working Group on Contract Publication. https://www. corruption-inefficiency-perus-local-public-works/. cgdev.org/publication/ft/publishing-government-contracts- addressing-concerns-and-easing-implementation. 20. Center for Global Development, 2014. 6. Bauhr, Monika, Agnes Czibik, Jenny de Fine Licht & Mihály 21. Schwar tz, Gerd. 2015. Making public investment more Fazekas. 2019. Lights on the Shadows of Public Procurement: efficient. Washington: International Monetary Fund. https:// Transparency as an Antidote to Corruption. Governance: w w w.imf.org/external/np/pp/eng/2015/061115.pdf.; and An International Journal of Policy, Administrations and Frank, Jonas Manuel; Kaiser, Kai-Alexander; Kim, Jay-Hyung; Institutions. Le, Tuan Minh; Rajaram, Anand. 2014. The power of public investment management: transforming resources into assets 7. Kenny, Charles. 2010. Publishing construction contracts and for growth (English). Directions in development; public sector outcome details (English). Policy Research working paper; no. governance. Washington, DC; World Bank Group. http:// WPS 5247. Washington, DC: World Bank. http://documents. documents.worldbank.org/curated/en/461121468164052711/ worldbank.org/curated/en/456291468147859471/Publishing- The-power-of-public-investment-management-transforming- construction-contracts-and-outcome-details. resources- into-assets-for-growth.; and OECD. 2013. Investing 8. J. Luis Guasch. 2004. Granting and renegotiating infrastructure Together: Working Effectively Across Levels of Government. concessions: doing it right (English). WBI development OECD Publications Centre. https://www.oecd.org/regional/ studies. Washington, DC: World Bank. http://documents. investing-together.htm.; and Abdul Abiad, Davide Furceri, worldbank.org/curated/en/678041468765605224/Granting- and Petia Topalova. 2018. The macroeconomic effects of and-renegotiating-infrastructure-concessions-doing-it-right. public investment: Evidence from advanced economies. IMF. Journal of Macroeconomics 50 (2016): 224-240. 9. J. Luis Guasch, Jean-Jacques Laffont and Stephane Straub. 2008. Renegotiation of Concession Contracts in Latin America: 22. CoST seeks to prevent integrity risks through accountability. Evidence From the Water and Transport Sectors. International The goal is not to detect corruption risks in a given context. Journal of Industrial Organization. Volume 26, Issue 2, March If a CoST program encounters potential corruption issues, 2008, p. 421-442. however, these are referred to the relevant authorities. 10. Messick, 2011. 23. CoST was launched as a pilot from 2008-2011. It has received grant funding from the UK’s Department for International 11. Knack, Stephen; Biletska, Nataliya; Kacker, Kanishka. Development (DFID), the World Bank (2011-2014) and the 2017. Deterring kickbacks and encouraging entry in public Netherland’s Ministr y of Foreign Affairs (MinBuZa). An procurement markets: evidence from firm surveys in 88 increase in funding allowed it to scale up its activities in 2015. developing countries (English). Policy Research working paper; At the time of writing, 14 countries are implementing CoST no. WPS 8078. Washington, D.C.: World Bank Group. http:// programs, that number is set to increase to 20 in the next year, documents.worldbank.org/curated/en/817871496169519447/ and up to 35 in 5 years. The World Bank participated in the Deterring-kickbacks-and- encouraging- entr y-in-public- International Advisory Group that oversaw the pilot project procurement- markets-evidence-from-firm-surveys-in-88- and currently has observer status on the CoST Board. developing-countries. 24. OGP: https://www.opengovpartnership.org/; OCP: https:// 12. These include the OECD Anti-Bribery Convention (1999), the www.open-contracting.org/; EITI: https://eiti.org/ GIFT: http:// OECD Recommendation on Public Integrity (2017), and the www.fiscaltransparency.net/. OECD Principles for Integrity in Public Procurement (2009) Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 89 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE 25. See for example, Brandon Brockmyer & Jonathan Fox ICT Industry. (2015): Assessing the Evidence: The Effectiveness and Impact of Public Governance- Oriented Multi-Stakeholder 36. The projec t was an ex tension of the Suvarnabhumi Initiatives, Transparency and Accountability Initiative, International Airpor t in Bangkok, valued at USD4.3bn https://accountabilityresearch.org/publication/assessing- managed by Airports of Thailand, a publicly listed company. the- evidence-the-ef fec tiveness-and-impac t-of-public- This project was doubtless selected because the construction governance-oriented-multi-stakeholder-initiatives/ of the original Suvarnabhumi International Airport had taken 35 years (1971 - 2006) and had been hampered by corruption, 26. An External Review of CoST in 2019 found evidence of positive mismanagement and procurement delays. Thailand’s first impact in CoST program countries, including in two fragile or project covered by the CoST program thus had a value that conflict affected contexts (Afghanistan and Honduras), and in was greater than the aggregate value of many other country a diverse set of country contexts in Africa, Asia and Central programs. America. 37. These are: the Official Information Act 1997 (OIA 1997); the 27. CoST has two membership categories: full and affiliate. NACC Act 1999, the Land Expropriation Act 1987, Cabinet Full members can apply for funding from the International Resolution of 20 April 2011 on Obligation of Government Secretariat. Countries must be eligible to receive official Agencies to disclose information on their website according development assistance (ODA) to receive CoST grant funding. to the Section 9 (3) and 9 (8) of the OIA 1997; Regulations of Affiliate members receive structured technical support without the Office of the PM on Procurement 1992 (ROPMP 1992); funding. All CoST tools and technical resources are freely Regulations of the Office of the PM on Public Consultation available for anyone to use (http://infrastructuretransparency. 2005; Regulations of the Office of the PM on Electronic org/resources). Procurement 2006; and Official Letter of the Ministry of Finance of 22 August 2012 on Guidelines on Disclosure of 28. Countries are invited to re-apply when constraints to effective Government Reference Costs of Construction Works. multi-stakeholder working or disclosure have been removed or addressed. 38. CoST’s analysis of infrastructure accountability in high-income countries concluded that this would be the most productive 29. The rules of procedure of an MSG are not unlike that of a board way of applying multi-stakeholder working in wealthier of directors of an organization. The CoST Secretariat provides economies. guidance on the composition of MSGs and on procedural rules for meetings and decision-making. 39. Between early-2018 and mid-2019 there had been almost 4000 views of the Facebook videos posted by CoST Thailand 30. In 2019 CoST and the Open Contracting Par tnership (more than 7 views per day) and 45 shares (more than one agreed on a joint approach to the standardization of open every other week). infrastructure data with the creation of the Open Contracting for Infrastructure Data Standard (OC4IDS). Alignment with 40. A financial advisor to the CGD credited the CoST program and another internationally accepted data standard (Open Integrity Pacts with helping “save the government THB 83.138 Contracting) supports the scalability of government efforts to billion that might have been wasted in payoffs”: ThaiVisa produce uniform machine-readable data on public contracts (2019). Anti-corruption body to save Bt142 billion through anti- and across the lifecycle of infrastructure projects. graft tools. https://forum.thaivisa.com/topic/1122657-anti- corruption-body-to-save-bt142-billion-through-anti-graft- 31. CoST supports the development of infrastructure digital tools/. A vice president of the Thai Chamber of Commerce platforms such as in Costa Rica (MapaInversiones), Ethiopia and of the Thailand Anti-Corruption Organisation reported (PPA), Honduras (SISOCS), and Thailand (AOT), or supports that Integrity Pacts and CoST would help the country prevent governments in enhancing existing e-GP systems (e.g. losses of Bt142.76 from corruption, crediting the impact of 230 Guatemala’s Guatecompras). voluntary observers monitoring projects.” ThaiVisa, 2019. 32. Further details about the CoST assurance process can be 41. CoST (2017). President of Ukraine Thanks CoST Ukraine Team found here: http://infrastructuretransparency.org/2018/11/12/ for Transparency and Objectiveness of Road Construction turning-infrastructure- data-into-compelling-information-the- and Repair Reports. https://costukraine.org/en/prezydent- added-value-of-cost-assurance/. ukrayiny-podyakuvav-komandi-cost-ukraine-za-prozorist-ta- 33. CoST (2014). Ethiopia finalises Disclosure Standard. http:// ob-yektyvnist-informatsiyi-shhodo- budivnytstva-ta-remontu- infrastruc turetransparenc y.org/news/ethiopia-finalises- dorig/. disclosure-standard/. 42. The CoST Board has international advisors representing 34. The Anti-Corruption Organization of Thailand (ACT) was government, civil society and the private sector. founded in 2011 by a former President of Thailand’s Chamber 43. “System for the Publication and Monitoring of Public Works of Commerce in response to widespread corruption in and Supervision Contracts” government projects and the public costs entailed. ACT was registered as a Foundation in 2014. 44. Decreto Ejecutivo Número PCM 02 – 2015 https://sisocs.org/ docs/decreto_sisocs.pdf 35. The first MSG was chaired by the Permanent Secretary of the Ministry of Transportation and hosted by the State-Enterprise 45. As of the date of publication the SISOCS platform publishes Policy Office (Ministry of Finance). Since 2017 a new MSG data on 1,782 projects, valued at USD1 billion, and the PPP formed by the Cabinet has included: Chair: the permanent platform is disclosing data on projects valued at 1.5 billion Secretary of the Ministry of Finance, Vice Chairs: the Director dollars. General of the Comptroller General’s Department (CGD) and the Chairman of the Anti-Corruption Organization of Thailand 46. Photographs from the Siguatepeque Road Maintenance (ACT). Other members include the National Economic and Project social audit report. Social Development Board (NESDB), SEPO, Transparency 47. Steps are underway to facilitate the interoperability of data Thailand, Good Governance for Social Development and between the National Procurement Office (ONCAE) and the the Environment Institute, Engineering Institute of Thailand, Ministry of Finance (SEFIN), but much work remains to be Association of Siamese Architects and the Association of Thai done. 90 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE 48. As established by the CoST MSG, in agreement with ONCAE 60. D e l m o n , J . 2 0 11. P u b l i c - P r i v a t e P a r t n e r s h i p and the Ministry of Infrastructure - Decreto Ejecutivo Número Projec t s in Infr as tr uc ture: A n E s sential Guide for PCM 02 – 2015. Polic y Ma ker s. C a mb r id g e: C a mb r id g e Univer s it y P r e s s , p . 169 -171. h t t p s : // w w w. c a m b r i d g e . o r g / 49. Presentation by Eduardo Engles at the World Bank, Frontiers c o r e / b o o k s /p u b l i c p r i v a t e - p a r t n e r s h i p - p r o j e c t s - i n - in PPP Economics (2019) and cited from (Squeren & Moore infrastructure/66B38CFE9CDDB9293BA57DC8CCAB19F4. (2015), Beuve, Moszoro & Saussier (2018)). 61. World Bank (2016). PPP Certification Guide, Chapter 7, 50. Marianne Fay, Hyoung Il Lee, Massimo Mastruzzi, Sungmin Managing the Contract Strategy, Delivery and Commissioning, Han, Moonkyoung Cho (2019). Hitting the Trillion Mark, A Look p. 59. at How Much Countries Are Spending on Infrastructure, World Bank, February 2019. Given the absence of fiscal and national 62. Ibid, PPP Certification Guide, p. 64-65. account data to fully capture infrastructure spending, the authors identify three proxies for infrastructure investments: 63. Ibid, PPP Certification, Chapter 7, page 64 two are variants on gross fixed capital formation from national 64. For more information (in Spanish): Campos Borja, Luis accounts system data following ADB (2017) and one is based Miguel, et al. 2019. Pliegos tipo como instrumento para la on fiscal data from the World Bank’s BOOST database. Two transparencia en la contratación estatal en Colombia. https:// of these proxies rely on the World Bank’s Private Participation repository.unilibre.edu.co/handle/10901/17437.; and http:// in Infrastructure database to capture the private share of www.infraestructura.co. infrastructure investments. 65. For more information: open-contracting.org and https:// 51. Government is used here as a general term to refer to the www.open-contracting.org/2019/05/03/a-little-data-goes-a- procuring authority or related public entity that is responsible long-way-how-bidder-analysis-could-boost-competition-in- for the PPP policies, implementation or oversight. colombias-infrastructure-contracts/. 52. This definition is taken from: World Bank (2017). Public- Private Partnerships: Reference Guide Version 3. World Bank, Washington, DC. © World Bank. https://openknowledge. worldbank.org/handle/10986/29052 License: CC BY 3.0 IGO, page 184. 53. World Bank, 2017: PPP Reference Guide, page 27. 54. See: World Bank (2017). Guidance on PPP Contractual Provisions. ht tps://ppp.worldbank.org/public-private - partnership/library/guidance-on-ppp-contractual-provisions- 2017-edition, for best international prac tice for PPP standardized clauses including clauses related to change management. 55. An alternative to economic rebalancing in the case of user fees is to adjust a contract based on the present value of revenues. The contract can be adjusted over time to extend the length of a contract to compensate for temporary shortfalls. Similarly, it can be shortened in the case of excess revenue. For more on this topic see: Engel, E., Fischer, R., & Galetovic, A. (2014). The Economics of Public-Private Partnerships: A Basic Guide. Cambridge: Cambridge University Press. doi:10.1017/ CBO9781139565615 (p. 122-130). 56. See Global Infrastructure Hub (2018). Contract Management Tool, Chapter 4, https://content.gihub.org/live/media/1464/ updated- chapter- 4 _ ar t 2_web.pdf. The PPP Contrac t Management Tool provides practical guidance to government officials responsible for managing public-private partnership (PPP) contracts and concession contracts during construction and operations,. 57. J. Luis Guasch. 2004. Granting and renegotiating infrastructure concessions: doing it right (English). WBI development studies. Washington, DC: World Bank. http://documents. worldbank.org/curated/en/678041468765605224/Granting- and-renegotiating-infrastructure-concessions-doing-it-right. 58. The information on Brazil and the Odebrecht scandal is based a presentation at the World Bank delivered by Alexander Galetovic: Frontiers in PPP Economics, World Bank, January 29-30, 2019. 59. Peru is refining this approach and is now aiming at greater negotiation flexibility, as embodied in modern contract types. The problem with lowball bids has been exacerbated by an over-emphasis on price in the bid evaluation process. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 91 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE References Abdul Abiad, Davide Furceri, and Petia Topalova. (2018). The International Growth Center Blog. https://www.theigc.org/ macroeconomic effects of public investment: Evidence from blog/guardians-accountability-field-experiment-corruption- advanced economies. IMF. Journal of Macroeconomics 50 inefficiency-perus-local-public-works/. (2016): 224-240. Messick, Richard. (2011). Curbing fraud, corruption, and collusion in Bauhr, Monika, Agnes Czibik, Jenny de Fine Licht & Mihály the roads sector (English). Washington, DC: World Bank. http:// Fazekas. (2019). Lights on the Shadows of Public Procurement: documents.worldbank.org/curated/en/975181468151765134/ Transparency as an Antidote to Corruption. Governance: An Curbing-fraud-corruption-and-collusion-in-the-roads-sector. International Journal of Policy, Administrations and Institutions. OECD. (20 07). Infras truc ture to 2030 ( Vol.2): Mapping Center for Global Development. (2014). Publishing Government Policy for Electricity, Water and Transport. http://dx.doi. Contracts: Addressing Concerns and Easing Implementation. org/10.1787/9789264031326-en. CGD Working Group on Contract Publication. https://www. cgdev.org/publication/ft/publishing-government-contracts- OECD. (2014). OECD Foreign Bribery Report: An Analysis of the addressing-concerns-and-easing-implementation. Crime of Bribery of Foreign Public Officials. OECD Publishing. https://www.oecd.org/corruption/oecd-foreign-bribery-report- Eli Berman, Michael Callen, Luke N. Condra, Mitch Downey, Tarek 9789264226616-en.htm. Ghanik & Mohammad Isaqzadeh. (2017). Community Monitors vs. Leakage: Experimental Evidence from Afghanistan. Mimeo. OECD. (2013). Investing Together: Working Effectively Across Levels of Government. OECD Publications Centre. https://www. Frank, Jonas Manuel; Kaiser, Kai-Alexander; Kim, Jay-Hyung; oecd.org/regional/investing-together.htm. Le, Tuan Minh; Rajaram, Anand. (2014). The power of public investment management: transforming resources into assets OECD. (2015), Consequences of Corruption at the Sector Level and for growth (English). Directions in development; public sector Implications for Economic Growth and Development. OECD governance. Washington, DC; World Bank Group. http:// Publishing, Paris. http://dx.doi.org/10.1787/9789264230781-en. documents.worldbank.org/curated/en/461121468164052711/ Rozenberg, Julie; Fay, Marianne. (2019). Beyond the Gap: How The-power-of-public-investment-management-transforming- Countries Can Afford the Infrastructure They Need while resources-into-assets-for-growth. Protecting the Planet. Sustainable Infrastructure. Washington, Hawkins, John, and Bob McKit trick. (2012). Construc tion DC: World Bank. https://openknowledge.worldbank.org/ Sector Transparency Initiative: making construction more handle/10986/31291 License: CC BY 3.0 IGO. accountable.  Proceedings of the Institution of Civil Engineers- Schwartz, Gerd. (2015). Making public investment more efficient. Civil Engineering. Vol. 165. No. 2. Thomas Telford Ltd. Washington: International Monetary Fund. https://www.imf.org/ IFC. (2018). Beyond the Balance Sheet - IFC Toolkit for Disclosure and external/np/pp/eng/2015/061115.pdf. Transparency. https://www.ifc.org/wps/wcm/connect/topics_ ext_content/ifc_external_corporate_site/ifc+cg/resources/ toolkits+and+manuals/beyond+the+balance+sheet+-+ifc+tool Case Study 4: Accountability in Infrastructure: The kit+for+disclosure+and+transparency. CoST Approach (Thailand, Ukraine, Honduras) J. Luis Guasch. (2004). Granting and renegotiating infrastructure Brandon Brockmyer & Jonathan Fox. (2015). Assessing the concessions: doing it right (English). WBI development studies. Evidence: The Effectiveness and Impact of Public Governance- Washington, DC: World Bank. http://documents.worldbank.org/ Oriented Multi-Stakeholder Initiatives, Transparency and curated/en/678041468765605224/Granting-and-renegotiating- Accountability Initiative. https://accountabilityresearch.org/ infrastructure-concessions-doing-it-right. publication/assessing-the-evidence-the-effectiveness-and- impac t-of-public-governance-oriented-multi-stakeholder- J. Luis Guasch, Jean-Jacques Laffont and Stephane Straub. (2008). initiatives/. Renegotiation of Concession Contracts in Latin America: Evidence From the Water and Transport Sectors. International CoST. (2014). Ethiopia finalises Disclosure Standard. http:// Journal of Industrial Organization. Volume 26, Issue 2, March inf r as tr uc turetr ans parenc y.org /news /ethiopia -finalises - 2008, p. 421-442. disclosure-standard/. Kenny, Charles. (2010). Publishing construction contracts and ThaiVisa. (2019). Anti-corruption body to save Bt142 billion through outcome details (English). Policy Research working paper; no. anti-graft tools. https://forum.thaivisa.com/topic/1122657- WPS 5247. Washington, DC: World Bank. http://documents. anti-corruption-body-to-save-bt142-billion-through-anti-graft- worldbank.org/curated/en/456291468147859471/Publishing- tools/. construction-contracts-and-outcome-details. CoST. (2017). President of Ukraine Thanks CoST Ukraine Team Kenny, Charles. (2012). Publishing construction contracts to for Transparency and Objectiveness of Road Construction improve efficiency and governance. Proceedings of the and Repair Reports. https://costukraine.org/en/prezydent- Institution of Civil Engineers-Civil Engineering. Vol. 165. No. 5. ukrayiny-podyakuvav-komandi-cost-ukraine-za-prozorist-ta- Thomas Telford Ltd. ob-yektyvnist-informatsiyi-shhodo-budivnytstva-ta-remontu- dorig/. Knack, Stephen; Biletska, Nataliya; Kacker, Kanishka. (2017). Deterring kickbacks and encouraging entr y in public procurement markets: evidence from firm sur veys in 88 developing countries (English). Policy Research working paper; Case Study 5: Managing Public Private Partnership no. WPS 8078. Washington, D.C.: World Bank Group. http:// (PPP) Renegotiation documents.worldbank.org/curated/en/817871496169519447/ Delmon, J. (2011). Public-Private Par tnership Projec ts in D eter r ing - k ic k b ac k s - an d - e nco ur aging - e nt r y- in - p ublic- Infrastructure: An Essential Guide for Policy Makers. Cambridge: procurement-market s-evidence-from-firm-sur veys-in- 88 - Cambridge University Press. https://www.cambridge.org/core/ developing-countries. books/publicprivate-partnership-projects-in-infrastructure/66B Lagunes, Paul. (2018). Guardians of accountability: a field 38CFE9CDDB9293BA57DC8CCAB19F4. experiment on corruption and inefficiency in local public works. 92 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 2 PUBLIC INFRASTRUCTURE Engel, E., Fischer, R., & Galetovic, A. (2014). The Economics of Public-Private Partnerships: A Basic Guide. Cambridge: Cambridge University Press. doi:10.1017/CBO9781139565615. Global Infrastructure Hub (2018). Contract Management Tool, Chapter 4, https://content.gihub.org/live/media/1464/updated- chapter-4_art2_web.pdf. J. Luis Guasch. (2004). Granting and renegotiating infrastructure concessions: doing it right (English). WBI development studies. Washington, DC: World Bank. http://documents.worldbank.org/ curated/en/678041468765605224/Granting-and-renegotiating- infrastructure-concessions-doing-it-right. Marianne Fay, Hyoung Il Lee, Massimo Mastruzzi, Sungmin Han, Moonkyoung Cho (2019). Hitting the Trillion Mark, A Look at How Much Countries Are Spending on Infrastructure, World Bank, February 2019. World Bank (2017). Public-Private Partnerships: Reference Guide Version 3. World Bank, Washington, DC. World Bank. https:// openknowledge.worldbank.org/handle/10986/29052 License: CC BY 3.0 IGO. World Bank (2017). Guidance on PPP Contractual Provisions. https://ppp.worldbank.org/public-private-partnership/library/ guidance-on-ppp-contractual-provisions-2017-edition. World Bank (2016). PPP Certification Guide, Chapter 7, Managing the Contract Strategy, Delivery and Commissioning. Case Study 6: Open Contracting Reforms in Colombia Campos Borja, Luis Miguel, et al. 2019.Pliegos tipo como instrumento para (2019). Pliegos tipo como instrumento para la transparencia en la contratación estatal en Colombia. https:// repository.unilibre.edu.co/handle/10901/17437. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 93 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 3 State-Owned Enterprises PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 3 STATE OWNED ENTERPRISES Introduction State-owned enterprise (SOE) corruption has scale of the assets they control, the considerable gained prominence in recent years. High-profile value of public contracts they award, and most corruption scandals, such as Petróleo Brasileiro S.A. of all their proximity to governments and politics. (Petrobras) in Brazil, Sonangol in Angola, Eskom in Corruption risks arise from various sources. SOEs in South Africa, and 1 Malaysia Development Berhad high-value sectors often enjoy monopoly or quasi- (1MDB) in Malaysia have attracted global attention monopoly rights that provide an opportunity for and put the issue of SOE corruption at the forefront. abnormal profit generation, a privileged relationship SOEs manage substantial resources in key sectors. with the government, and state financial support. Many are inefficient, operate at a loss, and fail to This creates incentives and opportunities to extract provide critical public goods and services, due in part significant rents. Such mechanisms are often used to to conflicting objectives and mismanagement—and to benefit political groups and party finances in order corruption. Corruption can be detrimental to the SOE to sustain the resource diversion over time. Risks also itself, to the economy, and to the people who count on arise from weak legal and regulatory frameworks; them for basic services. The consequences for SOEs corporate governance weaknesses at SOE levels: a are reputational and financial losses, a fall in market lack of transparency and disclosure over SOE finances value and share price, business disruption and fines, compounded by poor financial reporting practices; and risk of debarment from markets. For the economy, and limited effective government and citizen oversight. corruption can damage investor confidence, deter These risks are exacerbated by inadequate technology foreign investment, and lead to unsustainable debt or in SOE operations and weak citizen participation in a plunge in stock market value, negatively impacting monitoring SOE performance. Addressing these risks growth and increasing inequality. can help combat corruption and improve integrity. Broader shor tcomings in overall public sec tor SOEs face similar corruption risks as private governance and in the judicial sphere also play a key companies, but the risks are compounded by the role, though these are not covered in this chapter. SOE corruption risks Monopolies and preferential services, commodity trading, licensing, and investment treatment are especially prone to corruption. The dominance of SOEs in smaller markets where the private sector is less Corruption is most rampant where SOEs operate as able to participate and compete also makes it easier for monopolies or have exclusivity rights and are highly SOEs to be corrupt. regulated. A 2014 OECD study found that almost two- thirds of corruption instances occurred in sectors such Preferential treatment by the state gives rise to as oil and gas, mining, energy, transportation, and heavy abuse. Funds for direct and indirect subsidies, debt industry.1 Their size and market structure impede the write-offs and tax exemptions, and compensation entry of new players, which in turn creates a privileged for carrying out non-commercial objectives may be relationship between the SOE and the government and siphoned off for personal or political gain. Reliance on regulators. Such relationships allow for discretionary state support means that SOEs are less likely to suffer power and decision-making, unmanaged conflicts of the same consequences of corrupt practices as their interest, and blurred responsibilities between SOEs and private sector counterparts as governments can provide their supervising agencies. High-value activities, such resources to mitigate any damages incurred. SOEs also as the awarding of rights, procurement of goods and enjoy easy access to loans from state-owned banks at Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 95 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 3 STATE OWNED ENTERPRISES preferential rates, even when such loans have no clear ministries may not have the incentives and capacity to rationale. Subject to political interference, state banks prevent interference and oversee specialized functions themselves may suffer from corruption in the lending such as audit, compliance, and risk management. process, which can create a possible risk zone for both Insufficient attention may also be paid to establishing entities. A 2015 investigation into corrupt practices in reporting systems to detect corrupt practices or Chinese state banks, for example, found that abuse of monitor any corruption-related risks within SOEs. While office and kick-backs played a role in the approval and countries such as Malaysia have established centralized distribution of non-profitable loans to SOEs. 2 A 2020 ownership structures to address these problems, they study shows that countries with limited transparency too have been unable to prevent opportunistic behavior and accountability of their natural resource sectors and promote a culture of integrity. used those assets to secure large resource-based loans (RBLs). The countries with the largest amounts of RBLs in their respective region—Venezuela in Latin America Politicized boards and management ($59 billion) and Angola in sub-Saharan Africa ($24 billion)—both have poor resource governance scores.3 SOE boards are often appointed by political parties Corruption risks are also associated with relaxed anti- or the highest levels of government. They often money laundering procedures and due diligence include state ministers, party leaders, and politically practices, where state banks have been used to launder connected officials who present high risk by virtue of the proceeds of crimes in exchange for bribes. their position and influence. In the case of Petrobras, for example, politically appointed board members helped ensure a regular flow of funding to their respective Gaps in SOE legal and regulatory parties and allies through systematic bid rigging.4 frameworks Competency requirements for such board members often do not meet the qualifications and competencies Statutory loopholes and vagueness in legal and required of all board members, while verification of a regulatory frameworks are an underlying theme candidate’s integrity receives little if any attention. The to nearly all the risks mentioned below. Gaps and lack of a structured and transparent selection process weaknesses are found in key areas, such as state based on candidate assessments and shortlisting oversight and monitoring of SOEs, the selection of through independent institutions also makes the boards and management, board decision-making process vulnerable to interference and politicizes the processes, internal controls/compliance/and risk outcomes. management systems, information disclosure practices, and policies and procedures for creating an ethical Boards comprised of politically connected persons culture. An inadequate legal framework was the case may play little to any role in exercising the duty of in Brazil, which was strengthened in the aftermath of care and may instead engage in malfeasance. The the Petrobras scandal. Even where adequate laws and Parliamentary Committee Report on 1MDB in Malaysia regulations are in place, implementation may be limited highlighted the lack of diligence of the board—chaired or formalistic, and compliance may go unchecked. by the Prime Minister—in adhering to good corporate Critical policies, such as confidential repor ting governance practices in decision-making that led programs, asset disclosures, and banning of political to the misappropriation of public funds. High-value financing tend to be rare, while broader anti-corruption investment decisions were made at short notice without legislation may not be actively implemented. prior risk assessments, adherence to instructions and frameworks for board decision-making and approvals, and documentation of key decisions. In South Africa, Weak ownership arrangements a faulty appointment process also revealed the role of politics and private interest groups in board Cor r uption r is ks a re hi g her w here SO E deliberations, which led to the board’s violation of responsibilities reside in sector ministries that the duty of care in awarding a R564 million contract combine ownership, policymaking , and the to a company predominantly owned by the son of the regulatory function. Combining these functions President and his close family friends. 5 An informal creates conflicts of interest, scope for direct interference, system of patronage, the lack of adherence to proper and diffused accountability. Even in high-risk SOEs, decision-making frameworks, and limiting the scope 96 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 3 STATE OWNED ENTERPRISES of key decisions to a few individuals without second Compared to ministries, SOE procurement is reviews increased the scope for abuse. In Angola, as especially vulnerable to corruption and collusion the case study shows, the former President’s daughter, given the scale of assets they control. In addition Isabel dos Santos, the richest woman in Africa, had to public officials using their powers for personal gain, been the President of the Board of directors of the oil such as accepting a bribe in exchange for granting a SOE Sonagol, until she was removed as a result of anti- tender, SOEs are also susceptible to collusion and bid corruption and investigative efforts. rigging where bidders determine who should “win” the tender, and then arrange bids to ensure that the Risks also arise when the board has no role or only designated bidder is selected by the purportedly a figurehead role in appointing top management. competitive process. The process may be facilitated by Contrary to good practice boards which have the having an SOE insider that provides bidders with the power to hire and fire the CEO, the government often information to rig bids. In Angola, as the case study directly appoints the CEO and other key executives, shows, contracting was deeply affected by corruption often without a competitive and transparent selection and improving public procurement constituted a key process. This diminishes the oversight role of the board element of fighting corruption. Statutory regimes and makes SOE operations vulnerable to corruption that exempt SOEs from public procurement rules risk. Lack of oversight by the board and, conversely, a are especially susceptible to corrupt and collusive disregard by management for the role of the board, also behavior, as was the case in Petrobras, which enjoyed a allows executives to use personal networks to engage more flexible procurement regime at the time when the in corrupt schemes. The Petrobras and 1MDB cases criminal activities took place.9 Even where rules apply, show that management decisions were often made competition is avoided through means such as sole contrary to the board’s guidance or made without the sourcing, direct awards, tailor-made bids, or sharing board’s consent. inside information regarding the tender. Additional red flags include single bids, awarding of contracts based on price and not quality, and collusive bids. Clientelist Weak internal controls, compliance, groups may circumvent public tenders and manipulate and risk management the process to directly award contracts and channel the funds for their purposes, while audit bodies may Weak internal controls, compliance, and risk not be able to prevent such processes. In South Africa, management systems facilitate unethical behavior. for example, the boards of Transnet and Eskom created Such behavior may include unidentified or unmanaged specialized procurement committees, even though conflicts of interest, frequent gifts and hospitality, procurement is not a board responsibility—established failure to perform third party risk assessments, and with the sole purpose of giving their members and lack of documentation of contracts and transactions. preferred bidders direct access to SOE procurement In the case of Eskom, for example, an inquiry into budgets.10 These and other corrupt practices at the management practices showed that Eskom did not board and management level eventually led to the address conflict of interest by board members even removal of malfeasant and incompetent directors though it was obliged to do so pursuant to the conflict and executives, including criminal charges in several of interest rules. 6 And the Petrobras investigation instances. revealed that 100 or so Petrobras employees, including the CEO, were receiving valuable gifts from 2010 Illegal behavior also arises from lack of ethics rules, onwards, which were not reported or identified.7 The internal reporting mechanisms, and whistleblower lack of an internal risk management function also protections. Only some jurisdictions have ethics rules creates risk. Out of 32 countries surveyed by the for SOEs, while elsewhere SOE staff are expected to OECD on risk management practices, only 52 percent adhere to civil service or private sector rules. Staff ability require SOEs to establish risk management capacities to report misconduct without suffering repercussions and just 18 percent require at least large SOEs to came up in both the Petrobras and Eskom cases.11 In employ risk specialists.8 The focus, however, appears both instances, persons who reported the wrongdoing to be on financial and investment risks rather than on suffered consequences for doing so. There is virtually mismanagement and corruption risks. no data on confidential reporting practices and is an area where further attention is needed. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 97 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 3 STATE OWNED ENTERPRISES Poor transparency and disclosure The assessment showed that compliance is poor and practices the need for improvement is enormous. Only nine of the 74 companies received a “good” score, with many A common challenge for state auditors and influential SOEs failing.13 Similarly, in the last quarter external auditors is getting access to documents, of 2016, only half of the 50 sovereign wealth funds particularly around sensitive information. In Brazil, assessed by the Sovereign Wealth Fund Institute met for example, the Federal Court of Accounts struggled the disclosure threshold,14 while in Vietnam public for 20 months to get access to cost appraisal and other disclosure of SOE related financial and non-financial key documents from Petrobras to draw conclusions in information is voluntary, which has led to a predominant an urgent audit of work done on the off-shore rig P-57.12 practice of non-disclosure.15 In Georgia, 22 out of the At the same time, external auditors were also accused 36 SOEs with significant capital do not even have a of aiding Petrobras in misrepresenting its business webpage.16 and financial operations. Access to information is even harder to obtain when SOEs resort to changing SOEs may find ways to conceal important external auditors to conceal information or obtain a infor mation such a s major decisions on desired/positive finding, as for example in 1MDB. In procurement, quasi fiscal activities, background this case, audit firms signed off on accounts without and remuneration of management and board qualifications, although some auditors were let go for members, and related party transactions. The not approving the accounts unless more details on types and amount of state financial assistance as well specific investments were provided. Moreover, internal as material transactions with the state and other SOEs auditors may be controlled by management and not are often not reported. And where SOEs do disclose able to act as an independent source of information or financial information, issues may arise in the quality, vigilance for the board. reliability, and timeliness of the information due to lack of application of IFRS, inadequate oversight by the SOEs also fall short on information disclosure, audit committee, weak capacity within SOEs to process especially in sectors where corrupt practices information, and lack of incentives and penalties to are more frequently observed, such as natural strengthen compliance. Those that report may still resources. The 2017 Resource Governance Index not include information on other key areas, such as assessed the performance of 74 oil and mining SOEs beneficial ownership and anti-corruption programs. across 10 governance and transparency practices, SOEs, including those with significant capital, may not including the companies’ public reporting practices, even have a webpage. audit provisions, and conflict of interest protections. 98 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 3 STATE OWNED ENTERPRISES Reforms to reduce corruption and strengthen integrity Reducing corruption risk in SOEs is challenging, and • Opening up markets to greater competition to technical solutions must be politically acceptable reduce monopoly power and market share and options given the benefits that flow to the state incentivize financial and fiscal discipline. Opening from their economic activities. Policies designed to sectors to competition and allowing private sector improve corporate governance and oversight of SOEs participation into sectors and SOEs brings capital are central to reducing corruption vulnerability, but and expertise but also helps to reduce discretionary they are rarely adequate in the absence of political will powers and oppor tunities for corruption. In to tackle corruption in SOEs. This is evidenced in all Colombia, as the case study will show, the new three case studies: Colombia advanced SOE reforms Constitution of 1991 introduced a new model of under the leadership of its President and changed the economic development that included the SOE Constitution; corruption in Brazil’s SOEs was directly sector. As a result, public utilities were opened linked to patronage by top politicians and reforms can to private investment, which also allowed free only be sustained with political will; and in Angola, it agent entry and competition. Requiring SOEs to was a change in the administration that gave impetus operate on the strength of their balance sheet to deep sector reforms. In conclusion, without strong without government financing and putting in place political leadership to assure that implementation a clear framework for identifying and financing of laws and regulations (de jure) is carried out in non-commercial objectives makes SOEs more practice (de facto), there is a strong risk that corporate disciplined and reduces the scope for corruption. governance tools and measures will exist only on paper Commercializing and improving lending practices and have no teeth.  Prior to the Lavo Jato scandal— of state banks, and bringing in private capital which drew attention due its magnitude—the flaws in into the banks, can further limit corrupt activities Brazil’s corporate governance regulations were hidden from taking place. When SOEs are operating in from view or overlooked. Sustained political support, a competitive marketplace and there is no clear accompanied by an independent and competent rationale for state ownership, such SOEs can be justice system, is essential for making corporate let go and privatized, provided this can be done governance and regulatory oversight bodies truly in a transparent and efficient manner. When state effective and responsive.  Effective implementation capture is of concern in the SOE sector, this may and enforcement do not happen overnight, and also affect the privatization process. even the small but key steps and changes during one government can be reversed or undermined during • Strengthening SOE legal and regulatory the next. Thus, there is a need to think about these frameworks and practices. A s trong legal reforms as a long-term agenda. framework makes corruption harder to conceal, introduces transparency and accountability at all Actions to improve corporate governance are levels, and puts ethics at the center of business nevertheless critical and target a range of decision-making. As the case study shows, in the vulnerabilities in SOE oversight and implicate aftermath of the Petrobras scandal, the Brazilian many stakeholders. The menu of options below are Government passed a Law on the Responsibility of not intended to represent purely technocratic fixes in Federal State Companies (Law No. 13.303/2016). a political vacuum. Rather, they should be considered The law introduces a code of conduct and ethics within the range of what is politically feasible.  To for management and staff, sets forth requirements varying degrees, they draw on a combination of for board and management appointments, stakeholders to incentivize integrity within SOE strengthens the internal control environment, conduct. The first options rely heavily on private sector and increases transparency around contracting market discipline, while others rely on the influence of and procurement.17 O ther countries have ownership bodies, regulatory agencies, and broader enacted new SOE laws (Afghanistan, Ethiopia) or citizen engagement. ownership policies (Norway, Sweden) to establish Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 99 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 3 STATE OWNED ENTERPRISES key governance principles and measures to members. They also have the power to hire the CEO improve integrity and transparency, including the through a transparent and competitive process and introduction of ethics rules and employee position to hold the CEO accountable for maintaining high requirements. A wide range of countries require standards of integrity. Committed management SOEs to adopt corporate governance and ethics plays a key role in establishing, implementing, codes which contain principles and guidance on monitoring, and reporting on integrity programs. ethical behavior, acceptable and unacceptable benefits/gifts, and accountability mechanisms. • Establishing effective internal controls, compliance, Monitoring and promoting compliance are key to and risk management functions in the SOE. Brazil, ensure implementation. Colombia and various other countries have established policies and structures to manage risks • Building the commitment and capacity of state proactively (e.g. confidential reporting, follow-up ownership entities. To better exercise ownership on reported incidents) and to counter pressure right s and to shield SOEs from political and undue influence while recruiting qualified staff interference, countries such as China, Colombia, with access to resources and top management Malaysia, and Peru have established specialized structures. Sound internal controls and compliance ownership units. As per the OECD’s 2019 Anti- systems can help manage risk, investigate Corruption and Integrity Guidelines for SOEs, alleged misconduct, and measure any financial such entities should themselves have high implications. Their role is to lead and oversee standards of integrity and have the right skills the program, initiate investigations, monitor and and staff to oversee specialized functions, such receive reports from ethics hotlines, and provide as audit, compliance, and risk management. Such guidance to staff. Broader institutional and entities are increasingly recognizing the need governance factors may play a role in determining for: internal corruption risk mapping; third-party effectiveness of such systems—but strong, explicit, corruption due diligence; stronger accounting and visible commitment from the board and senior controls; training of management and staff; and management is essential. periodic reviews of such systems. A core function is to monitor and assess implementation, sanction • Countering corruption in high-risk activities and SOEs for non-compliance, and refer the matter to operations. Key measures include the adoption law enforcement as needed. and implementation of transparent procurement processes and e-GP, including the selection • Professionalizing the SOE board of directors and and appointment of third parties; monitoring of senior management. As the cornerstone of anti- contracts and projects; actions on “red flags”, such corruption and integrity, professionally composed as rush orders or changes in contract specifications boards can have the most direct impact on after a project has started; and whistleblowing lines building a culture of integrity. Board members for raising concerns about bids and contracts.19 In must be independent of any outside influence, Angola, the Public Procurement Law was updated be competent, possess high integrity, and be to include lowering the threshold for contracts selected based on a clearly defined appointment subject to public tender, the creation of a national policy to safeguard them from malfeasance. New procurement portal, and a list of companies Zealand, for example, has a structured selection certified to undertake construction work for the process in place where a specialized advisory body government. The Law also included a chapter on has a formal role in selecting candidates based ethical behavior in the planning and execution on qualifications and integrity and a structured of public contracts, including requirements for and transparent nominations process.18 Bringing impartiality and avoiding conflicts of interest, in independent members to strengthen board fraud, and corruption, legal compliance and decision-making and to chair the board’s ethics, confidentiality. Integrity pacts can help ensure a audit and risk committees can help prevent illicit transparent process with oversight by civil society activity from taking place. Good practice boards organizations to monitor compliance. A register also maintain and update a register of conflict of can be developed and used for risk assessment interests and incorporate transparency practices, and to design the due diligence process for third such as documentation on the voting of board parties. Strengthening the capacity of SOEs and 100 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 3 STATE OWNED ENTERPRISES procurement agencies to hold corrupt officials facilitate interaction with the company, increase to account and ensuring cooperation between transparency, and reduce corruption. A mobile various national enforcement agencies are also key app gained strength as active users and customers to anti-corruption. grew by 65 percent from one year to the next. Several private institutions helped to incentivize • Promoting transparency and full financial alliances while promoting effective and transparent disclosure, including of SOE debt. In addition to programs through informed and participatory financial reporting, SOEs are reporting more non- citizens. And in the Philippines, an NGO called financial information, e.g. corporate governance Concerned Citizens of Abra for Good Government and organizational structure, commercial strategy (CCAGG) trains community beneficiaries to conduct objectives and risk, KPIs and social objectives, audits and monitor project implementation in engagement with stakeholders and interest groups, order to reduce corruption in the construction of and anti-corruption initiatives. A good practice public works. example shown in the case study is the Medellin SOE in Colombia, which promoted a citizen-centric • Facilitating citizen engagement in holding SOEs to approach to transparency. In the aftermath of the account for performance and providing feedback to Petrobras scandal, Brazilian SOEs are required to management on service delivery issues. Facilitating publish annual and interim corporate governance citizen engagement is an effective way to fight and internal reports, as well as sustainability corruption. In Colombia, citizen monitoring tools reports, in line with the Global Reporting Initiative, that SOEs have developed can be even more while providing reasons for non-compliance if effective than pure rules-based anti-corruption not published. 20 Other countries are developing policy or traditional corporate governance transparency plans that require SOEs to also publish approaches (which are nevertheless important). information on the compensation of executive EPM, the Colombian power giant, is a leader in staff, advisors and associates and to disclose risk fostering citizen participation although it has not factors and internal control structures and reports. been immune to controversies. EPM overcame State auditors are increasingly reporting on both challenges through its track record of adopting the state’s role in promoting integrity and on a community-based approach against corruption governance within SOEs, although care should be and mismanagement. As the case study shows, taken to ensure that such reporting is not used for in response to corruption allegations, civil society improper interference in SOE operations. There in Colombia created a surveillance committee is growing coordination with banks, financial to oversee the decisions taken by the Mayor of regulators, and public procurement agencies to Medellin and any action that could negatively verify asset disclosures and provide full reporting. affect the SOE. A professional union was also In Angola, the 15 largest SOEs will be required to created with the sole purpose of shielding the publish their audited annual reports on the SOE SOE from political interference in its corporate oversight institute’s website (IGAPE). decisions. The citizen-centric culture appears not only to have persisted over time, but also to have • Digitalizing financial and service delivery grown, both in Medellín and the regions where the information to improve the accuracy of information SOE provides services. available to the public. Digitalization reduces corruption and facilitates advocacy and citizen participation. Service users are best placed to monitor the services on which they depend, due to greater incentives and information, as well as the possibility of face-to-face interaction with frontline providers. 21 In Colombia, EPM, a commercial SOE wholly owned by the Medellin municipal government that provides infrastructure services, created “Puntos fáciles” (Easy points) that are self-service spaces where customers and users can use new technologies to improve experience, Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 101 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 3 STATE OWNED ENTERPRISES Conclusions As this chapter including the accompanying case Finally, reforming governance of SOEs, although studies shows, tackling SOE corruption is critical necessary, may not always be enough to prevent to reducing negative economy-wide impacts and corruption. Such reforms are often accompanied to creating an environment of trust, transparency, by additional measures, such as SOE restructuring, and accountability. Well governed SOEs are better which may involve breaking large SOE multi-layered equipped to raise integrity standards and culture, enterprises into smaller business units or bringing protect their reputation and that of the state, and give opportunities for greater private sector involvement confidence to stakeholders. In turn, they are better in the operations, management or even ownership of able to access finance and attract private investment SOEs through PPPs or privatization, when the necessary to grow their business. By being more transparent and conditions are being met. Such conditions include accountable, they support sustainable development. reduced or contestable market share and economic EPM, the SOE in Medellin, Colombia, is such a dominance; transparency over ownership, operations case. Indeed, academic research, case studies, and and finances, including SOE debts; increased capacity experiences show that companies that adhere to good for monitoring and oversight; and improved efficiency. governance and ethical standards perform better The evidence shows that privatization or public-private financially in the long run than those without such a partnerships have brought big gains for many SOEs, commitment, and that companies that take concrete in both competitive and non-competitive sectors, with steps to implement ethical values outperform those respect to efficiency, transparency and accountability, that do not go beyond a declaration of commitment to and integrity. Gains come from ensuring that the business ethics.22 privatization process is done correctly. This means tailoring privatization to local conditions. It also means Combating corruption and building a culture of emphasizing the policy and institutional underpinnings integrity is easier said than done and the real of market operations rather than focusing solely on challenge is one of implementation. The needed privatization transactions. This requires developing reforms can be politically contentious and challenging and protecting competitive markets, creating proper to implement, and may not be feasible, or necessary, regulatory frameworks before privatization to ensure to put in place all at once. Overcoming the challenges efficiency and equity, developing social safety nets for can be difficult but experience shows that it can be those adversely affected, and introducing innovating done by paying attention to the reform process itself. pricing and subsidy mechanisms to ensure that the Phasing or sequencing of SOE reforms based on their poor have access to affordable essential services. political and institutional feasibility can help overcome entrenched interests and provide confidence to policy Strengthening transparency of the privatization makers to take further steps. The Angola case study process is essential and requires a host of measures. illustrates this. Where opposition is strong, reforms can Especially important is ensuring that transactions occur start with less controversial actions aimed at supporting without special privileges for insiders or other favored improvements in SOEs, such as putting independent purchasers, so that there is a level playing field with directors on SOE boards, establishing codes of conduct, potential competitors. A key lesson is that introducing and enhancing information disclosure. In the case of and enforcing transparency in the sales process is Brazil, most of the reforms to date have focused on essential to ensure that privatization does not lead necessary updates to the legislative framework; going to state capture or corrupt transactions. Promoting forward, implementation will be key to achieve results competition in the privatization process may be the and assure sustainability. Supporting improvements in most effective way to support transparency, while also a few key companies could also demonstrate concrete yielding maximum economic and financial benefits. results. Establishing new SOE laws and building Where privatization or private sector participation is institutional capacity may take time, but changes not a viable option, SOEs can still be exposed to capital in mindset and behavior are likely to occur as other market discipline through partial listings. Removing reforms take hold and create pressures for more reform. barriers to entry and exit is also important, and broader And building support for reform among stakeholders reforms to develop the private sector should continue. and the public can help strengthen SOE integrity. 102 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 3 STATE OWNED ENTERPRISES CASE STUDY 7 CASE STUDY 7 STATE OWNED ENTERPRISES Enhancing SOE Accountability in Colombia A citizen-centric approach to increase efficiency and enhance accountability in the Medellin SOE Introduction Empresas Públicas de Medellin (EPM), a commercial and industrial state company wholly owned by the Medellín Poverty and inequality, corruption and chronic violence municipal government, illustrates how sector reforms tormented Colombia in the 1990s. The city of Medellín were successfully introduced in a very challenging was one of the most affected, with the homicide rate environment, which in the 1990s included very high oscillating between 245 and 400 per 100,000 in the levels of corruption and extraordinary violence. It early 1990s. The high murder rates coincided with also shows how these reforms evolved through a long rapidly increasing rates of all kinds of crimes against process which originated in legislative changes and property and people, as the criminal justice system continued in a quest to strengthen transparency, citizen nearly collapsed. 23  In an effort to restore peace and engagement, and corporate governance.  Indeed, advance broader reforms in the country, engaging civil Colombia can be considered as good practice in the society was a staple part of Colombia’s efforts.24 This area of SOE reforms both in terms of the breadth was important because Colombia already had a very and depth of its legislative changes and, even more active and engaged civil society. importantly, in terms of implementation—the how of the reforms, not only the what. Although certain A profound change process started with important challenges remain, EPM showcases the importance of legislative amendments, including changes to the enforcing good standards and putting in place practical Constitution, followed by all-encompassing reforms, tools. What sets EPM apart from its Colombian and which continue to this day. The new Constitution of Latin American peers is its effective community-based 1991 introduced significant revisions, such as the new or citizen-centric approach to improve service delivery, model of economic development that also targeted the increase transparency, and prevent corruption. The SOE sector. As a result, public utilities were opened to transparency that came with this approach and the private investment, which also allowed free agent entry citizen monitoring tools the Colombians put in place and competition. Following that key step, the Colombian were very effective mechanisms, perhaps even more Congress strengthened the legal framework for the than  pure rules-based anti-corruption policies or electricity sector through the issuance of critical laws.25 traditional corporate governance approaches, which All these legislative changes provided the foundation nevertheless remain important. on which the Colombian SOEs later built their success. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 103 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 3 STATE OWNED ENTERPRISES awareness that EPM, although an autonomous body, is also a public service and, therefore, ‘ultimately owned Fostering transparency in by the citizens of Medellín’.28 This has helped to foster the Medellin SOE a policy of transparency towards the public, which is kept well informed about its different activities through The Empresas Públicas de Medellin (EPM) or the both the press and other means of communication. Medellin SOE is providing public utilities—including EPM identifies citizens as a paramount factor in water, gas, electricity, and telecommunications—in ‘shielding’ it from political changes or decisions that the Colombian city of Medellin. In addition, EPM could affect its sustainability and fosters mechanisms of has a majority stake in and management control of communication with the community and social control. 44 companies in Colombia and five other countries. Since 1957, EPM has included transparency towards This has also been noted by Corporación Transparencia the public as one of the basic principles of its business por Colombia, the Colombian chapter of Transparency culture. From the start, it appears that there has been International, which in its 2016 measurement of the BOX 3.1 About Empresas Públicas de Medellin EPM is a decentralized municipal entity, created in 1955 as an Autonomous Public Establishment and transformed into an Industrial and Commercial State Company (EICE) of a municipal nature in 1997. As an EICE, EPM has legal personality, administrative and financial autonomy and its own capital while, as a public service company regulated by Law 142 of 1994, its acts and contracts are subject to private law, except when expressly indicated otherwise in the Constitution or the law. EPM’s purpose is to provide public aqueduct, sewage, energy and gas distribution, mobile telephony and other telecommunications services. It can also provide street cleaning services and undertake any other complementary activity related to all these public services and the treatment and reuse of waste. In addition, under its statutes, the company can enter into any type of contract or partnership or form consortia with other individuals and legal entities for the purpose of achieving universality, quality and effectiveness in the provision of public services to its users, fostering general welfare and improvement of the population’s quality of life. Although the owner of EPM is the Medellín municipal government represented by the Mayor, in practice, the citizens of Medellín consider themselves to be the real ‘owners of the company’. 26 Along with the requirements established by the company’s Board for the development of its corporate governance practices, this perception is one of the key factors that has contributed to protect EPM from possible interference in its administration and strategy, with citizens looking out for and protecting the company from interference that could be detrimental to the SOE’s purpose. This has been accompanied by the development of a corporate culture under which citizens consider themselves ‘the DNA of the company’. In fact, as a response to corruption allegations, the civil society created a surveillance committee to observe and control the Mayor’s decisions and actions that could negatively affect the company. Also, a professional union was created with the sole purpose to isolate EPM and shield it from political interference in its corporate decisions. This culture appears not only to have persisted over time, but also to have grown, both in Medellín and the regions where EPM currently provides services. Source: Empresas Públicas de Medellín. EPM.27 104 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 3 STATE OWNED ENTERPRISES components of dialogue and control, highlighted Strengthening corporate governance EPM’s commitment to promoting citizen participation in control of its management. In the business transparency During 2018, EPM evaluated the boards of directors and assessment 2018, EPM obtained a final score of managers of its companies. The strengthening plans 89.6/100 average points, standing as a company with were implemented and executed throughout the year, a low level of corruption risk. This assessment indicates and the rules of procedure of the international affiliated how well the policies and mechanisms prevent companies’ boards were unified. As of 2020, those rules corruption risks, facilitate access to information, and were in the process of being adopted. promote spaces for dialogue and participation with the different stakeholders. For more than 10 years, EPM has During 2018, EPM’s Ethics Committee met, with participated voluntarily in the business transparency suppor t from an external advisor. Progress was assessment promoted by Transparencia por Colombia made in the analysis of “ethical dilemmas”, and the Corporation. The overall goal of the business adjustment to the organizational structure of ethical transparency assessment is to improve transparency management was approved as an opportunity for and anti-corruption standards and serve as a tool that improvement and to assure the implementation of the identifies institutional designs and practices that lead Ethical Management Model that began to operate in to corruption risks. 2019. Each one of EPM’s affiliates defined elements for ethical management, according to their characteristics In Medellin Cómo Vamos (Medellín How Are we Doing?), and dynamics and based on some minimum aspects an annual Citizen Perception Survey on quality of life approved by the EPM’s Ethics Committee. A roadmap in different areas and strata of the city, EPM regularly for the implementation of the Ethical Management occupied the first or second place of citizen trust. In Model was designed and adopted with support from 2018, 88% of the population had a favorable image donors. of EPM and 77% rated their business management as good or very good. EPM also strengthened the ethical and transparent management practices with suppliers and contractors. In addition to the warning made to suppliers and contractors for making false purchase orders in the The implementation process name of the company and its affiliates, EPM decided to strengthen the “Zero hour for procurement” strategy. Corruption has long been a significant problem in For this purpose, familiarity with the Code of Conduct South America and Colombia and remains a challenge was reinforced, and relevant information related to the even today. In 2018, the country ranked 99 th out procedure for submitting purchase orders was adjusted of 180 countries in Transparency International’s and provided to contractors. Corruption Perceptions Index. 29 According to the AmericasBarometer 2017, published by the Latin In February 2018, the Transparency and Integrity American Public Opinion Project 30 the perception Strategy for small and medium enterprises (SMEs) was of corruption in Colombia reached 74.9%. This is launched with support from donors and the Colombian also reflected in the World Bank’s Doing Business network of United Nations Global Compact. The which indicated that, in the view of businesspeople, objective was to strengthen the capacity of SMEs corruption is the factor, which most hampers companies’ to identify processes susceptible to corruption and competitiveness.31,32 implement actions for their protection, in accordance with Law 1778 of 2016. In October 2018, EPM created a In a challenging environment, EPM has had a unique Committee to recommend actions when cases of non- and successful approach to increasing transparency compliance with the Code of Conduct for Suppliers and strengthening corporate governance. Rather than and Contractors of Grupo EPM or risks associated with making the anti-corruption agenda a goal in itself, engagement with third parties are detected. the SOE placed citizens at the center of its policies and focused attention on improving service delivery and maximizing profits. Consequently, the company Improving citizen engagement reached unprecedented success, although it has not been immune to controversy.33 EPM developed several practices to facilitate its Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 105 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 3 STATE OWNED ENTERPRISES engagement with citizens. As a base for this engagement, which are intended to consult and/or inform the public EPM holds a public event that is broadcasted on local on different relevant matters. For instance, through television with live questions from journalists and the these mechanisms EPM has asked the public for ideas presentation of its Annual Sustainability Report as well on how to make EPM a more innovative company and as other community engagement and educational has consulted their opinions on how they wish to receive programs.34 information regarding high visibility projects. In 2019, EPM created a new communication channel called “Transparent Contact” where citizens could Providing citizens with digital tools to report acts of fraud and corruption involving officials facilitate access to information, improve and contractors. The initiative sought to prevent and experience, and increase transparency eradicate bad practices and create a transparent working environment. Citizens could make reports Digitalization reduces opportunities for petty corruption through a web page, a free hotline, email, or fax. and facilitates transparency, advocacy, and citizen “Transparent Contact” aimed to improve detection of participation. Service users are best placed to monitor conflicts of interest, unethical behavior and other types the services on which they depend, due to greater of irregularities, and enable EPM to act with greater incentives and information, as well as the possibility of speed in responding to such situations. face-to-face interaction with frontline providers.35 Since 2019, EMP has enabled other citizen participation In order to improve the experience of customers and spaces by the release of various participation exercises, provide them with more options, EPM enhanced self- BOX 3.2 Power Sector Reforms in Colombia and the Success of EPM Colombia’s experience of successfully advancing reforms in the power sector showcases many lessons for policy makers and practitioners. One of them is related to the country’s ability to reach compromise and accommodate the competing interests of national and municipal governments. Consensus was critical to the successful implementation of an ambitious reform agenda. Colombia’s power sector has long combined national-level power utilities, controlled by the central government, along with powerful municipal utilities—notably EPM in Medellín and EEEB in Bogotá. Together, these companies accounted for about 40 percent of electricity distribution in the country. There had long been tension over the allocation of roles between central government and municipal actors in the sector, and this came to a head when the sector reform laws of 1994 called for privatizing the utilities. The municipal governments objected, and a compromise allowed EPM and EEEB to remain vertically integrated public utilities if they separated the accounting of their generation and distribution activities and abided by new restrictions on market shares in their activities. EPM flourished under the new regulatory framework and remains to this day a successful, vertically integrated publicly owned utility and one of the main actors in the power sector. EEEB was unable to turn its performance around and eventually underwent vertical separation and privatization. Source: WB Rethinking the 1990s Orthodoxy on Power Sector Reform, Flagship Report, June 201937 106 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 3 STATE OWNED ENTERPRISES service solutions and digital channels. Six spaces were The case of EPM emphasizes several good practices enabled in strategic areas of the city of Medellín, that stand out and from which practitioners and policy called “Puntos fáciles” (Easy points). These self-service makers around the world can learn. These lessons spaces are equipped with technological devices so that can be easily replicated, especially in those contexts citizens can use new technologies with the aim to have where there is a vibrant civil society and citizens are a better customer experience and easier interaction active and feel empowered to play a role in the quality with the company. Users can perform up to 20 types of the services that the state is providing, as is the of online transactions, which reduces transaction costs case in Colombia. EPM’s corporate culture promoted and increases transparency.36 the idea that the SOE is ultimately owned by the citizens of Medellín, a culture which in turn fosters During 2018, EPM managed to interact with more than transparency and helps prevent corruption. Although 601,000 people from all over the country, by conducting certain challenges remain, EPM can be commended for educational activities with the community. Through the its efforts to continuously enable citizen participation strategies Por ti estamos ahí (We are there for you) and through innovative tools, such as the creation of special Cercanías (Surroundings) 80 programs were developed purpose spaces and channels. Through a range of in the country, in which EPM talked with 159,000 people mechanisms, it is asking the public for ideas on how to about the provision of residential public services. With make EPM a more innovative company and on how they the Cuidamundos (Take Care of the World) program, wish to receive information on subjects of interest. EPM interacted with more than 72,000 students, seeking to encourage care for the environment and Here are a few practices that stand out: promote the proper use of public utilities. 1. EPM developed several good practices to facilitate Seeking to consolidate EPM as a strategic ally of engagement with customers. For example, the its corporate customers and leverage commercial corporate governance model of EPM is highly offers, various business outreach programs, including participatory as provided by the Law of Domiciliary academic and regulatory events, were conducted Public Services (Law 142 of 1994). in 2018, in which more than 1,000 employees of government institutions and about 5,000 employees of 2. EPM’s new communication channel “Transparent EPM customers participated. In addition, 300 industrial Contact” can be used by citizens to report acts customers received academic advice and 586 small of fraud and corruption that involve officials businesses participated in energy efficiency awareness and contractors. This is a multichannel tool that campaigns. includes a web page, a free hotline, an electronic mailbox and a fax, through which the community may report acts associated with fraud, corruption, or violation of the norms or policies established by Reflections EPM. Preventing corruption and increasing transparency 3. The Medellin Cómo Vamos (Medellín How Are in the SOE sector is critical to reducing negative We Doing) Program is a private inter-agency economy-wide impacts and to creating an environment alliance with the objective of evaluating changes of trust, transparency, and accountability in which SOEs in the quality of life of the city of Medellín from the operate. The case of EPM shows that better governed perspective of its inhabitants. This involves several SOEs are better equipped to raise integrity standards private institutions to incentivize alliances and and culture, protect their reputation and that of the promote effective and transparent government state, and give confidence to stakeholders, especially through informed and participatory citizens. investors and consumers. This is critical since better governed SOEs are also better able to access finance through capital markets and attract private investment to grow their business. By being more transparent and accountable, they support sustainable development. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 107 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 3 STATE OWNED ENTERPRISES CASE STUDY 8 CASE STUDY 8 STATE OWNED ENTERPRISES SOE Reforms in Brazil following “Lava Jato” Increasing integrity in Brazil’s state-owned enterprises following the “Lava Jato” corruption investigations These coalition governments appointed intermediaries Introduction as directors of Petrobras and tasked them with ensuring a flow of funding back to their respective parties In 2014, Brazil’s Operação Lava Jato (Portuguese for and allies. Political leaders achieved this through “Operation Car Wash”) exposed one of the largest systematic bid rigging, involving a cartel of all the corruption scandals in the world and resulted in the major construction companies, to pass funds to the largest corruption investigation by the Federal Police intermediaries in order to finance their parties and in in Brazil’s history. Operation Car Wash, which started most cases their own personal wealth. Investigators as an investigation into money laundering, eventually also accused external independent auditors of aiding uncovered corruption in contracts worth billions Petrobras in misrepresenting its business and financial of dollars that had been awarded to construction operations. companies across Brazil. One of the worst offenders was Odebrecht, the largest construction conglomerate Though Brazil’s largest SOEs may have appeared in South America. 38 Investigations centered on to have sufficient standards in place for corporate contracts with state-owned enterprise (SOE) Petrobras, governance (e.g., listings on foreign stock exchanges), the Brazilian Petroleum Corporation, but later revealed the unprecedented actions taken by the justice system that corruption was embedded in virtually all public forced into the public view the gaps in law, as well investment contracts in Brazil. Investigators implicated as the previous lack of enforcement. Following the high-level politicians in Brazil and at least 11 other revelations, civil society demanded radical change, countries in Latin America and beyond (see Box 3.3: The with particular focus on strengthening the governance Impact of Operation Car Wash across Latin America). of SOEs. Robust corporate governance, therefore, was regarded as an antidote to corporate-level corruption The multi-billion-dollar corruption scheme at Petrobras by promoting transparency and better grounds for was intricately woven into the fabric of Brazil’s political accountability. 39 A new Anti-Corruption and Money parties and dated back to at least 1985, when Brazil Laundering Strategy is proposing concerted action transitioned to democratic rule. Board and executive on multiple fronts to mitigate corruption risks going appointments at Petrobras rested in the hands of forward (See Box 3.4: Brazil’s National Strategy Against political parties that formed coalition governments. Corruption and Money Laundering, ENCCLA). 108 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 3 STATE OWNED ENTERPRISES BOX 3.3 The Impact of Operation Car Wash across Latin America At their core, the crimes in the Lava Jato cases are connected to public investment contracts involving the main construction groups in Brazil, as well as financing by the Brazilian Development Bank. Among these companies, Petrobras was the most deeply implicated. The company had essentially been used as a slush fund by all politicians and officials to enrich themselves and to finance their political campaigns and gain influence at home and abroad. Investigations into the Lava Jato scandal have led to prison sentences for top executives and politicians. According to the Public Prosecutor’s office, by October 2018, Lava Jato had resulted in more than 200 convictions, including corruption, abuse of the international financial system, drug trafficking, and money laundering. More than a dozen other corporations and multiple foreign leaders have also been implicated in Lava Jato, mainly through Odebrecht, which used the Brazilian system of bribing politicians of many parties, to maintain a patronage relationship. Those caught up in the corruption include Venezuelan President Nicolas Maduro and four former Peruvian presidents as well as the leader of a Peruvian political party (Keiko Fujimori). The financial losses to Petrobras were huge. Petrobras itself estimated in its 2015 financial report that USD2.1 billion had been paid in bribes. In addition, it proposed almost USD17 billion in write-downs due to fraud and overvalued assets (including wasted investments, which nevertheless produced resources for political financing) which the company characterized as a “conservative” estimate. 40 Due in part to the impact of the scandal, as well as to its high debt burden and the low price of oil, Petrobras was also forced to cut capital investments and announced it would sell USD13.7 billion in assets over the following two years. 41 By mid- 2018, the corruption scandal was believed to have erased more than USD250 billion from Petrobras’s market value. The oil giant has also lost billions more in legal settlements and other costs related to graft, including a USD853 million settlement with the U.S. Department of Justice, the Securities and Exchange Commission, and Brazilian authorities. Petrobras appears to be now recovering modestly as its share price recovered from a low of USD3.8 in 2016 to over USD15 as of November 2019. effective constraints to corruption and rent extraction. Provisions in the new SOE framework to promote In 2015, the Ministry of Transparency, Monitoring and Control (MTMC) prepared a Guide for the Establishment transparency and corporate of Integrity Programs in State Owned Enterprises. The governance guide recommended that companies prepare their own integrity risk assessments and, on this basis, prepare The Operation Car Wash investigation exposed many their own integrity programs. The guide provided systemic problems in the governance of Brazil’s SOEs. ideas and suggested measures to strengthen integrity For example, it revealed the complexity of Brazilian SOE in SOEs, including in the area of procurement through ownership arrangements, with a multitude of institutions measures such as rotation of purchasing personnel. involved in SOE reporting and oversight leading to information asymmetry and diffuse accountability In 2016, the government passed the Law on the relationships. In addition, state and local governments’ Responsibility of Federal State Companies, which aimed reliance on a corrupt system of party financing meant to strengthen the internal control environment in SOEs that traditional accountability mechanisms were not through the introduction of fiscal councils and internal Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 109 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 3 STATE OWNED ENTERPRISES BOX 3.4 Brazil’s National Strategy against Corruption and Money Laundering (ENCCLA)42 Expected results under the new Strategy: 43 • Development of the National Network of Money Laundering Laboratories (Red-LAB) and development of the Bank Transfer System (SIMBA), the standardization of layout for judicial decision involving bank secrecy; • Development of the Account Register of National Financial System (CCS) and the initiative ​​ civil servants; to regulate the declaration of assets and values of • Regulation of access by supervisory bodies to the accounting records of entities contracted by the public administration; • Improvement of border control procedures; • Proposals for rules to regulate the utilization of cash and cryptocurrencies in order to prevent money laundering; • Development of the National System of Seized Goods (SNBA), administered by the National Council of Justice (CNJ) and the promotion of early disposal of assets, resulting in the improvement of the institute, later modified by Law 12,683 /12 and Law 12,694/12; • Discussion and draft of the text of Law No. 13.810 of 03/08/2019 providing for the enforcement of sanctions imposed by United Nations Security Council resolutions, including the unavailability of assets of individuals and legal entities, and the national designation of persons investigated or charged with terrorism, its financing or related acts; • Elaboration of a booklet for the guidance of public procurement officials (based on problems already identified by ENCCLA institutions); • Discussion and debate about whistleblowing and production of a draft law for its regulation; and • Recommendation for the establishment of specialized financial crime units in the Federal Police. audit committees. The law also aimed to increase guidance to support SOEs in implementing internal transparency around contracting and procurement, integrity programs. The Commission of Inter-sectoral which was the main channel of kickbacks exposed by Corporate Governance and Property Administration Operation Car Wash. Its implementation will be key, (CGPAR) approved a Resolution to require that all SOEs but the proposed instruments can be considered good have an audit committee that reports to the board. practices by SOE practitioners and policy makers in the region and beyond.44 All SOEs must also have a Fiscal Council, a governance body that monitors management’s activities and Since 2016, SOEs in Brazil are required to establish an financial statements and reports to shareholders. The internal audit function which reports directly to the board head of the internal audit unit may report directly to the and the audit committee. SOEs’ internal audit function, Council on the implementation of aspects raised in the including the nomination and dismissal of the head of reports and by the Council. the internal audit unit, is supervised by the MTMC. The state audit office undertakes financial, operational and Under the Access to Information Law (Law 12527/2011) investigative audits of SOEs. The MTMC published and Decree 7724, public institutions—including 110 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 3 STATE OWNED ENTERPRISES SOEs—are required to disclose information such experience for appointing senior SOE management or as their internal hierarchy and structure and public board members.  In addition, the law prohibited civil procurement processes. This legislation also requires servants from holding such positions. SOEs and other public institutions to establish channels for receiving information requests from the public, which shall be treated and responded to within the Increasing transparency in the timeframe indicated in that law.45 procurement process SOEs continue to be exempt from public procurement rules, but the new law imposed further restrictions The implementation process on direct procurement and also required increased transparency with regard to the costing of bids and Introducing codes of conduct any contract amendments.  Item costs (sometimes estimates) will be published while the overall financial After the law passed, all SOEs had to develop their bids remain confidential. SOEs can negotiate with own internal code of conduct or code of ethics, potential suppliers before bids are awarded. outlining in detail the expected behavior of staff and senior management, including clearly outlining what is acceptable and what might constitute conflict of interest Monitoring and enforcement or illegal activities. All federal SOEs had prepared and published their code of conduct as of end-2018. The 2016 law is a late acknowledgement that this area had to be strengthened, according to best practices already in place in many other countries. Another Establishing statutory audit committees development to underscore is the role of the Supreme Audit Institution (SAI)—“Tribunal de Contas da Uniao” The new law required that all companies establish in pursuing the corruption scheme. “statutor y audit commit tees” which would be responsible for hiring and overseeing both internal The stricter controls requirements introduced in 2016 and external auditors. In addition, the committees will not be enough. The changes in legislation call for would be responsible for receiving anonymous reports active enforcement and monitoring in order to ensure of any practices that violate the company’s business effective application of the law. This means that the and ethical guidelines. The government expects the SAI and the state internal audit arm (the Office of the audit committees to strengthen internal controls and Comptroller General) will have to play an active role in the ability of company boards to uncover and prevent order to advance the anti-corruption agenda beyond corruption. the corporate governance measures taken at the SOE- level. Just over 70 percent of federal SOEs had audit committees in place by early 2018 and nearly 90 percent had a whistleblower mechanism in place. Reflections The requirement of audit committees is an overdue development for the larger SOEs, especially listed The lessons from Brazil’s SOEs can be looked at from ones. Brazil has traditionally used a system of “fiscal two perspectives: (1) the actions that initially exposed councils” (conselho fiscal) as an equivalent to an audit the corruption and punished it, and (2) the actions committee, which had proved to be not very effective. that have been taken since to reduce the risk of future corruption in SOEs. Revising the process for appointing board First, the actions that were exposed by Lava Jato members and senior management should be viewed against the backdrop of the system of political financing. Brazilian legislation provided sitting The new law introduced clearer requirements with cabinet members and other federal elected officials regard to technical qualifications and professional with special standing as they could only be tried by the Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 111 112 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 3 STATE OWNED ENTERPRISES Federal Supreme Court. Cases against politicians move governance.46 The government and the legislature slowly through the court system. De facto, politicians in Brazil provided a robust technical response to an enjoyed “practical immunity from prosecution” in the unprecedented crisis by adopting a comprehensive words of Matthew M. Taylor. legal framework for procurement in SOEs, filling in a significant gap, and bringing innovations to the way For a few years, reform of criminal justice and the SOEs procure goods. However, it is not clear to what criminal procedural code and strengthening the justice extent the 2016 law alone can have the desired impact, institutions led to and facilitated the investigation that as the root problem is a combination of private sector disclosed the scandals. In particular, the Government collusion with public sector extortion to finance the of President Dilma Rousseff promoted two key laws in political system. Implementation of the laws is at a 2013, which allowed reduced sentences for individuals critical juncture and will determine their final impact. and corporations engaged in criminal activity if they The story line so far is complex and still evolving. Civil denounced others and produced evidence to support society will undoubtedly be watching closely. the allegations. This, combined with years of capacity building and training in the justice and police sector Brazil is a signator y to the OECD Anti-Briber y (particularly in the pursuit of money laundering), Convention, which establishes punishments for allowed the judiciary and the police to unravel corrupt individuals and companies bribing public officials networks, which had been impossible previously. from other countries in order to gain an advantage in international transactions. As par t of Brazil’s Some of the specifics that were essential to exposing commitment under the working group, the country the corruption included: undergoes regular evaluations/assessments of its overall legal and institutional framework to combat • The creation of task forces by the police and federal corruption. prosecutors to concentrate effort and resources on the investigation and to prosecute serious bribery The OECD working group on corruption expressed and money laundering crimes; concern that there is a slowdown and/or reversal in the fight against corruption in Brazil. Specifically, the • The use of pretrial detentions only in cases in which Brazilian Senate has approved a Bill on Abuse of Power, there was strong evidence of the crimes or in which which includes an overly broad definition of the offense detentions would prevent new crimes from being of abuse of authority by judges and prosecutors. committed; Some critics argue that this new law could serve • The use of plea agreements to disrupt complicity as a mechanism for corrupt individuals to unfairly and secrecy between criminals and to advance attack justice-seeking prosecutors and judges for investigations; appropriately doing their jobs and have a significant chilling effect on anti-corruption prosecutions and • Extensive international cooperation and support investigations in Brazil and beyond. The new law was from Switzerland, US, and other countries; prepared in response to concerns about abuse within the judiciary, prompting a backlash against the recent • Trying cases under public scrutiny, from evidence anti-corruption drive, which some see as politically and arguments to judgments; driven. • Speedy criminal procedures and trials; and In mid-November 2019, the Brazilian Supreme Court ruled to end the mandatory imprisonment of people • Strong public backing to prevent attempts by convicted of crimes who are appealing their cases. The powerful defendants to obstruct justice. decision of the Supreme Court to halt investigations and criminal proceedings based on reports from The second lens that is important is what the Operation administrative agencies, including financial intelligence Car Wash investigations triggered as a response. As units, tax authorities, etc., caused some concern, as this noted above, the Brazilian government responded with would restrict the ability of such agencies to investigate legislation to improve the integrity of SOEs and align corruption-related offenses. Brazil with international best practices on corporate Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 113 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 3 STATE OWNED ENTERPRISES CASE STUDY 9 CASE STUDY 9 STATE OWNED ENTERPRISES SOE Reforms in Angola Addressing systemic corruption in Angola’s SOEs through strong political commitment years, but the system overall suffers from powerful Introduction vested interests.48 Corruption scandals related to the SOEs in Angola The current political commitment and strong discourse made headlines at the beginning of 2020 in newspapers to tackle corruption in the country in general and in the across the world.47 However, the phenomenon of oil sector in particular, coming from the highest political corruption is not recent. It was particularly intense in the level, represents a unique opportunity to tackle years following the end of the civil war in 2002 as tens corruption in Angola and introduce credible reforms of billions of dollars in oil revenue had to be managed with a long-term impact. This can be aided by the by weak institutions and public financial management increased engagement from international institutions systems. Vested interests, weak control and oversight, with a strong governance agenda and expertise to and the absence of checks and balances were a few of build effective anti-corruption frameworks. the country’s many problems. Both petty and grand corruption have long thrived in Angola and given the resource rich nature of the economy, it involved staggering amounts of public money. Corruption in the oil and This widespread nature of corruption is well diamond sector and the role documented in numerous governance and anti- of SOEs corruption assessments by the donor community. Angola fairs badly in world rankings: it was ranked 165 The oil and mining sectors in Angola are considered out of 180 countries on Transparency International’s especially high-risk areas for corruption. Clientelist 2018 Corruption Perceptions Index. The World Bank networks generally govern the way business is Governance Indicator for Control of Corruption places conducted in Angola, with many Angolan companies Angola at a similar percentile rank as in 2000. It has functioning as front organizations for government been estimated that USD28 billion of government of ficials whose integrity and accountability are spending was unaccounted for between 2002 and frequently questioned by observers. Active and passive 2015 and billions of dollars have been transferred bribery, illicit enrichment and  conflict of interest  are often illicitly from Angola to offshore accounts, which criminalized by the Probity Law, 49 but offenses are has led to the country being listed in 2016 as a high- rarely prosecuted.50 risk and non-cooperative jurisdiction on anti-money laundering and combating the financing of terrorism. As Africa’s second-largest oil producer, Angola has While generally seen as weak, some anti-corruption vast petroleum wealth, which is licensed exclusively by laws and institutions have been put in place over the its SOE, Sonangol. It has ventures in a swath of other 114 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 3 STATE OWNED ENTERPRISES sectors, including air transport, telecoms, banking 2018, in which it committed to stop taking any new and insurance, and real estate, to support its core RBLs (collateralized loans) and limit how much it draws business. In 2018, its turnover was USD18 billion. By down on existing RBLs. 2015 Sonangol was in a deep crisis. The falling price of oil and longstanding inefficiency were draining Researchers 55 showed that in total, two-thirds of the company’s revenues. With oil the keystone of the all RBLs went to countries with poor governance Angolan economy, responsible for a third of its GDP and standards. Countries with limited transparency and 90% of its exports, a bankrupt Sonangol would mean accountability of their resource sectors used those economic catastrophe. The government took drastic assets to secure RBLs. The countries with by far the action. By decree of the then president, José Eduardo largest amounts of RBLs in their respective region— dos Santos, a committee to restructure the Angolan Venezuela in Latin America (USD59 billion) and Angola oil sector was constituted, and it invited a Maltese in sub-Saharan Africa (USD24 billion)—both have poor company, Wise Intelligence Solutions, to coordinate resource governance scores. Data 56 shows that in a group of consultants to advise on reforms. Wise’s roughly 40 percent of cases (21 cases), the borrowing owner was the president’s daughter, Isabel dos Santos. entity was an SOE operating in the oil or mining Six months later, Isabel dos Santos would be granted sector. Across one dataset, the following national oil even greater influence over the reforms. A second companies (NOCs) were recipients of most RBLs: presidential decree announced her appointment as Petrobras (Brazil), PetroEcuador (Ecuador), Petróleos de chair of the SOE, Sonangol, mandated with overseeing Venezuela (Venezuela), Sonangol (Angola), Société des its turnaround.51 Hydrocarbures du Tchad (Chad), and Société Nationale des Pétroles du Congo (Congo). Sonangol and Resource- Backed Loans (RBL) in Crackdown on corruption Angola 52 and efforts to increase transparency in the Angolan According to a recent study, 53 Angola received the SOE sector largest amount of RBLs in sub-Saharan Africa. Between 2000 and 2016, Chinese lenders committed over In September 2017, President João Lourenço took USD24 billion worth of oil-backed loans and credit lines office and initiated a crackdown on corruption. After to Angola, most of which have been disbursed. The taking office, President Lourenço started delivering on national oil company Sonangol has played an important his pledges by initiating a number of economic reforms role in RBLs in Angola. In addition to the Chinese RBLs, aimed at tackling corruption, graft and patronage as Sonangol independently borrowed large amounts from well as breaking up a number of artificial monopolies in Chinese lenders. Furthermore, USD10 billion from the the economy (most notably in the cement and telecoms USD15 billion oil-backed credit line that the Angolan sectors). At the same time, he made numerous high- government signed with China Development Bank in level appointments in key positions and initiated 2015 was subsequently lent to Sonangol. investigations against a number of high-level officials linked to former President Dos Santos and his family, The financial flows between Sonangol and Angola’s some of whom were put under preventive detention. government budget were not transparent. In 2012, for example, the International Monetary Fund (IMF) The former President’s daughter, Isabel dos Santos, uncovered USD32 billion excess of revenues over had been the president of the board of directors of expenditures in Angola’s state budget from 2007 the state-owned oil company Sonangol, until she was to 2010, which was the result of Sonangol using removed, as part of the anti-corruption and investigative government oil revenues to finance “quasi-fiscal efforts initiated under the new President. The son of operations” not recorded in official budget accounts.54 the former President, Jose Filomeno dos Santos, was In 2016, Angolan oil-backed loans had reached USD25 also removed as chairman of the sovereign wealth fund billion, which was more than half of the government’s (Fundo Soberano de Angola, FSDEA) and subsequently total debt. The country requested an IMF bailout in charged in a fraud case concerning misappropriation of Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 115 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 3 STATE OWNED ENTERPRISES USD500 million of public funds. His business partner¸ introduced to reinforce and complement the reforms Jean-Claude Bastos de Morais, was also arrested in to public procurement. In Angola, income and asset relation to the misappropriation case alongside the declaration is regulated principally by the Law on Public former governor of the National Bank of Angola, Valter Probity (Law 3/10 from 2010). Article 18 established Filipe. These are just a few of several high-level cases that public officials must not, in the exercise of their that have received significant attention both within functions, directly or through an intermediary, benefit and outside Angola. Norberto Garcia, another high- from an offer by any natural or legal entity, under ranking member of the MPLA party and former director Angolan or foreign law. Article 27 stipulates the of the Technical Unit for Private Investment (UTIP) was obligation of some officials to declare their income charged with fraud, money laundering and document and assets when taking office using a specific form. falsification. The former transport minister Augusto The types of officials included are those elected or Tomas was also arrested on charges of embezzlement appointed to posts, judicial and public prosecutors, and corruption. Another central component of the senior officials of central and local government, public anti-corruption policy under the current administration institutes, state-owned enterprises, managers of public has been the intent to recover stolen assets first by assets assigned to the armed forces, heads of local creating a legal framework for voluntary repatriation government. of resources under amnesty and subsequently through coercive repatriation and confiscation of assets in lieu In late 2018, regulations were issued for the declaration of stolen assets.57 of income and assets, declaration of interests, and declaration of impartiality and confidentiality in public procurement (Presidential Decree 319/18 of December 31). The regulations were issued alongside several Reforms in public tools, including the ethical code of conduct in public procurement, a guide for denouncing indications of procurement and the income corruption in public procurement, and a practical and asset declaration guide for preventing and managing risks of corruption system in public contracts (anti-corruption guide). Combined, the regulation and tools have been referred to as the Contracting of goods and services has been deeply strategy for the moralization of public procurement. af fec ted by corruption and improving public procurement constituted a key element of fighting The regulations extend the requirement for income and corruption in Angola. The public procurement law was asset declarations (IAD) specifically related to public updated to include lowering the threshold for contracts procurement to include both senior public officials and that are required to be subject to public tender, the technical staff preparing bidding documents, members creation of a national procurement portal and a list of the procurement committee and contract managers. of companies certified to undertake construction Senior officials in the public sector, including SOEs, work for the government (Presidential Decree 198/16 and members of the procurement committee are also of September 26). The thresholds for authorization required to declare any interests in companies, business of expenditure were updated in 2018 to adjust for groups, consortiums or other business interests that inflation, although the thresholds for requirements for could result in a conflict of interest (Article 2). The the type of procurement were not altered (Presidential regulations establish that the IAD of public officials must Decree 281/28 of November 28 and Rectification 26/18 be submitted to the highest level of authority within the of December 31). The law also included a chapter on procuring entity and handled in line with law 3/10 on ethical behavior in the planning and execution of public public probity. Declarations of interest, however, must contracts, including requirements for impartiality and be submitted to the Inspectorate-General of the Public avoiding conflicts of interest, fraud and corruption, legal Administration (IGEA), which is entitled to use them as compliance and confidentiality. In the past, compliance they see fit to deliver their mandate (Article 7 and 8). and enforcement of the legal anti-corruption framework This represents a shift in the IAD framework, which has had been a bigger problem than the legal framework to date been a closed system (IADs are submitted in itself. closed envelopes and only opened by the prosecutor’s office as part of an investigation) to a semi-open system Reforms to income and asset declaration were for matters concerning public procurement. 116 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 3 STATE OWNED ENTERPRISES and state assets have been sold through international More transparent competitive bids. Sonangol, the national oil company, is implementing its own “Regeneration Program,” which privatization efforts includes divesting non-core businesses and reducing involving the SOEs stakes in oil blocks. The company is expected to start divesting in early 2020. Angolan SOEs have been used in the past to extend favors and lucrative contracts to party loyalists. The To improve transparency and accountability of SOEs early 2020 ‘Luanda papers’ leaks58 by the international and reduce opportunities for corruption, the authorities consortium of investigative journalists showed the began publishing reports on its SOE portfolio, 59 extent of the misuse of state assets for personal gain by including audited annual reports of the 15 largest the Angolan elite—and in particular Isabel dos Santos SOEs, at the end of 2019.60 Ongoing structural reforms and her entourage. Ongoing SOE reforms in Angola aim to reduce the large State footprint in the economy, include efforts to address flaws in past SOE governance reduce fiscal risks, and foster private sector-led and privatization processes and increase transparency development. The authorities’ home-grown reforms— and predictability, thus leveling the playing field. The including Sonangol’s “Regeneration Program” and Privatization Law was published in the spring of 2019 and the privatization of several SOEs—are expected to a privatization program was presented in September. reduce State presence in the economy, curb fiscal The large and ambitious privatization program is being risks, improve governance, mitigate price distortions, implemented over four years. A number of minor SOEs and increase economic efficiency. In turn, these efforts Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 117 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 3 STATE OWNED ENTERPRISES should pave the way for private sector-led development required by the law. The government also committed to and economic diversification.61 Under the IMF program, increase the share of public contracts awarded through important fiscal risks in the economy are expected open tender (concurso público) to at least 50 percent to be mitigated by the proposed restructuring of the by end-2020.63 largest SOE, Sonangol, the improved transparency of all SOE accounts and the timely implementation of the SOE privatization program, whose proceeds could be used to reduce mounting debt. Conclusion Fighting corruption in SOEs remains a huge challenge in Angola, and the early policy actions need to be Institutional changes to carefully watched for sustainability and impact. The few corporate governance codes that were passed over increase transparency and the years had limited impact and action was needed efficiency in the oil SOE and beyond the regulatory level. With the arrival of the new beyond government in mid-2017, a concerted effort has been made to address systemic corruption by targeting both The authorities continue to make progress on the enforcement and prevention. The SOEs were front privatization program and reform of SOEs, yet and central in that effort. Some results can already be challenges remain. The public offering of the first set seen, as evidenced by reports of the donor community, of SOEs/state assets took place in September 2019. but progress is slow. A new and reinforced SOE unit Moreover, the authorities plan to continue with the in the Ministry of Finance is now collecting data and is disposal of non-core assets of Sonangol and to reduce preparing regular monitoring reports. Most SOE board some of its stakes in oil blocks. As part of an effort to of directors have been replaced. Many state assets, streamline the operations of Sonangol, the authorities which were ‘privatized’ (at low or zero costs) in the established the National Oil and Gas Agency in past have been taken back by the state and are now February 2019, which has taken over the function of being prepared for a new and transparent privatization concessionaire in the oil sector. The first phase of this process. Corporate governance in the state oil change was completed in June 2019 and involved the company Sonangol is being strengthened to help the new agency absorbing human resources and assets SOE become an efficient company rather than a parallel from Sonangol.62 public sector arm of the authorities, and the state’s concessionaire responsibilities have been transferred There have been many positive indications of the to a separate institution, which will somewhat reduce Government of Angola’s commitment to strengthening the opportunities for using it as an extended arm of governance and fighting corruption. In January 2019, the executive. In addition, the SOE has been asked to the National Assembly approved a new Penal Code, sell most of the 150+ subsidiaries. The same concerted which includes harsher punishment for both active and effor ts are now targeting the diamond holding passive corruption. The Attorney General’s Office, company ENDIAMA. On the other hand, there have which is in the process of implementing the anti- been setbacks: privatization is proceeding slower than corruption strategy published in December 2018, has expected, lending practices of state-owned banks have stepped up its investigations and two members of raised new concerns, and the transparency of Sonangol Parliament have been indicted on several corruption remains a work-in-progress. While the eventual impact charges. The creation of a specialized anti-corruption on corruption of Angola’s reforms remains to be seen, unit in 2018, under the Executive branch, is expected the country’s vigorous approach to tackle corruption in to further support the fight against corruption. To help the SOE sector is commendable and can serve as an enforce laws on SOE transparency and accountability, inspiration to practitioners and policy makers in other the 15 largest SOEs (by assets) will have to publish countries that are facing similar challenges. their audited annual repor ts on the website of the SOE oversight institute (the Institute of Assets Management and State Holdings [IGAPE]). Starting in 2019, the government enforced the publication of these companies’ annual reports on IGAPE’s webpage, as 118 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 3 STATE OWNED ENTERPRISES Notes 1. OECD (2018), State-Owned Enterprises and Corruption: What 21. Sohai, M. and Cavill, S., (2006). Combating corruption in Are the Risks and What Can Be Done?, OECD Publishing, the delivery of infrastructure services. [Paper presented Paris, https://doi.org/10.1787/9789264303058-en. at:] Conference on Ins titutions and Development, Reading, 22-23 September, https://pdfs.semanticscholar. 2. South China Morning Post (2016), “Corruption found cross org/274d/1efb699d1b8fdd99d353d2d7d20ed589af2f.pdf. China’s financial industry,” February 5, 2016. 22. John Sullivan (2009). “The Moral Compass of Companies: 3. David Mihalyi, Aisha Adam and Jyhjong Hwang (2020, Feb.). Business Ethics and Corporate Governance as Anti-Corruption Resource-Backed Loans: Pitfalls and Potential, Natural Tools.” IFC. Focus 7. Resource Governance Institute. 23. Coatsworth (2003). “Roots of Violence in Colombia: Armed 4. World Bank (2019). Increasing SOE Integrity in Brazil: Case Actors and Beyond”. Revista, Har vard Review of Latin Study. America. https://revista.drclas.har vard.edu/book /roots- 5. Public Protector of South Africa (2016), State Capture Report, violence-colombia 14 October 2016. 24. Id. 6. Public Protector of South Africa, 2016. 25. The Law of Domiciliary Public Services (Law 142 of 1994) and 7. United States District Court Southern District of New York the Electric Law (Law 143 of 1994). (2015), In Re: Petrobras Securities Litigation, Consolidated 26. Empresas Públicas de Medellín. EPM. Corporate Governance. Fourth Amended Class Action Complaint, Case No. 14-cv-9662 h t t p s : // w w w. e p m . c o m . c o /s i t e / i n v e s t o r s /c o r p o r a t e - (JSR), http://securities.stanford.edu/filings-documents/1053/ governance. PBSP00_01/20151130_r01c_14CV09662.pdf. 27. Empresas Públicas de Medellín. EPM. About Us. https://www. 8. OECD, Ibid. epm.com.co/site/investors/general-information/about-us. 9. This was the case with Petrobas at the time of corrupt activities 28. OECD (2015). OECD Review of the Corporate Governance of (Vianna M.P. (2014). See Vianna M.P. (2014). Brazilian State State-Owned Enterprises. Colombia. Page 96. Available at: Owned Enterprises: A Corruption Analysis. The Institute of https://www.oecd.org/daf/ca/Colombia_SOE_Review.pdf. Brazilian Business & Public Management Issues, The George Washington University. 29. Transparency International (2018). 2018 Corruption Perception Index. Available at: https://www.transparency.org/cpi2018 10. Lewis, Davis. 2018. Gordhan Shows Way Forward for Cleaner Public Corporations. Corruption Watch. ht tps://w w w. 30. LAPOP, USAID (2017). The Political Culture of Democracy corruptionwatch.org.za/gordhan-shows-way-for ward-for- in the Americas, 2016/2017. A Comparative Study of cleaner-public-corporations/. Democracy and Governance. https://www.vanderbilt.edu/ lapop/ab2016/AB2016-17_Comparative_Report_English_V2_ 11. United States District Court Southern District of New York, FINAL_090117_W.pdf. 2015, and Sunday Times (2017), How Eskom lavished its boss’s daughter with R1bn in contracts, 26 March 2017, https://www. 31. World Bank. (2020). Doing Business 2020. Washington D.C.: timeslive.co.za/sunday-times/news/2017-03-26-how-eskom- The World Bank. https://www.doingbusiness.org/en/reports/ lavished-its-bosss-daughter-with-r1bn-in-contracts/. global-reports/doing- business-2020. 12. United States District Court Southern District of New York, 32. OECD, 2015. 2015. 33. See the Hidroituango project for example. The Hidroituango 13. Revenue Watch Institute (2013), The 2013 Resource Governance dam is one of South America’s largest infrastructure projects, Index, A Measure of Transparency and Accountability in the a colossus of engineering intended to furnish nearly a fifth Oil, Gas and Mining Sector. of Colombia’s energy needs. In 2018 the massive structure nearly collapsed, sparking a national emergency that forced 14. SWFI (n.d.) , 4th Quarter 2016 LMTI. https://www.swfinstitute. the evacuation of tens of thousands of people. EPM, and some org/statistics-research/4th-quarter-2016-lmti/. of its managers, are currently under criminal investigation 15. World Bank (n.d.), Transparency of State Owned Enterprises for alleged corruption and environmental damage in its in Vietnam: Current Status and Ideas for Reform, http:// development of the dam. See: Above Ground (2019). EPM’s documents.worldbank.org/curated/en/618601468132616527/ disastrous dam: How Canada financed a high-risk energy pdf/898100PN0P14340G0Jul0240201400FINAL.pdf venture gone away. https://aboveground.ngo/edc/epms- disastrous-dam/. 16. See, for example, Georgian Young Lawyer’s Association (2015), Transparency and Accountability of State Owned Companies, 34. EPM’s net worth is reported annually to all citizens in a public https://gyla.ge/files/news/sawarmoebi_eng.pdf. event that is broadcasted on local television with live questions from journalists, together with other community engagement 17. World Bank, 2019. and educational programs. 18. OECD (2013), Boards of Direc tors of State - Owned 35. Sohai, M. and Cavill, S., 2006. Enterprises: An Overview of National Practices, Corporate Gover na nce, OECD Pu b lis hing, Par is, ht t p s: //d oi. 36. Users can pay public utilities in cash or by debit card, topping org/10.1787/9789264200425-en. up prepaid energy cards, generating payment coupons, obtaining certificates of prepaid services, among others. 19. G20 High Level Principles on Public Procurement. More than 311,000 transactions were processed during 2018. The EPM mobile app continues gaining strength— in 2018, 20. Transparency International (2013), Anti-Corruption Helpdesk: it reached 26,500 active users and customers, 65% more Transparency of State-Owned Enterprises, https://www. than the previous year. In addition, during 2018, more than transparency.org/files/content/corruptionqas/Transparency_ 75,000 customers and users received their bill only via e-mail, of_state_owned_enterprises.pdf. and about 320,000 coupons were paid electronically, that is, Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 119 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 3 STATE OWNED ENTERPRISES 16.25% of the total coupons collected in the year. June 2016 to November 2017. Gavin, Michelle (2020). Learning What We Always Knew: Corruption in Angola. https://www.cfr. 37. World Bank. 2019. World - Rethinking the 1990s Orthodoxy on org/blog/learning-what-we- always-knew-corruption-angola. Power Sector Reform: Flagship Report (English). Washington, D.C. : World Bank Group. http://documents.worldbank.org/ 48. WB Mapping of the Legal and Institutional Landscape for Anti- curated/en/597911563520308282/ World-Rethinking-the- Corruption in Angola, June 2019, Soren Kirk Jensen and Kjetil 1990s-Orthodoxy-on-Power-Sector-Reform-Flagship-Report. Hansen. 38. Odebrecht is the largest construction company in Brazil, 49. lei da probidade publica, 2010 established in 1944 in the northeast of Brazil, and was embedded in the traditional politics of Brazil, expanding its 50. GAN (2016). Angola Corruption Repor t. https://w w w. links with political structures during the military dictatorship. ganintegrity.com/portal/country-profiles/angola/ It had a whole department whose only purpose was to 51. Pegg, David (2020). How Angola’s state oil firm was left with just channel funds to politicians in Brazil and much of Latin $309 in its account. The Guardian. https://www.theguardian. America. This department was formally called the “Setor de com/world/2020/jan/19/angola-state-oil-company-sonangol- Operações Estruturadas” but was more commonly known as isabel-dos-santos-investigation the Department of Bribes. What started out as a small family construction group, grew quickly and at its peak, around 2010, 52. David Mihalyi, Aisha Adam and Jyhjong Hwang (2020, Feb.). the company had 181,000 employees across 21 countries. Resource-Backed Loans: Pitfalls and Potential, Natural Resource Governance Institute. 39. CFA Society Brazil. (2016). CORPORATE GOVERNANCE OF STATE-OWNED ENTERPRISES IN BRAZIL. http://cfasociety. 53. Id. org.br/media/uploads/bsk- pdf-manager/policy_brief_for_ 54. Wroughton, Lesley. (2012). IMF finds most of Angola’s missing brazil_50.pdf. $32 bln. Reuters. https://www.reuters.com/article/ozatp-imf- 40. Kiernan, Paul (2015). “Brazil’s Petrobras Reports Nearly angola- 20120125-idAFJOE80O00O20120125 $17 Billion in Asset and Corruption Charges”. The Wall 55. Muihalyi et.al., 2020. Street Jour nal. ht tps://w w w.wsj.com/ar ticles /br azils- petrobras-reports-nearly-17-billion-impairment-on-assets- 56. Id. corruption-1429744336. 57. WB Mapping of the Legal and Institutional Landscape for Anti- 41. Paul, 2015. Corruption in Angola, June 2019, Soren Kirk Jensen and Kjetil Hansen. 42. G20 Anti-Corruption Working Group meeting, 3 -6 February 2020, Riyadh, Saudi Arabia 58. “Luanda Leaks”. https://www.icij.org/investigations/luanda- leaks/ 43. See http://enccla.camara.leg.br/ and https://www.justica.gov. br/sua-protecao/lavagem-de-dinheiro 59. IGAPE. https://igape.minfin.gov.ao/PortalIGAPE/#!/ 44. Baleroni & Figueira (2018). Brazil: Two-year balance of 60. IMF (2019). Angola: First Review of the Extended Arrangement infrastructure in brazil: refocus of state-owned enterprises. Under the Extended Fund Facility, Requests for a Waiver of International Financial Law Review. https://www.iflr.com/ Nonobservance of a Performance Criterion, and Modifications Article/3852829/Brazil-Two-year-balance-of-infrastructure-in- of Performance Criteria, and Financing Assurances Review- Brazil-refocus-of-state-owned-enterprises.html Press Release; Staff Report; and Statement by the Executive Director for Angola. IMF Staff Country Reports. June 2019. 45. OECD (2016). Transparency and disclosure measures for state- Available at ht tps://w w w.imf.org/en/Publications/CR / owned enterprises (SOEs): Stocktaking of national practices. Issues/2019/06/19/Angola-First-Review-of-the-Extended- https://www.oecd.org/daf/ca/2016-SOEs-issues%20paper- A r r a n g e m e n t- U n d e r- t h e - E x t e n d e d - F u n d - F a c i l i t y - Transparency- and-disclosure-measures.pdf Requests-47003. 46. See BM&FBOVESPA’s SOEs Governance Program: available 61. Id. at www.bmfbovespa.com.br; IBGC’s Guidelines for SOEs, available at www.ibgc.org.br, Publicações/Cadernos de 62. Id. Governança; Article on the governance of SOEs written by Ana Novaes, CFA, member of CFASB’s Advocacy Committee: 63. Id. http://www.ibgc.org.br/inter.php?id=19628. 47. 2020 is off to a rough start for “Africa’s richest woman,” Isabel dos Santos, the daughter of former Angolan President José Eduardo dos Santos, who led his country for 38 years until being succeeded in 2017 by current President João References Lourenço. Ms. Dos Santos is involved in the Luanda Leaks, a series of investigative reports developed by the International David Mihalyi, Aisha Adam and Jyhjong Hwang (2020, Feb.). Consortium of Investigative Journalists and informed by a Resource-Backed Loans: Pitfalls and Potential, Natural Resource voluminous amount of documentation that a hacker shared Governance Institute on the Protect Whistleblowers platform in Africa. The reports detail how Ms. Dos Santos used access to the state’s resources Georgian Young Lawyer’s Association (2015), Transparency and for private gain, including by transferring funds from state- Accountability of State Owned Companies, https://gyla.ge/files/ owned enterprises to offshore private companies that she and news/sawarmoebi_eng.pdf. her allies controlled. Angolan authorities have frozen her bank World Bank (2020). Increasing SOE Integrity in Brazil. Case Study. accounts, and the Angolan attorney general announced that she had been indicted for money laundering, mismanagement, John Sullivan (2009). “The Moral Compass of Companies: Business and other economic crimes, largely committed during her Ethics and Corporate Governance as Anti-Corruption Tools.” tenure as head of the state-owned oil company Sonangol from IFC. Focus 7. 120 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 3 STATE OWNED ENTERPRISES Lewis, Davis. (2018). Gordhan Shows Way Forward for Cleaner Empresas Públicas de Medellín. EPM. About Us. https://www.epm. Public Corporations. Corruption Watch. ht tps://w w w. com.co/site/investors/general-information/about-us. corruptionwatch.org.za/gordhan-shows-way-for ward-for- cleaner-public-corporations/. LAPOP, USAID (2017). The Political Culture of Democracy in the Americas, 2016/2017. A Comparative Study of Democracy OECD (2013), Boards of Directors of State-Owned Enterprises: An a n d Gove r na nce. ht t p s: //w w w.v a n d e r b il t .e d u / la p o p/ Overview of National Practices, Corporate Governance, OECD a b 2 016 /A B2 016 -17_ C o m p a r a t i v e _ R e p o r t _ E n g l i s h _V 2 _ Publishing, Paris, https://doi.org/10.1787/9789264200425-en. FINAL_090117_W.pdf. OECD (2018), State-Owned Enterprises and Corruption: What OECD (2015). OECD Review of the Corporate Governance of Are the Risks and What Can Be Done?, OECD Publishing, Paris, State-Owned Enterprises. Colombia. Available at: https://www. https://doi.org/10.1787/9789264303058-en. oecd.org/daf/ca/Colombia_SOE_Review.pdf. Public Protector of South Africa (2016), State Capture Report, 14 Transparency International (2018). 2018 Corruption Perception October 2016. Index. Available at: https://www.transparency.org/cpi2018 Revenue Watch Institute (2013), The 2013 Resource Governance World Bank. (2020). Doing Business 2020. Washington D.C.: The Index, A Measure of Transparency and Accountability in the Oil, World Bank. https://www.doingbusiness.org/en/reports/global- Gas and Mining Sector. reports/doing-business-2020. Sohai, M. and Cavill, S., (2006). Combating corruption in World Bank. (2019).  World - Rethinking the 1990s Orthodoxy on the deliver y of infrastructure ser vices. [Paper presented Power Sector Reform: Flagship Report (English). Washington, at :] C o nfe re nce o n Ins t i t u t io ns a n d D evelo p me nt, D.C. : World Bank Group. http://documents.worldbank.org/ Reading, 22-23 September, https://pdfs.semanticscholar. curated/en/597911563520308282/ World-Rethinking-the- org/274d/1efb699d1b8fdd99d353d2d7d20ed589af2f.pdf. 1990s-Orthodoxy-on-Power-Sector-Reform-Flagship-Report. South China Morning Post (2016), “Corruption found cross China’s financial industry,” February 5, 2016. Case Study 8: SOE Reforms in Brazil following “Lava Sunday Times (2017), How Eskom lavished its boss’s daughter with Jato” R1bn in contracts, 26 March 2017, https://www.timeslive.co.za/ sunday-times/news/2017-03-26-how-eskom-lavished-its-bosss- Baleroni & Figueira (2018). Brazil: Two-year balance of infrastructure daughter-with-r1bn-in-contracts/. in brazil: refocus of state-owned enterprises. International Financial Law Review. https://www.iflr.com/Article/3852829/ SWFI (n.d.) , 4th Quarter 2016 LMTI. https://www.swfinstitute.org/ Brazil-Two-year-balance-of-infrastructure-in-Brazil-refocus-of- statistics-research/4th-quarter-2016-lmti/. state-owned-enterprises.html. Transparency International (2013), Anti-Corruption Helpdesk: CFA Society Brazil. (2016). CORPORATE GOVERNANCE OF STATE- Transparency of State-Owned Enterprises, https://www. OWNED ENTERPRISES IN BRAZIL. http://cfasociety.org.br/ transparency.org/files/content/corruptionqas/Transparency_ media/uploads/bsk-pdf-manager/policy_brief_for_brazil_50. of_state_owned_enterprises.pdf. pdf. United States District Court Southern District of New York (2015), Kiernan, Paul (2015). “Brazil’s Petrobras Reports Nearly $17 Billion In Re: Petrobras Securities Litigation, Consolidated Fourth in Asset and Corruption Charges”.  The Wall Street Journal. Amended Class Action Complaint, Case No. 14-cv-9662 https://www.wsj.com/articles/brazils-petrobras-reports-nearly- (JSR), http://securities.stanford.edu/filings-documents/1053/ 17-billion-impairment-on-assets-corruption-1429744336. PBSP00_01/20151130_r01c_14CV09662.pdf. OECD (2016). Transparency and disclosure measures for state- Vianna M.P. (2014). Brazilian State Owned Enterprises: A Corruption owned enterprises (SOEs): Stocktaking of national practices. Analysis. The Institute of Brazilian Business & Public Management https://www.oecd.org/daf/ca/2016-SOEs-issues%20paper- Issues, The George Washington University. Transparency-and-disclosure-measures.pdf. World Bank (2019). Increasing SOE Integrity in Brazil: Case Study. World Bank (2019). Increasing SOE Integrity in Brazil: Case Study. Case Study 9: SOE Reforms in Angola World Bank (n.d.), Transparency of State Owned Enterprises David Mihalyi, Aisha Adam and Jyhjong Hwang (2020, Feb.). in Vietnam: Current Status and Ideas for Reform, http:// Resource-Backed Loans: Pitfalls and Potential, Natural Resource documents.worldbank.org/curated/en/618601468132616527/ Governance Institute. pdf/898100PN0P14340G0Jul0240201400FINAL.pdf. GAN (2016). Angola Corruption Report. https://www.ganintegrity. com/portal/country-profiles/angola/. Case Study 7: Enhancing SOE Accountability in Gavin, Michelle (2020). Learning What We Always Knew: Corruption Colombia in Angola. https://www.cfr.org/blog/learning-what-we-always- knew-corruption-angola. Above Ground (2019). EPM’s disastrous dam: How Canada financed a high-risk energy venture gone away. https://aboveground. Pegg, David (2020). How Angola’s state oil firm was left with just ngo/edc/epms-disastrous-dam/. $309 in its account. The Guardian. https://www.theguardian. com/world/2020/jan/19/angola-state-oil-company-sonangol- Coatsworth (2003). “Roots of Violence in Colombia: Armed Actors isabel-dos-santos-investigation and Beyond”. Revista, Harvard Review of Latin America. https:// revista.drclas.harvard.edu/book/roots-violence-colombia Wroughton, Lesley. (2012). IMF finds most of Angola’s missing $32 bln. Reuters. https://www.reuters.com/article/ozatp-imf- Empresas Públicas de Medellín. EPM. Corporate Governance. angola-20120125-idAFJOE80O00O20120125. https://www.epm.com.co/site/investors/corporate-governance. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 121 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 Customs Administration Corruption in Customs: How can it be Tackled? PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION Introduction Why is it important to tackle significant incentives for traders to try to reduce import corruption in customs administration charges and speed up transactions by bribing customs in developing countries? officials to undervalue or under-declare goods.7 Many cases of extortion by customs officials are reported Modern customs administrations perform a where they threaten to use their authority to administer number of tasks, including revenue collection, ambiguous tax laws against traders.8 trade facilitation and protection of national borders. Corrupt practices often stand in the way of As a border protection agency, customs’ role is also accomplishing these tasks, actively compromising to prevent the import of illegal goods. Smuggling revenue collection, trade facilitation, and internal of drugs and weapons, and large-scale smuggling security requirements such as trafficking in illicit goods, of alcohol and cigarettes, places customs directly in including weapons and narcotics.1 Trade taxes—tariffs, the realm of organized crime. There is no scarcity of excises and import value added tax—account for a examples where criminals use any means, from extensive significant portion of government revenues, commonly bribery to intimidation and violence, to promote their 30-50% of total tax revenues in low-income countries.2 illegal transactions.9 Given the high financial stakes, In fragile states, customs typically account for an even rent-seeking opportunities are huge. In such settings, higher share of total tax revenues. However, estimates customs officials may have strong incentives to accept suggest that 30% or more of customs revenues are or ask for bribes in the execution of their duties. lost in some developing countries due to rampant corruption.3 Another important characteristic is that the relationship between customs and traders is Corruption in customs affects a country’s capacity normally managed through third parties (customs to benefit from the global economy. This is because brokers and logistics operators). Over time these corruption in customs delays the processing of imports third parties may develop close relations with officials and exports, increases the costs of doing business, and and exploit opportunities to act as facilitators of reduces the competitiveness of firms.4 As business and bribes. The participation of intermediaries in these investment decisions by multinational companies are relationships provides additional challenges in terms of increasingly subjected to international competition, the communication, transparency, and accountability. For presence of widespread corruption in customs can act instance, complex procedures for customs clearance in as a major disincentive to foreign investors.5 In addition, the Philippines in the late 1990s required face-to-face corruption in customs takes on new significance interactions between operators and customs officers in the current environment of heightened concern in practically all transactions—import entries, export about national security and international terrorism. entries, requests for transit and others.10,11 Excessive Sophisticated systems and procedures designed to discretion was also common in the management of detect weapons offer little protection if they can be customs operations in Bolivia.12 Consignments were circumvented by bribing customs officials. selected for physical inspections on a discretionary basis, without the application of objective criteria, and with little use of technical methods. Even with modern, What are the characteristics of sophisticated clearance procedures, direct contact corruption in customs? between customs officers and clearing agents cannot be avoided while goods are being physically inspected. There are few public agencies in which the Customs checks carry the risk of being conducted by preconditions for corruption are as clearly present individual officers, especially in small offices and during as they are in customs administrations. 6 Corrupt night and weekend shifts. Opportunities for corruption practices easily materialize in a working environment are high. Since customs administrations also operate in where officials enjoy discretionar y powers over geographically dispersed, remote posts, with relatively important decisions, and where risk-based systems few staff, adequate supervision of a customs office or of control and accountability are absent or easily individual officer is difficult. breached. High tariffs and complex regulations offer Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 123 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION Entrenched corruption is likely to affect the human service career plan, affects the continuity and resilience resource management systems. When appointments of reform and modernization efforts after changes in and promotions are influenced by corruption, this top leadership. 20 It also offers opportunities for the facilitates the formation and maintenance of networks appointment of key strategic customs management of accomplices. At larger border stations, harbors positions based on political alignment. In April 2015, and airpor ts, corruption may be conducted by the International Community Against Impunity in reasonably well-organized networks, where trust and Guatemala accused the political elite of the country to reciprocity are found between network members.13 be part of a sophisticated network of corruption and Such relationships are likely to reduce transaction smuggling in customs. The corruption scandal (“The costs, as well as any moral costs that may arise from Line”) became famous due to the mass protests that being involved in corruption. The peer networks often ultimately led to the resignation, investigation and function as ‘repositories of knowledge’ for members, arrest of then President Otto Pérez Molina.21 for example, on the attitudes of the top management to corruption, how the internal monitoring unit works, and who is potentially bribable among staff members and The role of family and social management. Establishment of a corruption network relationships must not be affecting an entire customs office is not unknown. underestimated Customs officers and managers may also remain Political interference is a major under the strong influence of traditional patterns concern of social relations and kinship. 22 These relations operate at cross purposes to the formal bureaucratic In some countries, customs administration has been structures and positions. The informal traditional an attractive target for political interference.14 system may rule over the formal “modern” one. Because This is because it offers both relatively well-paid jobs ordinary citizens perceive that customs officers receive and considerable rent-seeking opportunities.15 Political high salaries, extended family members expect to control over the customs administration can pay get their share of the high wages (and rents acquired high political dividends.16 Politicians may intervene in by other means). A person in a position of power is customs to grant favors, such as attractive managerial expected to use that influence to help his or her kin positions and tax exemptions to supporters, or to harass and community of origin. It is one’s social obligation to political opponents through excessive audits and delays help and share. in the clearing of goods. A recent study from Tunisia, for example, found that firms owned by the then president In such cases, customs staff are seen by their and his family were more likely to evade import tariffs. family members and social networks as important Tariff evasion in Tunisia led to considerable fiscal losses, potential patrons who have access to money, and resulted in substantial competitive disadvantages resources, and opportunities that they are morally for companies not aligned with the president’s’ family. obliged to share. To accumulate, even in corrupt ways, is not necessarily perceived to be bad in itself. It is Experiences from some developing countries accumulation without distribution which is considered demonstrate that the public sector may become unethical. 23 Only someone who accumulates can an instrument for the political elite to build public redistribute and be identified as “a man of honor”. support based on patron-client reciprocity.17 Patronage undermines the implementation of policies It is also in the customs officer’s own interest to and rules-of-law more generally. For instance, help others because he or she might be the one who distribution of civil-service positions based on non- needs help the next time around. Thus, a manager meritocratic criteria results in a civil service less apt in the customs administration may “forgive” a customs for the task with which it is charged.18 Meritocratic officer who is caught taking bribes or embezzling recruitment and promotion are overshadowed by the money, because next time he or she may be the one politics of who knows whom.19 Clientelistic structures who needs forgiveness. Instead of being fired, common and patronage may pervert integrity and modernization practice in some countries is to transfer customs officers reforms. The absence of a cadre of committed detected for corruption to other positions within the professionals and managers, structured in a robust civil- revenue administration.24 Favors of this kind may also 124 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION be understood as a way of consolidating and building and that a comprehensive approach is needed. These social capital. In other words, customs officers are documents identify a number of factors that contribute building up networks made up of family, friends, and to high integrity in customs administrations. However, acquaintances that are based on trust and reciprocity they provide less insight into how to implement as a way of banking assistance for the future. The larger measures to reform a corrupt administration.30 the network, the greater the accumulation of social capital that can be drawn on in a future time of need. One possible explanation for the persistent corruption How does the principal-agent in customs administrations in some countries may be relationship play out in practice? the fact that people at the middle and low end of the political-economic spectrum are just as involved in Much of the policy debate on anti-corruption vertical networks of patronage as the elite patrons who strategies in revenue administrations is rooted in benefit the most.25 the principal-agent (incentive) theory. Klitgaard’s31 popularization of this approach has been widely promoted and applied in a number of developing What do we know about fighting countries during the last two decades, as reflected in corruption in customs? the World Bank’s Customs Modernization Handbook.32 Klitgaard’s work has also been used extensively in the Recent international reports and declarations development of the Revised Arusha Declaration on have sought to address the problem of corruption Integrity in Customs, as well as in a range of the WCO’s in customs administration, but effective reform integrity-related tools. measures are not easy to implement. The Revised Arusha Declaration provides a global framework to Policy instruments need to be directed at both address corruption in customs and increase the level the incentives and opportunities for corruption. of integrity of customs officials for World Customs Following Klitgaard, 33 corruption is most likely to occur Organization (WCO) members.26 There are only small when agents (customs officers) enjoy monopoly power differences between the WCO Arusha Declaration27 and over clients (traders), when agents enjoy discretionary recommendations by other international organizations decision power over the provision of services (for such as the IMF’s integrity paper Practical measures instance, assessments of origin, value and classification to promote integrity in customs administrations,28 and of goods), and when the level of accountability is low. the OECD’s29 report Integrity in customs. Taking stock At the theoretical level, this approach explains how of good practices. They all emphasize that there is no customs officers have a number of incentives and quick solution to the problem of customs corruption opportunities for engaging in corrupt transactions. At Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 125 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION the more practical policy level, the approach indicates and influence how state actors relate to the general that policy instruments may be divided into those public. 38 What makes such informal social networks which influence the number of corrupt opportunities, relevant in the context of customs reforms is that they and those influencing the incentives. This includes generate strong moral imperatives, including a sense of policy instruments that affect the expected (gross) obligation to provide mutual assistance and reciprocity gain of the corrupt act, the probability of being caught, for favors given, which go above and beyond any and the size of the penalty if detected. If the expected consideration for the formal legal framework. gains of corruption are higher than the expected costs, the agent will, according to the theory, choose to be corrupt. For example, the expected gain for customs Efforts to address these factors have officers is higher when they have wide discretionary not always been successful powers and considerable monopoly power in their jobs. Addressing the root causes of corruption goes beyond legal and regulatory reform. A major Understanding the role of the principal reveals a challenge to the effectiveness of mainstream anti- major difficulty in implementing reforms. While corruption technical assistance is that it usually does the principal-agent-client model is a useful analytical not take into account the evidence that corruption framework to explore incentive problems in customs of ten is deeply embedded in the norms and and other public agencies, its dependency on the role expectations of political and social life.39 Even if most of the principal reveals one of the greatest obstacles customs officers may morally disapprove of corruption to reform. There are (at least) two objections to this and are fully aware of its negative consequences for approach: First, there may be several principals society at large, few rational actors have a clear-cut involved, each with incoherent objectives and interests. interest in establishing or defending clean institutions. Second, the principal(s) may also be corrupt and not The functional relevance of informal practices also acting in the interests of society but pursuing his or points to the problems with the tendency to address her narrow self-interests. Thus, part of the explanation corruption by means of adopting tougher formal why anti-corruption reforms in countries plagued laws. An adequate legal framework is, of course, by widespread corruption fail, is that they are based important to establish, and so are measures to reduce on a theoretical mischaracterization of the problem opportunities for corruption, including simplification of of systemic corruption, taking the existence of non- processes and rate structures, automation, etc. But laws corruptible principals for granted. Thus, Persson et al.34 and regulatory reforms must also be supplemented argue that in thoroughly corrupt settings, corruption with other approaches that address the root causes of rather resembles a collective action problem. corruption. Otherwise one risks ending up designing and implementing reforms that have little impact on the incidence as well as perception of corruption. How important are social norms and Misalignment of legal practice and ethical norms may informal practices? result in mere law-based compliance and “lawful, but awful” practices.40 Collective behaviors like corruption can be sustained by social norms. These norms are rooted in “shared Important progress can be achieved through understandings about actions that are obligatory, modern compliance management. Beyond the permitted, or forbidden within a society”.35 Such norms update of the legal framework and simplification provide the unwritten rules of behavior. Especially of procedures, modern compliance management when formal rules such as laws fail to regulate conduct, demands that customs administrations not only as is often the case in countries riddled with corruption, identify and sanction non-compliant behaviors but also social norms structure many social interactions by promote transparency and provide better guidance, dictating the rules of the game.36 Thus, there may also as well as recognize compliant operators and offer be social sanctions for violating these norms.37 different treatment (e.g. the Authorized Economic Operator Programmes). The adoption of modern Informal practices are pervasive in some countries. risk-based compliance management changes the These practices decisively shape the interactions relationship model with the private sector and traders among power networks of political and business elites and contributes to integrity improvement. 126 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION Would private management and outsourcing of Should customs officers’ salaries be increased? revenue collection be an option? Development Some scholars argue that increasing civil service wages agencies have in some cases helped fund what will reduce corruption.47 The basic idea is that a rise in might appear to be experiments in the privatization the tax collector’s salary is like an increase in the fine for of tax collection.41 Historical evidence 42 and more bribery, since that is what (s)he will lose if detected and recent experiences from developing countries, fired. Van Rijckeghem & Weder48 find that corruption including Angola and Mozambique 43 give reason for seems to be lower in countries where bureaucrats concern: such reforms have achieved few sustainable are relatively well paid compared to private sector results; the transfer of skills has been limited and the employees. However, in order to eliminate corruption, contract has been expensive for the government. Tax very large increases in salaries are needed49 and this is practitioners are therefore increasingly questioning not socially acceptable because customs officers are the value of outsourcing customs administration. already the best paid of public service employees in Outsourcing of some customs activities, for instance, most low-income countries. Hence, fighting corruption verification, convoy security and warehousing, might only on the basis of wage incentives may be extremely be appropriate, though experience suggests it may be costly to the authorities both financially and politically, expensive and susceptible to corruption especially in and will most likely have limited impact if not combined a medium- to long-term perspective. Outsourcing of with other measures such as improved auditing and other activities, such as valuation and entry processing monitoring of tax officers.50 This is also reflected in can also be challenging, since it places the collection experiences from reforms in Tanzania and Uganda.51 of government revenue directly into the hands of non- Despite a dramatic increase in pay rates in the revenue government interests. authorities compared to normal rates in the public sector, it was not enough to compensate the tax officers Pre-Shipment Inspection (PSI) programs have had for the expected gains from corruption. This argument mixed results. During the past three decades, several is supported by Foltz & Opoku-Agyemang.52 Based on developing countries have adopted PSI programs detailed survey data and experimental evidence from to improve the efficiency of tariff collection, and to West Africa, they find that the salary reform generally fight customs administration corruption.44 In these worsened petty corruption, caused by the increased programs, the inspection of imports is outsourced to effort by civil servants to get bribes, which made them a private surveillance company (a PSI firm). Foreign PSI- increase the value of each bribe taken. The results inspectors are tasked to verify the tariff classification suggest that merely raising salaries without changing and the value of individual incoming shipments before the context and incentives within which civil servants they leave their countries of origin and forward this operate will not have the desired effects on corruption. information to the client government. Pre-shipment inspection aims to complement information provided Raising salaries to combat corruption fails to in customs declarations and is used to evaluate customs fully recognize the important role played by social duties. This additional information is expected to limit obligations. Economic research on human behavior the discretionary power of customs officers and thus also indicates that reformers and economists have be an efficient means of reducing customs corruption. an inclination to exaggerate the impact of monetary Experiences with PSIs are mixed. In a study covering incentives because of a too narrow understanding 19 developing countries that have implemented PSI, of intrinsic motivation and group dynamics.53 It is a Yang 45 finds that these programs increased import well-known fact in sociological management theory duties on average by 15-30% during the first five that workplaces are social environments and that years. However, Anson et al. (2006) find less clear-cut people in them are motivated by much more than results; PSI programs may decrease or increase fraud. pure economic self-interest. 54 An additional aspect This is consistent with Dequiedt et al.46, who find that of wage incentives that has received little attention entering a PSI program is not optimal for all countries. in connection with institutional reforms in developing They conclude that for countries with a high level of countries is associated with the role of family networks corruption, PSI programs are not the solution. In highly and obligations (as mentioned above). Increased pay corrupt environments, there is no reason to believe rates may in some cases also imply more extensive that private interests are any less corrupt or more social obligations, which in turn may lead to an actual transparent in their dealings than staff of the customs net loss to the individual.55 This state-of-affairs can administration. develop into a vicious circle with higher wages leading Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 127 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION to more corruption because the tax officer has to make and a robust human resource development plan that up for the loss caused by such obligations. should address adherence to desired values and attitudes) (see the Madagascar and Afghanistan case The international customs community has studies). It is important to build an esprit de corps, with recognized that integrity development cannot be a common spirit of purpose, devotion, observance addressed exclusively by incentives associated with of institutional values and a collective commitment higher wages. The WCO advocates a comprehensive to guard integrity and report corruption cases. In approach for customs professionalism, addressing addition to the customs staff, it is important to work relevant aspects of management of people (long- with traders and other operators and establish clear term attractive career plan, competency-based human rules for expected behavior, for instance through resources management, merit-based recruitment and joint development of codes of conduct with customs promotion, including for key management positions, brokers. What is needed to reduce corruption in customs? Making customs reforms part of a particular events in the two countries’ history. In both broader reform of the public sector countries a new leadership came to power who was not dependent on informal ties and obligations to the Rwanda and Georgia are two success stories, networks associated with the previous regimes.58 Still, where customs reforms were not carried out in some lessons of broader relevance can be identified. In isolation. There have been many prescriptions and both countries, a combination of measures addressing initiatives on how to tackle corruption in customs, but the broader social and political roots of corruption the results have often been disappointing. However, and technical measures based on the principal-agent there are a few success stories, with Georgia and framework were applied. Rwanda as notable cases. In Georgia, the tax code was simplified, including the elimination of many tax 1. Send a clear signal from key leaders. Leaders at loopholes and a reduction in the number of taxes and the top can provide a strong signal that there import tariffs.56 One-stop windows were introduced for is a “new order” under which corruption is no customs clearing procedures. In Rwanda, reforms led longer tolerated. Changing norms from the top to significant improvements in collection efforts and is challenging. However, they can happen when auditing procedures. The tax and customs reforms in specific events open a window of opportunity in these countries were not implemented in isolation but which to take advantage of social discontent with were part of larger and radical reforms of the public the status quo.59 Opportunities to establish pro- sector. 57 The reform packages involved a drastic integrity norms within institutions are not always reshaping of the bureaucracies. Discredited public triggered by revolutions such as the one in Georgia. agencies were dismantled and replaced with new They can also be created by a whistleblower ones based on principles of leaner bureaucracies and exposing corruption, a major political scandal, or administrative simplification. The new rules were strictly public frustration with ineffective anti-corruption enforced based upon effective monitoring mechanisms effor ts (as described above in the case of and little or no tolerance of deviations. Thus, the Guatemala).60 When these opportunities arise, it is opportunity space to engage in corrupt practices was important to “seize the moment”. Incentives and dramatically reduced. interests matter for potential reform, and leaders may only support reform if it is in their interest to do What can we learn from the cases of Rwanda so. Thus, reformists need a strong understanding and Georgia? The experiences from Georgia and of the underlying political economy of a country Rwanda are, of course, context specific and refer to and of the interests and incentives that influence 128 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION key leaders who may be in a position to flip norms between easing red tape, such as simplification and instill a sense that corrupt practices are no of trading procedures, and having appropriate longer tolerated. controls, while taking into account the local context and inherent risk areas.62 Relevant actions of a 2. Create a new organizational culture that values technical nature include: integrity. If provided with the autonomy to do so, pro-integrity leaders and managers in customs • processes that reduce compliance costs and can demonstrate exemplary behavior, build up are based on a risk-based approach; organizational values, and create an environment • effective internal audit units; where it is safe to challenge norms. Shared • revenue administration processes that are responsibility and a sense of moving together digitalized and automated (including an are important in creating a new organizational automated system of internal controls and risk culture. Getting everyone on board may require assessment); and some additional resources. For example, support • ongoing performance assessments of relevant for a new human resources management system tools, procedures and controls may be important in establishing more secure employment arrangements. When an individual cannot be certain of future income, this insecurity Providing ongoing education and may heighten the influence of horizontal pressures training to engage in self-enriching acts, 61 a situation that is not conducive to normative shifts within The education and training of staff are identified as organizations. Strengthening employment security important factors affecting customs performance, may provide a basis for nurturing a culture of and key to building technolog y absorption integrity over the long term. capacity, as well improving the transferability of skills.63 Regular training of customs officers has been 3. Establish ownership of the reform within the particularly important when introducing new electronic revenue administration. Ownership of the systems, such as customs management systems or reform among the officials involved in reforming national electronic single windows. A comparison the revenue administration is a critical issue for among regions of the average time for export clearance sustainability. An administrative reform is unlikely shows that requiring a college degree is not necessarily to succeed if the main source of energy and associated with better customs efficiency.64 Many other leadership for it comes from outside. A locally variables impact the efficiency of customs procedures, grounded policy intervention is also less likely such as technology, legal support and infrastructure. to have unintended side effects. International However, customs administrations that offer regular development agencies should therefore not play a training for customs officials have shorter customs leading role and they should not dictate the content, clearance times than those that do not.65 The World pace and direction of the reforms. Integrity reforms Bank’s Doing Business data indicate that the average are often highly political processes that may pose time required to clear customs (for both exports and a threat to important local stakeholders. Thus, a imports) is about 34% lower in economies where strong and well-placed leadership of the customs customs officers receive regular training compared administration is essential for overcoming the to those where no regular training is provided. Sub- political and bureaucratic obstacles it is confronted Saharan Africa and the Middle East and North Africa with. are the regions where the difference in clearance time is largest between economies where regular training is 4. Design mechanisms that create a balance between offered and where it is not. simplification and controls. Oppor tunities for corruption in customs and border control can be reduced by designing mechanisms that create Introducing individual performance appropriate incentives, limit discretion by public contracts servants and include enhanced controls (see Box 4.1 for experiences from some Latin American Implementation of reforms can be strengthened countries). It is important to establish a balance through individual performance contracts. A Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 129 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION BOX 4.1 Standard Operating Procedures and Internal Audit Capacities in Latin America The customs administrations in Chile, Uruguay, Peru, Paraguay and Bolivia have adopted quality management as part of their integrity strategy. They have invested in the implementation of standard operating procedures and internal audit capacities to ensure consistency, improve the quality of service provision, and better frame the application of discretionary powers and accountability. A common feature in these administrations has been the adherence to ISO 9001 standards for selected procedures. For further information see: https://www.aduana.cl/aduanas-mantiene-y-amplia-certificacion-iso/aduana/2014-08-28/181638.html http://www.sunat.gob.pe/legislacion/aduana/certiso9000.htm https://www.aduana.gob.bo/aduana7/content/aduana-obtiene-certificaci%C3%B3n-iso-90012015-para-su-archivo-central- de-regional-santa-cruz major problem identified in recent studies is that collection and reductions in clearance times. Further, reforms often do not cascade to the level of frontline customs officers seem to have become more aware officers due to an information asymmetry between of their responsibilities, and the relationship between the senior management of customs and frontline customs agents and their managers has improved. officers.66 Recent experiences from Cameroon and One important insight from these experiences is that Madagascar demonstrate that the hierarchical link can administrative reforms in customs is about behavioral be strengthened by individual performance contracts.67 change, which requires internal leadership who is A performance contract is a formalized agreement trained to use the internal performance measurement between the customs managers and the customs policy. Individual performance measures and the threat officers. It has at its core a system of non-financial that poor results can be measured, compared and incentives and sanctions to be applied to an individual publicly released, may protect senior managers from officer’s performance.68 The contracts detail the results appointing officials as subordinates in their units based that must be met by individual customs officers in a on political allegiance.69 It also requires cooperation specific period of time for a set of specific indicators. with external control authorities and consultations The indicators go beyond the revenue targets fixed by with private sector operators and intermediaries that the government to include organizational and good provide services to traders. practice issues. Customs officers who are successful in meeting their performance goals will receive mainly non-financial incentives such as options to participate Incentivizing stakeholders to make in training courses and congratulatory letters from the customs administrations accountable management that are put in the officer’s permanent file and disseminated publicly to provide wider recognition. Another insight from these experiences is that If the performance contract commitments are broken, motivation for reform must also come from warnings are issued of possible disciplinary action if taxpayers and traders. Business communities, performance does not improve. import-export associations, clearing agent associations, and other influential stakeholders have a critical role to The effect of the contracts program on trade play in pressuring the customs administration to do a facilitation has been positive in Cameroon and better job of serving society. It is important to provide Madagascar. The volume of declarations processed incentives for stakeholders in the private sector to generated substantial improvements in revenue adopt anti-corruption policies and practices, and to 130 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION collaborate with customs and other relevant public upfront costs and risks associated with searching for sector actors to identify integrity vulnerabilities and new markets or negotiating deals. The internet and appropriate mitigation measures. Establishment of e-commerce are prompting customs brokers to offer formal spaces between customs and the private sector more sophisticated services rather than merely filing for exchanging information and reporting complaints documents for customs clearance. These insights might be an effective trust-building device.70 are echoed in several recent studies,72 with the WCO recommending that modernization and customs The customs broker profession is evolving . reforms are accompanied by the required training and Customs brokers play a crucial role due to their in- sharing of information between the government and depth knowledge of the industry, customs laws, tariffs brokers. Box 4.2 illustrates how this has been put into and regulations.71 Brokers are often the only channel practice by the Uruguay Customs Administration. In through which domestic companies can sell their addition, the International Trade and Customs Broker goods internationally. By hiring an agent, firms gain Association recommends capacity-building for brokers access to international markets without incurring the through certification programs and examinations. BOX 4.2 Comprehensive Modernization of Customs: The Uruguay Case From 2010 onwards the Uruguay Customs Administration embarked on a comprehensive modernization program with a number of complementary projects that included further automation and adoption of technology (e.g. electronic filing system, single window (Ventanilla Única de Comercio Exterior) , risk management, electronic seals, and a cargo tracking and tracing system); improvement of management systems and procedures (strategic planning, project management and business processes management, establishment of a results framework and monitoring system); development and professionalization of customs staff (including the update of career plans and review of salaries, a performance based incentive system and management agreements); renovation and maintenance of customs infrastructure (which raised internal morale). One of the highlights of this development cycle was the cooperation with the private sector and customs brokers to tackle integrity. The Customs Administration implemented a communication strategy (with public campaigns and open doors policy to disseminate information and raise awareness of how customs works); developed a Code of Ethics and Conduct; and established procedures for reporting integrity breaches. The Customs Administration signed 11 Integrity Agreements with private sector associations and representatives, making explicit the expected behaviors and commitment with a set of values. Communication channels were established to address concerns and manage conflicts. A strategic Public and Private Sector Consultative Forum was established, which also supported the development of the Authorized Economic Operator (OEA) program. The Customs Administration implemented regular anonymous perception surveys to traders on the quality of services rendered by the administration. The perception of integrity and the reputation of the Customs Administration have improved after the reform and modernization program. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 131 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION Coordinating and sharing information efforts and in building stronger institutions.74 More with relevant authorities countries are following the example of the US Foreign Corrupt Practices Act, which makes it an offense for Since tax crime and corruption are often linked, US firms to pay bribes to get business abroad. These tax and law enforcement authorities can benefit efforts include coordinated action through international from more effective cooperation and sharing of initiatives, such as the OECD Anti-Bribery Convention. information.73 Improving the sharing of information on However, enforcement by individual countries has been international trade could also help to reduce corruption uneven, and the flow of information between countries in customs. International cooperation is becoming is slow and unreliable, making it harder to investigate an increasingly important element in anti-corruption and prosecute corrupt acts.75 ‘How to’ matters a lot Taking a measured approach to and inevitable part of the process. The big challenge is reforms to use failures as learning opportunities, rather than as excuses for abolishing reforms. Overambition has been cited as a common cause of project failure in various countries.76 This does not imply that governments should keep the scope Understanding the prevailing of customs administrative reforms limited. But when environment governments decide what measures to take as part of their reform programs, they should bear in mind the Anti-corruption efforts require an understanding state of the economy and the resources at hand. Most of the norms and incentives of key players and developing countries have neither the political capital should therefore be based on thorough analysis of nor the administrative capacity to sustain more than a the customs administration and the environment limited range of concurrent initiatives. An incremental of which it is a part. Baez-Camargo & Passas78 argue process of change can add up to a radical transformation that a nuanced understanding of the political economy if it is sustained long enough. Nevertheless, experiences of corruption will help practitioners to recognize that, from Madagascar suggest that ‘quick wins’ in the form in the “challenging” cases, we are confronted with of fast revenue growth might be necessary to establish complicated systems comprising powerful and tightly credibility and trust in customs reforms.77 interwoven interests; this calls for an evidence-based, systematic, and collective response. Understanding social normative pressures in a given context can help Encouraging stability of leadership practitioners design interventions to relieve those and management pressures, allowing collective behavior to change.79 While it is well documented that peer networks can Sustainable change demands sustained effort, impose social pressure to engage in corruption, such commitment and leadership over time. In the networks can also be employed to mitigate the same countries referred to in this chapter as examples of pressures. progress, like Uruguay, Georgia, Madagascar and Rwanda, the modernization process was strongly supported by a management team that remained in Adopting a whole-of-government place for longer than usual or by a cadre of middle approach managers that obtained support and sustained the initiatives even when there were changes at the top The international customs community, represented management and executive levels. Reformers need by the WCO, advocates that integrity reforms political backing, and one must accept that some should be placed at the highest policy level, and initiatives will fail. Mistakes and setbacks are a normal should have a whole-of-government approach. 132 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION This would require the commitment of other external • Continue to commit to transparenc y and control authorities (such as the police, prosecutors and anti-corruption requirements through trade judicial power) and also private sector operators and agreements. intermediaries that provide services to traders. The development strategies should be comprehensive (as • Enforce the Convention on Combating Bribery of proposed by the Arusha Declaration) and sufficiently Foreign Public Officials in International Business resilient to be sustainable when the top leadership of Transactions to dissuade businesses and individuals the customs administration changes. from engaging in corrupt cross-border transactions and encourage the world’s major exporters and investors to ratify the Convention. Building integrity on a broader scale • Implement effective internal management tools in The reform strategies discussed above should the administration and ensure transparency and take place in the context of wider efforts to build accountability in internal procedures. integrity through increased enforcement of anti- corruption legislation, and better checks and • Incentivize the private sec tor to be more balances targeting the customs administration transparent and push for integrity within private and the private sector. 80 Such efforts include: sector associations. • Simplify the tariff structure to the maximum with a limited number of tariff peaks and variation within harmonized classification chapters. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 133 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION Conclusion: How can the fight against corruption be further strengthened? As a first step, it is important to understand how In addition to ownership, several other measures things actually function in the specific context, can promote sustainability. Reforms can fail because independently of how we would expect customs enthusiasm wanes and people return to their former to perform according to good governance logic. practices. It is therefore essential that training become This calls for more robust analysis of country and local a key component of each officer’s work program. contexts. Anti-corruption efforts require a thorough Given the increasing use of technology, which can also analysis of the customs administration and the reduce the opportunities for corruption, officers must environment of which it is a part, in order to understand be adequately trained to ensure that such technology the norms and incentives of key players. facilitates their work rather than becoming a burden. Other measures include (i) performance contracts Based on this analysis, a two-pronged approach to that provide incentives, albeit largely non-financial, reform needs to be adopted. The first prong relates to individual officers who meet their work objectives, to the development of policy instruments that are and (ii) incentives to stakeholders in the private sector directed at both the incentives and opportunities for to adopt anti-corruption policies and collaborate with corruption. Unless customs officers recognize that the customs to build trust and stamp out corruption. penalties for being caught are much more severe than the potential gains, they are going to continue to take Successful reforms in customs administrations the risk. This, of course, requires enforcement of the are not achieved overnight. Reformers must keep rules, which depends on the willingness at the top to this perspective in mind and not be discouraged when eradicate corruption. In addition, the current structure they face challenges in implementing their reforms. of most customs administrations is not conducive to the Nevertheless, significant progress can be made if the implementation of reforms as the principal-agent-client foundation blocks discussed above are put in place model places too great an emphasis on the role of the at the beginning of the process. Should unexpected principal. New approaches to address this situation dif ficulties arise during implementation, senior need to be explored. leadership will need to identify the root cause and make adjustments that will bring the reform back on The second prong must go beyond legal and track. Thus, achieving the goal of tackling corruption regulatory reform to address the root causes will require both time and a strong commitment from of corruption. Many efforts to adopt stricter rules senior leadership. for customs administrations have failed because the informal practices have continued. Changing culture and mindsets is much more difficult than bringing in new regulations because social norms are deep rooted. The experiences of Rwanda and Georgia, in particular, provide guidance on approaches and actions that have been successful. It is important that customs reform be part of a broader reform of the public sector with a clear commitment from the country’s leader that corruption will not be tolerated. This message is then taken on board by the leadership of the customs administration, who tries to inculcate a new organizational culture that values integrity. Where this leads to ownership of the reform by the customs administration, the sustainability of the reforms can be achieved. 134 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION CASE STUDY 10 CASE STUDY 10 CUSTOMS ADMINISTRATION Customs Reforms in Madagascar Using customs reforms and performance contracts in Madagascar to curb tax evasion, facilitate trade and enhance revenue Overview Introduction While the Malagasy customs collected half of the With a tax to GDP ratio of 10 percent, Madagascar’s country’s overall tax revenues, it was at the same time revenue mobilization is among the lowest in Africa. Like an institution permeated with corruption, with large in many developing and least-developed countries, revenue losses due to tariff evasion. Collusion between revenue mobilization is highly dependent on customs, inspectors, importers and brokers was widespread, which alone accounts for 48 percent of Madagascar’s while customs management was crippled by information overall tax revenues. With a customs officer collecting asymmetries on practices on the ground. As a response, on average 1.5 percent of total annual tax revenues Malagasy customs, in close collaboration with the World each year (about USD1.4 million per inspector per Bank, introduced individual performance contracts month), inspectors play a key role in mobilizing for customs inspectors in Madagascar’s main port of revenues. However, tariff evasion by colluding customs Toamasina, incentivizing them to curb tax evasion and inspectors and brokers has led to an estimated revenue illicit financial flows, and expedite customs clearance. loss equivalent to at least 30 percent of non-oil This was accompanied by continual data mining and revenues for the government.81 Information asymmetry monitoring, which helped to detect corrupt individuals about fraudulent practices on the ground constrained and practices, such as the manipulation of the customs’ customs management in its ability to adequately IT system, and enabled the design and implementation address these issues. Limited information also entailed of an evidence-based and locally-tailored reform the risk that top-down reforms would not cascade to the program. As a result, the intervention reduced some level of frontline officers. Consequently, an approach corrupt practices of inspectors, facilitated trade, and was needed that would strengthen the hierarchical link, doubled customs’ revenues within four years. The provide the head of customs with sufficient information success of this type of performance contract may serve as on practices on the ground, and finally remedy corrupt an important mechanism toward modernizing customs practices. and revenue administration (when complemented with other measures). Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 135 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION In 2016, under a newly appointed Director General, the of USD1,000, representing 2.5 times the GDP per capita Malagasy customs introduced individual performance of Madagascar; (ii) training opportunities at home and contracts for customs inspectors in Madagascar’s abroad; and (iii) accelerated career progression. More main port of Toamasina, incentivizing them to curb tax importantly, the negative incentive was to sanction poor evasion and illicit financial flows, and expedite customs performance by reassigning inspectors to less desirable clearance. This was undertaken in close collaboration positions where corruption opportunities were much with the World Bank, which provided financial smaller. The focus of the individual performance incentives for customs reforms through investment contracts for customs inspectors has been on non- project financing 82 and supported the reform efforts financial incentives, since the extent of corruption was by providing training, analytic and advisory support, so high for some officers that financial incentives could including on-site visits to countries with similar systems. not offset illegal payments. In customs, the threat of reassignment is, in general, a strong deterrent because the role of an inspector is also prestigious, especially a position at the main port of Toasmasina. In 2017, for example, 15,000 candidates applied for a 300-position The implementation process recruitment program launched by Madagascar customs.87 The reform approach to address tariff evasion and improve customs performance can be divided into four The contracts contained seven objective indicators principal steps: (at the beginning) covering trade facilitation with an expedited clearance process, but also the fight against Generation of operationally relevant fraud and maximizing revenue collection. Setting knowledge explicit performance targets required a structured stakeholder dialogue, particularly through consultations The initial step (January 2016) was to generate the and negotiations with inspectors, to overcome operationally relevant knowledge for designing an resistance to measures that would reduce opportunities effective and context-specific program. The World for corruption.88 A project implementation unit was Bank supported the Malagasy customs by studying established to lead this dialogue and to monitor each tariff evasion channels using mirror trade statistics, 83 inspector’s performance by using data on import which made it possible to identif y higher risk declarations collected from the Automated System for importers and customs brokers as well as the dominant Customs Data (ASYCUDA). corrupt mechanisms, such as misclassification 84 and undervaluation 85 of imported goods. 86 Estimates The performance contracts were signed in September suggested that, in 2014, customs fraud reduced non-oil 2016 and came into force the following month for 15 customs revenues (duties and import value-added tax) inspectors at the main port of Toamasina. Launched as by at least 30 percent. a six-month pilot, it has been gradually expanded to several other offices. The presentation of these study results to the private sector and to customs inspectors helped the Malagasy authorities to identify two priorities: reforming the Evaluation and adjustment accelerated clearance program and improving human resource management. Data mining and monitoring of individual performance almost on a real-time basis revealed sophisticated IT manipulation and collusion between some IT Design and implementation of individual staff, inspectors and some brokers and importers. performance contracts for customs A randomized control trial, conducted in 2018-2019, inspectors in Madagascar’s main port of showed that import declarations suspected of involving Toamasina collusion are significantly riskier, as measured by risk scores from a service provider,89 with a greater likelihood As a next step, contracts were designed rewarding good of being recommended for physical inspection and of performance with (i) bonuses, such as merit awards, being subject to reference value advice. Moreover, where the best performer in a quarter receives a bonus declarations suspected of involving collusion were 136 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION FIGURE 4.1 Excessive Interaction between Inspectors and Brokers Distribution of Declarations Across Inspectors Shares by Broker .20 .15 Frequency .10 .05 0 0 5 10 15 20 25 Inspector share of a given broker’s declarations (%) Predicted Observed Source: Chalendard et al. (2018) found to have significantly higher ex-ante declared Transparency values, taxation rates and undervaluation, and hence embody higher potential tax revenue losses.90 Analysis Transparency through publicizing performance metrics of customs data also demonstrated clear-cut evidence and rewarding good performance contributed to more of a differential treatment provided by inspectors to the merit-based promotion and recruitment. This was declarations of brokers they may be colluding with. For important, since, according to a survey conducted example, inspectors give priority to such declarations during contract implementation, only one out of every and assess them significantly faster; they also scan ten inspectors in Madagascar believed promotions were them less frequently and change less frequently the fair. To enhance transparency, a vacancy announcement inspection channel (Figure 4.1). to replace the transferred inspectors in Toamasina was published internally to all of the country’s inspectors The detection of the fraudulent practices of individual (more than 120), and a panel selected the best inspectors enabled the transfer of 6 out of the 15 candidates.93 This type of recruitment was the first of customs agents.91  As a result, the most common its kind to fill positions in Toamasina and a critical step. practice from inspectors, which was to stop cargo until a bribe payment was received, was reduced. The From a trade facilitation perspective, customs reforms likelihood of being sanctioned became higher, which have shown a strong positive impact on aggregate started to act as a deterrent for some non-compliant customs outcomes, such as expedited customs importers.92 This triggered a virtuous circle, which has clearance times (Figure 4.2)—which have increased been increasingly put in place. in other ports—and reduced frequency of physical inspections (red channel) from 60% in 2014 to 20% in However, some non-compliant practices continue. 2018. At the same time, inspection targeting and the In this regard, several indicators in the performance detection and recording of fraud improved.94 Among contracts were adjusted during the process due to general improvements in customs administration, these some ‘gaming’ and evolving collusion practices. performance enhancements have contributed to the Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 137 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION FIGURE 4.2 Evolution of Average Delays Average delays: Date of assessment - Date of submission 5 Average delays (Days) 4 3 2 1 Q1 2014 Q1 2015 Q1 2016 Q1 2017 Reform port Nonreform port Source: Raballand et al. (2017) TABLE 4.1 Revenues Doubled in 4 Years 2014 2015 2016 2017 2018 Collected Revenues by the Customs DG 1255 1459.2 1682.7 2047.1 2427.9 (in bn Ariary) Evolution of Revenues 7.1% 16.3% 15.3% 21.7% 18.6% (in %) Revenues of Customs DG as % of GDP 4.9% 5.1% 5.3% 5.7% Nd Source: World Bank data rapid growth of collected revenues since 2015 (Table environment enabled inspectors to deliberately not 4.1), which doubled within four years. Average revenue detect fraud, tax evasion and the associated corruption per container increased from USD3,435 in 2016 to of most customs inspectors were a logical corollary. USD5,020 in 2018. This highlights the impor tance of incentives in institutions, especially customs. Yet, the key to the behavioral change of inspectors was to combine Reflections targeted incentives with improved monitoring. Data mining and analysis on a regular basis—not just a one- An important finding is that customs inspectors in time exercise at the beginning of the project—have Toamasina have the required capacity and information proven to be extremely helpful in documenting and to detect fraud, but they usually have strong financial demonstrating evidence of collusion in customs. This, in incentives not to do so. Consequently, since the working turn, has enabled the design of context-specific reforms 138 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION and the making of evidence-based adjustments during contracts have been modified with much less teeth the implementation process. Positive reform outcomes (but expanded to several offices with less monitoring were achieved without any expensive infrastructure and a hardly credible sanction mechanism), which investments, such as information technology or could undermine the previous successes, as observed equipment, or lengthy legal changes. Instead, applied at the end of 2019. Moreover, key personnel in the IT research has paid considerable dividends. department have been kept, which, without strong monitoring, may have important consequences on the The relatively low-cost of this approach facilitates integrity of the IT system. upscaling and replication in other contexts.95 In this regard, having a good understanding of political While individual performance contracts have shown economy aspects and customs practices, including to generate positive outcomes in the social sectors, corruption patterns, is paramount, especially when this case study provides a novel example that this setting financial and non-financial incentives. Since approach can positively impact multiple outcomes also strong internal vested interests make reforms relatively in customs, at a relatively rapid pace and low cost for difficult in Madagascar, performance contracts were the administration. implemented with the aim of gradual improvement, but with important gains in terms of revenues already in the However, it requires a strong investment from short term. international financial institutions in terms of personnel, policy dialogue, and advice almost on a weekly basis Government reform leadership, particularly the support over many years. The higher pace of support to from the Director General and the Minister of Finance Madagascar customs began in 2016 but was built on an and Budget, has been central to the success of the engagement that started several years before. A mutual intervention.96 However, with a new President elected trust relationship between the customs administration in 2019, the Director General and a number of key and donors like the World Bank is essential to fight officers were replaced in customs. The performance corruption in customs. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 139 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION CASE STUDY 11 CASE STUDY 11 CUSTOMS ADMINISTRATION Customs Reforms in Afghanistan Reducing parallel customs structures through automation of clearance processes in Afghanistan decreased substantially. Major challenges persist, Overview however, with facilitation payments being routinely demanded and collusion and criminal corruption Anyone transporting goods in Afghanistan has to continuing to take place. negotiate parallel tax structures: the official customs system, run by the government, as well as others run by powerful interests, including provincial chiefs and various insurgent groups. All collect taxes and/or fees Introduction at border crossings, on goods transiting domestic transport routes, and in domestic markets. This revenue In May 2019, The Economist repor ted on the collection process—often facilitated through informal corruption lorry drivers in Afghanistan experienced negotiations—hinders the growth of legitimate trade when transporting goods across the country. The and contributes to ongoing problems of tax evasion newspaper spoke with Muhammad Akram, one of and smuggling at the borders. those lorry drivers, who said that both the Taliban and the government demanded payments from drivers. Beginning in 20 04, the Afghanistan Customs “But when the Taliban stop [Akram] at the checkpoint, Department in collaboration with the World Bank they write him a receipt,” The Economist reported. started a countrywide computerization of customs “Waving a fistful of green papers, [Akram] explains clearance operations. The goal of computerization and how they ensure he won’t be charged twice: after he automation was to improve the release of legitimate pays one group of Talibs, his receipt gets him through goods in an efficient manner and reduce opportunities subsequent stops. Government soldiers, in contrast, for corruption. Throughout the implementation process, rob him over and over.”97 the customs department faced numerous capacity and security constraints. Security in border areas was While the Afghanistan Customs Department (ACD) constantly evolving, which impacted the extent to made remarkable progress in improving the release which the government could effectively control various of legitimate goods in a fair and efficient manner from customs points. 2004 to 2019, Muhammad Akram’s story illustrates the magnitude of the challenge that ACD faces. Given the Through 15 years of efforts to improve processes and persistence of insecurity and conflict in Afghanistan, the reduce opportunities for parallel customs structures, threat posed by corruption in customs extends beyond revenue collection increased, and truck release times just fiscal losses and high trade transaction costs. Major 140 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION national security issues associated with terrorism and While the ACD had to rely on other parts of the drug trafficking are also at stake and are well beyond government to directly tackle the parallel customs customs’ capacity to manage on its own.98 structures—like those run by insurgent groups—the automation reform would contribute to those efforts by In countries like Afghanistan, combating corruption and reducing personal interactions and formally connecting illicit trade is not simply a matter of collusion between border posts to the central government, increasing the inspectors, impor ters, and brokers—a problem government’s ability to exert control. faced by customs all around the world—but rather a problem that extends across the fabric of society. ACD operates in a fragile country environment with parallel systems that undermine government efforts. The implementation process The ACD’s efforts are part of a broader State building process, legitimizing the State’s authority and control Automation of ACD’s customs procedures was rolled over territory and establishing a robust environment out in three phases, starting in 2004; an initial phase in of sound governance. Revenue collection efforts are which 8 out of 25 customs offices were connected to at the core of establishing the State’s legitimacy. Like headquarters’ central system, followed by a second and in many developing countries,99 customs payments third phase aimed at countrywide coverage. All three in Afghanistan account for a significant portion of phases were supported by the World Bank and other government revenue, with the ACD collecting roughly international donors (see Box 4.3). 40% of total revenues. Expanding the domestic revenue base is crucial to Afghanistan’s self-reliance, as external Automation started with the computerization of the assistance is expected to decline in the years to come. domestic transit process and was rolled out across Establishing good governance is a key component of three trade corridors. The first corridor connected the this process. busiest border crossing point (Torkham, on the road from Peshawar and the port of Karachi, Pakistan) to In 2004, ACD began the long process of switching Kabul, the capital city, via the Jalalabad inland clearance to automated customs procedures. Automation was post (see Figure 4.3). This involved computerization of expected to significantly reduce face-to-face contact customs processes from scratch and equipping border and the resulting informal negotiations that were then posts with the basic essentials of reliable power supply a central feature of the relationship between customs and communications.101 and traders.100 Automation was the driver of ACD’s reform agenda, facilitating overall rationalization and Automation was then carried out in the second busiest streamlining of business processes and procedures. corridor, connecting to Iran via Islam Qala to Herat, Moreover, it was meant as the vehicle to increase state followed by the northern corridor from Uzbekistan via legitimacy through enhanced control over revenue Hairatan to Mazar-e Sharif. This automation allowed streams, reducing corruption and space for parallel ACD to gain better control over customs revenues from structures from illicit actors. provincial governments and implement a domestic transit policy for the first time, allowing traders to Introducing automation across the board was a risky clear goods at inland customs points as opposed to decision, however, since the government did not border posts. Prior to that, if goods were not reported fully control all border posts, and it was not clear to the ACD at the border, they tended to be lost for that inland and border customs departments would good. Moreover, without the automation of customs collaborate and agree to send more revenue to points, revenues declared at the border were hard to customs headquarters by declaring goods through track, verify, and consolidate and thus easily subject to the system. These border posts were—and still are— diversion. often heavily intertwined with local non-state actors, constituting a complex negotiated equilibrium of In Torkham, the first customs border post to be official and illicit payments around the clearance of automated, brokers and traders initially resisted using goods. Infrastructure weaknesses, such as unreliable the automated system. Most of them had never worked electricity, limited satellite connectivity, and poor fiber- with computers before. Whereas before they were able optic cable availability added further challenges. to process goods using paper forms, moving from one customs official to the next, they now had to enter the Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 141 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION FIGURE 4.3 ACD Presence and Main Transit Trade Routes Source: ACD details of shipments into the automated system at the Revenue collection during the first phase increased start of the process, after which the digitized forms fivefold and clearance time reduced from 1.5 days to provided the basis for subsequent clearance checks 1.5 hours.103 The trade volume also grew during the and verifications. For automation to work, ACD had to same period but far more slowly than the revenue gains. train brokers and traders on how to use the systems. In Improvements were also reflected in the perceptions order to facilitate computerized declarations, the ACD of the business community: Afghanistan’s rank in the provided a computer center in Torkham where brokers World Bank Logistics Performance Indicator improved and traders could access the system to declare goods. significantly. In 2007, Afghanistan was rated as the In subsequent implementations at border crossings, worst performer in the world, whereas in 2010 it had brokers and traders were required to provide these jumped to 104th out of 155 countries. facilities themselves. Under the second phase of automation, the focus was One challenge that quickly emerged was the diversion on (i) upgrading the ASYCUDA ++ version to ASYCUDA of illicit trade and smuggling from automated customs World;104 (ii) computerizing three more trade corridors offices to non-automated ones. To counter this “border (Turkmenistan, Tajikistan and Southeast Iran); and (iii) shopping,” the government wanted to automate addressing human resource issues associated with remaining offices as fast as possible.102 By 2010, eight the retention, motivation, and competence of some of customs points had been automated. The remaining 17 ACD’s key ASYCUDA staff. were automated in subsequent phases. 142 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION BOX 4.3 Donor Support to Afghanistan Customs Department Throughout the reform process, ACD has been supported by the international donor community. The automation effort of the ACD has been sustained through three different World Bank funded projects: the Emergency Customs Modernization and Trade Facilitation Project (2004 – 2010), the Second Customs Reform and Trade Facilitation Project - (2010 – 2018), and more recently the Fiscal Performance Improvement Support Project (2018–2021). UNCTAD has been an active implementation partner during this time, working closely with the ACD on supporting the implementation of the Automated System for Customs Data (ASYCUDA), a computerized customs management system. Other donors, such as USAID, have provided bilateral support to the ACD on various other customs functions (e.g., export facilitation), complementing the ongoing automation reform effort. Donor support is coordinated through an Informal Customs Network that meets at regular intervals. Upgrading the systems to ASYCUDA World required automating core customs functions, specifically in the considerable skills from the national ASYCUDA staff, area of risk management. In addition, new technology which until 2010 were hired as civil servants under such as fingerprint readers to avoid unauthorized use the Ministry of Finance. But the national ASYCUDA of log-ins to the ASYCUDA system was installed, a team was experiencing human resource issues due to problem that had emerged over time as automation was difficulties in retaining highly qualified staff, a common being rolled out. E-payment is also underway, which will issue experienced by governments when dealing with contribute to further reducing clearance time, as well as in-house Information Technology systems. To address eliminate cash payments from the clearance process. this issue, 20 local ASYCUDA staff were contracted by the United Nations Conference on Trade and Development (UNCTAD), the main UN body working on trade issues. Working under a UN contract provided Reflections staff with better job security and more competitive remuneration.105 This national team built significant At the end of 2019, almost all border customs posts, capacity over time and the rollout of ASYCUDA post- as well as inland customs departments, were fully 2012 was largely implemented by them. The team automated, except for 3 border posts in particularly guaranteed the functioning and integrity of the system, remote and insecure locations—Paktika, Ghulam Khan supported by access to international expertise through and Badakhshan. UNCTAD. The UNCTAD contracts were supposed to be a medium-term solution; however, the return of these While on the one hand, ASYCUDA greatly facilitated and officers to a sustainable ASYCUDA structure within the to some extent formalized customs processes, a parallel ACD, with appropriate job security and better salaries, paper trail still exists for each transaction. In addition to did not eventuate. submitting declarations through the automated system, a paper-based declaration package forms the basis A third phase of reform began in 2018. It involved further for clearance decisions along the various steps in the expanding coverage of border and inland customs clearance procedure and moves from customs officer offices, as well as expansion of ASYCUDA modules to customs officer for approval. This impacts clearance such as risk management and post-clearance audit. times and also weakens potential gains in reducing These modules allowed for further streamlining and corruption by failing to eliminate discretionary and Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 143 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION unnecessary human contact. The barriers to removing implemented, largely due to political reasons. The the parallel paper trail are both legal (e.g. Afghanistan Cadre Regulation has many opponents, who prefer does not yet have an e-governance law)106 and political, keeping the current system of patronage appointments as there are incentives within the customs offices to at customs in place. Indeed, there are widespread maintain the parallel paper trail as this provides an allegations of political appointments, of pressure opportunity for much needed supplements to income, leading to the rehiring of dismissed staff, of preference which is currently very low at between $100–$200 a given to individuals with links to the political elite (at month. Indeed, even though the number of signatures the central or local level), and of the sale of lucrative and interactions between customs officers and clients posts.108 These pressures keep the Cadre Regulation decreased with the introduction of automation, from being effectively implemented. anecdotal evidence suggests that the actual bribe price at other points has increased, seemingly compensating Over time, traders, brokers and customs officers have for eliminated collection opportunities.107 also learned how to game the new system. Traders in Afghanistan can shop around for the border station that A Customs Cadre Regulation allowing for higher pay offers the best deal, even if it will increase transportation through competitive recruitment was developed and costs. While automation should have reduced this approved in 2018, aimed at addressing the human practice, turning a blind eye to undervaluation or resource problems. However, the regulation is not yet misclassification can go a long way in facilitating these FIGURE 4.4 Customs Revenue (in USD) Revenue (USD Million) Exchange Rate (AFN/USD) 1200 90 80 1000 70 800 60 50 600 40 400 30 20 200 10 0 0 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012* 2013 2014 2015 2016 2017 2018 2019 Total Revenue (in USD) Exchange Rate (AFN/USD) Source: Afghanistan Customs Department. All figures prior to 2005 may not be accurate. * In 2012, the Afghan calendar was changed from starting the new calendar year on March 21st to starting the new calendar year on December 23rd. 2012 as recorded here thus only covers nine months (March 21st – December 22nd, 2012). The previous year covered March 21st, 2011 – March 20th, 2012. The next year covers December 23rd, 2012 – December 22nd, 2013. 144 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION kinds of offers and deals. Discounts offered at customs remote areas, human resources, technical capacity, posts are partially an unintended response to officials security, and finally vested interests and political trying to meet ever increasing revenue targets with challenges. Tackling corruption in environments like the idea that offering informal discounts will bring in Afghanistan needs a multi-pronged approach that has more traders and thus result in more revenue for that to be revisited on a continuous basis as vested groups particular customs post. From a national perspective, find loopholes that need to be repeatedly plugged. however, the Treasury loses out as goods are cleared at discounted rates. Not only does this impact revenue The next steps for the ACD in further eliminating collection, it also greatly distorts trade statistics and corruption and facilitating trade will be to work towards growth estimations of the economy. The ACD has a fully automated self-assessment, eliminating the recently started to combat this practice, moving parallel paper trail, and optimizing the functionalities towards a new negotiated equilibrium with traders ASYCUDA World has to offer. In this case, traders and and brokers and also customs personnel, where more brokers would submit their self-assessed declarations accurate valuation and classification is being applied online through the automated portal and pay taxes and corresponding higher taxes are being paid, but based on their preliminary assessments, which would implementation will likely take time. subsequently be verified and checked by the ACD, supported by automated controls and (post-clearance) Indeed, it appears that the ACD is at a critical assessments. This will be a gradual process, however, as crossroads where initial gains from automation now the existing business processes must first be formalized require further, politically difficult, decisions in order to across the various customs offices in the country, move to the next level. The first phase of reforms saw supported by appropriate regulations and formal large gains in terms of revenue increases and improved procedures. To date, automation has contributed to processes, but the subsequent phases failed to deliver reducing opportunities to engage in corrupt behavior similar progress. Between 2007 and 2010, Afghanistan but has done little to tackle incentives. For this, some customs jumped from being the worst performer in the politically difficult decisions will be required, such as World Bank’s Logistics Performance Indicator to being addressing weaknesses in the ACD’s human resource ranked 104 out of 155 countries, but by 2018 it again capacity and effectively negotiating a new equilibrium ranked as one of the worst performers (158 out of 160 with traders and brokers in which proper taxes are countries). As Table 4.2 illustrates, revenue collection being paid and directed to the government. Unless increased fivefold in the first 5 years of reform, from these challenges are addressed in parallel, it may be USD138 million in 2004/5109 to over USD733 million in difficult for the ACD to sustain and improve on the 2009/10. Customs revenues increased at a slower rate progress it has already made. during subsequent phases of reform, reaching over USD1 billion in 2016 and then plateauing. Since then, improvements in revenue collection have been mostly driven by depreciation in the exchange rate. In summary, the endeavor to automate Afghanistan’s clearance process brought major benefits to the government, including increased revenue and improved clearance time. Other gains include improved transparency of trade transactions, better (although not yet accurate) customs and foreign trade statistics,110 simplified procedures, standardized documents, and the possibility to declare goods online. Automation also increased transparency of customs operations and national consistency across borders and has resulted in better predictability of the trade environment.111 While automation helped the ACD to boost revenue, this technocratic approach can only go so far. Ongoing challenges relate to the extension of automation to Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 145 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION Notes 1. Cantens, 2010; Hors, 2001; Ferreira, Engelschalk & Mayville, 13. Baez-Camargo, C. (2017). Corruption, Social Norms and 2007; Maoro et al., 2019; Raballand & Rajaram, 2013; WCO, Behaviours: A Comparative Assessment of Rwanda, Tanzania 2017; World Economic Forum, 2014; World Bank, 2019. and Uganda. Basel: Basel Institute on Governance. 2. World Customs Organization [WCO]. (2019). Annual Report Jackson, D. & Köbis, N. (2018). Anti-corruption through a social 2018-2019. 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Manufacturing Knowledge: A History of development: Lending in the Western Africa Department. p. the Hawthorne Experiments. Cambridge University Press: 325–45 in Langseth, P., Nogxina, S., Prinsloo, D. and Sullivan, Cambridge. R. (Eds.) Civil Service Reform in Anglophone Africa. Pretoria: Economic Development Institute, Overseas Development 55. Platteau, J.-P. (2000). Institutions, Social Norms, and Economic Administration, and Government of South Africa. Development. Amsterdam: Harwood Academic Publishers. Polidano, C. (2001). Why civil service reforms fail. IDPM 56. IMF, 2019. Public Policy and Management Working Paper no.16 57. Baez-Camargo & Passas, 2017. (March). Manchester: Institute for Development Policy and Management, University of Manchester. 58. Ibid. 77. Rijkers, 2019. 59. Jackson & Köbis, 2018. 78. Baez-Camargo & Passas, 2017. 60. Panth (2011) provides a collation of 18 case studies from around the world, with real examples on how changing social 79. Jackson & Köbis, 2017. norms have been used to change public services affected by 80. OECD, 2016. corrupt practices. 81. Raballand, Gael J. R. F.; Chalendard, Cyril Romain; Fernandes, 61. Fjeldstad, 2009. Ana Margarida; Mattoo, Aaditya; Rijkers, Bob. 2017. Customs 62. OECD, 2016; IMF, 2019. reform and per formance contracts: early results from Madagascar (English). Governance notes; no. 2. Washington, 63. de Wulf, L. (2005). Human resources and organizational issues D.C.: World Bank Group. http://documents.worldbank.org/ in customs. Chapter 2 (p. 31-50) in L. de Wulf and J.B. Sokol curated/en/714611506078407127/Customs-reform-and- (Eds.) Customs Modernization Handbook. Washington DC: performance-contracts-early-results-from- Madagascar. World Bank. Chalendard, C., Fernandes, A. M., Mattoo, A., Raballand, WCO, 2017. G., Rijkers, B. 2018. Collusion in Customs: Evidence from 64. World Bank. (2019). Doing Business Report 2019: Training for Madagascar. Preliminary draft. Unpublished. Reform. A World Bank Group Flagship Report. Washington 82. A component of a World Bank Public Sector Performance D.C.: The World Bank. investment lending included disbursement indicators linked 65. Ibid., p. 48. to increased confirmation of suspicious customs transactions related to home use at Toamasina Custom Office as well as 66. Cantens, T., Kaminski, J., Raballand, G. & Tchapa, T. (2014). a number of revenue offices that have been subject to an Customs, brokers, and informal sectors: A Cameroon case external evaluation of their performance contract/programs. study. Policy Research Working Paper 6788 (Februar y). Washington D.C.: The World Bank. 83. Mirror statistics calculate the gaps of foreign trade statistics between two trading partner countries and can be used to Chalendard, C. (2017). Using internal and external sources of detect potentially fraudulent import flows. See Cantens et al. information to reduce customs evasion. ICTD Working Paper (2012) for detailed discussion. 62 (January). Brighton, UK.: International Centre for Tax and Development. 84. Misclassification consists of importing a good on which there is an import tax or value-added tax (VAT) but declaring it as 67. Raballand, G. & Rajaram, A. (2013). Behavioural economics another good for which there is no import tax or VAT. and public sector reform. An accidental experiment and lessons from Cameroon. Policy Research Working Paper 6595 85. The value declared is lower than the actual purchase value (September). Washington D.C.: The World Bank. of imported goods leading to lower tax payments for the importer because taxes are paid as a percentage of declared Rijkers, B. (2019). Improving customs performance: Lessons value. from 5 years of reform in Madagascar. Powerpoint presentation (undated). Washington D.C.: World Bank. 86. Chalendard, Cyril Romain; Raballand, Gael J. R. F.; Rakotoarisoa, Antsa. 2016. The use of detailed statistical data 68. Raballand, G. & Rajaram, A., 2013. in customs reform: the case of Madagascar (English). Policy Research working paper; no. WPS 7625. Washington, D.C.: 69. Cantens, T. (2010). Is it possible to reform customs World Bank Group. http://documents.worldbank.org/curated/ administration? UNU-WIDER Working Paper No. 2010/118 en/512741468196174563/ The-use-of-detailed-statistical- (November). Helsinki: United Nations University: World data-in-customs-reform-the-case-of- Madagascar. Institute for Development Economic Research 87. Raballand et al., 2017; Chalendard et al., 2018. 70. WCO, 2017. 88. Despite initial resistance, the majority of inspectors when 71. Cantens et al., 2014; World Bank, 2019. surveyed said they preferred performance contracting after 72. OECD, 2017; WCO, 2017; World Bank, 2019. being trained on using the new monitoring system. However, some inspectors have not accepted the change. 73. OECD. (2017). Integrity in Customs. Taking Stock of Good Practices. Paris: OECD. http://www.oecd.org/gov/ethics/G20- 89. Risk management systems generate a risk score for the integrity-in-customs- taking-stock-of-good-practices.pdf shipment. The risk score determines the probability of inspection and the rigor of the inspection should it occur. 74. IMF, 2019. High-risk shipments face the highest degree of scrutiny via 75. Transparency International [TI]. (2018). Exporting Corruption. physical inspection whereas lower-risk shipments are given Progress Report 2018: Assessing Enforcement of the OECD less scrutiny, being subject to documentary inspection only Anti-Bribery Convention. Berlin: Transparency International. (Chalendard et al. 2018). 76. Schacter, M. (1995). Recent experience with institutional 90. Chalendard et al., 2018. 148 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION 91. Some of them were reintegrated with a new DG appointed in 107. World Bank. 2010:38. Afghanistan - Second Customs Reform March 2019. and Trade Facilitation Project: emergency project paper. Washington, DC: World Bank. https://hubs.worldbank.org/ 92. For more information on the rationale of the approach, see docs/imagebank/pages/docprofile.aspx?nodeid=12204315 Raballand and Rajaram (2013), “Behavioral Economics and Public Sector Reform - An Accidental Experiment and Lessons D oyle, Tom; Fanta Ivanovic, Enrique; Mclinden, Gerard; 108. from Madagascar”, mimeo. Widdowson, David Charles. 2010:346. Border management modernization (English). Washington, DC: World Bank. http:// 93. Raballand et al., 2017. documents.worldbank.org/curated/en/986291468192549495/ 94. Raballand et al., 2017. Border-management-modernization. 95. Cameroon was the first country in Sub-Saharan Africa to All figures prior to 2005 may not be accurate. 109. implement such a scheme (Raballand and Rajaram 2013). 110. While before automation trade statistics had to rely on Later, other countries, such as Togo and Liberia undertook reconciling paper records from across the country, the fairly similar initiatives. ASYCUDA system has greatly facilitated the production of 96. The use of Disbursement-Linked Indicators in the program trade statistics. However, the practice of undervaluation and funded by the World Bank was also quite effective. misclassification distorts the picture. 97. From: The Economist (May 18th, 2019), ‘Why Afghanistan’s 111. World Bank. 2018:44. Afghanistan - Second Customs government is losing the war with the Taliban’. Reform Trade Facilitation Project and Additional Financing Projects. Washington, D.C.: World Bank Group. https:// 98. Mclinden, Gerard; Durrani, Amer Zafar. 2007. Corruption in hubs.worldbank.org/docs/imagebank /pages/docprofile. Customs. World Customs Journal Volume 7(2):7. aspx?nodeid=30755272 99. See for example Custers, Anna Louise; Sutherland, Richard Anthony. 2019. Pakistan Customs : Mobilizing Domestic Revenues for Economic Development (English). Governance Notes; no. 15. Washington, D.C. : World References Bank Group. http://documents.worldbank.org/curated/ en/583881556727009480/Pakistan-Customs-Mobilizing- Domestic-Revenues-for-Economic-Development Anson, J., Cadot, O. & Olarreaga, M. (2006). Tariff evasion and customs corruption: Does Pre-Shipment Inspection help? The World Bank. 2010:35. Afghanistan - Second Customs Reform 100. B.E. Journal of Economic Analysis & Policy, 5(1): 1-26. and Trade Facilitation Project: emergency project paper. Washington, DC: World Bank. https://hubs.worldbank.org/ Ardigó, I.A. (2014). Corruption in tax and customs authorities. Anti- docs/imagebank/pages/docprofile.aspx?nodeid=12204315. Corruption Helpdesk. Berlin: Transparency International. https:// www.transparency.org/files/content/corruptionqas/Literature_ 101. World Bank. 2011:15. Afghanistan - Additional Financing Review_of_Corruption_risks_in_Customs_and_Tax_2014.pdf for Emergency Customs Modernization and Trade Facilitation Project. Washington, DC: World Bank. https:// Arifari, N.B. (2006). ‘We don’t eat papers’: corruption in transport, hubs.worldbank.org/docs/imagebank /pages/docprofile. customs and the civil forces. Chapter 6 (177-224) in G. Blundo & aspx?nodeid=14943926 J.-P. Olivier de Sardan (Eds.) Everyday Corruption and the State. Citizens & Public Officials in Africa. ZED Books: London & New 102. World Bank. 2011:46. Afghanistan - Additional Financing York. for Emergency Customs Modernization and Trade Facilitation Project. Washington, DC: World Bank. https:// Baez-Camargo, C. (2017). Corruption, Social Norms and Behaviours: hubs.worldbank.org/docs/imagebank /pages/docprofile. A Comparative Assessment of Rwanda, Tanzania and Uganda. aspx?nodeid=14943926 Basel: Basel Institute on Governance. N ote this is a reference point for overall clearance time at 103. Baez-Camargo, C. & Passas, N. (2017). Hidden agendas, social the Kabul Inland Custom Department. At Torkham border norms and why we need to re-think anti-corruption. OECD 91% of trucks were estimated to be cleared in fewer than 90 Global Anti-Corruption & Integrity Forum. Paris: OECD. minutes in September 2009. World Bank. 2011:31. Afghanistan - Additional Financing for Emergency Customs Modernization Besley, T. & McLaren, J. (1993). Taxes and bribery: the role of wage and Trade Facilitation Project. Washington, DC: World incentives. Economic Journal, 103(416): 119-141. Bank. https://hubs.worldbank.org/docs/imagebank/pages/ Campos, J.E. & Pradhan, S. (2007). The Many Faces of docprofile.aspx?nodeid=14943926 Corruption: Tracking Vulnerabilitiesat the Sector Level. Washington D.C.: The WorldBank. https://openknowledge. A SYCUDA is a computerized customs management system, 104. w o r l d b a n k . o r g / b i t s t r e a m / h a n d l e /10 9 8 6 /6 8 4 8 / 3 9 9 8 5 developed in Geneva by the United Nations Conference on 0REPLACEM101OFFICIAL0USE0ONLY1.pdf Trade and Development (UNCTAD). UNCTAD supports two versions: ASYCUDA ++, which was developed in 1992, and Cantens, T. (2015). Mirror analysis: Customs risk analysis and fraud ASYCUDA World, which was developed in 2002. As part of detection. Global Trade and Customs Journal 10(6): 207–216. the second phase, ACD upgraded to the most recent version of ASYCUDA. Cantens, T. (2010). Is it possible to reform customs administration? UNU-WIDER Working Paper No. 2010/118 (November). Helsinki: W orld Bank. 2018:36. Afghanistan - Second Customs 105. United Nations University: World Institute for Development Reform Trade Facilitation Project and Additional Financing Economic Research Projects. Washington, D.C.: World Bank Group. https:// hubs.worldbank.org/docs/imagebank /pages/docprofile. Cantens, T., Kaminski, J., Raballand, G. & Tchapa, T. (2014). aspx?nodeid=30755272 Customs, brokers, and informal sectors: A Cameroon case study. Policy Research Working Paper 6788 (February). Washington Although at the time of writing this case study the e-governance 106. D.C.: The World Bank. law was under review with the Ministry of Justice. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 149 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 4 CUSTOMS ADMINISTRATION Chalendard, C. (2017). Using internal and external sources of Foltz, J.D. & Opoku-Agyemang, K.A. (2015). Do higher salaries information to reduce customs evasion. ICTD Working Paper lower petty corruption? A policy experiment on West Africa’s 62 (January). Brighton, UK.: International Centre for Tax and highways. IGC Working Paper (June). International Growth Development. 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Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 151 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 Public Services: Land, Ports, Healthcare PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE Introduction Why is it important to curb a variety of methodologies to estimate the magnitude corruption in public services? of such costs (see Table 5.1). Naturally, these estimated costs differ by country and service delivery sector. Corruption in public services takes many forms. For example, bribe payments to port and customs “Corrupt incentives exist because state officials have officials by cargo shippers were about 14 percent of the power to allocate scarce benefits and impose total shipping costs in Mozambique, in comparison to onerous costs.”1 Consequently, reducing the benefits or 4 percent in South Africa. In another example, truck increasing the costs of malfeasance are the key strategies drivers in Indonesia pay around 13 percent of the for anti-corruption efforts in public service delivery. A cost of the trip in bribes to police; this is significant classic example is a service provider—a government in comparison to the truck drivers’ wages, which clerk issuing passports or licenses, a teacher, doctor, or average about 10 percent of the trip cost. Perhaps police officer—extracting an informal payment from a most staggeringly, in Uganda, only 13 percent of the citizen or business to grant access to a service, expedite education funds from the central government for it, or guarantee a certain quality standard. These forms non-wage spending reached the schools, suggesting of malfeasance are often labeled “petty corruption” that 87 percent of the public money had been lost because of the relatively small amounts involved in to graft. While these estimates must rely on various every transaction; however, these per-transaction assumptions, and as such are subject to critiques, taken amounts add up to significant totals in those systems together they point to the significant magnitude of the where they are common. Yet such “petty corruption” monetary costs of corruption in public services. One in service delivery sectors is often symptomatic of what attempt to estimate the total amount of bribes across the literature refers to as “grand corruption,”2 such as sectors in a single country, Ukraine, arrived at roughly embezzling funds earmarked for government services, USD0.5 billion, or 1 percent of the country’s GDP per receiving kickbacks from private-sector contractors year.4 Additional costs with multiplier effects include responsible for different aspects of delivery, or various poor development outcomes that are sector-specific forms of collusion and realized conflicts of interest. (e.g., corrupt health or education sectors), reduced volume of international trade and investment flows due Whether operating on a relatively small or large to high informal payments, and generally low trust in scale, corruption in service delivery imposes government. Low trust in turn results in a vicious cycle significant costs on the government, citizens, of low investment, low tax compliance, and low citizen and businesses. Olken and Pande3 provide a useful participation. review of the existing country-specific studies that use Adopting a sector-specific approach Unpacking sector-specific issues is crucial to more sector-specific approach allows one to see the diagnose the root causes of corruption in public problem holistically and to laser-focus on appropriate services. Some researchers have argued that binary solutions. For example, the Curbing Corruption7 distinctions of corruption types in service delivery— initiative by a group of international policy experts grand/petty, need/greed, political/bureaucratic, and academics develops a list of corruption types for institutional/individual—may be useful as a framing 11 sectors, including health, land, shipping, defense, device, but are not particularly actionable in terms education, police, and others. The typology includes of formulating a reform approach. 5 This is because 20-40 different types of corruption per sector that these different types of corruption, just as the general are common across countries; as an example, Figure phenomena such as bribery, nepotism, or collusion, can 5.1 lists corruption typologies in land and health be present in any sector at the same time.6 Instead, a administrations. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 153 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE Understanding the existing corruption types in build stakeholder coalitions. For example, where the a sector enables the design of appropriate and professional integrity has currency, doctors could be feasible solutions. For example, in healthcare, a asked to lead the reform. Where civil society is strong reform could be narrowly focused on rooting out a and vocal, further power could be given to patient particular issue, such as bribery in surgery waiting groups for monitoring and closing the accountability lists, or adopt a multi-pronged approach to focus on loop. In some situations, a link to an international the entire service. The correct diagnostics also allows initiative, such as U4 for healthcare or EITI for mining, reformers to assess the feasibility of the program, as may provide the necessary alliance to boost the reform well as to identify the loci of leadership and how to and increase its feasibility and credibility. TABLE 5.1 Corruption in Public Services: Estimating the Magnitude of the Problem Source Country Service Type of Methodology Estimate of the delivery corruption magnitude of sector corruption Olken and Indonesia Police Bribes paid by Direct observation: 13 percent of cost of Barron (2009) truck drivers to Enumerators accompanied a trip police truck drivers on their (cf. truck driver’s salary regular routes, posing as is 10 percent of cost of truck drivers’ assistants, a trip) and recorded illegal payments Sequeira and South Africa, Ports and Bribe payments to Direct observation: Bribes amounted to 14 Djankov (2010) Mozambique customs port and border Enumerators accompanied percent (Mozambique) post officials clearing agents in ports and 4 percent (South to collect information on Africa) of the total bribe payments respective shipping costs for container passing through the port Reinikka and Uganda Education Graft in public Estimate by subtraction: 87 percent of funds Svensson spending of PETS compared the (schools received (2004) educational funds amount of grant sent on average only 13 intended to cover down from the central percent of the grants) school’s nonwage government to the amount payments received by schools Olken (2006) Indonesia Social Theft of rice Estimate by subtraction: At least 18 percent assistance from a program Administrative data were of the program’s rice that distributed compared to a generally disappeared before subsidized rice administered household reaching households survey Gorodnichenko Ukraine Multiple Bribes received Estimate from market Aggregate amount of and Peter by public sector inference: bribery estimated to (2007) employees Residual wage differentials be is between USD between the public 460 million – USD and private sectors 580 million, or about (consumption levels 1 percent of GDP of are the same in the two Ukraine groups and labor) Source: Olken and Pande, 2012. 154 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE FIGURE 5.1 Disaggregating Corruption Typology within Service Delivery Sectors Corruption Typology - Health Corruption Typology - Land HEALTH FUNCTIONS LAND ADMINISTRATION 1. Poor clinical protocols 1. Bribery and rent-seeking by land administration officials 2. Unnecessary interventions 2. Bribery of judicial authorities 3. Informal payments in interventions 3. Favouritism and nepotism by land in decision-making 4. Informal payments in waiting lists 4. Elite capture and preferential access to land titling schemes 5. Prescribing unnecessary or costly medicines 5. Manipulation and interference of records, adjudication and 6. Over-charging dispute resolution 7. Other cases of illegal contact 6. Manipulation of land valuation to secure higher prices and/ 8. Inappropriate prescribing and misuse of the electronic or reduce compensation payable systems 7. Fraud and production of false claim documentation & 9. Over-treatment certificates LEADERSHIP & GOVERNANCE 8. Embezzlement of public land administration funds & land revenues 10. Capture by special interests 9. Use of the institutions as a platform for private practice 11. Inappropriate care strategies 10. Manipulation in public procurement of land administration 12. Dereliction by fraud, lax controls services to win private contracts HEALTH WORKFORCE CUSTOMARY LAND TENURE 13. Inappropriate selection for jobs, promotion or training 14. Inappropriate absenteeism 11. Abuse of power by chiefs 15. Nepotism in restrictive expert groups 12. Control over land revenues by influential people 16. Inappropriate professional accreditation 13. Multiple allocations of the same plots 17. Expert-bias in complaints procedures 14. Conversion of customary and rural land for urban 18. Improper inducements for conferences, research, development placements 15. Reluctance of officials to provide land services 19. Fake workshops and fake per-diems 16. National institutions and business interests override local 20. Discrimination against groups land rights 21. Undeclared or tolerated conflicts of interest MANAGEMENT OF STATE-OWNED LAND 22. Fake reimbursement claims MEDICAL PRODUCTS, VACCINES & TECHNOLOGIES 17. Collusion of government officials by private interests 18. Manipulation of compulsory land acquisition and 23. Substandard, falsified medicines compensation processes 24. Inappropriate approval of products 19. Inadequate legal framework for conversion to private land 25. Inappropriate product quality inspection 20. Irregular conversion of property classification status 26. Private sector collusion in markets 27. Corruption in new product R&D LAND USE, PLANNING & INVESTMENTS 28. Companies ‘gaming’ the system 29. Theft and diversion of Products 21. Capture of profits originating from land conversion and 30. Re-packaging of non-sterile and expired product re-zoning 31. Legal parallel trade in drugs 22. Abuse of government officials’ discretionary power to 32. Overly high pricing on non-medical products propose developments 33. Inadequate control of non-intervention studies 23. Acquisition of land through state capture and/or by insider 34. Improper benefits from companies information 35. Improper acceptance of donated devices 24. Bribery of government officials by investors and/or 36. Improper research, trial & marketing practices by companies developers HEALTH FINANCING LARGE SCALE LAND ACQUISITION FOR INVESTMENT 37. Corruption in health insurance 25. Bribery and manipulation of community leaders 38. Corruption in procurement 26. Payments of bribes and kickbacks to officials involved in 39. Complex & opaque tendering procedures approving land allocations 40. Decentralised procurement that enables corruption 27. Circumvention of agreed and legally binding consultation 41. Donor collusion in corruption procedures 42. Corrupt invoicing by suppliers 28. Political interference in land acquisition and allocation HEALTH INFORMATION SYSTEM Not usually a source of corruption types Source: Curbing Corruption Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 155 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE What are emerging economies doing to address corruption in public services? Implementation of reforms takes time, providing The solutions being implemented in these three important lessons for emerging economies along sectors vividly illustrate the types of reforms that the way. Rose-Ackerman and Palifka8 offer general have a chance to take root in emerging economies. takeaways: “The most favorable cases are those in They take into account both the service type as well as which the number of beneficiaries builds up over time sector specifics. as reforms take effect to create a constituency for the new policies. In particular, reform is much easier if Some public services, such as land administration, the domestic and international business communities lend themselves to sector-wide “sunlight” reforms believe they will benefit from a reduction in corruption with a primary aim to modernize the sector and and patronage, and ordinary citizens benefit as well.” increase transparency, thus increasing the cost In other words, progress takes time, often decades, of malfeasance and reducing corrupt incentives in and sequencing matters. However, there are plenty service delivery. The case of Rwanda’s reform of land of anti-corruption initiatives focused on ser vice mapping and titling is an example of such an approach. delivery ongoing around the world, many of them The reform was focused on good management practices showing promise, even if the progress is partial or in land administration, including the digitization of its sustainability not yet ascertained. It is this partial records. Even though rooting out corruption was not a progress and the potential reversals that offer lessons stated objective of the reform, the largely informal land for other countries on what works and what doesn’t in transactional system in place prior to the reform was particular sectors and contexts. especially conducive to corruption. Some of the most common types of corruption issues are bribe payments Although the issues and their corresponding to gain access to records; the production of fraudulent solutions are sector-specific, there are common documentation and certificates; circumvention of threads that can be derived when comparing procedures for allocating land or the duplicative reforms across sectors. This chapter focuses on three allocation of land plots; bribery of court officials; and distinctive service delivery sectors: healthcare, land refusal of basic services without payment. The reform administration, and port services. is one of the reasons why Rwanda scores significantly better in regional surveys on managing corruption in • Healthcare is an example of a frontline public land services than neighboring countries. In addition, service that affects virtually all citizens, as proven this reform took place during a period of post-conflict by the 2020 COVID-19 crisis. If plagued by recovery where land was a continuing source of tension. pervasive corruption, the outcomes in human Since corruption was a symptom of the underlying development can be impacted, which in extreme problem, the reform was able to use the post-conflict cases undermine governments’ legitimacy. window of opportunity to solve a number of underlying issues, including corruption. • Land administration – land titling and registration – affects a large proportion of the population and In other public services, such as healthcare, the is often a very sensitive sector that is central to sector-wide approach needs to focus on improving many economies. Especially in historically unequal the sector’s development outcomes that have been or post-conflict societies, corruption in land directly affected by corruption. In these cases, the administration can undermine land reform and fight against corruption moves away from financial citizens’ trust in government as a whole. compliance that “zero tolerance” approaches espouse, focusing instead on improving service delivery across • Port services may seem like a very specific issue; the sector. In Ukraine’s ongoing health system reform, however, they are a good example of a government- changing the incentives of healthcare providers involves to-business (G2B) service. Pervasive corruption decreasing relative benefits from corrupt transactions in ports directly affects trade and the investment as well as increasing their costs, resulting in better climate in the countries relying on maritime health outcomes. The reforms have been initiated for commerce, hampering their development. capitation financing in primary care; raising health 156 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE professionals’ remuneration; initiating transparent, the costs and risks of corruption, and government, merit-based medical university admissions and health which is trying to stem the flow of lost revenues. The staff appointments; and developing an eHealth digital collective action problem of the shipping companies record-keeping system. Even though still ongoing, was partly addressed by an international association these reforms aim to lower out-of-pocket expenditure, called the Maritime Anti-Corruption Network (MACN), reduce the number of acute medical events, and which brings together a group of shipping companies increase patient satisfaction with their care providers. collectively concerned about reducing the prevalence This is an example of a true “ecosystem reform,” of corruption in the sector. MACN and UNDP have in which changes to legislation are going hand-in- piloted some reform programs globally and so were hand with executive implementation and strong civic able to play a constructive key role in Nigeria’s ports engagement to serve as a feedback loop. sector reform. The network worked together with the Nigerian government to initiate and implement Successful sector reforms specifically focused measures with an aim to reduce corruption. These on rooting out corruption in service delivery are included developing corruption risk assessments of possible when coalitions are formed. In the case five ports, followed by standardizing procedures, using of the program to combat corruption in Nigeria’s an e-governance portal, and establishing a grievance ports, such a coalition included private shippers, mechanism. Surveys conducted by the network and its the United Nations Development Program (UNDP) partners suggest the measures had a positive impact and three of the country’s anti-corruption agencies. in improving functioning of the ports, even though Shipping is a sector where it is possible to align the substantial work remains to be done. incentives of private companies, concerned about What can we learn from these examples? The reform approach need not be designed extortion more difficult to hide. specifically to combat corruption, but rather aim to resolve its impact. Sector-wide reforms will have anti- Although each approach was different, it seized corruption effects as long as they increase the costs and/ an existing political window of opportunity for or reduce the benefits of corrupt transactions. When reform. In Rwanda, it meant addressing the land the reforms specifically target corruption in a sector, titling issue during the post-conflict period by creating they seem to work when there is a strong pro-reform more transparency. In Ukraine, the reform was a coalition between the anti-corruption champions in response to a public health crisis, facilitated by the ripe the government and businesses or citizens. In order for political climate. In Nigeria, an international shippers’ businesses and citizens to be able to become agents of association with strong commercial incentives found change, their collective action problem must be solved. willing partners in the UNDP and three anti-corruption To this end, an international network or body may help agencies that were motivated to show positive results in galvanize the effort. combating corruption. In all three cases, employing information and None of the three reforms are fully finished, communication technologies played a role, but uncontroversial, or immune from possible reversals. only insofar as they changed the underlying Rwanda’s top-down approach calls into question the incentives. In Rwanda, the land records were digitized, reform’s sustainability. Ukraine’s success continues to which brought the necessary amount of “sunlight” into depend on the ability of the reformers to sustain their the system, which meant that this basic information momentum. In Nigeria, despite improvements, there could no longer be bought and sold. In Ukraine, a digital is still a long way to go until corruption in ports is fully eHealth platform connected to the reimbursement rooted out. However, intermediate results in all three system was initiated to ensure greater transparency cases show that progress is possible even in very in payments. In Nigeria, an e-governance portal was challenging environments. introduced for the ports, making malfeasance and Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 157 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE CASE STUDY 12 CASE STUDY 12 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE Land Administration Reforms in Rwanda Improving land administration through the Land Tenure Regularization (LTR) program in Rwanda Overview Introduction Rwanda set out to address the issue of land ownership Historically, insecurity over land ownership was a critical and land-related challenges through passage of several part of the tension between communities, Addressing laws and policies. The 2004 National Land Policy insecurity around land has consequently been one of the provides general guidance on a rational and planned foremost priorities of the post-conflict reforms initiated use of land while ensuring sound land management and in Rwanda following the 1994 Rwandan genocide. The efficient land administration. The policy was developed long-term solution was found to be the initiation of a to address land-related challenges, including a land land reform. The reform started with a new policy and tenure that was dominated by customary law, resulting law in 2004 and 2005 respectively. in land fragmentation, a practice that reduces further the size of family farms below the threshold of the The problems of conflict and corruption are closely average surface area that is economically viable. A wide- interlinked. As surmised by Apollinaire Mupihanyi, ranging program initiated by the Rwandan government Executive Director of Transparency International between 2008 and 2012 to map and title land parcels Rwanda, “when there is conflict, this increases for the entire country has played an important role in corruption... people with wealth buy their way out of improving service delivery and reducing corruption problems. Vulnerable people are the worst affected, risks. especially poor Rwandans and women.” The reform process did not stop with the land titling Corruption was one of the symptoms of the deficiencies program, and since 2012 the Rwanda Land Use and in Rwanda’s land administrative system in place Management Authority has been grappling with the following the conflict. In its 2007 activity report, the challenge of maintaining digital records for over 10 Rwandan Ombudsman identified the land registry million land parcels. This has required extensive training as the government agency about which it received of officials and campaigns to raise awareness around the third highest number of complaints, including the land registry system. While these challenges are complaints of corruption.9 A qualitative study published ongoing, the country can claim important successes in by Transparency International Rwanda in 2009 on the having formalized its land administrative system. Even land administrative system in Kigali also revealed if reducing corruption may not have been an overt aim widespread citizen dissatisfaction and concern around of the project, this is one of the reasons why Rwanda corruption, particularly related to land expropriation. compares positively to its peers in East Africa for the low prevalence of corruption in land administration. The largely informal land transactional system in 158 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE place before reform in Rwanda gave rise to a range improvements in land governance in Rwanda and of corruption risks. In the absence of consistent and improved integrity in the provision of land services.11 objective land ownership information, land officials and the courts have broad discretion when mediating land disputes, increasing their potential susceptibility to improper influence. Some of the most common The implementation process types of corruption issues in service delivery, which occur in informal land administrative systems, are The process of land reform in Rwanda initiated in bribe payments to simply gain access to records; the 2000s was first premised on changes to its legal the production of fraudulent documentation and framework for land. The Rwandan Constitution (2003), certificates; circumvention of procedures for allocating National Land Policy (2004) and Organic Land Law land or the duplicative allocation of land plots; bribery (2005) had all provided a basis for legal recognition of court officials; and refusal of basic services without of land rights and established clearer mechanisms for payment.10 enforcing rights and resolving conflicts. With a legal framework in place, the Land Tenure Regularisation While addressing land ownership as one of the sources (LTR) program then set out with the goal of issuing title of conflict may have been the foremost motivation registers to all landowners in the country. The program for land tenure reform in Rwanda, important lessons can be divided into two phases: the land mapping and from the program subsequently implemented have titling project, initiated in 2008 and concluded in 2012, relevance to anti-corruption practitioners. Faced with a and the development and maintenance of the digital largely unmapped national tenure system, the country registry to make this service available to the public. embarked on an ambitious program to formally map and digitize all land titles across the country. After the process, the government then had to improve the Phase I: Land mapping and titling public’s knowledge and understanding of the new system, and the land registry had to find a sustainable Multilateral agencies such as the African Development way to maintain and administer the digital database. Bank (AfDB) have cited the Rwandan government’s Overcoming these challenges has led to important approach to its land titling program as an example of Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 159 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE good practice.12 The biggest challenge the Rwandan been integrated into the Rwanda Natural Resources authorities had to overcome was that land ownership Authority (RNRA), a larger government agency whose was largely unmapped: in 2005 the land registry held remit also covered the management of other natural titles for only 20,000 parcels for a population of over resources such as water, forestry and mines, underwent 9 million people. The National Land Centre, the land a transformation from the focus on mapping titles administrative agency and registry which was then to administering the large database that had been responsible for the reform,13 took an important early created. This necessitated investment in skills and decision in the implementation process to pilot the training of registry officers. In 2012, the RNRA rolled out project in four areas between 2006 and 2009, covering new software to record the different categories of land 15,000 plots of land within three districts. This enabled transactions that had been formally established under the agency to test the practicalities of implementing the new system. Again, in a move designed to lower the program, the results of which informed the Strategic costs, the registry made use of existing open source Roadmap for Land Tenure Reform in Rwanda, an software to build its Land Administrative Information organizing document that was adopted by the cabinet System. in 2008. Perhaps the most significant challenge to overcome On the basis of the pilot’s findings, the Strategic was the initially low level of citizen engagement with the Roadmap concluded that the most effective means new administrative system. The processes introduced for mapping the entire country was to use aerial were entirely new to citizens, which was reflected in photography. This had the advantage of being quicker the fact that by 2012 less than a million people had and more cost effective than demarcating parcels collected their title documents, while in 2013-14 only entirely through on-site surveying. It involved using 10,535 transactions were recorded in the land registry. airplanes and helicopters to photograph land parcels The RNRA responded by commencing a large-scale based on visible boundaries. Once the photographers public awareness campaign, which included media identified possible boundaries, staff from the National advertising and holding events, such as a national land Land Centre visited individual parcels to determine week. The registry additionally decentralized services, their ownership. establishing district land commissions supported by committees at sector and cell level, the smallest Completing such a large exercise required a significant organizing units of local government in Rwanda, to increase in personnel numbers at the National Land make services more accessible to citizens. The end Centre. In 2008 the agency recruited 100 permanent result was that by mid-2017, 7.16 million landowners employees, 800 contract workers and more than had collected their titles and in 2015-16 the number of 5,000 casual personnel. The employees gathered data recorded transactions had increased tenfold.16 on parcels, which was then transmitted to a central office and, after allowing for a period for corrections Securing the financial sustainability of the new system and objections, digitized to enable land titles to be has also proven to be a key challenge. The mapping issued. In the correction stage, one innovation was program had received substantial funding from donors the large-scale mobilization of citizens, up to around of around USD67.5 million.17 The funding was due 110,000 people, to assist in adjudicating disputes.14 to end in 2013 and, although the UK Department for This was based on training community members to hear International Development continued its support to the different views on the land ownership information that registry, this was at a lower level, making it necessary had been gathered and establishing land committees to find ways of self-financing. The registry team had in each district. By 2012, the database held information difficulty in fully engaging the finance ministry to provide on 10.4 million land parcels.15 adequate funding, while revenue from administrative fees had not yet been sufficient to entirely fund operations due to problems of affordability for citizens Phase II: Establishing a land in obtaining titles.18 administrative structure As of 2020, the registry is an independent entity and While a major achievement in itself, the land mapping known as the Rwanda Land Use and Management and titling program did not represent the end of this Authority, but securing financing has been a challenge. process. The National Land Centre, which by then had There was some concern that donors may step back 160 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE from supporting the sector with the registry system track changes in land use and provide information in place, threatening what has been achieved to date. for land use planning. 20 These two areas are Experts still believe that more awareness around the vulnerable to corruption, given the significant benefits of recording transactions needs to be built, changes in monetary value that occur in land use as a significant number of transactions take place planning. informally, particularly in rural areas. Transaction fees may therefore be a factor inhibiting access to service. An indication of the benefits of this reform process can This points to the need for consistent long-term be seen by comparing survey data on the corruption in financial support in maintaining the registry. land administration in Rwanda to its neighbors in East Africa. The East African Bribery Index captures key data on corruption in service delivery across various sectors in the region. Analysis conducted by Transparency Reflections International Kenya for the period 2010–2014 found that Rwanda scored significantly better in managing The land reform program is widely recognized as having corruption in land services than neighboring countries. made an important contribution to helping manage Its aggregate score for corruption in land services in the conflicts that are present around land use and 2014 was 12, where scores range from 0 to 100, and management in Rwanda. The AfDB considers that the 100 is the worst score. This compares favorably with process resulted in a ‘noticeable element of increased Burundi (42), Kenya (55), Tanzania (36) and Uganda (60). efficiency, transparency, citizen participation and The aggregate score brings together five indicators: development of viable land governance institutions.’19 the likelihood of encountering bribery, the prevalence of bribery, the average size of a bribe, the share of the Apollinaire Mupihanyi, E xecutive Direc tor of ‘national bribe’, and the perceived impact of bribery.21 Transparency International Rwanda, believes that As of 2020, more recent data on corruption in the land the land reform also had an important impact on services sector in Rwanda was unavailable. reducing corruption: “Although we can’t say that with digitalization all issues were solved, I ascertain that The scores for land services are consistent with various corruption was drastically reduced.” He also cited the reports and surveys, which have concluded that the benefits that “transparency and clear management” in prevalence of corruption across different types of this sector have for land values and investor confidence. public service delivery in Rwanda is low by regional While this may not have been the principal, or even standards.22 However, the same may not be true of all an explicit, aim of the project, lessons can be drawn sectors. transparency in certain areas of government from this case for reducing corruption risks in service activity such as procurement or the organization of delivery. The system that was established has several elections can be limited.23 key characteristics that can help to reduce corruption risks. Notwithstanding this point, the case shows the value of scrutinizing broader governance reforms to determine • Fees for services and obtaining documentation are whether gains in reducing corruption have also been standardized and publicly advertised, including on achieved. By regularizing the land tenure system and the agency’s website; making land ownership information readily available, the reforms implemented have played an important • Citizens can use a mobile texting service to directly role in upholding high standards of integrity in service access land registration information without the delivery in land administration in Rwanda. need to obtain this from land officials; • This independent source of land ownership information can be used to settle contested points and ambiguities, which in an informal system create space for improper forms of influence to be used; and • The database produced has already been used to Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 161 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE CASE STUDY 13 CASE STUDY 13 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE Collective Action for Reforms in Nigeria Ports Collective action to spur changes in functioning of ports in Nigeria Overview Introduction Ports in Nigeria face corruption that deeply impacts their Ports in Nigeria face corruption challenges that operational effectiveness with harmful consequences are rooted in the sector-wide issues. A 2018 report for the country’s economy. While the issues persisted prepared by the Lagos Chamber of Commerce and for a long time, an anti-corruption program instigated Industry estimated that illegal charges, bureaucratic by the Maritime Anti-Corruption Network (MACN) and red tape, delays and capacity underutilization in ports its partners in Nigeria since from 2012 has nonetheless cost the country around 3% of gross domestic product demonstrated that progress in countering the problem (GDP) annually. 25 These are long-standing problems. is possible.24 Commenting on the situation in the 1990s, Chatham House wrote that “ports in Lagos had a notorious The MACN brought together a global group of over reputation: vessels often had to wait for weeks – 100 companies in the shipping sector that wanted to sometimes months – offshore until a berth became free, reduce the prevalence of corruption in ports around while rampant corruption added hugely to the time and the world. Beginning with a risk assessment of five cost entailed in clearing cargo for onward delivery to its Nigerian ports, the network worked together with final destination.”26 government agencies, port authorities, and civil society to implement a series of measures designed to reduce Challenges of congestion and lack of adequate corruption. These included standardizing procedures, infrastructure resulted in its biggest port Apapa in using an e-governance portal, and establishing a Lagos losing its leadership position as a regional grievance mechanism. Surveys conducted by the gateway for shipping to the neighboring port of Lomé network suggest the measures have had a positive in Togo. In 2017, Lome became the largest port in West impact in improving the functioning of ports. Though Africa by volume of containers handled.27 there is still a long road ahead to tame corruption in Nigeria’s ports, this case study shows how anti- Interaction between government and business in corruption measures can make incremental progress Nigerian ports faced threats of delays, unpredictability in challenging sectors through collective action and and confusion around processes that lead to illicit stakeholder collaboration. payments to circumvent procedures. Based on a survey 162 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE of 79 leaders in the industry, the Lagos Chamber network adopted a clear step-by-step reform strategy, of Commerce estimated that illegal charges added beginning with a risk assessment (2012–2014), before 50% to the cost of imports and 60% for exports.28 In policy implementation (2015–2017) and then collecting addition to being a major source of lost revenue for data for a preliminary impact assessment (2017).30 the government and increasing the cost of goods for citizens, illicit payments increased operational costs for companies and exposed them to significant regulatory Risk assessment (2012–2014) risk. As a result, both businesses and the government had strong incentives to work together to address The United Nations Development Program (UNDP) these issues. office in Nigeria, which had an existing relationship with the Nigerian authorities around the themes of trade Recognizing the magnitude of the problems in the and governance, played a critical role in launching and shipping industry, a group of shipping companies coordinating the reforms. The UNDP also coordinated banded together in 2011 to form the MACN. The with three Nigerian anti-corruption agencies involved group, which included Maersk, the Mediterranean in the reforms. These were: Shipping Company and Stena Bulk, grew to include over 100 members worldwide, including vessel owners, • The Technical Unit on Governance and Anti- ship managers, commodity trading firms, and service Corruption Reforms, which is primarily a research providers. Business for Social Responsibility, an and policy unit. It produces country surveys and international civil society organization, managed the develops tools and indicators for monitoring network. A key guiding principle of the network was to corruption and governance issues; engage with multiple stakeholders in government and the private sector. “As soon as you have a stakeholder • The Independent Corrupt Practices Commission, who is out of the room, they take the blame for the which is involved in both the prevention and problem,” said Cecilia Müller Torbrand, MACN’s enforcement of corruption. This project fitted Executive Director. “Stakeholders become constructive within the agency’s prevention mandate, which has when they work together.” included reviewing the procedures and practices of government bodies to identify weaknesses in Following its establishment, the MACN began managing corruption risks; and researching countries where it could work with government authorities to test a series of anti-corruption • The Bureau for Public Procurement, a federal measures. After surveying its members on the most agency which makes recommendations on best challenging ports globally in terms of corruption, and practice and supervises public procurement. It has assessing the willingness and capacity of the local a track record in anti-corruption work and has built government to support reform, the MACN decided to a reputation as an effective agency. launch a pilot program in Nigeria. The program covered five ports: Lagos Apapa, Lagos Tin Can, Port Harcourt, The involvement and coordination of these three Port Calabar, and Port Warri. MACN’s decision to agencies, which generally operate independently, choose Nigeria to pilot its approach was a significant provided an important foundation to implement the challenge, as it was expected that many businesses and program. The three government agencies carried government officials would resist any change. out a corruption risk assessment, which followed a methodology developed by the UNDP. The agencies put together a team of 20 assessors who conducted inter views and reviewed data from 17 different stakeholder groups in the ports sector, ranging from the The implementation process Nigerian Ports Authority, to Customs and Immigration Ser vices, and shipping companies and freight When confronted with corruption entrenched in the forwarders. The assessment was structured around functioning of a sector, it can be difficult to find an entry three levels of risk: the environmental level, focusing on point for reform. To overcome this difficulty, MACN broader macro factors that influence corrupt behavior, consulted widely within its network to determine that such as economic, political and social issues; the conditions for reform were present in Nigeria. The organizational level, reviewing the internal processes Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 163 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE and controls across port organizations for gaps; and the The Por t Ser vice Suppor t Por tal, which aims to personnel level, identifying specific individuals at risk of standardize cargo handling and impor t-expor t involvement in corruption.31 operations across Nigeria’s ports, also seeks to improve the efficiency and transparency of the ports’ The assessors initially faced opposition, with agencies systems. Installed at a cost of USD159,000 by the at some ports refusing to participate in the exercise Nigerian Shippers Council, companies are able to out of fear that the assessments would expose illegal track online the status of port service enquiries and practices. The assessors were able to overcome this complaints, data which can also be used to assess the problem due to high-level support from the leadership performance of agencies.34 Research in ports in other of the Nigerian Ports Authority, the federal government countries has shown that technology and automation agency which oversees all the ports. The government of procedures are two tools which can help counter agencies themselves were also able to push back on corruption. Technology reduces the frequency of this opposition by emphasizing both the value of the interaction between companies and multiple layers of exercise for improving operational effectiveness and government officials and agencies, often conducted in the support from shipping businesses and the UNDP. time-pressurized circumstances in this sector.35 Even when the ports fully participated in the exercise, In addition, a grievance mechanism provided an the assessors faced challenges. Most of the port outlet for shipping companies to report incidents and agencies lacked clear process maps and had not raise concerns, thus improving the level of data and established standard operating procedures (SOPs). knowledge collected on corruption in the ports. The Without those in place, the assessors could not compare number of incidents reported by members, including actual practice with established standards.32 safety-related incidents, increased from 6 in 2011 to 155 in 2017.36 The Nigerian Ports Authority also set up The assessment identified several key risks in the an anti-corruption and transparency unit to investigate operating practices of the ports. The biggest was the concerns in 2016, although it is still to be seen how excessive level of bureaucratic red tape. For example, effective the agency can be in ensuring implementation the assessors found that getting clearance for a vessel of appropriate responses to the complaints raised.37 and its cargo in Lagos could require as many as 140 signatures from officials at local authorities and port While the measures introduced helped to reduce agencies.33 Other risks highlighted in the assessment opportunities for corruption, progress is not linear. included facilitation payments made by ship captains, A fundamental reform of routine practices is a much unpredictable and unclear decision-making processes, longer-term process. In this regard, a train-the-trainers and a lack of internal communication and training module led by the Convention on Business Integrity around anti-corruption. These points all informed the (CBi), a leading Nigerian civil society organization, recommendations subsequently developed by the showed how a large number of personnel could be MACN and its government partners. reached to raise awareness. The training focused on professional ethics and was structured around several scenarios, which had been developed around the Policy implementation (2015–2017) problems in the sector garnered from the corruption risk assessment. Both public and private stakeholders Over a two-year period, the MACN and its government attended the training. The co-founder and CEO of the partners implemented a series of reforms in the ports CBi, Soji Apampa, said in interview that the training sector. Many of these measures go hand in hand had been well-received and “confirmed something with improving organizational effectiveness. One key that we have long known: people are corrupt because priority, for example, was to develop and distribute they have no alternative. It is not because they are evil SOPs for vessel clearance at the ports. The aim was to but because they are trapped in a system… If you give improve transparency around a process which has been people the option of integrity, they will take that path, highly susceptible to corruption. Publishing standards but they have to be made aware.” meant that companies had a clearer reference point when assessing the legitimacy of demands for payment for alleged violations of procedures. 164 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 165 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE among government officials around new procedures, Reflections and requests for bribes were still present and even increasing in some ports.38 This finding was consistent In 2018, the MACN conducted a survey of stakeholders with another survey, compiled by the MACN and CBi in the ports to assess the preliminary impact of its work in 2019, which found that deliberate violation of SOPs with government partners. The survey indicated that and the use of discretionary authority were still severe the program had chalked up some initial successes, problems in the ports. 39 More than 90% of sector while progress in other areas had been more limited. leaders surveyed by the Lagos Chamber of Commerce and Industry in 2018 also believed that corruption Among the companies themselves, members of the remained a big issue in the ports.40 This continues to MACN claimed to have implemented a zero-tolerance directly harm the operational effectiveness of ports. approach to bribe requests when calling at Nigeria Nigeria now ranks 179 out of 188 countries on the without this resulting in additional delays or threats. World Bank’s Ease of Doing Business Index for trading They also reported that physical harassment and across borders, an indicator that captures the time and threats to crew during vessel clearance were becoming cost of doing business at a country’s borders. less severe. Despite the ongoing challenges, the high level of Over time, some companies increased their use of the coordination between shipping companies was a grievance mechanism, and the customs authorities significant achievement that has not been seen to the were quick to respond to complaints. Soji Apampa of same extent in other sectors. The MACN’s partnership the CBi gave the example of a US shipping firm which with government agencies could be replicated in other had used the line in response to a corrupt demand from sectors affected by systemic corruption. As highlighted customs authorities in one port in 2018. After making by the UNDP, an important aspect of the program was the complaint, the issue was resolved within 48 hours to involve Nigeria’s anti-corruption agencies directly by appealing directly to the heads of the national in tackling corrupt practices in service delivery, which customs authorities. Now the company routinely uses can have a more direct impact on those affected by the mechanism, and issues are typically resolved within corruption on a day-to-day basis.41 24 hours or less. “It has taken from 2012 to get here”, said Apampa, but more people are using the line The program helped in building political support without fear of repercussions.” in Nigeria, in part by framing the reforms in terms of their potential economic benefits rather than focusing The anti-corruption training for public officials is also exclusively on their potential benefits in reducing beginning to show some modest signs of success. corruption. “The project has survived changes in The CBi trained 1,000 senior public officials from 2016 political administrations and built momentum since to 2018, and the MACN’s survey uncovered several 2014,” said Torband, the program director of MACN,“It examples of port officials actively assisting MACN shows the project has a decent anchor. We have members to reject corrupt demands. This reflects introduced and analyzed a problem, showing why it is partial success of the training in promoting the value important for government. Fundamentally, addressing of professional ethics over other social obligations, these issues represents the possibility for the country to even if problems persist. “It is not that corruption has import and export goods, and trade is linked to social disappeared, but options for integrity now co-exist economic development. This doesn’t just need to be with corruption,” said Apampa. As of 2019, the MACN about fighting corruption.” planned to build on these efforts by training 600 people as compliance officers within the ports. Their Several aspects of the MACN’s strategy were critical to role will be to ensure compliance with procedures and the incremental progress that the program was able to promote professional ethics through further training in achieve: individual locations. • Collaboration. In making the case to businesses While significant progress was made, the MACN’s that there was more to gain than lose through initiative was unable to achieve wholesale changes to collaboration, the MACN put forward a solution the integrity culture in the ports in a short period. The that eased the costs of doing business and 2018 MACN survey highlighted a low level of awareness approached the problem on a manageable scale 166 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE to earn quick wins to generate momentum.42 • Dual focus on change and data collection. The clear organizing framework of the program around a theory of change as well as the continual emphasis on data collection around corrupt practices are two methodological approaches that have served the program well. • Risk assessment. Even if not without contention, the process of conducting a corruption risk assessment supported the participation of a broad range of stakeholders in the program. Expansion of the program Despite these encouraging successes, the task of rooting out corruption in the Nigerian ports is by no means completed. Further work is now underway to improve implementation of the measures developed in Nigeria. In particular, the MACN plans to focus on increasing awareness and ensuring consistency in the application of the revised SOPs. Middle management will be the main targets of further engagement and training, in addition to the local compliance officers. After feedback from members that the problems can be more severe further away from shore, the program is also extending beyond the six ports to oil and gas terminals and floating production vessels. The MACN has used the methodology and lessons learned from Nigeria to launch programs in a number of other countries, including Argentina, Egypt, India, and Indonesia.43 Programs in these countries have already brought about major changes in practice. In Argentina, for example, the organization helped change regulations for the loading and inspection of vessels holding agricultural products. This led to a 90% drop in the number of corrupt incidents reported through the MACN’s anonymous reporting mechanism. All of the MACN’s programs place strong emphasis on public- private collaboration and demonstrate that when the incentives are clearly framed the private sector can be a strong advocate for reducing corruption. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 167 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE CASE STUDY 14 CASE STUDY 14 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE Reforms in the Health Sector in Ukraine Revolutionizing care: Ukraine’s sectoral approach to anti-corruption in health Overview Introduction Following the 2014 Euromaidan Revolution, Ukraine In 2011, 4-year-old Christina Babiak from Kherson embarked on a national reform program to reduce Oblast was diagnosed with congenital aplastic anemia widespread corruption within government. In the and needed an urgent bone marrow transplant. As health sector, the government introduced several such a treatment was only available abroad, Christina’s complementary reforms that aimed to improve the parents appealed to the Ministry of Health, which health outcomes of Ukrainian citizens, but designed in granted them almost USD200,000 for Christina to such a way that they would also reduce corruption. The receive the procedure at Debrecen Scientific University reforms included reconfiguring primary care financing in Hungary. Christina’s parents were later told that the and essential medicines reimbursement under the procedure was to take place at a municipal clinic in newly formed National Health Service of Ukraine; raising Miskolc that was affiliated with the Debrecen Scientific the remuneration of health professionals; introducing a University and they reluctantly agreed to the treatment. transparent, merit-based, process for medical university It turned out that the clinic and university were not admissions; and initiating development of an eHealth affiliated at all and Debrecen Scientific University was digital records system. As of early 2020, these reforms in fact not equipped to perform pediatric bone marrow have improved overall value for money, lowered out- transplants. The ministry had employed a mediator of-pocket expenditure, reduced the number of acute to arrange the treatment and handle the funds. The medical events, and increased patient satisfaction clinic received approximately USD160,000 and the rest with their care providers. Such indications of change went missing. Three days after the botched procedure are encouraging, although it may be too early to tell Christina died.44 if these ongoing reforms will sustainably reduce levels of corruption on a national scale. In the coming years, There is no shortage of literature describing the it will be critical that anti-corruption momentum is failure of the Ukrainian health system to provide for its maintained to allow for the full realization of the sectoral citizens. Historically, modern Ukraine’s political system reforms. has been described as a kleptocracy and earned 168 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE Ukraine the title of being “the most corrupt country relies predominantly on financial control mechanisms, in Europe”.45 In the health sector, rampant corruption the possibility of bringing strategic health sector has resulted in poorly maintained, funded, staffed and improvements through an anti-corruption lens opens supplied health institutions, and high levels of out-of- up.53 pocket and informal payments across all levels of care. Unsurprisingly, Ukrainians were recorded as having the Following the 2014 Euromaidan Revolution, when second lowest life expectancy compared to all other months of sustained protests ousted the president European countries after Moldova.46 and large swathes of the political establishment, the new administration chose to attempt a sectoral The procedures for financing Ukraine’s health system approach to reducing corruption in the health system. facilitated both corruption and poor health outcomes. The subsequent Law on the Prevention of Corruption Health facilities received lump sums to cover costs bolstered further support for anti-corruption reforms of inputs, regardless of the level of patient flow or in the country, including for the Ministry of Health to conditions treated, and patients were assigned a tackle rampant corruption within the system as part practitioner based on their place of residence, giving of centralized reform efforts, in addition to public them little to no recourse when provided poor or procurement reforms. fraudulent services. This was coupled with severely low wages for health personnel. For example, in 2014, the The ministry embedded these anti-corruption reforms average monthly salary for health workers in Ukraine in the National Healthcare Reform Strategy 2015-2020,54 was approximately 2,500 Ukrainian hryvnia (UAH) developed by a group of 12 Ukrainian and international or USD100.47 Such low wages incentivized medical experts with financial and technical support from the personnel to expect informal payments or in-kind gifts International Renaissance Foundation, the World Bank, for better quality care.48,49 Data from 2010 indicated that and the World Health Organization (WHO). The strategy 53% of Ukrainians had made informal cash payments set out a plan to overhaul Ukraine’s healthcare system, and 42% had provided gifts in-kind to personnel at highlighting the importance of tackling inefficiency and health facilities.50 corruption as a cornerstone for providing services that met patients’ needs. In addition to corruption within health institutions, the medical education system was also infamous for corruption schemes, including students paying bribes to deans and professors for study entry, exam results, and qualifications. According to OECD, unlike other The implementation process higher education institutions, applicants to medical universities did not have to complete so-called External The ambitious reforms included in the strategy aimed Independent Testing, which was successfully used in primarily to improve service delivery and control costs, other university subjects to ensure students were but also lent themselves to reducing corruption. The accepted based on independently verified merit. reforms included establishing a national health service Rather, applicants to medical universities wielded their and reimbursement plan, improving compensation for social and financial capital in order to be accepted to the health personnel, introducing transparent processes for coveted, state-funded positions at medical universities medical university admissions and career progression, by paying bribes to those responsible for admissions.51 and developing an eHealth system for digital health This problem also traveled beyond borders, as Ukraine records and reimbursement. The Acting Minister of educated many medical students from other countries, Health Ulana Suprun led these reform efforts from including India, Nigeria and Turkey.52 2016 to 2019. In May 2017 the ministry also conducted a Corruption Risk Assessment and shortly thereafter In an effort to steer away from scattered, isolated established an anti-corruption program55 to improve interventions or broad national-level approaches, there overall transparency and accountability within the has been increasing global advocacy for a sectoral ministry itself. approach to tackling corruption in health that prioritizes improvement in health outcomes as the key indicator of The health ministry established the National Health success. Advocates of this approach have suggested Service of Ukraine (NHSU) in March 2018 as a national that by moving away from a zero-tolerance stance that insurer  and the main institution responsible for Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 169 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE promoting and implementing a revised healthcare complemented by a weekly-updated, online resource, financing mechanism. The new mechanism, known as “There is a Medicine” (ELiky)62, where patients could “money follows the patient”, employed output-based search for information on all available, state-funded purchasing through capitation56 adjusted for age. Using stock at a given health facility. This resource also this approach, the NHSU funded patients’ servicing, provided links to information about the cost and rather than providing lump sums to finance facilities, reimbursement of medicines. doctors, or other staff. Under this scheme, expanded to cover specialized outpatient care and hospitals in 2020, Through the NHSU’s primary care financing reforms, all public facilities and any private facilities requiring or provider salaries have increased. 63 As part of the desiring public financial support, had to sign up to the “money follows the patient” model, primary care NHSU scheme. providers whose facilities have joined the NHSU scheme have seen an increase in salaries based on the number As part of this scheme at the primary care level57,58 of patients with whom they sign declarations. Some patients signed a “declaration” with their practitioner providers saw a tripling of their salaries. For example, and financial reimbursements were calculated based on in the months immediately after the implementation the number of patients registered to a facility. To sign of the model, the Ministry of Health reported that a a declaration, patients had to present their passport, family doctor in the Odessa Oblast, who had signed individual tax number and include their registered 1,795 patient declarations, earned UAH16,011 (USD640) address on declarations. Declarations were confirmed after tax in July, as opposed to UAH5,834 (USD230) the using patients’ mobile phones connected to their previous month.64 Such an incentive can act as a quality registered address. Signed declarations underwent assurance model and a deterrent for informal payments central vetting in the NHSU and eZdorovya (described as, under the NHSU, patients were able to change below) data systems that used digital algorithms to their provider if they were dissatisfied with services. prevent fraudulent or multiple submissions. Further The impact of increased salaries was reflected in a data cleaning was undertaken regularly to remove reduction in reported levels of bribery in an October from the registry duplications, as well as those who 2018 poll, which found that 7% of polled patients paid had emigrated or were deceased. A key component of a bribe compared with 15% four months earlier in June this reform was that patients could change providers if 2018, and 20% in August 2017.65 they were dissatisfied with the services provided. As of early 2020, 97% of all primary care facilities had signed The ministry identified two further points of intervention onto the NHSU and by March 2020 nearly two-thirds to concentrate on that presented a corruption risk of the Ukrainian population had signed declarations to the healthcare profession more broadly, namely, (29.3 million). The government kept a transparent, medical university admissions and appointment online record of all primary healthcare facilities and the procedures for Senior Healthcare Managers. 66,67 In number of signed declarations on the NHSU open data both instances, merit-based requirements were put platform.59,60 In 2020, the NHSU went beyond primary in place. Previously, those aiming to study medicine care and integrated secondary and tertiary care into could apply to any of the medical universities in the the reimbursement scheme with a second phase of country using their final high-school results without NHSU integration commencing in April 2020. any external admissions testing. However, starting in 2018, students for the specialties of dentistry, medicine Prior to the establishment of the NHSU, the Ministry and pediatrics were required to achieve a higher of Health developed a medicines governance minimum score on entrance criteria in relevant subjects program in 2017 called, the Affordable Medicines reviewed by external independent evaluators. Further Programme, which was then integrated into the NHSU initiatives to improve medical school examinations, reimbursement scheme. The program set out a list such as standardized interim and exit exams, were of essential medicines for three chronic diseases that also introduced. For example, in 2019 the Ministry of were covered by the NHSU outpatient reimbursement Health set the Unified State Qualification Exam, which program, namely, hypertension, diabetes type 2, and expanded the existing “Krok” examination schedule to asthma. Patients were provided with information about include the standardized “International Foundations which medicines were covered and which were not. This of Medicine” exam.68 In addition to providing greater increased overall access to medicines and led to a huge quality assurance of knowledge and skills of students reduction in patient co-payments.61 This system was and graduates, this reform aimed to weed out those 170 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE who bought their university placements.69 Reflections The process for the appointment of senior health staff was also adapted to be relatively transparent and merit- The health sector reforms undertaken in Ukraine began based from 2018 onward.70 Using the new procedure, a in 2014 and in a short period of time considerable gains hiring panel was assigned, consisting of representatives were made. The sectoral approach that was adopted from the administrative body, selected members of the shows how diverse health system reforms that prioritize public and staff delegates—any interested individual health outcomes and improvements to system efficiency could apply to become an interviewing board member. can be coupled with anti-corruption objectives in order In one example, this procedure was applied for the to achieve both ends. This is encouraging, as it can be appointment of the Director of the Department of immensely challenging to acquire resources needed Health for the Poltava Oblast in January 2020. Three to implement a sustainable anti-corruption reform, shortlisted candidates were required to complete a especially in the health system. written test, a professional exam, and an interview with an independent selection committee, which culminated There are three distinct cornerstones of Ukraine’s in an objective numerical score. The recruitment reforms, namely, supportive legislative change, diverse procedure and the results of the outcome were made reform implementation that targets the corruption public in the local news.71 causing the greatest harm, and civic participation. Particularly for reforms carried out in primary care, Finally, in 2018 the ministry launched a further initiative it appears that collectively these initiatives had a that ties many of the reforms together, eZdorovya72, positive impact. According to a series of surveys, rates which was an e-Health system accessible by patients, of reported bribery when accessing health services providers and administrators alike that aimed to digitize decreased from 20% in August 2017 to 7% in October all appointments and medical records, including 2018.76 This is encouraging, as bribery and out-of- prescriptions, thereby making paper-based record- pocket expenses were listed among the major reasons keeping obsolete. Paper-based records present a for catastrophic loss77 in Ukraine.78 Also, increased risk for fraudulent practices and can hinder accurate access to essential medicines has led to a decrease in medical surveillance, whereas e-Health records can the total number of acute events, such as heart attack facilitate better quality and faster care, rule out loss of or stroke.79 This has all occurred in spite of a decrease in patients’ medical data, enable more efficient resource overall % GDP expenditure on health since 2013—7.3% management, improve price-setting accuracy and in 2013, 6.7% in 2016.80 ensure better overall quality control. The eZdorovya system was initially developed and tested by However, it would be premature to declare it all Transparency International Ukraine in 2017 to support a success; as the reform process in the Ukrainian the restructuring of health financing and allow for better healthcare system continues, considerable corruption management of public spending. The system was risks and challenges still remain, and reversals cannot later transferred to the ministry in 2018, after which it be ruled out. For example, while there has been a became a state-owned enterprise.73 Already by the end reduction in out-of-pocket expenses in primary care, of July 2019, over 29 million patients (as part of signing an increase in secondary and tertiary care—not yet declarations), over 24,500 doctors, nearly 11,000 integrated into the NHSU reimbursement system—has pharmacists, over 2,000 medical establishments and been observed.81 This illustrates the critical need for over 1,000 pharmacies had joined the system. At the sustained momentum on health system improvement same time, more than 4 million electronic prescriptions and anti-corruption to ensure Ukraine reaches its goal were filled under the NHSU reimbursement program of having a healthcare “ecosystem in which the very and over 3 million e-prescriptions issued by pharmacies causes of corruption will be impossible”.82 were reimbursed.74,75 The next steps for eZdorovya are the roll-out of digital patient health records and the integration of the secondary and tertiary care levels into the system as part of the NHSU health sector financing reforms planned for 2020. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 171 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE Notes 1. Rose-Ackerman, Susan & Palifka, Bonnie J. (2016). Reducing 21. Transparency International Kenya (2015). ‘The East African Incentives and Increasing Costs. Chapter 4 of Corruption and Bribery Index: trends analysis 2010–2014’. Government: Causes, Consequences, and Reform. Cambridge University Press. Page 126. 22. Transparency International Kenya (2017). ‘The East African Bribery Index 2017’.; Camargo, C. and Gatwa, T. (2018). Informal 2. For a definition of grand corruption, see: http://files. governance and corruption – transcending the principal t r ans p are nc y.org /co nte nt /d ow nload /2033/1314 4/f ile/ agent and collective action paradigms. Basel Institute on GrandCorruption_LegalDefinition.pdf Governance. https://www.baselgovernance.org/publications/ informal-governance-and-corruption-transcending-principal- 3. Benjamin A. Olken & Rohini Pande, 2012. “Corruption in agent-and-collective-1.; and Developing Countries,” Annual Review of Economics, Annual Reviews, vol. 4(1), p. 479- 509, 07. Sebudubudu, D., Khatib, L. and Bozzini, A. (2017). ‘The atypical achievers: Botswana, Qatar and Rwanda’ in Mungiu-Pippidi, 4. Yuriy Gorodnichenko & Klara Sabirianova Peter (2007). Public A. and Johnston, M. (eds), Transitions to Good Governance: sector pay and corruption: Measuring bribery from micro data, Creating Virtuous Circles of Anti-Corruption, Cheltenham: Journal of Public Economics, Volume 91, Issues 5–6, p. 963- Edward Elgar Publishing. 991. 23. Sebudubudu et. al., 2017. 5. Pyman, Mark (2019). Sectors as the primary locus for corruption reform. https://curbingcorruption.com/mark-pyman-sectors- 24. Parts of this case study draw from: MACN (2018). Nigeria as-the-primary- locus-for-corruption-reform-april-2019/. Collective Action: MACN Impact Report. Basel Institute on Governance. https://www.baselgovernance.org/publications/ 6. Incentives for grand and petty corruption do not always nigeria-collective-action-macn-impact-report. The author is go hand in hand. For example, Bussell (2013) argues that also grateful to Cecilia Müller Torbrand, Executive Director the incentives to do away with petty corruption in India by of the MACN, and Soji Apampa, CEO of the Convention on introducing digitization and one-stop shops depend on the Business Integrity, for further information and insight provided reformers’ access to grand corruption rents. in interviews in February 2019. 7. See https://curbingcorruption.com/about/. 25. The Lagos Chamber of Commerce & Industry (2018), ‘Costs of 8. Rose-Ackerman & Palifka, 2016, page 443. Maritime Port Challenges in Nigeria’. 9. Transparency International Rwanda (2009), ‘Ville de Kigali: 26. Chatham House (2015), ‘Nigeria’s Booming Borders: The Etude sur la transparence et l’intégrité dans les services Drivers and Consequences of Unrecorded Trade’. d’urbanisme et du cadastre’. 27. Data compiled by Dynamar, a Dutch maritime intelligence and 10. For a full typology see Koechlin, L., Quan, J. and Mulukutla, consulting firm and cited in Quartz Africa (2018), ‘The Never- H. (2016), Tackling corruption in land governance. A LEGEND Ending Congestion at Nigeria’s Largest Port is Starting to Get analytical paper. https://landportal.org/library/resources/ Very Expensive’. l e g e n d - a n a l y t i c a l - p a p e r-1/ t a c k l i n g - c o r r u p t i o n - l a n d - 28. The Lagos Chamber of Commerce & Industry, 2018. governance.. 29. Background on the organization is available on its website, 11. Parts of this case study draw from: Schreiber, Leon (2017), http://www.maritime-acn.org/about-macn Securing land rights: making land titling work in Rwanda, 2012- 17, Innovations for Successful Societies, Princeton University. 30. MACN, 2018. 12. African Development Bank (2011), Land tenure regularization 31. UNDP (2017), ‘Corruption Risk Assessment and Integrity in Rwanda: good practices in land reform: case study. Planning’. https://www.ng.undp.org/content /nigeria/en/ home/libr ar y/democr atic _ gover nance/cor r uption-risk- 13. In implementing this program, the land agency also took assessment-and-integrity-planning.html. different names, with the government also changing its governance structure on two occasions. The National Land 32. Ibid Centre began the mapping and titling program before it was integrated into the Rwanda Natural Resources Authority 33. MACN, 2018 (RNRA) in 2011. In 2017 the agency was renamed the Rwanda 34. Ship Technology (2016), ‘Nigeria ramps up por t anti- Land Use and Management Authority and re-established as an corruption’. independent body. 35. Sequeira, S. and Djankov, S. (2010), ‘An empirical study of 14. African Development Bank, 2011. corruption in ports’. 15. Schreiber, 2017. 36. MACN, 2018. 16. Ibid 37. Ship Technology, 2016. 17. Ibid 38. MACN, 2018. 18. Centre for Public Impact (2017). Land reform in Rwanda. 39. Proshare Business (2019)., ‘CBi and MACN explain inefficiency https://www.centreforpublicimpact.org/case-study/land- at Nigerian ports; corruption still a problem’. reform-rwanda/. 40. The Lagos Chamber of Commerce & Industry, 2018. 19. African Development Bank, 2011. 41. UNDP, 2016. 20. World Bank (2017). A tool for sustainable land use management in Rwanda. https://www.worldbank.org/en/ 42. Center for the Advancement of Public Integrity (2017), ‘The news/feature/2017/06/06/a-tool- for-sustainable-land-use- Maritime Anti-Corruption Network. A Model for Public-Private management-in-rwanda. Cooperation against Graft’. 172 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE 43. MACN (2018), ‘2018 Annual Report’, https://www.maritime- 60. National Health Ser vice of Ukraine, 2020, Declarations acn.org/news/2019/6/17/macn-2018-annual-report-available. on the selection of a PMD physician submitted to the WHO, https://data.gov.ua/dataset/a8228262-5576-4a14- 44. TCN, 2011, The Death of a 4-Year-Old Child from Kherson beb8-789573573546. Revealed a Pattern of Corruption in the MOH, 26 June 2011, https://tsn.ua/ukrayina/smer t-4-richnoyi-ditini-z-hersona- 61. World Health Organization, 2019, Evaluation Of The rozkrila-shemu-korupciyi-v-moz.html. Affordable Medicines Programme In Ukraine, WHO Regional Office for Europe, Copenhagen. 45. Bullough O, 2015, Welcome to Ukraine, the most corrupt nation in Europe, in: The Guardian, 06 February 2015, https:// 62. See https://eliky.in.ua/. www.theguardian.com/news/2015/feb/04/welcome-to-the- most-corrupt-nation-in-europe-ukraine. 63. Ministry of Health of Ukraine, 2018a, Primary care physicians’ salaries increase starting July 2018, https://en.moz.gov.ua/ 46. World Health Organization, 2018, Life expectancy at birth ar ticle/news/primar y- care-physicians’-salaries-increase- (years), WHO European Region, European Health Information starting-july-2018. Gateway, https://gateway.euro.who.int/en/indicators/hfa_43- 1010-life-expectancy-at-birth-years/. 64. MoH Ukraine, 2018a. 47. State Statistic Service of Ukraine (2014). http://ukrstat.gov.ua/. 65. RATING Sociological Group, 2019, Assessment Of The State Of Healthcare In Ukraine, http://ratinggroup.ua/en/research/ 48. Lekhan VN, Rudiy VM, Shevchenko MV, Nitzan Kaluski D, uk r aine /o ce nk a _ me dicins koy_ s fer y_v_ uk r aine _ 21-29_ Richardson E., 2015, Ukraine: Health system review. Health maya_2019_goda.html. Systems in Transition, 2015; 17(2): 1–153. 66. Ministry of Health of Ukraine, 2018b, Fighting corruption is 49. Yabchanka O, 2016, A Ukrainian doctor’s choice: be a beggar key to improving healthcare: Ukraine implements transparent or a racketeer, in: Euromaidan Press, http://euromaidanpress. and merit-based selection of senior healthcare managers, com/2016/03/04/a-ukrainian-doctors-choice-be-a-beggar-or- 15 November 2018, https://en.moz.gov.ua/ar ticle/news/ a-racketeer/. fighting-corruption-is-key-to-improving-healthcare-ukraine- implements-transparent-and-merit-based- selection-of- 50. Stepurko TG, Pavlova M, Gryga I, Murauskiene L & W Groot, senior-healthcare-managers. 2015, Informal payments for health care services: The case of Lithuania, Poland and Ukraine, Journal of Eurasian Studies, 67. Government Portal of Ukraine, 2019. 6(1): 46-58. 68. Vox Ukraine, 2019a, How the Ministry of Healthcare is Trying 51. OECD, 2017, OECD Reviews of Integrity in Education: Ukraine to Make Ukrainian Medical Students Take American Exams, 2017: Chapter 7 -Corrupt access to higher education in https://voxukraine.org/en/how-the-ministry-of-healthcare-is- Ukraine, OECD Publishing, Paris. trying-to-make-ukrainian-medical-students-take-american- exams/. 52. Osipian A, 2018, Corruption in Ukraine’s Medical Universities, 30 July 2018, https://www.insidehighered.com/blogs/world- 69. Vox Ukraine, 2019b, How a Former Rector of the Kharkiv view/corruption- ukraine%E2%80%99s-medical-universities. University of Radioelectronics Became a Scourge for Students, ht tps://voxukraine.org/en/how-a-for mer-rec tor- of-the - 53. Bauhoff S, Oroxom R, Steingrüber S & A Wierzynska, kharkiv-university-of-radioelectronics-became-a-scourge-for- 2018, Rethinking corruption risk management for global students/. health programmes, Public Administration Review, 23 October 2018, https://www.publicadministrationreview. 70. Resolution No. 1094 “On Approval of the Procedure for com/2018/10/23/666/. selecting heads of state and municipal healthcare institutions through an open competition”. 54. See Ministry of Health of Ukraine, 2015, National Health Reform Strategy for Ukraine 2015-2020, Kiev, https://en.moz. 71. Lisogor M, 2020, Victoria Loza Won The Competition For gov.ua/uploads/0/16- strategy_eng.pdf. The Position Of Director Of The Department Of Health, in: Poltavshchyna, 28 Januar y 2020, https://poltava.to/ 55. See https://moz.gov.ua/uploads/0/1410-dn_20170914_1086_ news/54162/. dod_programa.pdf. 72. See https://ehealth.gov.ua/. 56. Capitation is a payment arrangement for healthcare providers that sets an amount for each enrolled person, per period of 73. Transparency International Ukraine, 2018, The Project Office time, whether or not that person seeks care. It incentivizes Provided The MoH with the eHealth System, https://ti- ukraine. preventative healthcare, as there is a greater financial reward org/news/proektnyi-ofis-peredav-moz-systemu-ehealth/. for preventing rather than treating disease. In Ukraine, capitation is set on a clear list of services provided at primary 74. National Health Service of Ukraine, 2020. healthcare centers and payment is calculated based on the 75. Ukrinform, 2019, Leading IT companies will join the number of citizens that have signed declarations with primary development of eZdorovya, https://www.ukrinform.ua/rubric- care providers. society/2750237-providni-itkompanii-dolucatsa-do-rozrobki- 57. Resolution No. 1013-r; National legislation “On Approval of ezdorovya.html. the Concept of Reform of Financing of Health Care System”. 76. RATING, 2019. 58. Order No. 503; National legislation “On Approval of the 77. Catastrophic loss or catastrophic health expenditure refers to Procedure for Selection of Primary Care Doctor and Forms health expenses that are in such disproportion to an individual of Declaration for Selection of Primary Care Doctor” https:// or household income that it results in a financial catastrophe zakon.rada.gov.ua/laws/show/z0347-18?lang=en for the individual or household. 59. Government Portal-Ukraine, 2019, Health Care System Reform, 78. Lekhan et al., 2015. https://w w w.kmu.gov.ua/en/reformi/rozvitok-lyudskogo- kapitalu/reforma- sistemi-ohoroni-zdorovya. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 173 PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE 79. Government Portal-Ukraine, 2018, The Ministry of Healthcare Transparency International Kenya (2017). ‘The East African Bribery of Ukraine implements seven strategic programs to eliminate Index 2017’. corruption in the health sector, 01 October 2018, https:// www.kmu.gov.ua/en/news/7-napryamiv-roboti-moz-shcho- Transparency International Rwanda (2009), ‘Ville de Kigali: Etude dolayut-korupciyu. sur la transparence et l’intégrité dans les services d’urbanisme et du cadastre’. 80. World Bank, 2020, Current health expenditure (% of GDP) – Ukraine, https://data.worldbank.org/indicator/SH.XPD.CHEX. World Bank (2017). A tool for sustainable land use management GD.ZS?locations=UA. i n R w a n d a . h t t p s : // w w w.w o r l d b a n k . o r g /e n / n e w s / f e a t u r e / 2 017/ 0 6 / 0 6 /a - t o o l - f o r- s u s t a i n a b l e - l a n d - u s e - 81. Stepurko TG, Semygina TV, Barska YG, Zahozha V & N management-in-Rrwa Kharchenko, 2019, Health Index Ukraine 2018: Results of the National Survey, Kyiv. 82. Ministry of Health of Ukraine, 2019, How the healthcare system Case Study 13: Collective Action for Reforms in Nigeria has changed, 15 April 2019, https://en.moz.gov.ua/article/ Ports news/how-the- healthcare-system-has-changed. Center for the Advancement of Public Integrity (2017), ‘The Maritime Anti-Corruption Network. A Model for Public-Private Cooperation against Graft’. Chatham House (2015), ‘Nigeria’s Booming Borders: The Drivers and Consequences of Unrecorded Trade’. References MACN (2018), ‘2018 Annual Report’, https://www.maritime-acn. org/news/2019/6/17/macn-2018-annual-report-available. Benjamin A. Olken & Rohini Pande, (2012). “Corruption in Developing Countries,” Annual Review of Economics, Annual MACN (2018). Nigeria Collective Action: MACN Impact Report. Reviews, vol. 4(1), p. 479-509, 07.  Basel Institute on Governance. https://www.baselgovernance. org/publications/nigeria-collective-action-macn-impact-report Pyman, Mark (2019). Sectors as the primary locus for corruption reform. https://curbingcorruption.com/mark-pyman-sectors-as- Proshare Business (2019)., ‘CBi and MACN explain inefficiency at the-primary-locus-for-corruption-reform-april-2019/. Nigerian ports; corruption still a problem’. Rose-Ackerman, Susan & Palifka, Bonnie J. (2016). Corruption and Quartz Africa (2018), ‘The Never-Ending Congestion at Nigeria’s Government: Causes, Consequences, and Reform. Cambridge Largest Port is Starting to Get Very Expensive’. University Press. Sequeira, S. and Djankov, S. (2010), ‘An empirical study of Yuriy Gorodnichenko & Klara Sabirianova Peter (2007). Public corruption in ports’. sector pay and corruption: Measuring bribery from micro data, Ship Technology (2016), ‘Nigeria ramps up port anti-corruption’. Journal of Public Economics, Volume 91, Issues 5–6, p. 963-991. The Lagos Chamber of Commerce & Industry (2018), ‘Costs of Maritime Port Challenges in Nigeria’. Case Study 12: Land Administration Reforms in UNDP (2017), ‘Corruption Risk Assessment and Integrity Planning’. Rwanda https://www.ng.undp.org/content/nigeria/en/home/library/ African Development Bank (2011), Land tenure regularization in democratic _governance/corruption-risk-assessment-and- Rwanda: good practices in land reform: case study. integrity-planning.html. Camargo, C. and Gatwa, T. (2018). Informal governance and corruption – transcending the principal agent and collective Case Study 14: Reforms in the Health Sector in Ukraine action paradigms. Basel Institute on Governance. https://www. baselgovernance.org/publications/informal-governance-and- Bauhoff S, Oroxom R, Steingrüber S & A Wierzynska, (2018), corruption-transcending-principal-agent-and-collective-1. Rethinking corruption risk management for global health programmes, Public Administration Review, 23 October 2018, Centre for Public Impact (2017). Land reform in Rwanda. https:// https://www.publicadministrationreview.com/2018/10/23/66/. w w w.centreforpublicimpac t.org/case-study/land-reform- rwanda/. Bullough O, (2015), Welcome to Ukraine, the most corrupt nation in Europe, in: The Guardian, 06 February 2015, https://www. Koechlin, L., Quan, J. and Mulukutla, H. (2016), Tackling corruption theguardian.com/news/2015/feb/04/welcome-to-the-most- in land governance. A LEGEND analytical paper. https:// corrupt-nation-in-europe-ukraine. landportal.org/library/resources/legend-analytical-paper-1/ tackling-corruption-land-governance. Government Portal-Ukraine, (2018), The Ministry of Healthcare of Ukraine implements seven strategic programs to eliminate Schreiber, Leon (2017), Securing land rights: making land titling corruption in the health sector, 01 October 2018, https://www. work in Rwanda, 2012-17, Innovations for Successful Societies, kmu.gov.ua/en/news/7-napryamiv-roboti-moz-shcho-dolayut- Princeton University. korupciyu. Sebudubudu, D., Khatib, L. and Bozzini, A. (2017). ‘The atypical Government Portal-Ukraine, (2019), Health Care System Reform, achievers: Botswana, Qatar and Rwanda’ in Mungiu-Pippidi, ht tps://w w w.kmu.gov.ua/en/refor mi/roz vitok-lyudskogo - A. and Johnston, M. (eds), Transitions to Good Governance: kapitalu/reforma-sistemi-ohoroni-zdorovya. Creating Virtuous Circles of Anti-Corruption, Cheltenham: Edward Elgar Publishing. Lekhan VN, Rudiy VM, Shevchenko MV, Nitzan Kaluski D, Richardson E. Ukraine: Health system review. Health Systems in Transparency International Kenya (2015). ‘The East African Bribery Transition, 2015; 17(2): 1–153. Index: trends analysis 2010–2014’. 174 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART I CONFRONTING CORRUPTION IN SECTORS AND FUNCTIONS CHAPTER 5 PUBLIC SERVICES: LAND, PORTS, HEALTHCARE Lisogor M, (2020), Victoria Loza Won The Competition For Ukrinform, 2019, Leading IT companies will join the development of The Position Of Director Of The Department Of Health, in: eZdorovya, https://www.ukrinform.ua/rubric-society/2750237- Poltavshchyna, 28 January 2020, https://poltava.to/news/54162/. providni-itkompanii-dolucatsa-do-rozrobki-ezdorovya.html. Management Sciences for Health, 2019, USAID’s Safemed Activity Vox Ukraine, 2019a, How the Ministry of Healthcare is Trying to Provides Support To Open Medical Central Procurement Make Ukrainian Medical Students Take American Exams, https:// Agency, 13 November 2019, https://www.msh.org/news-events/ voxukraine.org/en/how-the-ministry-of-healthcare-is-trying-to- stories/usaid’s-safemed-activity-provides-support-to-open- make-ukrainian-medical-students-take-american-exams/. medical-central-procurement. Vox Ukraine, 2019b, How a Former Rector of the Kharkiv University Ministry of Health of Ukraine, 2015, National Health Reform of Radioelectronics Became a Scourge for Students, https:// Strategy for Ukraine 2015-2020, Kiev, https://en.moz.gov.ua/ voxuk r aine.org /en / how -a -for mer- rec tor- of-t he - k har k iv- uploads/0/16-strategy_eng.pdf. university-of-radioelectronics-became-a-scourge-for-students/. 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World Health Organization, 2018, Life expectancy at birth (years), Ministry of Health of Ukraine, 2018b, Fighting corruption is key WHO European Region, European Health Information Gateway, to improving healthcare: Ukraine implements transparent https://gateway.euro.who.int/en/indicators/hfa_43-1010-life- and merit-based selection of senior healthcare managers, expectancy-at-birth-years/. 15 November 2018, ht tps://en.moz.gov.ua/ar ticle/news/ fighting-corruption-is-key-to-improving-healthcare-ukraine- World Health Organization, 2019, Evaluation Of The Affordable implements-transparent-and-merit-based-selection-of-senior- Medicines Programme In Ukraine, WHO Regional Office for healthcare-managers. Europe, Copenhagen. Ministry of Health of Ukraine, 2019, How the healthcare system World Health Organization, 2020, Global Health Expenditure Data: has changed, 15 April 2019, https://en.moz.gov.ua/article/news/ Out-of-pocket expenditure per capita in $US - 2013-2017, http:// how-the-healthcare-system-has-changed. apps.who.int/nha/database/ViewData/Indicators/en. Ministry of Health of Ukraine, (n.d.), How to choose your family Yabchanka O, 2016, A Ukrainian doctor’s choice: be a beggar doctor, https://en.moz.gov.ua/how-to-choose-your-family- or a racketeer, in: Euromaidan Press, http://euromaidanpress. doctor. com/2016/03/04/a-ukrainian-doctors-choice-be-a-beggar-or- a-racketeer/. National Health Service of Ukraine, 2020, Declarations on the selection of a PMD physician submitted to the WHO, https://data. gov.ua/dataset/a8228262-5576-4a14-beb8-789573573546. OECD, 2017, OECD Reviews of Integrity in Education: Ukraine 2017: Chapter 7 -Corrupt access to higher education in Ukraine, OECD Publishing, Paris. Osipian A, 2018, Corruption in Ukraine’s Medical Universities, 30 July 2018, https://www.insidehighered.com/blogs/world-view/ corruption-ukraine%E2%80%99s-medical-universities. RATING Sociological Group, 2019, Assessment Of The State Of Healthcare In Ukraine, http://ratinggroup.ua/en/research/ u k r a i n e /o c e n k a _ m e d i c i n s ko y_ s f e r y_v_ u k r a i n e _ 21-2 9_ maya_2019_goda.html. Romaniuk, P & T Semigina, 2018, Ukrainian health care system and its chances for successful transition from Soviet legacies, Globalization and Health, 14:116. State Statistic Service of Ukraine (2014). http://ukrstat.gov.ua/. Stepurko TG, Pavlova M, Gryga I, Murauskiene L & W Groot, 2015, Informal payments for health care services: The case of Lithuania, Poland and Ukraine, Journal of Eurasian Studies, 6(1): 46-58. Stepurko TG, Semygina TV, Barska YG, Zahozha V & N Kharchenko, 2019, Health Index Ukraine 2018: Results of the National Survey, Kyiv. 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Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 175 PART II Key Instruments for Fighting Corruption Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 177 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 6 Open and Inclusive Government Let the Sunshine In: Tackling Corruption through Open Government Approaches PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 6 OPEN AND INCLUSIVE GOVERNMENT Introduction Corruption thrives in an environment of secrecy efforts to promote accountability and responsiveness and opaque government processes, with lack of represent the frontier (as represented in the figure by accountability in the use of public resources. Open the “maturity” continuum). government reforms aim instead to promote an ethos of transparency, inclusiveness and collaboration. Over Each of these elements is critical to effecting time, this could potentially shift norms in a sustainable broader change, as transparency and participation way by introducing changes that lead to enhanced lead to greater accountability resulting in a transparency and promote an environment that is less government response. Transparency is at the core of conducive to corrupt activity, and empowering citizens the open government concept, as it enables informed to demand better services from the government. The debate based on a common understanding of issues, impact of these reforms depends on the existence of and participation is essential because it means that other enabling factors, such as political will, a free and citizens play a role in the problem-solving process (rather independent media, a robust civil society, and effective than being passive recipients of information). While accountability and sanctioning mechanisms. The idea there is a valid notion of transparency and participation of open government has gained momentum in the as intrinsically good—the idea that citizens have an last decade, with anti-corruption objectives among inherent right to know about and engage in their own the key drivers of the shift. As illustrated in Figure governance—from an anti-corruption perspective, the 6.1 below, open government can be broken down focus is on transparency and participation as routes into four components: transparency, participation, to a more efficient and ethical use of public resources accountability, and responsiveness.1 Initiatives to through greater accountability of public officials, increase transparency are the most widespread, while followed by a government response. FIGURE 6.1 Unpacking Open Government TRANSPARENCY PARTICIPATION ACCOUNTABILITY RESPONSIVENESS The public The public has can hold the access to and The public The government government understands participates in the responds to and accountable for information about workings of the reflects citizens’ its policy and the workings of government demands service delivery the government performance HIGH MATURITY LOW MATURITY Source: Adapted from Ul-Aflaha, McNeil, and Kumagai (2020). Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 179 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 6 OPEN AND INCLUSIVE GOVERNMENT Theoretical and empirical underpinnings Open government is a broad and holistic concept less likely to engage in corrupt behavior, contributing that has gained significant momentum and to a more ethical and citizen-centric government where widespread usage, driven in part by digitization. social norms shift and corruption is less likely to thrive. Using open government approaches to tackle While the logic may be straightforward, as with other corruption arises in part from a perceived failure of kinds of governance reforms, it is a challenge to make more “direct” anti-corruption strategies in the 1990s an empirically-grounded causal link between open (such as the formation of anti-corruption agencies) and government measures and specific impacts, such the search for indirect approaches that mainstream as reduced corruption, as the evidence base is still prevention measures. 2 Moreover, technologies and somewhat limited. Nevertheless, a growing body of digital tools have created new ways to engage citizens case studies, as well as cross-national and experimental in anti-corruption efforts, giving impetus to the open evidence, demonstrates that well-designed open government movement. approaches can lead to positive change. For example, the idea of participatory budgeting—that is, involving The theory of change posits that openness can lead citizens in decisions about how to spend public funds— to a stronger relationship between government originated in Brazil, and has since been implemented and citizens, increasing levels of trust and social in many countries. One study found that Brazilian capital and generating more effective government municipalities with participatory budgeting have, policy and service delivery. An open government on average, 39% higher tax collections than those involves citizens in the workings of government by without, and that the correlation is stronger the providing relevant information, creating opportunities longer participatory budgeting has been in place. 3 for citizen engagement, and implementing mechanisms The findings suggest that over time participatory that strengthen accountability. Over time, due to the institutions may strengthen trust and generate tangible increasing risks associated with corruption (because of financial benefits, which could potentially include the higher likelihood of detection), officials should be indirect effects on corruption. BOX 6.1 What Does Open Data Have to Do with Open Government? The term “open data” occurs frequently in discussions about open government. Open data is data that is freely accessible and reusable by anyone; the term also implies technical openness, meaning that the data is machine-readable and available in bulk. 8 Many governments, wishing to become more open (in the sense of embracing transparency, participation, accountability, and responsiveness), have usefully committed to publishing open data. However, as explored by Yu and Robinson9 , a government can theoretically be open using low-tech approaches, while open data efforts (e.g. releasing public bus schedules in an online, machine-readable format) can be undertaken by governments that remain politically closed and unaccountable. It is therefore worth keeping the distinction between openness of data and openness of government in mind. There are many instances of governments claiming a mantle of openness based on data provision without taking politically meaningful steps toward open government. Open data reforms may accelerate a transition to open government in some contexts, but assessing their potential to reduce corruption requires considering to what extent they address underlying political and institutional issues. 180 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 6 OPEN AND INCLUSIVE GOVERNMENT Transparency is a foundational pillar of open freedom and civil rights) and political agency are also government but can only enable accountability key. Effective sanctioning mechanisms must also exist, if complementary policies and enabling factors with the most important being political accountability are present. Countries cannot stop at releasing (for example via elections) and legal accountability information (e.g. via open data initiatives—see Box 6.1); (via the rule of law).6 Fox7 refers to the importance of they need to create and enforce specific accountability strategies that reflect both citizen “voice” and state mechanisms. The potential impact of transparency on capacity to respond, or “teeth”. corruption hinges on whether stakeholders are able to understand and act upon the information provided4 and T hese cha lleng es underscore the critica l whether it results in an official response. In practice, this roles of reform champions, coalitions for can break down for many reasons, such as the lack of change, “infomediaries,” such as journalists, a strong policy framework to promote accountability, an independent media where that exists and lack of agency on the part of civil society, or lack of a watchdog organizations. These have the time, robust and free press. One study looked at data from expertise, and platform to get meaningful information 25 countries in Sub-Saharan Africa to try to make a to the stakeholders positioned to make a difference. more comprehensive assessment of whether open Moreover, reform sustainability requires the continued government data is associated with accountability.5 It availability of resources for stakeholder engagement found that while open government data is correlated and outreach, as well as for recurrent costs, such as the with better scores on an “accountability index,” the maintenance and upgrading of IT systems. factors of access to information (related to political Using open approaches to fight corruption This section looks at three entry points for legislation and initiatives, with about 120 countries reformers: increasing citizens’ access to information passing right to information laws.11 These laws via legislation or transparency initiatives; increasing create a legal framework that supports openness by fiscal transparency (treated as a separate category of giving the public the right to request government data, “information” due to its prominence in anti-corruption as well as access to information about government laws, efforts); and facilitating citizen engagement and regulations, and legal processes. While legal reform is social accountability. These selected examples do often a first step for governments that wish to pursue not represent a comprehensive catalog of open an open agenda, implementation is key. Ensuring that government reforms, but rather aim to highlight a few the rules on the books are enforced and function in common issues and considerations at the intersection practice is a challenge for many countries, as is making of the open government and anti-corruption agendas. citizens aware of their rights. Looking beyond the set of topics highlighted here, open government themes are prominent throughout Many governments have implemented open data this report. Other relevant discussions include the role initiatives to proactively make data accessible, of transparency and citizen engagement in conjunction often as part of their commitments under the with public procurement, infrastructure projects, and Open Government Partnership, a multilateral SOE management (Chapters 1, 2, and 3); and public initiative that now counts nearly 100 countries scrutiny of beneficial ownership arrangements and and loca lities a s members . This may mean officials’ private assets (Chapters 8 and 9). establishing online government data portals or one- stop-shops for information; providing data files in machine-readable form; making information available Access to information in local languages; disseminating information via radio or text message; providing data visualizations Interest in transparency has surged in recent years, if literacy rates are low; or other locally appropriate as witnessed by a spate of access to information10 strategies. In general, open data advocates and anti- Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 181 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 6 OPEN AND INCLUSIVE GOVERNMENT corruption campaigners have been working relatively international efforts, for example in the case of Open independently of each other; there is therefore scope Ownership’s beneficial ownership registry,16 as well as to link these two agendas more closely together.12 domestic initiatives. In Mexico, a CSO analysis based on data from the country’s online data platform for Evidence of the impact of legal rights to access school performance revealed the endemic nature information on the extent and nature of corruption of corruption in the education system, prompting a is mixed. When meaningful information is available in the public outcry. The report led to audits in 10 states and public domain, it can sometimes lead to dramatic results, a change in teacher payroll funding from the state to as seen in the case of the investigative journalism that federal level.17 Patience may be required. It can take led to the release of the Panama Papers in 2016. It is less years for awareness of an issue to build, and then at obvious, however, that information that governments a critical political inflection point, public outrage may choose to disclose has similarly powerful results. A relatively quickly force a response; such “jolts” also meta-analysis of the literature on the effectiveness demonstrate that political will is not a static variable.18 of transparency and access to information initiatives found a body of evidence suggesting that access to P ro g ress depends on cooperation among information is “important to the effectiveness of the stakeholders. In India, which has some of the most broader range of social accountability mechanisms, robust access to information legislation and has earned although evidence of the direct impact on corruption is a reputation as a success story in this area, research inconsistent”.13 This prompts a key question about what underscores the importance of ongoing efforts to build impactful implementation requires. awareness among citizens of their rights and the ways they can obtain information.19 Cooperation among Information by itself cannot solve the problem of multiple stakeholders seems to be key, as for instance corruption, as seen in countries that score well on journalists tend to rely on CSOs and citizens to do international rankings on transparency measures some of the slow legwork of filing information requests. but have blatant instances of corruption. At the Sustained coalitions of media, activists, and CSOs have same time, it is encouraging to note that information been essential to creating an ethos among citizens disclosure has, in some cases, enabled civil society and around the right to information agenda. the media to bring the abuses to light.14 In Ukraine, collaboration among CSOs and a concerted effort to use access to information rights to piece data together Fiscal transparency exposed corruption in the health sector disguised as charitable payments.15 These anti-corruption advocates Fiscal transparency, a standard principle of repeatedly ran into obstacles created by those good governance, has a number of benefits apart benefiting from the status quo. This illustrates that from better public spending accountability. It in addition to information disclosure, the underlying encompasses transparency of fiscal data, the budget realities of politics and power asymmetries must be process, and related government functions. 21,22 It has considered. been shown to contribute to a range of benefits from citizen empowerment and more efficient and effective A broader enabling environment that supports the public spending23 to lower sovereign borrowing costs.24 involvement of a range of stakeholders in accessing, From an anti-corruption perspective, the purpose of analyzing and responding to information in the fiscal transparency is to enable greater scrutiny of public public domain is essential for access to information accounts, thus deterring corruption, so that resources initiatives to lead to more fundamental change. are used in the public interest. The existing literature Media outlets, civil society watchdog groups, bloggers, shows that budget tracking indeed reduces leakage of think tanks, academics, and others play important roles public funds (a proxy for corruption), but once again, in translating specialized or voluminous information success generally depends on a combination of factors into a format that a broader audience can act upon. and interventions, such as accompanying measures to Civil society and media organizations often step into engage citizens.25 Diagnostic and reporting tools such the gap to transform it into usable formats—merging as the Public Expenditure Tracking Survey (PETS) can and structuring relevant data from multiple sources, be useful, and public financial management reforms, translating it into open formats, and extracting such as strengthening IT systems may also help lower relevant bits from large volumes of data. This includes corruption via increased transparency.26 182 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 6 OPEN AND INCLUSIVE GOVERNMENT Fiscal transparency, both in general and at the Since public procurement accounts for an sectoral level, has led to identifiable victories overwhelming share of public spending, open against corruption in some countries. For example, contracting reforms are closely related to fiscal after the government of Brazil’s decision to publish transparency. Open contracting29 aims to increase data on the use of government credit cards through value for money in public spending by making timely its Transparency Portal, journalists began publicizing and comprehensive information on government suspicious transactions. This prompted multiple contracting available to the public, and by effectively scandals and sanctions, including the resignation of a engaging stakeholders across the public and private Minister and payment of $30,000 to the government; sectors, and in civil society. This can lead to measurable also, “perhaps most importantly… [it] led almost savings. For example, in Colombia, an open contracting immediately to a 25 percent reduction in spending by reform in the procurement of public school lunches officials on government cards”.27 Sector-specific fiscal led to government savings of 10 to 15 percent and transparency efforts have also emerged. In Malawi, contributed to ending a price-fixing operation.30 the Infrastructure Transparency Initiative (CoST) led to the cancellation of a public roads contract due to concerns about quality and price, and similar CoST Citizen engagement achievements have been notched elsewhere.28 Owing to their large share of government revenues in many Fostering citizen engagement and participation countries and endemic corruption in the sector, the is at the heart of the open government idea. extractive industries have been a particular focus for Engagement initiatives are often organized at the fiscal transparency advocates (Box 6.2). local level and tend to focus on government service BOX 6.2 The Extractive Industries Transparency Initiative (EITI) Data released by members of the multilateral Extractive Industries Transparency Initiative (EITI) has been used by a range of civil society and media organizations, such as journalists looking into a license acquisition deal in Liberia, or the identity of mining companies in Cameroon. 31 In Madagascar, EITI reporting led to a debate around overdue revenue transfers to localities, prompting an investigation that revealed that payments had been made to local officials’ personal bank accounts, because the municipalities lacked official accounts. 32 In Burkina Faso, EITI reporting revealed that an illegal $10 million signature bonus had been part of an agreement between the government and a mining company. 33 The EITI example also highlights the importance of calibrating expectations for a particular type of reform: “unlike criminal investigations, leaks or whistleblower statements, EITI reporting is neither forensic nor unpredictable enough to expose most instances of corruption. Instead, EITI reporting aims to spread systematic transparency across the sector”. 34 Despite its limitations, the kind of regularly provided information promoted by EITI (and by some other forms of fiscal transparency initiatives) can play a valuable role in providing background information on a context in which corruption takes place, shedding light on the processes behind transactions, and highlighting risks. Moreover, once again the evidence shows that results are context dependent. A meta review of studies on EITI’s impact found that the likelihood that EITI reporting helps reduce corruption is partly driven by local factors such as the strength of civil society. 35 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 183 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 6 OPEN AND INCLUSIVE GOVERNMENT provision or public expenditure, though they can run conditions. 42 Impactful interventions are effective the gamut from simple mechanisms for citizen feedback when they address citizens’ private interests, and garner on schools or healthcare facilities to processes for high levels of citizen participation. Important enabling sustained public deliberation around complex policy factors include access to information, legislation, policy issues. Governments may seek public participation in and practices, an active and independent media, the design, implementation, and monitoring of specific citizens’ ability to hold institutions accountable through projects, such as large-scale infrastructure investments, oversight institutions and political channels, markets and or in ongoing matters of policymaking or oversight of institutions that prevent elite capture, credible sanctions, expenditure and service delivery. and the existence of coalitions among multiple actors.43 The World Bank44 stresses the “importance of [citizen] Evaluating the impact of engaging citizens in public volunteerism and agency in overcoming collective action resource allocation and other social accountability problems,” advising that international actors “build on mechanisms on corruption can be difficult, since organic structures and bottom-up solutions”. Also, the these activities tend to have broader governance creation of positive incentives for officials, rather than goals (such as improving services or empowering merely exposure of corrupt behavior, increases the citizens), rather than fighting corruption per se. likelihood of meaningful impact. However, as the foregoing discussion has emphasized, transparency and engagement need each other to Designing a locally appropriate intervention effect change.36 Research shows a link between higher requires an understanding of the socio-political levels of participation of external stakeholders in landscape and the associated corruption risks in budgeting processes, and lower levels of corruption.37 that specific context. It is, for example, useful to Theoretically, public engagement can increase assess the potential for successful collective action.45 oversight of budget allocation and spending decisions. If the environment seems conducive to effective The Government of Kaduna State in Nigeria, for collective action (based on factors such as high levels example, has published its budget online in a citizen of participation in voluntary associations), then social friendly format, as well as created an online feedback accountability tools leveraging group participation (e.g. platform, in-person public consultations, and a citizen community scorecards) may be appropriate. In areas accountability report.38 Participatory budgeting work with low potential for collective action, tools based may also have an indirect effect on corruption via the on individual feedback (e.g. SMS reporting) may be building of trust and platforms for deliberation in the more effective. For instance, a social accountability community, which may be preconditions for tightening initiative in one community in the Philippines aimed at the link between transparency and accountability.39 monitoring support for farmers was highly successful, in large part due to the preexisting dense horizontal There is evidence that social accountability social networks.46 Other factors to consider in designing mechanisms, such as social audits, surveys, citizen engagement initiatives include measures for promoting report cards, or grievance redress mechanisms, can the equitable representation of women and for reaching all be used to address corruption in service delivery. vulnerable groups. Technology can be useful in creating feedback loops, as with the Proactive Listening initiative of EDE Este, While civil society monitoring of government an electricity distribution company in the Dominican performance can help in identifying corruption, Republic, which enables citizens to report problems, it can also uncover other causes of weak service including service issues or requests for bribes from delivery. In South Africa, the International Budget maintenance personnel. It was implemented in 2011, Partnership (IBP) worked with local stakeholders in and within a few years, the instances of reported eThekwini Metro to conduct a social audit of communal corruption had declined 70 percent.40 A review of ablution blocks. While corruption is often blamed for digital accountability platforms in the Philippines found problems in the area, the audit revealed maintenance that people need not just transparency, but “specifics issues that the responsible officials did not know about. that enable the public to systematically track resource Rather than simply flagging a problem and making flows and monitor programs ‘in their own backyards’”.41 assumptions about the underlying cause, since the campaigners were able to dig into what was really Overall, evidence shows that social accountability happening and who specifically could fix it, they were initiatives can be effective, but under certain able to get positive results.47 184 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 6 OPEN AND INCLUSIVE GOVERNMENT Conclusion Open government measures can directly or indirectly lead to a reduction in corruption even though the impact can be difficult to measure. An example of a direct effect is the sanctioning of corrupt officials prompted by public outrage following media reports made possible by access to information initiatives. Indirect effects occur as officials are deterred from engaging in corruption because the incentives have changed. They may perceive higher benefits associated with behaving ethically (e.g. due to increased levels of trust and cooperation between government and citizens) and higher risks associated with illegality (e.g. as greater scrutiny increases the risk of being caught, and better policies reduce the scope for corruption). However, what is clear is that no intervention is a panacea; notably, transparency initiatives must be accompanied by other measures to facilitate uptake of the information and a government response. The enabling environment plays a (possibly decisive) role. Interventions should address a genuine need; for example, data should be published with a purpose and in a format and manner that fits, and not just to check a box. Clearly defining the problem also makes it easier to measure results, which will add to the evidence base of what works. Coalition building and increasing awareness may be slow processes requiring significant patience. Open government promotes the appropriate use of public resources, which is the crux of the fight against corruption. Tackling corruption is notoriously difficult, but if information is increasingly reaching citizens and the media, and officials are acknowledging its accuracy, that is a step in the right direction. Over time, with a holistic approach tailored to the context, open government may help change behaviors so that public resources are directed not to the pockets of individuals but rather to the common good. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 185 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 6 OPEN AND INCLUSIVE GOVERNMENT CASE STUDY 15 CASE STUDY 15 OPEN AND INCLUSIVE GOVERNMENT Boosting Accountability through Participatory Budgeting in Kenya Overview Introduction Beginning in March 2013, Kenya devolved a huge When Kenya began rolling out its 2010 constitution, local amount of responsibility for delivering public services governments and citizens suddenly had a far greater role to county governments. The administration envisioned in governance than ever before in the country’s history. that these local governments would closely incorporate Newly established county governments, which took citizens in the governance process and that citizens office in March 2013, took on major responsibilities— would be able to demand greater accountability and major funding—for delivering public services and from their elected representatives. Two years into local infrastructure. The new constitution stated that the devolution process, counties sought assistance the new “devolved” governance system ought to from the World Bank to improve their participatory “give powers of self-governance to the people” and processes. The World Bank introduced the counties to “recognize the right of communities to manage their to “par ticipator y budgeting,” an approach that own affairs and to further their development.”49 Along involved allocating a portion of the budget for citizens’ with increasing citizen participation in governance, the priorities and creating a participatory process where new system aimed to tackle regional inequality, increase citizens could work together to define and vote on the responsiveness and accountability of government development priorities. Two counties piloted the to citizens, allow regions greater autonomy, and re- process in the 2015/2016 fiscal year, and more counties balance power away from a historically strong central followed their lead in each of the following years. government. The Kenya Accountable Devolution While participatory budgeting did not directly target Program, a World Bank multi-donor trust fund program, corruption, it nonetheless had an impact on ensuring supported Kenya’s transition to the new system. public funds were spent on citizens’ needs, increased citizen oversight of public spending, and in some cases Delivering on the promises of the new constitution was a resulted in cost savings during project implementation. tall order. Citizens had little experience participating in Kenya’s experience with open budgeting illustrates the governance process, and local officials often lacked that engaging citizenry in the budgeting process can the skills to encourage meaningful participation. In the enhance accountability of public officials.48 first two years of the devolved system, counties’ efforts 186 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 6 OPEN AND INCLUSIVE GOVERNMENT at increasing participation tended to be tokenistic at budget process and a platform to hold local officials best and opportunities for women and minority groups accountable. to engage were minimal. Pressure on counties to fix the problem grew when Kenya’s High Court annulled Kiambu county’s 2013 finance bill for failing to meet the constitutional requirements for citizen participation.50 The implementation process Even when counties made genuine attempts at engaging Kenya had some experience in par ticipator y citizens, public forums were usually unstructured and governance through its Local Authority Transfer Fund, citizens were rarely provided with adequate advance launched in 1998, and its Constituency Development notice or information to participate effectively. Meetings Fund, introduced in 2003. Through these two funds, the often resulted in citizens presenting overambitious central government allocated resources for community wish lists that were difficult to translate into practical projects following a selection process that involved development projects. community meetings where citizens identified priorities. However, the initiatives faced some challenges due to Seeing the challenges that county governments a number of reasons like poor access to information, were facing in delivering their mandate, the Kenya low levels of citizen participation, and weak monitoring, Accountable Devolution Program partnered with the all of which meant projects often stalled or service Council of Governors, an organization composed delivery was poor.51 Still, this prior experience, along of the governors of all 47 counties, and the Kenya with different counties’ experiments with engaging School of Government, a training institution for the citizens in 2014 and 2015, provided a starting to point public sector. In October 2015, the Kenya School of to build on. Government hosted a workshop for representatives from county governments. A team of international In January 2016, the World Bank exper ts led a experts led by the World Bank introduced the Kenyan workshop to help local officials from the three counties attendees to participatory budgeting, a tool pioneered design participatory budgeting mechanisms using a by the Brazilian city of Porto Alegre beginning in the 10-step process (see Box 6.3). Time was short—the late 1980s. Participatory budgeting involved engaging budget preparation cycle ended on June 30 th. In less citizens in discussions about development priorities than six months, the three pilot counties had to design and allocating a portion of the government’s budget a participatory budgeting process that fit their local for projects chosen by citizens. context, mobilize citizens, refine their ideas, and vote on priorities. Following the workshop, representatives from 12 counties that showed a high level of interest in participatory budgeting attended a seminar to learn Designing a participatory budgeting how they could go about implementing it. The World system Bank team selected six of the 12 counties from the seminar to work with to implement participatory The World Bank team leading the par ticipator y budgeting. To ensure resources were not spread too budgeting training implemented a two-tier process for thin, the team decided to pilot participatory budgeting working with counties on the design of participatory with three of those counties in 2016, and three more the budgeting systems. First, the team trained high-level following year. The selected counties all demonstrated policy makers, including county finance ministers and that they had incorporated citizen input in previous heads of departments for planning and budgeting. budgets and committed to allocate at least 5% of their Next, those heads of department trained staff working budget to participatory budgeting in the next budget at a more local level, and some also held trainings for cycle. elected representatives who were members of the county assembly. “We wanted the policy makers, but The idea was that, through participatory budgeting, we also wanted those who would oversee the running counties would allocate resources in a way that of the program to make sure it cascaded down to the better responded to the needs of their citizens. lower levels,” said Annette Omolo, who led the World The par ticipator y budgeting process could also Bank’s participatory budgeting initiative in Kenya. provide citizens with a better understanding of the Under the devolved system, counties were divided into Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 187 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 6 OPEN AND INCLUSIVE GOVERNMENT BOX 6.3 The 10-Step Process to Implement Participatory Budgeting 52 1. Choose a general strategy (Where and when to implement? What are the goals?). 2. Prepare the organizational model (Decide on an approach to engage with citizens, set aside a portion of the budget for participatory budgeting initiatives). 3. Develop informational material and mobilize citizens. 4. Hold public meetings to identify citizens’ priorities. 5. Carry out technical evaluation of proposals. 6. Refine and publish the list of proposals. 7. Hold a vote so citizens can decide which proposals to prioritize. 8. Approve the proposals and ensure budget is allocated. 9. Create voluntary working groups on selected proposals to oversee implementation. 10. Review the process and make improvements for future budget cycles. sub-counties, sub-counties were divided into wards, and Makueni allocated 12% of their 2016 budgets to and wards were divided into sub-wards and villages. participatory budgeting. Although policy makers in The World Bank team wanted to help the counties Kakamega county participated in the first-tier training, implement participatory budgeting at the ward level the county later dropped out of the pilot program. and encourage participation down to the sub-location or village level. Mobilizing citizens and reaching Each county adapted an approach based on its local agreement on priorities culture and context. Makueni county, for example, had already implemented citizen meetings that closely Next, West Pokot and Makueni had to mobilize their matched the participatory budgeting approach, so the citizens and encourage them to attend participatory county government only had to make revisions to their budgeting meetings. The county governments placed existing processes. “Makueni already had a framework advertisements in major daily newspapers detailing for engaging citizens down to the sub-ward level,” said meeting dates, times, and venues. In addition, the Omolo. “But they wanted to make it more inclusive, for two administrations advertised meetings on radio, example by including people who might never have left made announcements at public gatherings (such as their village before.” Makueni had 3,455 villages, and church meetings), put up flyers in public places, sent the county government wanted to ensure every one text messages to citizen contact lists, and posted of them was included in the participatory budgeting information on social media channels. Citizens who process. were unable to attend meetings could send written submissions to the county finance offices by email. At the second-tier trainings in West Pokot and Makueni, the high-level officials that attended the first-tier event The counties worked out a process whereby citizens trained officials at the ward level and worked out the could choose priorities at a local level and then practicalities of implementation. Both West Pokot gradually refine those ideas into a selection of specific 188 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 6 OPEN AND INCLUSIVE GOVERNMENT projects that would be voted on and finalized at the back to the county when funds allocated to a project county level. In Makueni, the head of each village appeared to be too low—or too high. When projects organized public meetings to discuss development were under budget, funds could be diverted to other needs and propose possible projects to address them. citizen-selected projects. One way that the committees Each of Makueni’s 3,455 villages chose 11 local leaders helped cut costs was by facilitating land donations. to represent their village and present the development For example, in the construction of several dams in priorities decided on at “village clusters,” which were Makueni, the county was able to acquire land for free groups of 11-15 villages grouped together based on from community members who realized the benefit the proximity and similarities. Eleven representatives from dams would bring to their communities. each cluster then attended sub-ward meetings, where they prioritized which projects to present at the ward level. In early March, projects were presented at the Refining the process ward level, the first level of official representation. All projects presented had to show a trajectory of how they After budgets were allocated for the first year’s were arrived at from a specific local development need. projects, the World Bank team and the counties set No new projects could be introduced at the ward level. about improving the process for the following year. At each meeting, attendees discussed all of the One area the counties wanted to improve was the proposed projects and eventually reached agreement inclusion of underrepresented or marginalized groups, on a few projects to put to a vote. Attendees voted such as youth and disabled people. To ensure higher on which projects to move on to the next level, participation of those groups, Makueni set up “thematic within the budget constraints outlined by the county groups” and specifically invited young people and government. There was no set mechanism for voting on people from the disabled community. According to projects. A secret ballot was recommended during the Omolo, the thematic groups “made the counties aware participatory budget training, and some locations used of the particular issues the groups were facing,” and by secret ballots to avoid potential conflicts during the participating in the participatory budgeting process, decision-making process. In practice, however, most the groups “could make decisions on what they locations found it easier to conduct voting by a show of needed…rather than having someone else make those hands. “We did not see any evidence of people being decisions for them.” coerced into voting a particular way,” said Omolo. Engaging at a more local level also helped counties On March 18th, 2016, Makueni held a county level forum boost inclusivity. “You find women and youth in to present the county’s budget for the next year. The the villages, from there they are able to access the budget included the projects which had made their meetings,” said Omolo. “In rural areas it is difficult for way from the village level through to final approval a woman to leave her immediate environment and her by the elected officials of the county assembly and daily chores to travel long distances for a meeting.” the governor. Examples of projects chosen included a medicine dispensary, a stadium, a training college, an Another issue that Makueni and West Pokot faced adult learning center, an early childhood development in the first year was that, in some cases, the projects center, and a borehole to extract water. The county decided on had ended up not being feasible to set up a complaint mechanism, so that citizens could implement. There were a range of reasons behind this, make complaints about errors in the projects chosen or for example not having land to implement the project, problems in the selection process. or the land allocated being unusable. To avoid these issues, Makueni introduced technical evaluations to After the governor signed off on the projects to be their participatory budgeting process. “County officials implemented, Makueni set up project management and citizen representatives went to the field to assess committees, made up of citizens from the area where the land, the costs, and other technical aspects, and the project was being implemented, to oversee took that information back to the citizens,” said implementation. The county trained the committees on Omolo. “Citizens could then adjust their selections or their responsibilities, and how they could monitor and allocations based on the evaluations. For example, they supervise the project. The committees paid particularly might need to allocate more funding for a particular close attention to project spending, and reported project based on the evaluation.” West Pokot also Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 189 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 6 OPEN AND INCLUSIVE GOVERNMENT presented the technical costs of the proposed projects Expanding from the pilot to the citizen representatives at ward level meetings to guide their final selection of projects. In the second half of 2016, the World Bank team began working with the three other counties that had In 2017, the World Bank team partnered with Map been selected at the initial participatory budgeting Kibera, a local organization in Kenya, to further workshop. All three followed a similar process to that strengthen citizens’ ability to make informed decisions adopted by Makueni and West Pokot, and followed during the participatory budgeting process. Map through on their commitments to allocate part of their Kibera began helping the counties integrate more budget to the projects chosen through participatory data and digital mapping into the decision-making budgeting. process. For example, digital maps made it easier for communities to identify where medical facilities were, In addition, more counties became interested in or where boreholes to access water were, and that data following the example set by the pilot counties. Media made it easier for participants to identify where the in Kenya highlighted Makueni’s experience, and areas of greatest need were. “Mapping helped citizens word spread across the country how that county had determine their real needs and priorities,” said Omolo. delivered on citizens’ priorities through participatory “Now their decisions are informed by data.” governance. 190 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 6 OPEN AND INCLUSIVE GOVERNMENT To capitalize on the interest, the Council of Governors The mapping component of the process helped citizens in August 2018 organized a peer-learning workshop find better and more cost-effective solutions for their in Makueni, where other counties could learn how needs than might otherwise have been decided on. participatory budgeting worked in practice. At the “In some cases, communities realized there was no workshop, Makueni’s governor Kivutha Kibwana need for an entirely new project when instead they just described his county’s experience implementing needed to upgrade an existing facility,” said Omolo. participatory budgeting and other governors also “In other cases, it might just require more staff in order shared their efforts at improving citizen engagement.53 to improve service delivery.” Counties with a strong level of interest in participatory budgeting were able to request World Bank support Citizens were also able to identify cost savings through through the Council of Governors. After training a their oversight role. According to Omolo, local citizens further seven counties on participatory budgeting in often had a better idea of the costs of labor and 2017, the World Bank team trained four more in 2018. materials than bureaucrats did, and when citizens in Makueni had access to project expenses they were able Makueni county continued to be one of the leaders to identify opportunities to deliver projects at lower of the participatory budgeting movement, and in cost. “Increased accountability has meant more value 2019 introduced a new innovation to streamline the for money,” said Omolo. Although Makueni had strong budgeting process. The county trained “Community citizen oversight through its project management Resource Volunteers” on how to conduct meetings, committees, as of 2019 most other counties were yet to and these volunteers went on to convene and facilitate implement similar mechanisms. participatory budgeting meetings at the village and village cluster levels. The new process reduced the Officials wielded little say on the par ticipator y administrative burden on officials, who previously had to budgeting por tion of the budget, but since travel to each village unit to oversee meetings, and also participatory budgeting allocations were less than 15% reduced the number of days needed to select projects of each county’s entire budget, the overall impact on since meetings could be conducted simultaneously. increasing budget oversight and preventing corruption was somewhat limited. “Whatever projects citizens decide on are locked in,” said Omolo. “Policy makers still have their flagship projects, because participatory Reflections budgeting is always only allocated a portion of the budget.” Over time however, counties tended to Participatory budgeting reforms are designed to incrementally increase funds available for participatory ensure that public money is spent on communities’ budgeting and also began to incorporate more citizen highest priorities, and do not directly target corruption. involvement and oversight in other portions of the Nevertheless, in Kenya’s case, introducing participatory budget. budgeting possibly reduced or prevented corruption because citizens were more engaged in the budget As of 2019, par ticipator y budgeting had been allocation process and had more information to hold implemented in less than a quarter of Kenya’s counties public officials accountable. “In Makueni… people and the extent of citizen engagement across those become part and parcel of the [budgeting] process,” counties varied. In counties like Makueni, however, said Kibwana. “At various levels on the ground, they where the government had embraced participatory must approve completed projects. It is only when they budgeting by actively engaging citizens and giving are satisfied that the county government can process them a strong oversight role, the reform was working. payments.”54 “The budget process has gained more credibility and there is more trust between the citizens and the If projects stalled or were not completed, citizens government,” said Omolo. could demand explanations from the officials that had approved their project selections. According to Omolo, in some instances, citizens refused to select new priorities until county officials provided answers as to why the previous year’s selections had not been completed. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 191 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 6 OPEN AND INCLUSIVE GOVERNMENT CASE STUDY 16 CASE STUDY 16 OPEN AND INCLUSIVE GOVERNMENT Enhancing Social Accountability in Ethiopia earlier, the country had launched a decentralization Overview policy whereby the governments of the country’s woredas (administrative divisions similar to districts) Citizens’ engagement with government to address progressively took on more power and responsibility. service delivery issues had long been a challenge The idea was that these local governments would be in Ethiopia. To encourage citizens to hold service more responsive to citizens’ wants and needs. “But that providers more accountable, the government in 2011 was on paper, not in reality,” said Workneh Denekew, launched the second phase of the Ethiopia Social who worked on the Ethiopia Social Accountability Pilot Accountability Program, which aimed to build on a Program (known as ESAP 1) from 2006 to 2009. “We pilot implemented from 2006 to 2009. The program had just come from a very long period with successive partnered with civil society organizations across the totalitarian regimes when everything was top-down. country, which then worked with communities to assess Citizens couldn’t do much more than accept the status and give feedback to public service providers, such as quo… their demands were limited.” schools and healthcare centers. At the outset, there was very little trust between citizens, service providers, Part of the problem was a lack of resources. While the and the government. By 2019, when a third phase of country boasted double-digit GDP growth in 2010 and the program began, there was significantly more trust 2011, its GDP per capita was just USD1,162, ranking it between the different stakeholders, and there were among the bottom ten countries in the world according some signs that citizens were beginning to hold service to that indicator. 55 Although resource constraints providers more accountable. While the program’s explained some of the challenges, another important scope to impact corruption was limited, it did boost dynamic was that local governments were more citizens’ knowledge on public services and the role of responsive to senior officials than to the citizens they government, giving them the opportunity to take on a served, and citizens feared the repercussions of voicing greater oversight role. discontent. Since citizens did not speak out about the quality of public services, it was difficult for service providers, such as schools or health clinics, to know how they could improve. Introduction Civil society organizations, too, had limited opportunity In 2011, Ethiopia was looking for ways to better engage to influence local governments or service providers. The its citizens and improve public service delivery. A decade Ethiopian government—dominated at all levels by the 192 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 6 OPEN AND INCLUSIVE GOVERNMENT ruling political party—was effective at implementing programs from a national level that reached right down to the village level. But that top-down structure did The implementation process not have any mechanism for the government to receive feedback from citizens or civil society groups working Partnering with civil society and at a local level. Such feedback was critical for boosting spreading knowledge social accountability, which involved citizen groups holding government officials and service providers The first step was to identify partner organizations to accountable for delivering quality public services. work with. The management agency for the program invited interested civil society groups around the To shift the status quo, the Ethiopian government in country to submit applications to be involved. Selected cooperation with its development partners and the organizations would receive funding and training to World Bank launched the Ethiopia Social Accountability work with local governments, service providers, and Program 2 (ESAP 2) in 2012. ESAP 2 was funded by a citizens on social accountability initiatives. In their multi-donor trust fund and implemented by VNG applications, the organizations identified the sector or International, the international development arm of the sectors they wanted to focus on (education, healthcare, Association of Dutch Municipalities (known as VNG, its agriculture, water and sanitation, or roads), and the acronym in Dutch). VNG International, which worked in woredas and kebeles they planned to work in. Kebeles, several developing countries to strengthen democratic the smallest administrative division in Ethiopia, are governance at a local level, set up an agency in Ethiopia usually made up of a few thousand people, and there to administer the program. The agency aimed to build are usually a few dozen kebeles in each woreda. on the success of ESAP 1, which had worked with 12 civil society organizations to improve social accountability Some civil society organizations were initially skeptical in a select few regions in Ethiopia. ESAP 2’s goal was about the government’s commitment to the project. to partner with civil society organizations across the Many wanted to take a human rights-based approach country, facilitate a dialogue between citizens, service to their work, but government legislation limited providers, and local governments, and eventually, to any human rights advocacy. Fortunately, the highly improve the quality of public services. influential finance ministry—which led the ESAP 2 steering committee—strongly supported the effort to Building trust between civil society, citizens, and the improve social accountability. The government granted government was a monumental task. At the time, civil civil society organizations permission to work on the society activity was highly restricted in Ethiopia, and program, and the finance ministry’s endorsement was the Charities and Societies Proclamation strictly limited crucial in signaling to civil society that the government NGOs’ work on human rights and policy advocacy supported its involvement. issues. Citizens feared speaking up about the issues they faced in accessing education, healthcare, and After recognizing the government’s commitment—and other services. For example, parents avoided voicing the possibility of securing funding for their activities— discontent about schools because they were concerned civil society’s interest in the program grew. There their children might face repercussions. At the same was significant funding available, and the program time, the administration feared being blamed for ultimately aimed to improve the livelihoods of the poor service failures, and worried that citizens would demand in Ethiopia—a goal shared by many civil society groups. far more than service providers were able to deliver. In total, 118 civil society organizations were selected to “We had to bring civil society and government work in 240 different woredas, about a quarter of the together,” said Lucia Nass, who went on to lead capacity total woredas in the country. Within each woreda, each development and training for ESAP 2. “It seemed very organization initially focused on about 3-5 kebeles, and risky because there was so much animosity, but if the then scaled up to cover more kebeles over time. project was going to go anywhere, we had to do it.” Education and health were the most common sectors to work in, followed by agriculture. For example, some organizations opted to work with primary schools or health centers. In the agriculture sector, organizations Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 193 194 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 6 OPEN AND INCLUSIVE GOVERNMENT worked with extension agents that provided technical Each committee had a unique structure, partly tailored support to farmers at the kebele level. Only a few to the area it was working in, and partly down to who organizations chose to work with water and roads, volunteered to participate. “Some committees were as these areas often required intervention from the dominated by service providers, while others were regional or central government—something beyond mostly citizens,” said Meskerem Girma, who worked the program’s scope. with Nass on the program. “There were usually 9 to 15 people on each committee.” Before disbursing funds, a team of trainers held a workshop with the selected organizations. The training The committees also included members of the woreda focused mostly on how to use five distinct social council. In theory, councils were supposed to provide accountability tools: Community Scorecard, Citizen oversight of service providers, but few had been able Report Card, Participatory Planning and Budgeting, to do so effectively. “Gradually council members, Public Expenditure Tracking Survey, and Gender civil society organizations, and regional governments Responsive Budgeting.56 As well as introducing the began to understand the role councils could play,” said tools, the trainers also taught attendees about the Meskerem. governance system in Ethiopia and how budgets were allocated. The trainers found that there was little awareness about how government functioned in Implementing social accountability tools, Ethiopia and the important roles that woreda councils, meeting with service providers, and civil society organizations, and citizens had in the developing joint action plans governance process. The Financial Transparency and Accountability team (a separate component of the Although ESAP 2 introduced civil society organizations Protection of Basic Services Program that ESAP was to several different social accountability tools, the most part of) led budget education activities throughout the widely used by far was the community scorecard. The country. community scorecard involved communities holding discussions and developing indicators to assess the performance of service providers, with the service Setting up social accountability providers also conducting self-evaluations. The committees assessments were followed by a joint discussion to reconcile differences in the scores and come up with After being trained and receiving funds, the civil society a joint action plan to improve service delivery moving organizations began forming “social accountability forward. committees” in the woredas and kebeles they planned to work in. The committees had a tripartite structure, The quality of the action plans—and to what extent being composed of elected representatives from they were implemented—varied greatly. “Some service woreda or kebele councils (who were in charge of providers were extremely enthusiastic about the action oversight and resource allocation), public administrators plans, and really wanted to improve service delivery,” (in charge of service delivery), and citizens (including said Meskerem. However, there was no enforcement civil society representatives). mechanism to ensure follow through. “If nobody worked on the action plans, then nothing happened,” In some areas, earning approval and participation from Meskerem said. the local government proved to be quite a challenge. When they faced resistance from woreda councils, civil The process to form joint action plans was often society organizations tried different strategies to win difficult, as was the case when the Addis Ababa their cooperation. In some cases, this meant involving Women’s Association, a civil society organization higher levels of government, for example someone from based in Ethiopia’s capital city, worked with Addis the regional government or a representative from the Hiwot Health Center to improve healthcare service Ministry of Finance. Often these higher-level officials delivery. “The hardest part of the process is building could “nudge things forward,” according to Nass. In trust; that takes the longest time,” said Mussie Yasin, other cases, civil society organizations sought help project coordinator for the association. “During the from peer organizations that had already established initial meetings at Addis Hiwot, all of our discussions working relationships with government. were heated.” Community members accused doctors Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 195 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 6 OPEN AND INCLUSIVE GOVERNMENT of misdeeds, and the doctors felt attacked and social accountability committees went dormant, and responded in a defensive manner. “But after a while, some joint action plans were never followed up on,” the tone changed, and the consultations began to be said Meskerem. about finding solutions to the problems together.” To respond to the concerns that community members Further difficulties ensued in October 2016, when expressed in the face-to-face meetings, the medical the country entered a state of emergency that lasted center recruited more midwives, installed a power nearly a year. “In some regions our partners found it generator and water pump, and allocated more funding very difficult to continue,” said Nass. Civil society for medicine purchases.57 organizations halted operations when the situation worsened, but picked up their work again when the situation improved. Building trust and sharing ideas Following an administration change and government After the first year of implementation across the country, reforms in 2018, the ESAP 3 project, also administered ESAP 2 hosted an event to bring all of the civil society by the World Bank and managed by VNG International, organizations together with selected service providers finally launched in May 2019. Around the same time, the from the 240 woredas involved, as well as government new government rescinded the Charities and Societies representatives. “We were looking for important Proclamation, opening the door for civil society innovations that were working,” said Nass. “That organizations to work on a wider range of issues and encouraged others to look beyond what they were take on a stronger policy advocacy role. already doing.” Social accountability committees were encouraged to create videos of their efforts to improve The new project team began working on ways to services in their districts, and the event included a deepen social accountability in Ethiopia and ensure video competition to celebrate those successes. their efforts were sustainable. For example, the ESAP 3 team planned to work closer with longstanding local ESAP 2 held similar events annually, with 250 or more governance organizations, such as kebele councils, people attending each year. Over time, the events community-led structures, and other groups, which attracted a wider range of stakeholders, including were likely more sustainable than parallel structures representatives from regional governments that had like the social accountability committees. In addition, not originally been included in the program. According the ESAP 3 team planned to integrate their work to Nass, most government representatives—including with higher levels of government—which could work woreda councils, woreda administrations, and regional on a wider range of issues—as well as focus more on government officials—were reluctant to participate at planning and budgeting at the woreda level. By 2020 the beginning but grew to fully embrace the program ESAP 3 was operating in 317 woredas and was set to after they saw the positive impact it was having in disburse funding to civil society organizations through communities across the country. the end of 2023. Overcoming obstacles Reflections When ESAP 2 came to a close, there was strong enthusiasm from those involved to continue supporting ESAP 2 did not directly target corruption, and its goals civil society in Ethiopia to improve social accountability. were mostly to increase public participation, build However, changing political dynamics and other factors better relations between local governments, citizens, meant a new project to build on ESAP 2 was slow to and civil society organizations, and to improve service materialize. To ensure that the achievements of ESAP delivery. Nevertheless, those involved in the project 2 were not lost, several donors chipped in to fund a suggested that the initiative likely had some spillover “bridging phase” until the new project (which would effects in reducing corruption, even if on a small scale. be known as ESAP 3) came together. While some of “At the district level, there is not much money that can the civil society organizations and social accountability be captured by corruption,” said Nass. “In that sense, committees continued throughout the bridging phase, the scope to reduce corruption was not very large. others struggled to maintain momentum. “A lot of However, there is a lot of petty corruption, which is 196 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 6 OPEN AND INCLUSIVE GOVERNMENT especially difficult for poor people. ESAP 2 helped citizens understand what services are supposed to be free and what services need to be paid, and how much they cost. With greater transparency and accountability, corruption becomes more difficult.” In addition, ESAP 2 spread knowledge about the important role that woreda councils play in overseeing ser vice deliver y. “There is now a much better understanding that councils have an oversight role,” said Nass. In theory, increased oversight would reduce opportunities for corruption. Citizen oversight increased too. Several people involved in the implementation of ESAP 2 reported that there were some indications that citizens had become more willing to voice their concerns about public services. One example of this was through increased participation in parent teacher association meetings at primary schools. Participation in such avenues that allowed them to demand better public services was potentially a sign that citizens were beginning to hold government accountable. According to Nass, Meskerem, and others closely involved in the program, its biggest result was increased trust between civil society, service providers, and the government—something that had been severely lacking when the program began. “Over the years ESAP has developed a strong position of trust with both civil society and the government,” said Paul Hamilton, who was leading ESAP 3, and added “We hope that the trust will deepen now that the project has entered its third phase in 2020.” Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 197 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 6 OPEN AND INCLUSIVE GOVERNMENT Notes 1. Ul-Aflaha, Aichida, Mary L. McNeil, and Saki Kumagai. 2020. 20. The Open Budget Survey conducted by the International “Building Blocks and New Frontiers for Open Government.” Budget Partnership measures transparency, participation, and Washington, DC: World Bank Group. http://documents. oversight with respect to the budget process at the country worldbank.org/curated/en/658171581605975570/Building- level. https://www.internationalbudget.org/open-budget- Blocks-and-New-Frontiers-for-Open-Government survey 2. DFID, 2015. 21. The Global Initiative for Fiscal Transparency (GIFT) espouses a set of ten Principles of Public Participation in Fiscal Policy. See 3. Touchton, Michael, Brian Wampler, and Tiago Peixoto. 2019. http://www.fiscaltransparency.net/pp_principles/#toggle-id-1 “Of Governance and Revenue: Participatory Institutions and Tax Compliance in Brazil.” World Bank PRWP 8797. 22. The alternate term “fiscal openness,” as used by the Open Government Par tnership, underscores that while much 4. DFID, 2015. progress has been made on fiscal transparency, public 5. Jelenic, Michael Christopher. 2019. “From Theory to Practice: participation and government accountability remain the key Open Government Data, Accountability, and Service Delivery.” frontier areas. https://www.opengovpartnership.org/policy- Draft working paper. https://openknowledge.worldbank.org/ area/fiscal-openness/ handle/10986/31800. 23. Rudiger, Anja. 2018. “State of the Field Review: Fiscal 6. Chen, Can and Sukumar Ganapati. 2018. “Is Transparency the Transparency and Accountability.” Research Note for the Fiscal Best Disinfectant?” Open Government Partnership, May 24, Futures’ Scenario Planning Workshops, March and April 2018. 2018. https://www.opengovpartnership.org/documents/is- Prepared by the author with staff at the Carnegie Endowment transparency-the-best-disinfectant/. of International Peace, the International Budget Partnership and the Transparency and Accountability Initiative. https:// 7. Fox, Jonathan A. 2015. “Social Accountability: What Does the www.internationalbudget.org/wp-content/uploads/state-of- Evidence Really Say?” World Development, Vol. 72, 346-361. the-field-review-fiscal-transparency-and-accountability-2018. pdf. 8. For more discussion, see https://blog.okfn.org/2013/10/03/ defining-open-data/ 24. Kubota, Megumi and Albert G. Zeufack. 2020. “Assessing the Returns on Investment in Data Openness and Transparency.” 9. Yu, Harlan and David G. Robinson. 2012. “The New Ambiguity Policy Research working paper; no. WPS 9136. Washington, of ‘Open Government’.” February 28, 2012. 59 UCLA L. Rev. DC: World Bank Group. http://documents.worldbank.org/ Disc. 178 (2012). https://ssrn.com/abstract=2012489. curated/en/398401580479439299/Assessing-the-Returns-on- 10. Also known as right to information (RTI) or freedom of Investment-in-Data-Openness-and-Transparency. information (FOI) initiatives 25. DFD, 2015. 11. According to Transparency International; see https://www. 26. Johnsøn, Jesper, Nils Taxell and Dominik Zaum. 2012. tr ans parenc y.org /new s /feature/r ight _to _ infor mation _ “Mapping Evidence Gaps in Anti-Corruption: Assessing people_power the state of the operationally relevant evidence on donors’ 12. Vrushi, Jon and Robin Hodess. 2017. “Connecting the Dots: actions and approaches to reducing corruption.” U4 Issue Building the Case for Open Data to Fight Corruption.” Oct. 2012 No. 7. https://www.u4.no/publications/mapping- Tr ans pare nc y Inter natio nal and Wor ld W id e We b evidence-gaps-in-anti-corruption-assessing-the-state-of- Foundation. http://webfoundation.org/docs/2017/04/2017_ the-operationally-relevant-evidence-on- donors-actions-and- OpenDataConnectingDots_EN-6.pdf. approaches-to-reducing-corruption.pdf. 13. DFID 2015, p. 71. 27. Graft, Auralice, Stefaan Verhulst and Andrew Young. 2016. “Brazil’s Open Budget Transparency Portal: Making Public 14. De Renzio, Paolo. 2016. “What Do Scandals in Brazil and How Public Money Is Spent.” GovLab and Omidyar Network: South Africa Tell Us About the Link Between Transparency and Jan. 2016. P.11. https://odimpact.org/files/case-study-brazil. Corruption?”, blog, International Budget Partnership, Feb. 1, pdf. 2016. https://www.internationalbudget.org/2016/02/the-link- between-transparency-and- corruption/. 28. Open Government Par tnership (OGP). 2019. “Open Government Partnership Global Report.” Volume I. https:// 15. Postolovska, Iryna. 2016. “Ukraine: Combatting Corruption www.opengovpartnership.org/wp-content/uploads/2019/09/ Disguised as Charity.” IBP Case Study, Oct. 2016. https://www. Global-Report_Volume-1.pdf. internationalbudget.org/publications/case-study-combating- corruption-ukraine/. 29. See the Open Contracting Partnership website for resources including documentation on how to implement the Open 16. https://register.openownership.org/ Contracting Data Standard: https://www.open-contracting. org/data/. 17. Young, Andrew and Stefaan Verhulst. 2016. “Mexico’s Mejora Tu Escuela.” GovLab and Omidyar Network: Jan. 2016.https:// 30. Open Government Par tnership (OGP). 2019. “Open odimpact.org/files/case-study-mexico.pdf. Government Partnership Global Report.” Volume I. https:// www.opengovpartnership.org/wp-content/uploads/2019/09/ 18. McCann, Brent. 2019. “Models for Successful MENA Anti- Global-Report_Volume-1.pdf. Corruption Strategies.” Arab Reform Initiative Report, Dec. 9, 2019. https://www.arab-reform.net/publication/models-for- 31. Gillies, Alexandra. 2019. “The EITI’s Role in Addressing successful-mena-anti-corruption-strategies/. Corruption.” EITI Discussion Paper, Oct. 2019. https://eiti.org/ files/documents/eitis_role_in_addressing_corruption_en.pdf. 19. 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Adapted by author from: Hall, Jeremy Andrew Buchyzia; accountability. Omolo, Annette Akinyi; Peixoto, Tiago Carneiro; Wanjiru, 37. Johnsøn et al., 2012. Rose Ruth. 2018. Participatory Budgeting Manual for County Governments in Kenya (English). Washington, D.C. : World 38. See http://openkaduna.com.ng/Budget/citizen-budget/. Bank Group. http://documents.worldbank.org/curated/ en/754841536125154333/Participatory-Budgeting-Manual- 39. Otto, Birke, Floriane Clement, Binayak Das, Hari Dhungana, for-County-Governments-in-Kenya Lotte Feuerstein, Girma Senbeta and Jasmina Van Driel. 2019. “Social accountability and water integrity: Learning 53. Nzoika, Stephen (2018). “Peer Review: Governors Learn from experiences with par ticipator y and transparent from Makueni’s Success.” Standard Digital. August 28, 2018. budgeting in Ethiopia and Nepal.” U4 Issue 2019:11. https:// https://www.standardmedia.co.ke/article/2001293605/peer- www.u4.no/publications/social-accountability-and-water- review-governors-learn-from-makueni-success. integrity-learning-from-experiences-with-participatory-and- transparent- budgeting-in-ethiopia-and-nepal.pdf. 54. Maundu, Pius (2018). “Makueni Success Story Inspires County Bosses.” Daily Nation. September 1, 2018. https://www. 40. Peixoto, Tiago and Jonathan Fox. 2017. “: When Does ICT- nation.co.ke/news/Makueni-success-story-inspires-county- Enabled Citizen Voice Lead to Government Responsiveness?,” bosses/1056-4738540-qpxr4yz/index.html. in Civic Tech in the Global South: Assessing Technology for the Public Good, eds. Tiago Peixoto and Micah L. Sifry. World 55. GDP per capita PPP, data from 2011. World Bank Open Data. Bank: Washington, DC. 41. Custer, S., H. Rahemtulla, K. Kaiser, and R. van den Brink. 2016. 56. 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Returns on Investment in Data Openness and Transparency. 200 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 6 OPEN AND INCLUSIVE GOVERNMENT Tr a n s p a r e n c y I n t e r n a t i o n a l a n d Wo r l d W i d e We b Foundation. http://webfoundation.org/docs/2017/04/2017_ OpenDataConnectingDots_EN-6.pdf. Young, Andrew and Stefaan Verhulst. 2016. Mexico’s Mejora Tu Escuela. GovLab and Omidyar Network: Jan. 2016. https:// odimpact.org/files/case-study-mexico.pdf. Yu, Harlan and David G. Robinson. 2012. The New Ambiguity of ‘Open Government’. February 28, 2012. 59 UCLA L. Rev. Disc. 178 (2012). https://ssrn.com/abstract=2012489 . Case Study 15: Boosting Accountability through Participatory Budgeting in Kenya Hall, Jeremy Andrew Buchyzia; Omolo, Annette Akinyi; Peixoto, Tiago Carneiro; Wanjiru, Rose Ruth. 2018.  Par ticipator y Budgeting Manual for County Governments in Kenya (English). Washington, D.C. : World Bank Group. http://documents. worldbank.org/curated/en/754841536125154333/Participatory- Budgeting-Manual-for-County-Governments-in-Kenya. Kenya School of Government. 2015. Participation in Kenya’s Local Development Funds: Reviewing the Past to Inform the Future. ht tp://document s.wor ldbank.org /cur ated / en/666021468172488909/pdf/94499-NWP.pdf. Maundu, Pius. 2018. Makueni Success Story Inspires County Bosses. Daily Nation. September 1, 2018. https://www. nation.co.ke/news/Makueni-success-stor y-inspires-county- bosses/1056-4738540-qpxr4yz/index.html. Nzoika, Stephen. 2018. Peer Review: Governors Learn from Makueni’s Success. Standard Digital. August 28, 2018. https:// www.standardmedia.co.ke/article/2001293605/peer-review- governors-learn-from-makueni-success. Omolo, Annette Akinyi; Macphail, Bruce; Wanjiru, Rose Ruth; Peixoto, Tiago Carneiro. 2017.  Inclusive and effective citizen engagement: participatory budgeting - Makueni and West Pokot counties (English). Washington, D.C.: World Bank Group. http:// documents.worldbank.org/curated/en/231501494574792952/ Inclusive-and-effective-citizen-engagement-par ticipator y- budgeting-Makueni-and-West-Pokot-counties. Republic of Kenya. 2014. Petition No. 532 of 2013 Consolidated with Petition Nos. 12 of 2014, 35, 36 of 2014, 42 of 2014, & 72 of 2014 and Judicial Review Miscellaneous Application No. 61 of 2014. The High Court of Kenya at Nairobi. http://kenyalaw.org/ caselaw/cases/view/97000/. Case Study 16: Enhancing Social Accountability in Ethiopia Ethiopia Social Accountability Program. 2012. Social Accountability Guide, First Edition, Ethiopia Protection of Basic Services Social Accountability Program. http://esap2.org.et/social- accountability-guide-online/. World Bank. 2017. CSOs serve as bridges to improving delivery and accountability of services. Feature Story, The World Bank Group, July 24, 2017. https://www.worldbank.org/en/news/ feature/2017/07/24/c sos-ser ve -as-bridges-to -improving- delivery-and-accountability-of-services. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 201 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 7 GovTech Emerging Technologies to Disrupt Public Sector Fraud and Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 7 GOVTECH Introduction How important are emerging innovation. Governments across the world have technologies in combating corruption? invested in digitizing government systems, including eProcurement systems.60 However, any system will only The broadening and deepening of global digitization be as good as the practices that complement it. To gain of governments and citizens is changing the face greater traction for addressing fraud and corruption, of public sector governance and its impact on data needs to be captured, and linked with other data. anti-corruption in both developing and advanced Mandating the use of the system and validating and economies. Digital government is moving fast, beyond analyzing data using Artificial Intelligence (AI) or other digitizing paper-based records and transactions. The methods can prove to be effective. The correct question, broad spectrum and increasing sophistication of the therefore, is not whether eProcurement systems can use of technology ranging from mobile computing to reduce corruption, but rather to investigate whether internet-connected sensors—spanning the internet the institutional environment supports the use of data of things (IoT) and biometric identification—means to detect fraud and corruption (see Box 7.1 on Brazil that digitization is ever more ubiquitous. The increase Court of Accounts). Institutional processes, practices, in digital interactions among officials, citizens, and policies and regulatory regimes will determine whether business within countries and across the globe has had digital applications are successful (or not) in achieving a positive as well as a negative impact. On the one hand, the desired outcome. legitimate money can move efficiently, but on the other, illicit gains can be moved quickly across individuals and Increasing sophistication and advancement countries, making it difficult to track. in technical solutions has implications for human resource management in the public While digitization as a ‘foundational’ factor sector. Understanding emerging technologies is important, other factors like institutional and their application in an institutional context incentives and capacities and strong leadership requires specialized skills to assess and apply these are key for enhanced efficiency, improved service technologies, both in the delivery of specific solutions delivery and fewer opportunities for corruption. (e.g., procurement data analytics and AI) and to better The 2017 World Development Report on Digital prioritize solutions. Government officials or public sector Dividends extensively documented that digitization by specialists typically do not come from a technologist itself will not change the nature of public services if the background, or spend much time keeping abreast of institutional incentives and capacities are not in place. the latest technology trends. While reform champions Similarly, to be effective, digitization and technology, will themselves not need to be technical specialists, together with strong institutional mechanisms, can they should at the minimum have an understanding of make fraud and corruption more costly and less what can be expected from different applications. Any attractive for perpetrators both inside and outside productive discussion in this area will need to carefully of government. Use of digital technology with strong align institutional reform with technology terminologies leadership can be instrumental in bringing about a wider and expertise for domain areas, such as fraud and transformation, including improved service delivery58 corruption. Some of these concepts are discussed later and less opportunities for corrupt practices.59 This has in the chapter and listed in Table 7.1. been demonstrated in the case study of India’s Andhra Pradesh (AP) State Digital Transformation Strategy in While available data suggest that higher levels of the past decade. AP’s experience shows how the sub- digital government development are most likely national government was able to disrupt traditionally correlated with greater government effectiveness strong vested interests that resisted change. and less corruption, other factors may also be playing a role. While technologies such as the internet, The traction that digital technologies may have social media, and digital feedback mechanisms may in reducing fraud and corruption depends on the initially heighten perceptions of corruption by exposing institutional context. Many political manifestos corruption, the real issue is whether they lead to change at the national and sub-national level ar ticulate in behaviors to reduce, if not eradicate, corruption in commitments to anti-corruption and technological a particular domain. Reporting and disclosure may in Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 203 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 7 GOVTECH its own right not reduce petty bribes, but follow-up straightforward, and therefore may confound more actions may.5 However, given the aggregate nature general associations between income levels and a of these cross-country indicators, measurement is not general set of governance indicators.6 BOX 7.1 Brazil’s Tribunal of Accounts Robots AI can serve as a decision support tool for identifying transactions and payments ex ante that are at a high risk of fraud and corruption. However, this technology can only have an impact if it changes the behavior of relevant government personnel, in this case auditors. The Brazilian Federal Court of Accounts ( Tribunal de Contas da União, “TCU”), a Brazilian Supreme Audit Institution (SAI), has implemented AI systems since 2015 to analyze the procurement processes of the federal administration. The TCU’s acronyms for the systems translate into robot names: Analysis of Bids, Contracts and Public Calls (ALICE) 4; Analysis of the Dispute in Electronic Bids (ADELE); Integrated Monitoring for Acquisition Control (MONICA); and Guidance System on Facts and Evidence for the Auditor (SOFIA). A more systematic study of auditors suggests that the solutions have not been mandatory, nor has training for auditors. The designers, however, suggested that this was part of a deliberate strategy. They believe that the auditors don’t need to be trained to use the products; if they do, something is wrong. Just as a first-time user doesn’t need to be trained to use Netflix. If the solutions use complex algorithms based on machine learning and cognitive processing, what should matter to the auditor are the results and their reliability for each purpose (Chief Data Officer). Interviews of Audit Managers suggested varying levels of use: ALICE (3/5), followed by SOFIA (2/5), ADELE (1/5) and MONICA (1/5). Most managers were ambivalent about the actual changes or implications the decision support tools brought to their work. Qualitative interviews suggested that many auditors still followed old practices, including a preference for text editors and spreadsheets. While adoption was growing, it was happening at a slow pace. Source: Neves et. al. (2019) Use of digital technologies involves both opportunities and challenges Digital government transitions, coupled with and data. Valuable resources, such as spectrum disruptive technological change, offer both licenses can be a source of significant rents and opportunities and risks for anti-corruption. Digital consequently corruption.8 Digital realms also bring a investments (e.g., major 5G or shifts to cloud based new set of public sector vulnerabilities in terms of abuse services)7 can lead to an increase in complexities and of office and capturing illicit gains. Digital transaction higher scope for corruption, as they might entail new platforms (including bitcoin stores) can facilitate a modalities of procurement around notional services rapid or scaled illicit syphoning of resources. On the 204 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 7 GOVTECH other hand, digitization can help improve transparency, The maturity of Singapore’s digital ecosystem, coupled with near real-time feedback helping expose illicit with its integrity institutions, demonstrates how a behavior. Digital workflows and validation can lead to country can leverage opportunities that new forms of simplification of bureaucratic procedures and limit the digital data offer, together with technological solutions. discretion of public officials, improving the beneficiary However, in a context that is still largely cash based, experience and reducing corruption. For example, reliant on paper-based workflows, and where existing distributed ledger technologies—commonly known as systems are not set up to link to each other, options in the blockchains (discussed later)—promise to increase the short term are quite different. In such an environment, trust in digital registries and transaction data, reducing specific technical measures such as linking procurement the scope for records tampering by officials. to enterprise registries, as both systems improve, can prove to be a better solution to detect, for example, Acros s leve ls of di g ita l tra nsfor m ation , rigging patterns in bidding. A relatively underdeveloped governments are facing different opportunities digital government ecosystem or institutional context and challenges for better leveraging technology. may also provide opportunities for ‘leapfrogging’ in Si ng a p o re’s g ove r n m e nt, fo r ex a m p le, ha s terms of technology solutions. For example, the use of demonstrated a strong commitment to addressing high-resolution satellite imagery technology platforms fraud and corruption, not only by augmenting the to supervise projects in Fragile, Conflict, and Violence use of technologies, but also by developing in-house (FCV) afflicted states where regular project supervision technology capabilities in such areas as AI (see Box 7.2). is not possible (e.g., Afghanistan or Iraq) represents BOX 7.2 Singapore’s SkillsFuture Program and Fraud Detection Singapore’s SkillsFuture program, a several million dollar grant program for training, faced issues of corruption. It was found that fraudulent training providers were signing up fictitious beneficiaries and pocketing the training fees. Given the importance of the program, Singapore’s Government Technology Agency (“GovTech”) helped implement an AI machine learning solution to flag anomalous transactions. GovTech is a statutory board of the Singapore government, under the Prime Minister’s Office. Since its current establishment in 2016, GovTech has built up strong in-house capabilities for applying technology solutions to government decision-making challenges (in this case Fraud and Corruption Detection), as well as citizen and business facing services. Beyond the innovative technical solution (unsupervised machine learning to flag training payments that would suggest further human scrutiny), Singapore has introduced additional controls to ensure the integrity of the program. The program involves about 600,000 claims per year. Training recipients must now scan a time sensitive Quick Response (QR) code, which in turn is linked to individual Singpass accounts. SingPass, which stands for Singapore Personal Access, is an authentication system for citizens to transact online with the government. The SingPass mechanism uses a variety of authentication mechanisms, including fingerprint and facial recognition. Singapore’s digital government development is by all accounts one of the most advanced in the world. The SkillsFuture case highlights not just the applied use of AI, but above all the progressive linkage of different technologies, including foundational biometric identity confirmation technologies. Source: Goh (2019), Singapore Straits Times (2019), Ko (2020) Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 205 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 7 GOVTECH both a different rationale and realization of technology- a particular service. While biometric technologies supported solutions. to confirm identities are not completely novel, rapid reductions in cost and increases in reliability have made For developing countries seeking to address it possible to scale them up in a massive way in such public sector management challenges, there settings as India.9 may be opportunities to leapfrog and deploy new disruptive technologies (DTs) more widely. DTs This chapter seeks to highlight areas where digital have, in several instances, enabled better or new ways technology developments can help disrupt fraud of doing things (like the shift from chemical to digital and corruption in the public sector. The focus is photography). They are also associated with lower on the use of more recent technologies, against the complexity and costs to address the needs of a wider wider backdrop of digitization, to promote increased base of users by improving day-to-day processes. Due detection of corruption and reduced discretion to their widespread use of cloud-based platforms, (or abuse) on the part of public officials and other they are also rapidly scalable. Examples of DTs include implicated parties. Through illustrative boxes and transport platforms, such as Grab, that combine the cases, the chapter highlights the key contributions of use of smartphone, location-referencing/mapping, AI, a number of technologies in practice and associated and financial intermediation innovation to transform theories of change. Digital technology disruptions Digital technology disruptions have been used in applications, may be driven by efforts to increase taxes, the public sector in a number of areas, including improve the business environment, enhance services, for revenue, expenditure, regulation, and financial or improve the effectiveness of certain regulatory and physical asset management. Table 7.1 functions. Framing technology-supported reforms as a summarizes the range of use-case applications across public services delivery agenda, rather than in the first selected areas of public sector management used to instance as an anti-corruption crusade, may also be a address the associated vulnerabilities. The primary more disarming approach in light of the existence of driver for reforms, and consequently more concerted the vested interests benefiting from corruption. TABLE 7.1 Public Sector Fraud and Corruption Domains Domains Addressing Vulnerabilities Applications Revenue Mobilization Reduce tax or customs evasion eFiling, Risk profiling Reduce expenditure leakages/ Expenditure risks and risk Expenditures / Procurements efficiencies (wages, recurrent, or management capital) Address petty corruption and Public Services Digital services unresponsive services Regulatory Services Enhance enforcement of CCTV Cameras/IoT/satellites/drones Enforcement environmental standards, zoning, for verification Tighten control and oversight over key Public property and works registries, States assets management financial and physical assets public investment management International Money Laundering Illicit gains are moved across borders Stolen asset recovery and re-patriation /Stolen Asset Recovery Source: World Bank Staff 206 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 7 GOVTECH While digital channels can help improve convenience connected to foundational systems. In more and lower levels of corruption in many public extreme data scarce settings, including FCV-affected services (as listed above), the impact will depend countries, technologies may serve to mitigate fraud and on the complementary practices put in place. A corruption risks associated with information barriers. study by Okunogbe and Pouliquen10 in Tajikistan finds Satellite or drone imagery could be useful to validate that higher risk firms, as categorized by an indicator infrastructure projects where physical supervision is from the tax authorities, are less likely to use eFiling,11 too costly or risky. Enhanced technologies can work to as the choice to e-file taxes remains voluntary. The increase detection and reduce discretion (and abuse) study finds that the impacts of technology, thus limiting with respect to particular risk areas like irregularities in discretion on the part of officials, will differ by how that construction. However, some of these techniques may discretion was previously used. If it was used to allow only go so far, as parties colluding towards fraud and firms to pay lower taxes against a bribe payment to corruption learn to neutralize or evade these types the official, technology may disrupt this equilibrium. If of technological measures. “Leapfrog” technologies officials were using discretion to correctly monitor firms, like satellite imagery are also likely to be most the outcome may be different. The study suggests that powerful if they can be connected with progressively depending on the degree to which electronic channels strengthening “foundational” systems, for example are voluntary, and how discretion was used, impacts eProcurement systems. Table 7.2 outlines cross-cutting will be heterogenous. Other benefits of eFiling systems areas of technological change that appear to have an include saving time and the ability to screen data (e.g., impact on public sector fraud and corruption across the for risk profiling) more quickly. enumerated use-case applications. The past decade has seen rapid changes across a set of cross-cutting Enhanced technologies may offer opportunities technologies. A number of terms, such as big data and to address information asymmetries in difficult AI can refer to very different approaches and use in digitization settings, but should preferably be different settings. TABLE 7.2 Major Technology Trends for Public Sector Fraud and Corruption Technology Trends Examples Opportunities Digitization / Core Public Sector Improved process controls and FMIS, HRMS, Digital Registries, M&E Enterprise Systems transparency Expansion of data from systems, Richer feedback and insights from a Big Data satellites, smartphones, sensors, vast new ecosystem of data Unmanned Aerial Vehicles (UAVs) Ability to better leverage conventional Use of cloud platforms to rapidly scale Cloud Computing Platforms core and emerging big data, including data integration and analysis AI Use of automated/deep learning Artificial Intelligence/ Machine Ex Ante or Ex Post risk detection (Box techniques to identify fraud and Learning 7.1 and Box 7.2) corruption risks Unique identification of civil Civil service registry clearing Transfer/ Biometrics (ID4D) servants and government program social safety net programs beneficiaries Cashless transactions, transaction FinTech Digital money, wallets tracking Distributed Ledger Technology/ Trusted data sources and “smart” Cadasters, next generation e-GP Blockchains contracts Use of sensor networks, including Environmental monitoring, public Internet of Things (IoT) visual CCTV for monitoring and safety control processes Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 207 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 7 GOVTECH Big data careful attention to omissions and biases. Conventional public sector enterprise systems relating The power of big data lies in linking relevant data to counting money, people, assets, and outputs may from a variety of sources (numeric, text, and image all be subject to omissions. Even if a civil servant is data) and breaking data silos. Governments have registered in a database, there is no guarantee that traditionally relied on collected statistical data, as well he/she exists. The fact that an eProcurement system as accumulated administrative data. The overarching records a public works contract is an important step in concept of big data has come to refer to a wealth of new the journey of digitization. In the context of transactions sources that are larger in size, higher in frequency, and systems such as FMIS or eProcurement, a key question often contain quite personalized data.12 For example, is whether all transactions are comprehensive, and if Hlatshwayo et. al.13 adopt a “big data” approach to not, why certain transactions are not included in these measuring corruption based on cross-country news flow systems.19 But this is still a long way from linking it to indices of corruption (NIC) and anti-corruption (anti- richer big data, such as image verification, or risk NIC) from over 665 million international news articles. pattern analytics of bidding. There may or may not be They find that increased reporting on corruption shows biases relative to fraud and corruption (e.g., bidders some relationship with financial and real sector variables captured in an eProcurement system, or taxpayers (e.g., stock markets and growth). However, the ability of in an eFiling system). Despite large investments in IT developing countries, in particular, to implement the systems, the systems were not designed necessarily requisite data wrangling and analytics may in many to flag corruption and often do not. Statistical data cases still prove to be challenging. The term ‘data that is typically collected is representative. But big wrangling’ refers to the significant effort that is required data sources like India’s I Paid a Bribe may also only to bring data together and clean it before meaningful give a partial or biased view of fraud and corruption. big data analytics or AI can be applied. While data While big data—and the related application of Artificial may exist in government, it is often siloed, requiring Intelligence-Machine Learning (AI-ML)—can enhance both technical capabilities and strong institutional detection and limit discretion abuse, the perseverance leadership for integration, and consequently impact in and skills to link and clean data will be key. terms of detection and control. Greater access to digital data, alongside technology Cloud-based platforms tools, can empower civil society and reform champions in government to detect fraud and Cloud-based platforms and services provide for corruption. The literature on ICT for better governance on-tap computing, 20 better data management has highlighted that leveraging digital channels, capabilities, and storage capacities. They are not an including social media, to enhance transparency and improvement over traditional hardware deployments feedback helps to flag corruption.14 The evidence, that typically entail large fixed costs, but provide a however, remains patchy.15 AI is also increasingly potential mechanism for addressing data fragmentation viewed as a possible strategy for governments (and and silos. Cloud architectures lend themselves to the civil society) to sift the digital data to gain insights on establishment of Application Programming Interfaces illicit behavior.16 In settings such as Brazil, civil society (APIs) that provide real-time integration of data and has used data mining opportunities and techniques front-end services. Estonia’s X-road is a globally concerning social media and expenditure records to recognized open source data exchange platform that flag fraudulent behavior by officials and politicians.17 shows in real time if respective agencies are sharing These initiatives, however, risk remaining at the relevant data services. For reformers seeking to periphery of how the public sector, and its associated break down data silos, for example to cross-reference fraud and corruption risks, actually work in the digital eProcurement and firm level data, this type of readily area. While significant expectations are placed on available technology can be quite powerful. Rather transparency and feedback, there is a dearth of robust than requiring prolonged system set-up cycles, the impact evaluations to confirm the impact of these data technology allows reformist policy makers to tackle and feedback channels.18 data sharing, along with analytics, in a faster and more agile manner. The use of traditional public administration systems as well as new big data sources requires 208 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 7 GOVTECH Artificial Intelligence (AI) and compares the same data with tax records. Machine Learning (ML) • Brazil’s Office of the Comptroller General has While AI, with adequate digital data foundations, developed a system that can rate the probability is being increasingly used in a number of areas, its of any official being corrupt, based on entering a ability to serve as a powerful tool for detecting social security number. corruption risks in the public sector rests on a few key factors. First, it should be technically sound and • Singapore’s AI for fraud detec tion in the be able to match the right algorithms with requisite SkillsFuture Program uses unsupervised learning data. Second, it should allow flags or triggers to be used to flag suspicious transactions (Box 2). manually for further action. And finally, it should be able to decipher, understand and use the information to improve and plug leakages. Successfully bringing these Biometrics elements together in a public sector setting demands specialized skills, and strong leadership to ensure the Biometrics has enabled identity validation, better linking and rationalizing of the different data systems targeting and access to services, and, in many (e.g., as part of AI-ML applications). The legal and countries, improved attendance of public servants. institutional environment for the application of AI tools Biometric technologies have to-date focused on such remains critical in terms of actual impacts for fraud and anchors as digital fingerprints, facial recognition, and corruption, particularly to sanction the perpetrators. iris scans. 23 In the public sector, confirming, or more generally cross-linking, identity can help identify Both AI and machine learning have a key role to play ghost workers, target beneficiaries and track transfer in helping to detect fraud and corruption. AI tells payments. While biometric technologies are not new, the computer what to look for, while machine learning their cost and versatility has improved significantly. allows the computer to draw out patterns not directly India’s Aadhar24 biometric identity program, launched seen by humans. Both approaches should be thought in 2010, provided unique digital identity to more than of as decision support for humans, rather than fully 1.2 billion Indians.25,26 Once a near universal platform automating detection or discretion. There are examples of digital IDs is in place, the relative “start-up” costs of of the use of both with varying degrees of success. verification decrease. In settings where unique digital For example, when Ukraine’s State Audit Service ID platforms are not yet in place, biometric registration developed 35 risk indicators to help evaluate tenders will still need to be conducted on a stand-alone basis. for closer inspection, fraudulent bidders adapted their In Sierra Leone, payroll verification and reconciliation behavior to avoid these fixed criteria. 21 The Dozorro exercises using biometrics led to substantial integrity system by Transparency International demonstrated gains through the weeding out of staff wastages. There that machine learning was a more effective way to flag was a decline in the average civil service payroll bill for changing behaviors. Many tax authorities are using 4 years in a row from 2014 to 2017 leading to savings of digital technologies to make the process of paying USD4 million, a significant sum in a small country such taxes easier, while building AI tools for helping detect as Sierra Leone. The reduced complexity and costs of evasion. The degree to which this combination exists biometric solutions now also allow biometrics to be across the functional areas is likely to differ significantly deployed in high-risk, FCV settings, such as fraud and for any given context. A few successful examples are corruption associated with refugee aid programs.27 An listed below: impact evaluation by Dhaliwal and Hanna28 suggests that biometrics helped increase health worker Use of AI in detecting corruption in the public sector: attendance by 15 percent. • Mexico’s tax authorities identified 1,200 fraudulent The benefits of more stringent biometric verification companies and 3,500 fraudulent transactions criteria must be offset against the risk of errors in within 3 months of a pilot AI scheme.22 excluding genuine beneficiaries from government programs. India’s Aadhar program, launched in • India’s Union Finance Ministry Project Insight 2010, covers over 90 percent of the Indian population monitors data from various sources, including (available to ‘residents’), through a 12-digit ID number social media to detect spending patterns and linked to specific biometric data, such as iris scans and Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 209 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 7 GOVTECH fingerprints. 29 The scale of India’s program makes it Blockchains unique by global standards, and also a key platform in India’s overall emerging digital stack.30 Its per unit cost Blockchains have attracted significant attention of USD1.16 per person also makes it probably the most as a technological revolution, but the technology cost effective on a unit basis globally.31,32 The program is still evolving. Blockchains are in effect a database has helped generate huge savings through cleaning shared across a public or private computing up fraud in government social benefits programs. network.37,38 Unlike a centralized database, blockchains However, Aadhar has also had to address challenges are in principle less prone to being tampered with by of fraud by its national network of agencies certified to the principal who controls the database. Blockchains enroll persons into the program.33 A continuing concern rely on decentralized consensus across a number has been that the technology can also generate errors of parties who share the same data. The blockchain of exclusion. An impact randomized control trial can represent stores of value (e.g., BitCoin), indirect evaluation by Muralidharan et. al. 34 for a subsidized representation of value (e.g., land records), or any food program in the state of Jharkhand highlights that other form of asset/ownership list. In the public “attempts to reduce corruption in welfare programs sector, the blockchain can fulfill a number of functions can also generate non-trivial costs in terms of exclusion where trust, independence, or conflict of interest may and inconvenience to genuine beneficiaries.” render standard data systems unreliable. This could include elections, records management (including certificates and land titles) and procurement. 39 For Financial Technology example, Andhra Pradesh in India (see case study) is using blockchain systems to maintain land records Financial Technolog y (FinTech) innovations and streamline vehicle registrations as a solution to have increased the scope and scale for digital rampant corruption and a surge of property disputes.40 payments and are transforming interactions However, blockchains are subject to their own risks, between governments and citizens. Mobile money as can be seen from a number of bitcoin thefts, since and payment systems 35 provide convenient means for stakes to a block content can be anonymous, which financial transactions, including for those not served makes prosecuting illicit behavior challenging.41 The by retail banking systems. The growing prominence field of blockchain is a rapidly developing field, with a of on-line transactions in the private and public sector plethora of different institutional design and technical has increased the need for Know Your Customer (KYC), solutions currently being deployed. especially if money or sensitive information changes hands (e.g., transfer payments, access to health records). Blockchain technology can support efforts to The standards for KYC usually depend on the type of improve trust in digital government in settings service and the national context of digital IDs. Effective where trust is low. Records are preser ved as KYC can significantly reduce the transaction costs immutable unless there is a consensus that they (including the reduced need for face-to-face processes) can be changed. This can no longer be done by the to provide public services, such as transfer payments collusion of corrupt officials as it would need to invoke (e.g., social security, conditional cash transfers, medical a wider consensus as there is no single owner. This reimbursements), while better managing the risks of can have significant impact in areas such as voting, fraud and corruption through automated processes land registries, certificates (marriage, education, or and AI-ML decision support algorithm applications. other official attestations, construction permits, civil Given that most countries lack a universal and unique service rolls, payments, zoning designations, etc.). ID, solutions will need to involve some type of modular For example, in Georgia in 2018, 1.5 million land titles approach with respect to program and service design. were published on a blockchain, with streamlined The financial sector has led developments in predictive registration processes and strengthened provision analytics, including for credit scoring and assessing of on-line services.42 Blockchain technology is still potentially fraudulent charges. These techniques are evolving, and the decentralized database structures, being increasingly used to assess, for example, medical especially data, such as images and maps (including payment claims, as these are a significant part of public historical documents such as scanned deeds and sector expenditures in advanced as well as emerging maps), may face challenges in managing large amounts countries.36 of data. 210 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 7 GOVTECH BitCoins water and electricity). An anecdotal example is tracking down Greek taxpayers who had not declared their The rise of BitCoins and other cryptocurrencies, pools.46 Both in the private and increasingly also the initially seen as anonymous ownership of assets, public sector, the technology for asset tracking can be may lead to the strengthening of centralized used for controlling the illicit use of government assets monitoring for cashless societies over time. (e.g., official vehicles) or improving asset inventories The ability of cr yptocurrencies to move rapidly (including through the use of embedded RFID asset across borders, which limits both transparency and tracking or QR Code identification). accountability regarding ownership of gains, has raised significant concerns that they may be a store of illicit While different technologies have merit in wealth.43 Its blockchain exchanges could also be used their own right, the full impact lies in breaking in combination with the traditional financial system to technology silos and implementing interlinked facilitate cross-border money laundering.44 Countries approaches across sectors and services. The such as China have clamped down significantly on intersection of public sector applications (7.1) and more first generation cryptocurrencies, but are developing rapidly developing technology applications can work their own state-sanctioned digital currencies. This positively, but also adversely, to disrupt the ability of move out of cash and traditional banking systems may the authorities to detect fraud or circumscribe human in future make traceability easier for authorities, with discretion so as to reduce the risk of its occurrence. significant implications for taxation or stolen asset Digital decision support automation, 47 as part of tracking and recovery. For example, China plans to fiduciary oversight, can potentially enable officials create a national blockchain cryptocurrency that could to focus on more high-risk activities in unravelling make traceability easier for the central government and corrupt practices. However, for these applications to provide greater oversight and scrutiny of transaction have traction they will need to have both ex ante and records associated with local tax authorities and other ex post links to business processes. When viewed government payments. This suggests that blockchain through a silo lens, the application and evaluation of as a technology can be deployed in quite a number digital government transformation technologies will of ways, with very different impacts on detection and face two major challenges. First, technology silos will discretion. Perhaps more than for any of the other need to be broken as silo technology solutions will technologies reviewed here, both the technology typically be associated with higher costs, incompatible specifics of the application and the institutional context technologies, and fragmented learning.48 Second, will shape potential outcomes.45 the biggest impacts from digital technology in government will come from network and critical-mass effects associated with deepening digitization, and Internet of things and other sensor increasingly interlinked approaches to detection and technology business process discretion. The internet of things (IoT) and other sensor technology are increasingly allowing for richer and more dynamic tracking and feedback. Two main types of sensor technology that generate data are image producing technology (e.g., satellites, CCTV) and local tracking technology (e.g., GPS trackers for vehicles or radio frequency identification (RFID) trackers). These technologies have been available for decades, though with rapid and significant improvements in functionality (higher capabilities coupled with lower cost and complexity of deployment). Combining these technologies with on-line networking (IoT technologies) has enabled opportunities for scaling up the impact in areas such as public asset/infrastructure management and provision of public services (e.g., smart meters for Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 211 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 7 GOVTECH Conclusions and risks Given the expanse and diverse nature of public a higher degree of digital technology literacy, as well sector services, the most productive strategies build as to build Technology Innovation Partnerships. These on a mix of wider government digitization contexts partnerships should be committed to helping national and intersecting technology developments, rather and sub-national governments strike the right balance than focusing excessively on a single technology. between more conventional and emerging technology Growing digitization in the public sector and societies applications. For digitization to be effective, a number is a reality and can be used to improve efficiency in of complementary efforts will be required, a few of delivering public services and plugging leakages. Table which are listed below. 7.3 lists options for navigating through GovTech in the public sector for speedy and more efficient delivery of Building digital literacy for government leaders: It is services with an ultimate aim of addressing leakages important for decision-makers to continuously update and corruption in the system. their understanding of the type and use of digital technology to guard against the possible pitfalls. Such In light of rapidly developing technologies, there is pitfalls include heavy investment in any one technology, a risk that governments over-invest and rely too which may be outdated, and vendors selling specific much on the latest technologies to address deep- solutions. seated governance issues in the public sector. As Eaves 49 admonishes, governments should focus on Increasingly adopting and operationalizing a digital being fast followers, rather than engage in expensive, government platforms lens: The opportunities and excessively risky, and ultimately ill-fated explorations risks for technology in the public sector must be set of untested technologies. Addressing principal-agent against the broader context of digitization within and and time-horizon challenges particular to bureaucratic outside the country. Rather than see these investments reforms in developing countries, the question is: as stand-alone cases, they should be treated as a Where does the line between fast follower and ill- portfolio and platform building set of efforts. Some advised technology projects get drawn, especially if initial investments will result in higher returns only reformers are looking to hurdle or “leap-frog”? The after more cross-cutting technologies are yielding key to this dilemma may be to empower reformers with dividends. TABLE 7.3 Navigating GovTech for Public Sector Fraud and Corruption Prioritization and Sequencing Dimensions/Questions Deliver use-case centric applications (AI, big data, data Functional or Foundation Prioritizations integration), versus emphasizing foundational platforms (Digitization, ID, connectivity) Improve legacy systems (e.g., traditional database design) or Conventional or Disruptive Technologies seize new models (cloud, blockchain) Stress decision support tools for detection, versus changing Detection or Discretion Focus business processes to reduce discretion with high-risk fraud and corruption abuse Leverage traditional administrative data (e.g., civil service Public or Private Data Foundations registries, procurement, targeted statistical data collection) or draw on private sector/interest data (big data, satellites) Emphasize digital solutions (e.g., detection) or analogue Digital and Analogue Complements complements (e.g., willingness to prosecute) Stress performance outcomes (tax, services), while framing fraud Performance “versus” fraud-corruption metrics and corruption as barriers to achieving these objectives. 212 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 7 GOVTECH Investing adequately for broader digital disruptions: Adopting a prudent approach to digital technology Most digital disruptions stem from improving public investments both for public ser vice delivery services rather than eradicating fraud and corruption. improvements and addressing corruption: It is well- The most successful activities will therefore depend recognized that ICT is no silver bullet to address poor on a wider set of functional and foundational efforts public sector governance. Implementing technological and resourcing. Strong cost-benefit appraisals will help solutions in the context of government bureaucracies strengthen the design and implementation of these rife with inertia and vested interests can be challenging. efforts. While benefits may be framed in terms of losses The roll-out of the latest ICT systems, including those averted (e.g., so many dollars in ghost worker salaries supported by development partners, may be seen saved), wider metrics are likely to be particularly as potentially solving the problem, but this is not material (e.g., health services improved, revenues necessarily the case. Given the traditional investment raised equitably). project lifecycle of 3-4 years, sustainability could be at risk under the next political cycle or administration Addressing privacy concerns: The literature on the use unless the reform context or commitment is truly of AI in the US justice system illustrates this concern.50 enabling. What is essential is that for any country to If algorithms are used to flag firms or individuals for adopt new technology or ‘leapfrog’, the corresponding fraud and corruption risks, care must be taken to filter analog complements must be in place. While the for any adverse bias.51 For example, firms that have current wave of disruptive technologies brings a variety come out of the “digital shadows” by registering on of new tools to address old problems, one needs to eProcurement systems may be more exposed. These guard against catching up with the latest technology. In transitions therefore need to be managed, including some cases, they may indeed be game-changing, but by strengthening the incentives for firms or individuals care must be taken that the next must-have technology to participate in the digital ecosystem. Conversely, does not become an excuse to address persistent safeguards need to be put in place to ensure that challenges, such as poor service delivery and fraud digital data is not abused to illicitly target particular and corruption. These issues should not wait for new firms or individuals. technology before they are addressed. ANNEX 1 Selected Tech Glossary Broadly refers to instances where the ways of working of an organization (including Digital Transformation government) are fundamentally changed due to the application of new workflows and data use. Typically used to refer to innovations that have upstaged market incumbents (e.g., Uber and the taxi industry) by offering more convenient and scalable solutions. In terms of Disruptive Technologies governments, key aspects would include reduced complexity and costs for a user, along with requisite capabilities to address a particular need or wholly new process. The World Bank’s GovTech initiative is focused on three core aspects, as follows: (i) designing human-centered services that are simple, transparent, and universally GovTech accessible; (ii) engaging citizens to increase participation, foster transparency and accountability and build trust; and (iii) transforming core government operations to bring the public sector into the 21st century.52 On-demand availability of computer system resources, especially data storage and Cloud Services computing power, which does not require direct active management by the user or fixed hardware outlays. A blockchain is a decentralized, distributed and public digital ledger that is used to record Blockchains transactions across many computers so that the record cannot be altered retroactively without the alteration of all subsequent blocks and the consensus of the network.53 Application Programming Interface is a communications protocol, allowing for example API targeted and dynamic data exchanges across government. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 213 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 7 GOVTECH CASE STUDY 17 CASE STUDY 17 GOVTECH Digital Transformation in Andhra Pradesh, India and managerial capacity of urban local bodies. 54 Overview Updating maps was a particularly pressing issue, as towns across the state had rapidly urbanized and In 2010, municipalities across the Indian state of Andhra grown in population. Without accurate maps, municipal Pradesh were unable to collect adequate revenue or governments could not properly assess property taxes deliver the public services that citizens demanded. or identify community needs regarding water, sewage, Through the Andhra Pradesh Municipal Development waste disposal, or street lighting. Improving building project, the state progressively leveraged digital permits was another major concern. The paper-based government platforms and emerging technologies submission of construction permits was subject to a to improve public services. The government used high degree of discretion, causing delays and creating drones to collect geospatial data and update maps, opportunities for fraud and corruption. replaced paper-based systems with digital ones, and trained both staff and citizens on how to use the new AP’s leaders recognized that digital technologies could platforms. Citizens could access services or lodge help the state increase revenue and improve delivery grievances through multiple channels: online, by of government services. In 2010, the government telephone or through a mobile phone application. and its development partners launched the Andhra The reforms significantly reduced opportunities for Pradesh Municipal Development Project, which aimed fraud and corruption in key areas, such as taxation and to leverage digital government reforms to address the construction permitting, and improved revenue for state’s governance challenges. The USD300 million local governments. eight-year project planned to use drones, artificial intelligence, and other technologies to collect and integrate geospatial data. Such data was critical for tax and land management purposes. Along with Introduction improving data collection, the state wanted to make public services more easily accessible for citizens, and In 2010, Andhra Pradesh (AP), a state located on India’s to introduce a citizen feedback system to improve southeastern coast, was struggling to deliver high- monitoring of public service delivery. quality public services to its 50 million citizens. As urban and economic growth accelerated and cities expanded, provision of urban services, such as roads, water and sanitation fell short of growing demand. For instance, The implementation process the piped water coverage ratio had declined by over 10 percent in the cities of AP between 1991 and 2001, Using new technologies to improve data and municipal sewerage systems served fewer than 20 collection and integration percent of residents. These service deficiencies were largely a consequence of the inadequate local financial With the project’s support, AP used cutting edge 214 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 7 GOVTECH disruptive technologies—such as drones—to map risks. Rather, supporting combinations of emerging properties and collect information. Under the project technologies served to address this goal. Table 7.4 over 1,000 municipal government staff were trained in summarizes the technologies that were used to support the use of drones to capture geospatial data. Several the AP program. Some technologies used, such as rounds of training and capacity building workshops Geographic Information System (GIS) platforms, had were held to train government staff in all the new been around for many years. However, while installing systems introduced. software manually had not been practical, cloud-based technologies made it easier to deploy GIS platforms Drones turned out to be cheaper than satellite imagery, across a significant number of municipalities. Both the other main option to collect property data, and drones and AI in the form applied were indeed a new drone images were also of higher quality. The collected technology for the decade, at least for this type of data was analyzed using machine learning and artificial application. The reduced cost and complexity of these intelligence techniques. For example, the drone images technologies allowed for their application, while their were projected over base maps and connected to other increased capability met the objectives of the reform. data across multiple applications, providing a complete geospatial view of municipalities. The government linked the newly collected information with existing Increasing access to public services records across various government departments to enable data exchange and cross-verification. After the The government made more than 350 services available information was updated, the government found it online through a website called MeeSeva and provided easier to match demand and supply for urban services. time-bound ser vice level agreements for those services. The government also made some services The state also introduced an online building permission available through PuraSeva, a mobile phone application platform and trained government staff how to use it developed. Several government depar tments it. The digital submission of construction permit under went business process re-engineering to applications with automated artificial intelligence encourage availability of online services. approvals reduced the discretion officials had in the permit approval process. AP created a Citizens Charter that included details of services to be provided along with stipulated timelines The AP experience highlighted that no single and fee structure. This information was available technology could serve to improve service delivery on the MeeSeva website and was also displayed in while also reducing fraud and corruption incidence and Citizen Service Centers. The government provided TABLE 7.4 AP’s Transformational Technologies Technology Functions Comments Integration and application of different Ability to intersect and cross- validate GIS Platforms spatial data layers different data Drones for spatial Use of drones with AI supported image Rapid mapping and validation of mapping with AI processing geospatial cadaster information Cloud-based integration and software Enterprise Resource Municipal e-governance system services for wide array of service and Planning (ERP) connected to geoportal management functions Online Building Permission Digital submission of construction permit System (Cloud-AI Discretion reduced for officials applications with automated AI approvals Supported) Smartphone application PuraSeva provides for different channels Continuous feedback enabled for feedback of citizen feedback Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 215 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 7 GOVTECH legal backing to service level agreements and digital citizen grievances available, along with information on documents. The legal changes ensured that new digital the government’s response. The initiative increased documents were legally valid. responsiveness and efficiency as services had to be delivered within fixed timelines or else the cause of the delay had to be reported. Incorporating citizen feedback Integrated service delivery platforms supported the The state launched a citizen feedback mechanism to entire lifecycle of city governance. The platforms were ensure service standards were maintained and reduce used for planning, implementation, results monitoring, petty corruption. Citizens could leave feedback by and feedback for correc tive ac tion. Multiple telephone, at citizen service centers, or through a technologies were connected, departments were able new mobile phone application called PuraSeva. Using to exchange information, and data was no longer in the application, citizens could geo-tag pictures of silos. service delivery problems, such as water leakages. The application assigned accountability to a municipal The new systems enabled municipal governments to engineer to fix the problem, and a dashboard allowed collect accurate information, which in turn provided elected officials to view the information in real time. two key benefits: The government made information on the response • It helped curtail tax evasion. Revenue from taken publicly available. For instance, citizens were property taxes and water charges more than provided with access to information regarding the doubled from 2015 to 2019. status of their complaints; municipal employees were given toolkits, training, and a way to track their • It improved the monitoring and delivery of public work; city managers were entrusted with data-driven services. For example, piped water was provided decisions that were real-time and easy to analyze; at to over 200,000 households, and processing times the state level, data-driven planning was undertaken for citizens to apply for public services reduced based on key performance indicators. If the grievance significantly. is actionable, and action taken is made public, more citizens get encouraged to use the platform. Clear Citizens benefited from digital technology as it enabled accountability and transparency on the response taken them not only to take advantage of better service encourages more people to use the digital platform, delivery, but to do so at a lower cost and with less ensuring its success. human interaction. Citizens could access services or lodge grievances through multiple channels, including In the 2019 fiscal year, more than 125,000 complaints the PuraSeva mobile phone application, Mee-Seva were received. Just 367 went unresolved. The citizen service centers, websites, or through phone complaints spanned a wide range of service delivery calls. issues, including non-functioning streetlights, water pipe leaks, and absenteeism of street sweepers. What led to these achievements? Almost half of these complaints were resolved within stipulated timelines. The citizen feedback system was 1. Strong political will to improve governance simple, transparent, and increased accountability of and make AP more attractive for investors was civil servants and municipal officials. an essential driver of the reform. There was considerable push from AP’s top leaders to introduce technology-based reforms to combat inefficiency and corruption prevalent in municipal Lessons learned systems. Despite a change in political leadership in 2014, the new government continued to support What was achieved? technology driven reforms and sustained the momentum. The new government that came to The project leveraged technology to boost transparency power in 2019 also continued to use and enhance and strengthen accountability. It also increased citizen the platform to improve service delivery. engagement by making real-time information on 216 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 7 GOVTECH 2. ‘Analog complements’ such as business process indicators. Actions taken on grievances were made re-engineering and complementar y reforms public to enhance trust and encourage greater use supported the technology driven governance of the platform. reforms. The state government drew up time- bound service level agreements (SLAs), with legal 4. Training and capacity building programs helped backing, for almost 385 services, which even reduce resistance from government staff and today are being delivered through the integrated encouraged the uptake of new technology by online portal ‘Mee-Seva,’ while some services are citizens. Government staff across all 110 urban available through the app ‘PuraSeva.’ Putting the local bodies (ULBs) in AP received training on using ‘Citizens Charter’ on the ‘Mee-Seva’ website as the building permission platform; over 1,000 ULB well as in the Citizen Service Centers enhanced staff were trained in the use of drones to capture transparency and raised awareness. In addition, GIS data; and other staff were trained in using the several government depar tments under went new systems. business process re-engineering to deliver online services more efficiently. Combining all these elements was the key to success. Thus, integrated digital technology, including the 3. Real-time data enabled stakeholders across sectors use of drones, GIS mapping, processing with artificial to develop innovative solutions. Getting real time intelligence, E-governance (ERP) dashboard, geo- data—whether on working streetlights, garbage portal, Pura Seva app and Mee-Seva platforms, collection, or unauthorized constructions—had to automated building permission approval systems, and be available, up to date, and easy to use and analyze the seamless linkage with various other government for the process to be successful. Citizens had applications had to go hand in hand with extensive access to information regarding the status of their training of government staff on the use of the ICT complaints; municipal employees could track their applications. This combination, all together, helped work; and city managers could make data-driven improve both municipal service delivery and the decisions. At the state level, data-driven planning tax revenues of the ULBs, while making the system was under taken based on key per formance responsive, inclusive, and participatory. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 217 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 7 GOVTECH Final reflections The recent developments in digital technologies have continued to catalyze public service delivery improvements, while potentially circumscribing fraud and corruption. Drones continue to rapidly increase the availability of increased resolution spatial and temporal data. Similarly, specialized sensors (IoTs) have significantly reduced the cost of data collection from the field. Significant advances in data processing and artificial intelligence coupled with cloud (and potentially quantum) computing can enable a vast amount of data from varied sources to be analyzed and used for evidence-based informed decision-making. Major advances in encryption and data protection technologies, together with robust interoperability and data-sharing strategies, have opened up an entirely new ecosystem of public and private sector players in developing new and innovative services, while preserving data confidentiality where necessary. These developments (collectively called Industry Revolution 4.0) provide unprecedented opportunities to formulate new policies that help overcome information gaps/ asymmetries, enabling a common platform for multiple agencies to work together and deliver services in ways that were not possible earlier. AP did not have advanced technology initially, but was able to “leapfrog” to the adoption of a set of emerging technologies. The past decade of success in AP suggests that national, and particularly sub- national governments, need to foster digital strategies that are broader than the current ICT strategies. They should foster a policy and institutional environment that promotes transparency and accountability, encourages uptake of new technology, invests in digital literacy and ensures broad-based digital strategies that improve participation by all, while keeping cyber-security concerns and data protection in mind. The experience of AP shows that technology can be a great enabler of better service delivery and good governance, provided there is strong participation by citizens and government in the uptake of this technology and if the political leadership is strongly supportive. 218 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 7 GOVTECH Notes 1. Cf. Vandy, Edie P. (2020). Sierra Leone: A digital President Bio 16. Aarvik, Per. (2019). Artificial Intelligence – a promising anti- embraces technology to transform the nation, The Patriotic corruption tool in development settings?, https://www. Vanguard. http://w w w.thepatrioticvanguard.com/sierra- u4.no/publications/artificial- intelligence-a-promising-anti- leone-a-digital-president-bio-embraces-technology-to- corruption-tool-in-development-settings.pdf, p. 50. transform-the-nation. 17. Cordovae, Yasodara and Eduardo Vincente Gonçalves. 2. World Economy Forum. (2020). Hacking corruption in the (2019). Rosie the Robot: Social accountability one tweet at a digital era: How tech is shaping the future of integrity in times time (Parts 1 and 2), October, https://blogs.worldbank.org/ of crisis Global Future Council on Transparency And Anti- governance/rosie-robot-social-accountability-one-tweet- corruption, Global Future Transparency And Anti-Corruption, time. May 2020.http://www3.weforum.org/docs/WEF_GFC_on_ Transparency_and_ AC _ Agenda_for_Business _Integrity_ 18. See U4, 2016. pillar_3_2020.pdf, pp, 17 19. Cf. Hashim, Ali; Piattifuenfkirchen, Moritz Otto Maria Alfons; 3. See Turkowitz, Joel. (2020). Confronting Corruption in public Cole, Winston Percy Onipede; Naqvi, Ammar; Minallah, procurement: Elements of Effective Approaches, 14 February, Akmal; Prathna, Maun; So, Sokbunthoeun. 2019. The Use Draft Note Prepared for Global Anti-Corruption Report, p. 14. of Data Analytics Techniques to Assess the Functioning of a Government’s Financial Management Information System 4. https://canaltech.com.br/governo/cgu-evita-prejuizos-de-r-1- : An Application to Pakistan and Cambodia (English). Policy bilhao-gracas-a-sistema-proprio-anti-fraudes-148083/ Research working paper; no. WPS 8689. Washington, D.C.: World Bank Group. ht tp://documents.worldbank.org/ 5. cf Ryvkina et. al. 2017 for the case of India’s I Paid a Bribe curated/en/226121546531748578/The-Use-of-Data-Analytics- application: Ryvkina, Dmitry, Danila Serrab, James Tremewanc. Techniques-to-Assess-the-Functioning- of-a-Governments- (2017). I paid a bribe: An experiment on information sharing Financial-Management-Information-System-An-Application- and extortionary corruption, European Economic Review, to-Pakistan-and-Cambodia. Volume 94, May 2017, p. 1-22. 20. Cloud-based services refers to the ability to access computer 6. Jha, Chandan Kumar Sudipta Sarangi. (2017). Social Media, resources, from storage to compute power, on-demand via Internet, and Corruption, Information Economics and Policy, the internet. There is a variety of ways by which this shift away Vol. 39, 2017. from traditional local systems is being implemented, but it is 7. For example, Ericsson to pay over $1 billion to resolve U.S. providing a higher degree of versatility and agility by which corruption probes, Reuters, December 7, 2019. governments can deploy innovative and scalable solutions. This means that government agencies do not need to invest 8. Cf. Hindustan Times. (2015). Coal, spectrum auction helped in large fixed costs to apply big data analytics, allow for both curb corruption: PM Modi, https://www.hindustantimes.com/ access to powerful tools for data fusion and AI. india/coal-spectrum- auction-helped-curb-corruption-pm- modi/story-qYP0D49stcHrp1GwRHUrcM.html. 21. Aarvik, 2019. 9. See Gelb, Alan and Anna Diofasi Metz. (2018). Identification 22. Cited by Aarvik, 2019: 5. Revolution: Can Digital ID Be Harnessed for Development?, 23. See Gelb and Metz, 2018. Washington, DC: Center for Global Development, https:// www.cgdev.org/publication/identification-revolution-can- 24. India’s Aadhar biometric system is focused on proving unique digital-id-be-harnessed-development, p. 272. but not specific identify. It stores a large database of unique identities, and agencies can query if an identify is unique. This 10. Okunogbe, Oyebola and Victor Pouliquen. (2018). Technology, is somewhat different from a digital platform that would store Taxation, and Corruption: Evidence from the Introduction of all additional attributes of an individual. Electronic Tax Filing, World Bank Policy Working Paper, 8452. 25. D’Silva, Derryl, Zuzana Filková, Frank Packer and Siddharth 11. This risk indicator appears to have been developed based Tiwari. (2019). The design of digital financial infrastructure: on set of weighted criteria, rather than predicted based lessons from India, Bank of International Settlements (BIS) on an empirical model (e.g., proxies of previous outcomes Papers, No 106, 15 December, https://www.bis.org/publ/ associated with observed fraud and corruption). bppdf/bispap106.htm, p. 39. 12. Harding, M., Hersh, J. (2018). Big Data in economics. IZA 26. This registry does not itself capture details of the individuals, World of Labor 2018: 451 doi: 10.15185/izawol.451. but allows for checking if a given ID query is unique or 13. Hlatshwayo, Sandile, Anne Oeking; Manuk Ghazanchyan; duplication (therefore checking duplicate claims or the set-up David Corvino; Ananya Shukla; Lamin Y Leigh. (2018). The of multiple identities). Measurement and Macro- Relevance of Corruption: A Big 27. Gotev, Georgi. (2018). EU flags fraud and corruption in refugee Data Approach, IMF Working Paper, https://www.imf.org/ settlements in Uganda, Euractiv, https://www.euractiv.com/ en/Publications/WP/Issues/2018/08/31/The- Measurement- section/european- external-action-service/news/eu-flags- and-Macro-Relevance-of-Corruption-A-Big-Data- fraud-and-corruption-in-refugee-settlements-in-uganda/. Approach-46157. 28. Dhaliwala, lIqbal and Rema Hannab. (2017). The devil is in the 14. U4. (2016). Literature review: The use of ICTs in the fight against details: The successes and limitations of bureaucratic reform corruption, https://www.u4.no/publications/literature-review- in India, Journal of Development Economics, Volume 124, the-use-of-icts- in-the-fight-against-corruption.pdf, p. 16. January 2017, p. 1-21. 15. Cf. Gupta, Sanjeev, Michael Keen, Alpa Shah, and 29. India’s Supreme Court ruled in September 2018 that the Ge nevieve Verdier. (2017 ). Digit al Revolu tio ns in Aadhar biometric database was constitutionally legal. The P u b li c F i n a n c e, h t t p s: // w w w.e li b r a r y.i m f.o r g / v i e w/ ruling agreed that the Aadhar can be used to distribute IMF071/24304-9781484315224/24304-9781484315224/ch08. government subsidies and benefits, and linked to tax numbers. xml?lang=en&redirect=true,. But it was no longer mandatory for opening Bank accounts or getting mobile connections. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 219 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 7 GOVTECH 30. D’Silva et. al., 2019. 43. A parallel argument could of course be made for cash, as India’s 2016 demonization of large denomination notes made 31. See Sen, Srijoni. (2019). A Decade of Aadhaar: Lessons in clear. Implementing a Foundational ID System, Observer Research Foundation, May, https://www.or fonline.org/research/a- 44. See ““DO YOU KNOW ALEXANDER VINNIK?” How an decade-of-aadhaar-lessons-in-implementing-a-foundational- offshore Bitcoin exchange and a London payments company id-system-50464/, p. 12. were misused to create a high-tech money-laundering machine”, Global Witness, https://www.globalwitness.org/en/ 32. See India’s Biometric Identity Program Is Rooting Out campaigns/corruption-and-money-laundering/btc-e- vinnik- Corruption, Slate, Aug 3, 2018 mayzus/ 33. Sen, 2019. 45. Will the China of tomorrow run on the technology behind 34. Muralidharan, Karthik, Paul Niehaus, Sandip Sukhtankar. bitcoin?, South China Morning Post, 2 Dec 2019, https://www. (2020). Identity Verification Standards in Welfare Programs: scmp.com/news/china/politics/article/3040132/will-china- Experimental Evidence from India, NBER Working Paper tomorrow-run-technology-behind-bitcoin No. 26744, Issued in February 2020, https://www.nber.org/ 46. See Greek Wealth is Everywhere but in the Tax Forms (New papers/w26744. York Times, 2010). But the challenge remained that even armed 35. Kenya’s early M-Pesa, China’s e-Payments platforms (CGAP with digital evidence, the work of validating this manually and 2019). getting results in the analogue courts proved challenging, as suggested by Greece’s Efforts to Limit Tax Evasion Have Little 36. Cornillie, Chris. (2019). Medicare Agency Turns to A.I. to Stop Success. Fraud and Faulty Payments. Bloomberg Government. The US Centers for Medicare and Medicaid Services (CMS) estimated 47. Decision support automation in this area can be mechanistic that in 2017 it has saved Centers for Medicare and Medicaid (e.g., basic symbolic rules that flag transactions from Services USD $15.5 billion, already in part using AI tools. procurement to travel expenses submissions) or using either supervised (trained) or unsupervised (outlier detection) 37. Carson, Brant, Giulio Romanelli, Patricia Walsh, and Askhat machine learning algorithms. Technologies in this area, also Zhumaev. (2018). Blockchain beyond the hype: What is the grouped as Robotic Process Automation (RPA), extend to even strategic business value?, McKinsey Insights. https://www. more interactive products such as chatbots. mckinsey.com/business-func tions/mckinsey-digital/our- insights/blockchain-beyond-the-hype-what-is- the-strategic- 48. ITU and DIAL. 2019. SDG Digital Investment Framework - business-value?cid=other-eml-alt-mip-mck-oth- 1806&hlkid= A whole-of-Government Approach to Investing in Digital d2c58d1171ab41a8a16e22859260e7cf&hctky=1871478&hdpid Technologies to Achieve the SDGs, ht tp://handle.itu. =6a0817ff-c71d-4a97-be68-b9b733f3d39f. int/11.1002/pub/812df924-en, p. 136. 38. The more general term for this technology is Distributed 49. Eaves, David. (2018). “The Fast-Follower Strategy for Ledger Technologies (DLTs), emphasizing that no central Technology in Government.” Governing, August 27, 2018, actor controls the “truth” regarding the respective records. https://w w w.hks.har vard.edu/publications/fast-follower- The proof mechanism to confirm that a block in a blockchain is strategy-technology-government. indeed subject to a consensus is subject to a host of designs 50. O’Neil, Cathy. (2016). Weapons of Math Destruction, Crown and implementation. One form of verification, which requires Books. a competition to solve cryptographic puzzles, has given rise to miner teams. The intuition here is that if many miners have 51. Greater emphasis on digital technology may amplify a number deployed collective efforts to “strike” a confirmation of the of blindspot and bias risks. Digital technologies present a set of block, reversing the block will be costly for any entity wishing distributional/digital literacy issues (including around gender to tamper with the content. These proof mechanisms can be lines), which can also emerge in terms of the intersection of quite costly in terms of energy and need to reward miners. technology and corruption. These merit special attention, DLTs also come in a variety of designs termed public or private including special initiatives to democratize the application of blockchains, in terms of who can view or alter the contents of technology. 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According to World Bank research, over 160 them are effective. Most AID systems have yet to live countries around the world have introduced financial up to their potential. Cumbersome filing procedures, disclosure systems.1 Asset and interest disclosure (AID) crucial gaps in the disclosure forms, and lack of systems differ in scope and reach, level of sophistication transparency and enforcement are limiting the role of and transparency. Countries use different institutional AID. Such weaknesses also may make it merely another setups and methods to enforce the disclosure rules check-a-box exercise to implement national anti- and verify information. However, the analysis shows a corruption strategies. Lack of control of submission and clear trend of AID becoming a universal instrument to ineffective verification of declarations undermine their enhance public sector transparency and accountability, importance as an anti-corruption tool. There is also promote integrity and prevent corruption. little understanding of the impact that the asset and interest disclosure systems have on the level of integrity AID systems have increasingly become a multi- and corruption in the country. Countries rarely have a purpose tool aimed at preventing conflicts of clear vision of why they are introducing or reforming interest, detecting unjustified assets and building their AID systems, what goals they are pursuing in this broader integrity of public service. AID, therefore, process, and what outcomes they expect to achieve. combines prevention and enforcement purposes. New combined systems are replacing traditional ones, This chapter aims to show what an effective AID which often treated disclosure of assets and interests system should look like and how it can be relevant separately and pursued different objectives. Countries in the context of transnational financial flows, introduce or bolster verification mechanisms to improve new ways of disguising unjustified wealth, as well enforcement. as domestic typologies of conflict of interest and hidden wealth. Selected case studies included in the AID systems also raise heated debates, especially chapter illustrate what works and what does not, as well concerning public disclosure of information from as the new trends and essential features that make AID the declarations. It is a prominent example of how effective. The chapter will follow the general framework countries balance considerations of privacy and that is used to regulate AID systems: who should file, personal security with the public interest in transparency when and how, what to declare, how to verify and and accountability. sanction non-compliance, and what information should be public. It will end with remarks on how governments With more systems becoming digitized and going and other stakeholders can measure the impact of AID online, AID contributes to the development of systems and make them more relevant. digital governance and economy. Electronic systems of disclosure have a spillover effect by encouraging civil society and media that use data on the assets and interests of public officials in their watchdog activities. Open AID systems can contribute to the transparency of ownership and support supervision efforts in other sectors. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 225 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 8 ASSET AND INTEREST DECLARATIONS The key questions about AID systems Who should file asset and interest easier to track and verify disclosures of the official. declarations? The first question to answer when designing an How frequently should declarations be AID system relates to the filer population. Including filed? too many declarants may dilute the focus, raise political opposition and complicate enforcement. Excluding Frequency of filings should follow the employment impor tant categories of filers whom the public cycle of the official and provide a record of both perceives to be high risk in terms of corruption may entry and exit situations (when the official started also negatively reflect on the system’s effectiveness and terminated his/her public sector employment), and credibility. It is therefore important to find a and changes throughout his/her career. It is also balanced solution that targets, first of all, the high- useful to look at former officials’ assets and interests risk public sector positions and areas. There is no one or two years after leaving office to see whether standard list of officials whom the system should they gained any unjustified assets or improper cover. The filer population should ultimately reflect the interests. Some systems also require filing of ad hoc national corruption risk assessment. Considerations of forms whenever significant changes in assets happen. effectiveness and impact sought by the system should It is important to note that disclosures discussed in this guide the decision on the scope of filers. chapter differ from the conflict of interest reports which officials have to file when a conflict of interest arises and Consideration needs to be given to a minimum and requires a management response. a broader list. The minimum list of high-risk positions can reflect the definition of domestic politically exposed persons used in the anti-money laundering Electronic vs. paper filing legislation. The broader list may include key officials in all branches of government, including the President, M ana g ing a paper-ba sed sy stem involves members of parliament, members of government and substantial challenges and costs, which an heads of central executive authorities, other political electronic system can eliminate. The following are officials, staff of private offices of political officials some of the benefits of the electronic system: it allows (such as advisors), regional governors, mayors of large for coverage of a broader scope of declarants, simplifies cities, judges, prosecutors, members of the judicial the submission process by making the declaration form and prosecutorial governance bodies, anti-corruption more user-friendly, reduces the number of mistakes investigators, senior executives of state-owned made in the forms, facilitates further verification of enterprises, etc. The high-risk areas or functions may declarations, and improves data management and include, for example, officials responsible for public security. Not surprisingly, an increasing number of procurement, licensing and supervision, members of countries in various regions have transitioned to independent market regulators, and tax and customs electronic AID systems. officials. However, severa l issues ma y impede the Family members should be included. Approximately introduction of an electronic disclosure system. 65 percent of countries with disclosure laws require These include internet coverage and quality of access, officials to submit information not only for themselves availability of digital authentication, institutional but also for their family members. 2 Omitting family capacity to process electronic filings and ensure data members creates a loophole that declarants can easily security, and additional costs to develop and roll out a abuse to avoid disclosure of assets and interests. The new IT system. system can require family members to submit their disclosures directly, or the public officials can include Despite implementation challenges, World Bank information on assets/interests held by family members experience in advising countries in this area shows in their own declaration forms. The latter approach that the electronic system saves financial and reduces the number of forms submitted and makes it human resources. It eliminates the need for secure 226 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 8 ASSET AND INTEREST DECLARATIONS physical storage space for paper declarations and conflict of interest rules. Among such elements that an allows the staff of asset declaration agencies to focus effective AID form should include are: on ensuring compliance and advising filers on how to correctly fill out the declaration form or how to manage • Disclosure of all types of income as well as gifts a potential conflict of interest. It also raises the level and sponsored travel, including disclosure of of compliance with the disclosure requirements and the identification details of the legal entity or provides better transparency and public accountability.3 individual who was the source of the income, gift or sponsored travel. What is to be declared? • Disclosure of national and foreign bank accounts and safe deposit boxes (vaults) to which the To be useful, the asset and interest disclosure has declarant or family members have access, even if to include information that allows the tracking of formally opened by another person. all the important assets and interests of the public official. The information provided should also highlight • Loans given or received by the public official, significant changes in wealth that lawful income cannot including to/from private individuals. explain, and uncover interests that may be in conflict with the filer’s official duties. • Deferred corporate rights (e.g. options to purchase shares) and investments regardless of their form. Modern AID systems have to reflect current typologies of money laundering and corruption. • Disclosure of expenditures above a cer tain Ownership through proxies remains a widespread way threshold. This is essential to track significant of hiding control of assets or getting unlawful benefits. changes in wealth by comparing income, savings It is essential for an AID system to require public officials and expenditures over time. Expenditures should or their related persons to report the legal entities of cover not only acquisition of assets but also which they have beneficial ownership and control. The payment for services and works. declaration form should also cover trusts and other similar legal arrangements, including any relation a • Disclosure of interests not related to income or public official or family members have regarding a trust. assets, notably contracts with state entities of the declarant and family members or companies in Disclosure of assets should not only include their their control, prior employment, and any link with formal ownership. What matters for AID is the real legal entities and associations (e.g. membership in control of assets regardless of the nominal owner, and governing bodies). the use of assets, which may show hidden ownership or lifestyle not commensurate with the official’s position In the new AID systems, policy makers often focus or income. Disclosure of beneficial ownership of assets more on assets, forgetting that the disclosure should therefore extend to all types of tangible or form can be very helpful in managing conflicts of intangible property and income. interest. When officials fill out the form, they have to take stock of their interests and review them against Use of virtual assets (e.g. cryptocurrencies) their official duties. The officials can then seek guidance has become a challenge for tracking ill-gotten from the respective integrity official and manage their proceeds. The reporting of such assets in the AID form potential or real conflict of interest. The disclosure form is an important step towards bringing transparency to can be a crucial tool to detect conflicts, if it contains this new mode of wealth accumulation. sufficient information on the financial and non-financial interests of the declarant and related persons. Building a comprehensive disclosure form without important loopholes can be accomplished by considering the outcome of the verification process. How can declarations best be The form should ask for information that the verification verified? process can later use to detect infringements based on an analysis of methods of hiding unjustified assets, Verification is an important element of the laundering of criminal proceeds and violations of enforcement of the disclosure rules. Effective Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 227 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 8 ASSET AND INTEREST DECLARATIONS verification helps to uncover non-compliance and to clear criteria limiting discretionary decision-making. start the process that ultimately leads to imposing The system may categorize declarations submitted sanctions. Verification can enable the detection of: by certain top officials as high-risk by default. This will give credibility to the system and avoid focus • Cases of late submission or non-submission of on low-level officials or petty inconsistencies. disclosure forms • External signals (e.g. media reports, complaints of • Prohibited gifts citizens or watchdog NGOs, referrals from other • Assets or income not reported or disclosed authorities) should take priority. The agency should incorrectly (e.g. under-reporting or over-reporting verify them if they give rise to a substantiated of value) suspicion of irregularity. Anonymous reports about verifiable facts should also be included. • Assets not justified by the lawful income • The verification should include IT solutions that • Lifestyle of the public official that does not automate certain operations. Such solutions can commensurate with his status perform a risk analysis of each declaration, compare • Non-compliance with anti-corruption restrictions several declarations of the filer or compare with (incompatibilities, divestment of financial interests, declarations of similar filers. Applying analytical post-employment restrictions, etc.) software to the disclosure data can help to find patterns that can be then used to develop red flags • Interests or activities that may give rise to situations for future verifications. of potential, real or apparent conflict of interest with the declarant’s duties and position. • Cross-checking disclosures with other government- held registers and databases is an important Certain legislative and institutional conditions element of the verification that effectively uses provide the basis for an effective verification government data. The system can also automate system. These include: such cross-checks and perform them shortly after the declaration is filed or even at the time of the • A clear legislative framework that establishes the submission. verification mandate, its triggers and scope. Verification can only be as effective as the people • Verification procedures that streamline the who conduct it. Experience in countries shows verification process and prevent unnecessary that decentralized systems of verification, i.e. where impediments (e.g. short time limits for verification individual agencies take on this responsibility for their procedures or the possibility to challenge each own officials, are rarely effective because of the lack step of the proceedings). of motivation, expertise, and resources. A dedicated verification agency provides a better model for • Use of a risk-based approach to trigger and organizing the verification process. Such an agency does prioritize verification when inherent risks are found not have to deal only with the verification of financial in the disclosure form, such as the position/duties disclosures; it may also combine this function with other of the declarant. Systems which automatically preventive or law enforcement functions in the anti- trigger the verification on formal grounds (e.g. late corruption arena. It is important though to separate the submission) are ineffective as they overburden verification functions within such an agency to ensure the verification agency. This is especially relevant proper specialization and autonomy. The regulations for systems where the number of disclosures is should grant to the officials who conduct verification a substantial and not matched with the resources to certain level of autonomy and protection against undue verify them. interference. • When the number of mandatory verifications is A verification agency should have sufficient substantial, the verification agency has to prioritize powers and resources to perform its duties. Such its work by focusing on high-risk declarations. Such powers could include access to government registers prioritization should be transparent and based on and databases, including tax information, company 228 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 8 ASSET AND INTEREST DECLARATIONS register and registers of real estate and vehicles, right to compliance. Criminal sanctions for serious violations obtain information and records from public and private related to asset and interest disclosure (e.g. non- entities, access to banking and other financial data, reporting of significant assets or illicit enrichment), and the possibility to request or access information which can be enforced through criminal proceedings, abroad. At the same time, the verification agencies are are usually more effective than administrative ones. usually not law enforcement bodies and lack certain tools that a criminal investigation can employ, e.g. In line with the proportionality principle, certain special investigative techniques. This highlights the breaches may attract softer measures that need to understand the limitations of administrative do not qualify as sanctions but bear negative bodies in charge of verification and the importance consequences for the non-compliant official. For of cooperation with law enforcement bodies. It also example, the public disclosure of the names of those affects the debate on the level of dissuasive sanctions, who failed to submit a declaration or submitted it as shown below. outside of the set time limit may be sufficient to deter repeat infringements. The “naming and shaming” A major challenge for the verification agencies is can also reinforce other imposed measures and raise finding and tracking assets or financial interests awareness about the disclosure requirements. Such located abroad. This remains an area of weakness in visibility also helps to build public trust and awareness most AID systems with a strong verification mechanism. of the AID system. Some countries implement this tool To address this issue, the verification agencies may as a searchable register of corruption offenders that is take a number of measures, for example: raise the open to the public. technical expertise of their staff by providing training on the available open source information and use of Sanctions for AID related violations do not have foreign jurisdiction registers; establish a legal mandate to be applied against an individual to be effective. and the technical capacity of the verification agency Civil or administrative confiscation of unjustified to get and use information from foreign ownership assets, even without the individual liability of the public registers for verification purposes; develop relations official, may be a dissuasive instrument to target assets and sign information exchange agreements with that exceed the official’s lawful income. Such measures verification agencies in other jurisdictions, especially in target the outcomes of the criminal acts of corruption neighboring countries where declarants often acquire or money laundering by confiscating the proceeds or keep assets; and join and support regional initiatives of such activity without having to overcome often for information exchange on the assets and interests of an insurmountable hurdle of detecting and proving public officials.4 underlying offenses. Besides sanctions or measures that target How are sanctions to be imposed for declarants, an effective AID system should also non-compliance? include sanctions that support the enforcement mechanism. They ensure that the different actors in Effectiveness of verification is closely linked to an AID system properly perform the duties assigned to the sanctioning regime, which should be effective, them. Such sanctions may target, in particular: proportionate and dissuasive. Verification, which uncovers irregularities, is just the first step. The • Failure of public and private entities to provide sanctioning proceedings have to follow and adequately information in response to a request from the respond to the discovered violations. To be dissuasive, institution carrying out the verification; and sanctions must have a sufficient deterrent effect, which means that the personal cost of the sanction is higher • Failure of a public agency or official to fulfill than the potential benefit derived from the offense. their duties related to the AID (e.g. to check the To be proportionate, sanctions must correspond to submission of declarations, report non-compliance the offense. to the enforcement agency, verify the identity of the official if such identification is required during The level of sanctions and applicable procedures the official’s registration of the disclosure in the may also determine what tools enforcement electronic system). agencies could use to establish and punish non- Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 229 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 8 ASSET AND INTEREST DECLARATIONS How much transparency should the The best approach to ensure transparency is to disclosure system have? make data from asset and interest disclosures available online. Providing public access to such Public transparency of asset and interest information free of charge and without technical declarations acts as a deterrent in and of itself barriers will help to reach the transparency objective. and reinforces other elements of the system. Public An electronic AID system allows the collection of availability of information from declarations increases structured data through declaration forms and then scrutiny and complements the enforcement efforts of its publication in open data (i.e. machine-readable) the verification agency. Transparency of information formats. Publishing declarations as open data facilitates about the assets and interests of public officials helps their re-use by civil society and the private sector can to build public sector integrity and promotes public contribute to the emergence of new data analytics tools trust in the government. Over 55% of countries require and watchdog initiatives. the declared information to be public.5 Broader public disclosure can be beneficial also Making declarations public has both opponents and because of cross-sector use. For example, publicly critics, as such transparency conflicts with the available information on declarants and their related privacy and data protection rights of the declarants persons can help banks (and other obliged entities and related persons. In some contexts, this can affect under the anti-money laundering framework) to their security and become a barrier to the entry of some conduct customer due diligence, in particular by professionals into public service. The policy makers identifying politically exposed persons. Information therefore have to find a balanced solution that takes about beneficial ownership of public officials in account of these competing interests.6 The degree of legal entities can increase corporate transparency transparency could be linked to the corruption and and improve the investment climate in the country. public administration integrity level in the country—the Governments can combine data from AID forms with more corrupt and less integrity there is in the system other data to detect and prevent violations in areas like the more transparency it requires. Other considerations public procurement and licensing of rights to resources matter as well (e.g. the level of physical security and (e.g. in the extractive sector). Cross-checking data with violent crimes). As a result of the balancing exercise, the register of asset and interest disclosures can help even in systems where wide public access is granted, sector regulators ensure compliance with the ownership certain information can be withheld from publication. and transparency requirements in the respective This could be information about a person’s IDs and sector (e.g. banking, competition, audiovisual media place of residence or also information about cash and services). AID transparency has, therefore, a significant valuables held outside of banks. In any case, the scope spillover effect when actors in other areas use data from of the information withheld from disclosure should be declarations for the public good. explicitly and narrowly determined in law. Final reflections AID systems constitute a fast-developing anti- Countries and development partners, however, corruption policy and enforcement area. More need a better understanding of how to measure and more countries all over the world are introducing the success and impact of AID systems. It may be or upgrading their systems. The reforms usually aim impossible to establish exactly to what extent AID has to digitize filing systems, broaden their scope, and contributed to the success or failure of anti-corruption establish a verification mechanism. Governments often policies. But it is still important to measure the impact promote their AID systems as an anti-corruption tool of a disclosure system. This can include measuring that focuses on the public officials themselves. This and population perception and expert opinion on how the the visibility of AID systems can explain their popularity AID system has contributed to the transparency and as an anti-corruption measure. accountability of the public administration, and the 230 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 8 ASSET AND INTEREST DECLARATIONS opinion of the public officials themselves on whether by boosting civil society activism and encouraging AID has resulted in better compliance with anti- watchdog activities, improving compliance with anti- corruption restrictions and improved integrity. Surveys money laundering and other sectoral regulations, of various stakeholders can measure the perception of increasing corporate ownership transparency or whether the verification of declarations is effective and contributing to digital governance. unbiased. The case studies of Romania and Ukraine that The results of enforcement efforts can also indicate follow constitute examples of successful AID the level of success. These results are reflected systems. Although both countries publish declarations by the level of compliance with the AID submission online, the two systems are different in their history obligation, the number of detected violations and and level of development. One is completely digital applied sanctions, the amount of unjustified assets covering about 1 million filers, while the other allows and prohibited gifts detected and confiscated, the submission of scanned paper declarations. One country number of disclosed and prevented conflict-of-interest has a strong track record of enforcement and dissuasive situations, etc. The work of verification agencies can sanctions, while in the other a poor enforcement be evaluated using different performance indicators record and allegations of bias brought down the measuring the effectiveness and efficiency of their corruption prevention agency. The case studies show work. why enforcement is key and how digitization can make AID systems more effective. They also include lessons The impact of AID may also extend beyond its learned from these countries that may be useful for primary anti-corruption goal and have a cross- policy makers and practitioners in other countries. sector effect. A disclosure system can have an impact Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 231 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 8 ASSET AND INTEREST DECLARATIONS CASE STUDY 18 CASE STUDY 18 ASSET AND INTEREST DECLARATIONS Reform of Asset and Interest Disclosure in Ukraine Overview Introduction Ukraine has required that public officials submit asset In the winter of 2013-2014, hundreds of thousands of declaration forms since the mid-1990s, but up until 2014, Ukrainians took to the streets in protest. While the the forms were merely a formality and were ineffective main impetus for the demonstrations was a shift in in preventing corruption. Following the dramatic events government policy away from integration with the of the Revolution of Dignity (Euromaidan) in 2014, civil European Union, the protesters were also motivated by society successfully advocated an overhaul of the anti- the widespread corruption that permeated Ukrainian corruption infrastructure, including the introduction politics. The protest movement—which became known of a new electronic asset and interest disclosure as the Ukrainian Revolution of Dignity or Euromaidan— system. A new organization, the National Agency for led to the ouster of President Viktor Yanukovych. Corruption Prevention, had to lead implementation Yanukovych and other public officials were accused of the e-declarations system. Despite numerous of embezzling billions of dollars to pay for mansions, attempts by spoilers to block or weaken the reform, sports cars, and other luxuries. the new system became operational in September 2016, becoming one of the most comprehensive asset In theory, Ukrainians should have been able to track declaration systems worldwide in terms of how much elected officials’ assets through an asset declaration information was disclosed and made publicly available. system put in place in 1995 (and revised in 2011). But the By the end of 2019, the system held over 4 million system lacked an enforcement mechanism and provided electronic documents, all of which were available for for very limited public access to asset declarations. free public access, including in machine-readable Officials submitted hand-written declarations to the format. The asset declarations register connected to respective human resources department, which usually 16 other government databases for cross-checks and kept them out of the public eye and rarely reviewed operated an automated risk analysis system to select them. The amount of information that was disclosed declarations for verification. Although the system itself was limited and did not allow effective identification of was a success, the corruption prevention agency largely variations of wealth and conflicts of interest. As a result, failed to use it to sanction non-compliance or ill-gotten asset declarations did not help the public hold officials gains. At the end of 2019, the agency was overhauled to accountable. improve its effectiveness. 232 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 8 ASSET AND INTEREST DECLARATIONS Following the revolution, which ousted the top The design of the new system included a vastly leadership of the country, lawmakers embarked on a improved asset and interest disclosure form, secure complete overhaul of the country’s anti-corruption data storage through a public-access website separate infrastructure. The new anti-corruption legislation from the main database, and protection against data called for a fully electronic and web-based system of tampering since submitted documents could not be asset and interest disclosure and a new institution to withdrawn or changed in the system and each document oversee the system and verify asset declarations of had to display the date and time of its submission. The public officials. The law also extended significantly the system’s terms of reference also stipulated a free read- scope of the disclosure, provided for online publication only access to the e-declarations by the public and the of data from declarations and strengthened sanctions possibility of data re-use. for non-compliance, including criminal punishment. The new system aimed to prevent and detect conflicts of interest, monitor public officials’ wealth, and ensure Implementing the system transparency of officials’ assets and interests. While the system was being designed, political Implementing such a system was never going to be inter ference threatened to block it from being easy. Corruption was endemic throughout all areas of implemented. In December 2015 parliament passed public administration, and many officials were resistant amendments that postponed the launch of the to change. e-declaration system for one year. After civil society and international partners raised concerns, parliament returned to this issue, but instead of removing the amendment, it introduced a set of new restricting The implementation process changes. Designing a new system When the President vetoed those changes, opponents in parliament tried a new approach to thwart the new The support of development partners, such as the system, this time by drawing out the process to select World Bank, International Monetary Fund and the commissioners for the new corruption prevention European Union through advisory assistance, budget agency. The government appointed the minimum support operations and the EU visa liberalization plan required number of commissioners only in March 2016. was essential for the design of the asset declaration Opponents also tried to derail the launch by denying system and its launch. The budget support operations technical certification of the IT system behind the new and the EU visa liberalization plan focused on pillars asset declaration register. Some members of parliament of the system, such as legislation underpinning the (MPs) claimed that the system was deficient because verification of declarations as well as the launch of the the digital signature of one of the commissioners was electronic filing system. allegedly compromised. Even before the government set up the National Agency Through a combination of public campaigns and for Corruption Prevention, which would be responsible consult ations with gover nment s t akeholder s, for the operation of the new e-declarations system, civil society advocacy groups and international preparations for the system’s creation started. Following development partners maintained their focus on the a request from the Ministry of Justice, in July 2015, the need to avoid delays in the implementation of this World Bank handed the draft terms of reference for the vital reform. Eventually those efforts paid off, and in electronic system to the ministry, and two months later, June 2016 the newly established National Agency for the United Nations Development Programme (UNDP) Corruption Prevention formally accepted the software in Ukraine used the terms of reference as a basis for and approved the bylaws necessary for the system’s calling a software development tender. The contractor functioning. was selected in December 2015 and delivered the software in mid-2016. A quality assurance group that The new system became operational in September included the Ministry of Justice and the World Bank 2016 when the first wave of filers submitted their provided advice during the software development e-declarations. Within two months, over 100,000 process. declarants submitted forms through the electronic Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 233 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 8 ASSET AND INTEREST DECLARATIONS system. Once submitted, all declarations became categories of high-risk declarants whom the law had immediately public online. The agency fully launched previously missed, such as leadership of the president’s the system on January 1, 2017, when about 1 million office, and assistants to judges. The new amendments filers from the public sector had to file their declarations. clarified the definition of family members and the definition of property use which filers had to report, and The initial launch of the electronic filing system did introduced requirements for the disclosure of beneficial not go smoothly. The system experienced overloads ownership in trusts and similar legal arrangements, in peak periods, and the corruption prevention agency cryptocurrencies, bank accounts and bank safe deposit had insufficient capacity to advise declarants who boxes in Ukraine or abroad. were trying to submit their forms. To make it easier for declarants to comply with disclosure requirements, In 2019 the corruption prevention agency started using over time the agency introduced additional support the software for the automated analysis of declarations. for declarants, such as guidelines, video aids, and an The analysis included automated cross-checks with 13 online training course. external government registers and checked data against more than 100 pre-determined red flags.8 Based on such One important part of implementation was integrating analysis, the system ranked all submitted declarations the new system with external registers, such as the according to their risk rating and determined which land register, company register, vehicles register and declarations should be prioritized for full verification tax database. Such integration required a lot of inter- conducted by the agency’s staff. Ukraine was one of agency negotiations and time to technically arrange the first countries in the world to introduce such an for the data exchange. Legal obstacles also hampered automated risk analysis of declarations in bulk, which integration with some databases. Ultimately, parliament also included data cross-checks. had to amend the law to remove these obstacles. The availability of information through the new While there was an overall drive to strengthen anti- e-declarations system fostered a range of new civil corruption efforts, there were also temporary setbacks. society initiatives. All documents submitted in the web- When the anti-corruption drive of politicians linked to the based system immediately became available online revolution weakened, some political groups and parts at https://public.nazk.gov.ua. Documents were also of government tried to roll back the new achievements, disclosed through an open application programming including by curtailing the asset and interest disclosure interface (API) as machine-readable data, allowing system. In 2017, parliament instituted requirements NGOs to develop new watchdog instruments. that anti-corruption NGOs and activists also file asset declarations, a decision that violated international “Introduction of the new e-declaration system was one standards.7 The new requirements were criticized by of the main anti-corruption achievements in Ukraine Ukrainian civil society and international partners, who in the past 5 years,” said Vitaliy Shabunin, head of the perceived parliament’s actions as a backlash against leading anti-corruption NGO “Anti-corruption Action the civil society actors who advocated for the new Centre”. “Journalists, NGOs and, first of all, voters got system and defended attempts to undermine it. The access to comprehensive information about wealth e-declarations for civil society activists remained in of politicians and officials. The scope of data and the force until the Constitutional Court revoked them in possibility of its processing in a machine-readable June 2019. format afforded the country multiple investigations into unlawful assets of public officials. Such investigations doomed many political and civil service careers of Enhancing the effectiveness of the corrupt officials who managed to keep their positions system even after the two prior revolutions.” National elections held in 2019 brought in a new For example, a group of activists developed a website government that had campaigned on an anti-corruption (declarations.com.ua/en) that presented the data agenda. The administration change opened a new retrieved from the official database with advanced window of opportunity for anti-corruption reforms. In search and filtering features, a more user-friendly October 2019, parliament passed amendments that interface, and data analytics and visualization tools. extended the disclosure requirements to cover new The site also included digitized forms of previous paper 234 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 8 ASSET AND INTEREST DECLARATIONS FIGURE 8.1 Implementation Timeline of Electronic Asset and Interest Disclosure System in Ukraine World Bank e-declarations TOR submitted to Official launch of "Reboot" of NACP Ministry of Justice NACP operation started Main part of the New Corruption e-declarations Prevention Law system software E-declarations system adopted delivered launched for all filers Oct-14 Apr-15 Jul-15 Mar-16 May-16 Jun-16 Aug-16 Sep-16 Jan-17 Jan-19 Oct-19 Nov-19 Government appointed Launch of e-declarations More than 4 million 4 NACP commissioners system (the first wave asset declaration of filers) forms available online for public Corruption NACP approved NACP launched access Prevention Law regulations necessary for automated entered into force the system's launch verification module of declarations BOX 8.1 Scope of Asset and Interest Disclosure Form Ukraine’s form of electronic declaration captures a very broad range of disclosure items. Most systems target real estate, vehicles, corporate rights, income, gifts, etc. In addition to such usual disclosure items, Ukraine’s form also covers assets that reflect current corruption and money laundering typologies in the country and abroad. The form covers, for example, the following: • Beneficial ownership (control) in legal entities, trusts and similar legal arrangements in Ukraine and abroad. • Cryptocurrencies. • Bank accounts regardless of the balance, opened by any person in the declarant’s or family member’s name, safe deposit boxes and persons who have access to them. • Any property or income that formally belongs to a third person, but which is in fact controlled by the declarant (family member) or from which the declarant (family member) receives or can receive income. • Use of any property. • Any expenditure or transaction as a result of which the declarant acquired or ceased to own or use any asset. Some of the items above (e.g. trusts, cryptocurrencies) were recently introduced and filers have to disclose them in declarations that cover the period starting January 1, 2020. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 235 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 8 ASSET AND INTEREST DECLARATIONS declarations, which allowed citizens to track the assets government set up a six-member panel that included of officials to earlier periods. The same group operated representatives of two prominent anti-corruption another website (ring.org.ua) where 19 databases, Ukrainian NGOs and international exper ts from including asset declarations, the company register Slovenia, Germany, and US proposed by international and public procurement database, were integrated to organizations. The selection process was transparent provide cross search and a comparison of data. and merit-based, including general skills and psychological tests, essays, and interviews with the Another anti-corruption watchdog NGO created a 30 candidates who applied. In January 2020, the database of domestic politically exposed persons9 using newly-selected head announced a broad reform of the a range of public sources, including e-declarations. The agency to win back the public’s trust. database was used by banks for customer due diligence and by anti-corruption investigators and investigative journalists. Information was available in English and was integrated in the WorldCheck database and other Reflections commercial data aggregators. The database aimed to prevent Ukrainians from using financial institutions Ukraine’s new asset and interest disclosure system to transfer ill-gotten assets abroad and disguise their was recognized both by Ukrainian citizens and the origin. Inspired by this example, other groups in Europe international community as one of the key tools to and Asia began establishing similar databases in their turn around the country’s reputation for high levels of countries.10,11 corruption. “By publicly disclosing officials’ incomes and assets via an open, directly accessible digital system, the e-declaration system was Ukraine’s breakthrough Overhauling the anti-corruption agency instrument to prevent corruption,” said Blerta Cela, the to improve enforcement UNDP’s deputy country director.13 By the end of 2019, the e-declaration system contained Support from international organizations like the EU, over 4 million electronic documents. IMF, UNDP, and the World Bank, and advocacy from civil society organizations on the ground in Ukraine, Despite the public availability of this data, the was critical to get the system up and running and to corruption prevention agency failed to gain public overcome efforts to block its implementation. In the trust. Verification of declarations and enforcement of absence of broad political will and a strong national sanctions for non-compliance, in particular, remained institution to oversee the design and implementation a weak spot. The corruption prevention agency and of the new system, civil society and international the police focused their enforcement efforts mostly partners stepped in to provide the necessary technical on minor infringements. Allegations of arbitrar y exper tise and advocacy suppor t to develop and application of the law and ineffectiveness discredited launch the new system. Later, those groups mounted the agency and led to calls for its urgent overhaul.12 a defense against attempts to curtail the robust asset Those calls grew louder after a whistleblower from disclosure provisions. the corruption prevention agency disclosed in 2017 that the President’s office at the time allegedly The submission compliance levels in Ukraine were gave instructions to the agency’s staff concerning high—despite the lack of sanctions handed down. verifications they conducted. Part of the reason for this was that it was relatively easy to detect non-submission of declarations since After the 2019 elections, where a majority of MPs the law required entities that employed declarants to that won seats were from the new president’s party, check if they submitted their declarations on time and parliament passed amendments to reboot the agency report back to the corruption prevention agency, and and replace its leadership through an open competition. the fact that all declarations were available online for Giving a fresh start to the corruption prevention agency public scrutiny. was one of the electoral promises of the new president and his party. The newly revealed details about officials’ wealth sent shockwaves around Ukraine. While Ukrainians To choose a new leader for the agenc y, the had long suspected that many public officials were 236 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 8 ASSET AND INTEREST DECLARATIONS incredibly wealthy, the extent of the riches they had needs broader powers and resources, including the amassed caused a media storm. A survey conducted ability to impose sanctions, get information from shortly after the new asset and interest disclosure different actors, access financial information and other system’s launch found that Ukrainians thought the new government registers, and request information from system was one of the four biggest successes of 2016 abroad. In addition, it was important to have multiple in the country.14 A poll conducted in 2017 showed that points of verification, including criminal investigation 72% of Ukrainians had a positive or somewhat positive of false statements in the declarations, since criminal opinion about the system.15 investigators usually have more powers and resources to pursue effectively cases of false disclosure. Several aspects of the Ukrainian reform made it stand out as one of the most promising asset and interest In Ukraine, however, even the criminal investigators ran disclosure systems around the world. “The Ukrainian into difficulties in pursuing cases. The National Anti- system of asset declarations is probably one of the Corruption Bureau of Ukraine, a criminal investigation most advanced globally in terms of the information body targeting high-level corruption that was set up covered, the use of innovative digital solutions, and the in 2015, opened more than 60 criminal proceedings level of transparency,” said Ivan Presniakov, Deputy into false disclosure by high-level public officials, but Chairperson of the corruption prevention agency, who failed to deliver tangible results of dissuasive sanctions had previously managed the e-declarations system because judicial reform lagged behind. development project at the UNDP. “It has three distinct features. First, the scope of reported data is In late 2019 the judicial reform started to make progress, comprehensive and leaves almost no loopholes to promising to ensure that those who failed to comply abuse the system. Second, there are strong sanctions with the asset and interest disclosure legislation would for false data or untimely submission. And, third, what be sanctioned. In September, a new anti-corruption is of crucial importance, almost all data is publicly court took over the cases from the ordinary courts that disclosed, which guarantees that assets of any official had proven ineffective in dealing with corruption cases. are under the scrutiny of public or law enforcement In early 2020, this new court delivered a conviction for eye.” the non-submission of asset declaration by a judge, and more verdicts in cases of false asset disclosure were Ukraine’s digital by design approach provided many expected throughout 2020. benefits, especially because the e-declaration data was available for public use in machine-readable format. The availability of this information triggered civil societ y ac tivism, the emergence of data analytics tools, and new forms of civil society and journalism watchdog activities. The digital approach also allowed the corruption prevention agency to continuously improve the system by adding additional functionalities, such as the automated red-flag analysis and the automated cross-checks with registers. As well as being cost effective, the digital approach eliminated the burden of storing and processing paper forms and limited manual work. While the system itself was a success, its effectiveness was hampered by the corruption prevention agency’s limitations in verifying the asset declaration information and sanctioning non-compliance. Although there were strong sanctions in place for submitting a false declaration or failing to submit a declaration altogether, there was little enforcement. The agency’s struggles highlighted that in order for an asset declaration system to function effectively, the responsible agency Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 237 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 8 ASSET AND INTEREST DECLARATIONS CASE STUDY 19 CASE STUDY 19 ASSET AND INTEREST DECLARATIONS Enhancing Effectiveness of Asset Declarations in Romania and designed to issue early warnings to contracting Overview authorities about potential conflicts of interest in procurement procedures. Asset declarations were first introduced in 1996 with the aim of cleaning up the public sector following the transition from Communism. The asset disclosure system, which was later expanded to cover potential Introduction conflicts of interest and incompatibilities,16 underwent several series of major reforms from 2003 through 2010. As Romania transitioned from a state-controlled The road from first establishing the system to seeing economy to a market economy in the early 1990s, many results took many years and even now refinements are public officials became inexplicably wealthy, despite needed to match the emerging challenges. having spent their entire professional lives working for meagre government salaries. MPs, ministers, mayors or A wide range of Romanian public officials have to heads of local or regional governments and their family declare their assets and interests. But Romania also members acquired real estate, vehicles or land whose set up a verification mechanism focused on detecting value was disproportionate to their current or past and sanctioning unjustified variations of wealth, sources of income. The rapid accumulation of wealth conflicts of interest and incompatibilities. Since 2007, among public officials was hard to miss since private an independent administrative agency—the National property had only recently appeared. Law enforcement Integrity Agency (ANI)—has managed the system. The failed to credibly tackle this very visible integrity issue, agency collects mostly paper-based declarations and and the level of trust in the public sector decreased. publishes them on its website.17 Transparency has been key to the success of the system; it has allowed for public In 1996 Romania introduced mandatory asset disclosure oversight of disclosure forms and given prominence to for public officials, as did other countries in the region the system on the political reform agenda. Public access and elsewhere in the world. But the system initially did also contributed to the effectiveness of the verification not deliver on its promise. Officials submitted disclosure process, as the vast majority of review procedures have forms to their human resources department, and the been triggered by media and civil society reports. information declared was not disclosed to the public. With no transparency and no effective mechanism to In 2017, the ANI launched its newest tool, PREVENT, verify assets or unjustified variations of wealth, the asset which is linked with the public procurement system disclosure system failed to make significant inroads 238 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 8 ASSET AND INTEREST DECLARATIONS in reducing Romania’s corruption problem. Between sources of income and debts of family members as well 1996 and 2007, Romanian courts adjudicated less than as the balance of their bank accounts needed to be ten cases of civil confiscation of unjustified variations disclosed and was made publicly available. of wealth. While this is a relatively high number in the regional context, it did not come close to making a dent Civil society groups and investigative journalists used in the challenge at hand. the declarations in combination with other open source data to paint a comprehensive picture of the A window of opportunity to fix the system began to interests and wealth of public officials. During electoral appear at the end of the 1990s, when Romania started campaigns and when individuals were competing for the long process of joining the European Union (EU). high-level public functions, information from the asset Along with other reforms, Romania had to tackle and interest disclosures played an important role in corruption in order to be accepted into the EU. public debates. Initial concerns that public access to information in disclosures might pose a threat to the personal security of public officials turned out to be unfounded. “Blacklisting”19 of candidates for public The implementation process office, based on information from the declarations, became a frequent practice of civil society groups Reforming the system since 2004. Investigative journalists routinely used declarations of assets and interests as a first step in In 2003, Romania introduced declarations of private their investigations. interests18 in addition to asset disclosures, and the information filed in the declarations became publicly By the time Romania joined the EU in 2007, its asset available for the first time. However, the information declaration system was comprehensive in terms of the that declarants had to submit was limited in scope. For scope of the information disclosed and much of what example, the asset disclosure form did not include the was filed was made publicly available. But there was precise value of bank deposits, loans or debts, but just still much work to do for the country to stamp out an indication of whether they exceeded the threshold of corruption, and the reforms of the late 1990s and 2000s 10,000 euro. Declarants were also required to disclose were fragile. To ensure that Romania remained on track in a yes or no format if they held shares worth more than with its anti-corruption agenda, the EU implemented 10,000 euro. the “Cooperation and Verification Mechanism” (CVM), a tool used for both Romania and Bulgaria (which faced In 2004, the disclosure form was amended to close similar challenges and joined the EU at the same time). more loopholes, such as including the actual value of The mechanism allowed the European Commission, bank deposits if above 10,000 euro. the executive branch of the EU, to issue regular reports assessing the two countries’ progress20 on or deviation Finally, in 2005, the government made sweeping from their reform agendas. reforms to the asset and interest disclosures. The forms became more comprehensive, requiring officials to The European Commission set four criteria for assessing declare a much wider range of information: movable Romania’s progress. One of those criteria was to set up and immovable property with a clear indication of an agency responsible for verifying asset disclosures, the value, financial assets in Romania or abroad (bank identifying conflicts of interest, and issuing sanctions accounts and other financial investments including their for noncompliance. Despite pressure from the EU to respective value), liabilities, gifts and all income. set up the agency, it took time to overcome strong domestic opposition. Local and national elected public officials, civil servants, judges and prosecutors, police and intelligence officers The ANI was set-up as an independent administrative all had to file public disclosures at the beginning and agency in mid-2007 and became operational at the end of their mandate, and yearly while they remained beginning of 2008. The ANI published all disclosures in their position. Filers needed to submit information on its website and kept them there for three years not only on their own assets, income and interests, (before archiving them). As of April 2020, 7.7 million but also on those of their family members (spouse and declarations are available on the ANI’s public portal. dependent children). Information on the values and Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 239 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 8 ASSET AND INTEREST DECLARATIONS Facing challenges or ex-officio by the chief prosecutors from the Courts of Appeal (there are 15 courts of appeal in the country). Early in ANI’s life, it faced a fundamental challenge The verification was conducted by a commission to its institutional framework and at an immediate composed of two judges and one prosecutor and later operational level to many on-going verification assessed by appeal court judges. The results achieved procedures. One of the first cases on confiscation of by these commissions in the area of wealth verifications unjustified variations of wealth, which was sent to the were modest. The system lacked accountability court in 2008, was appealed, and in April 2010 the mechanisms and transferred tasks to the judiciary that Constitutional Court found that parts of the law on the should have been dealt with by administrative control procedure for controlling wealth were unconstitutional. bodies. Prosecutors and judges had to perform the A new law, amended to reflect the criticism from the prima-facie investigations of wealth, although this is Constitutional Court, was adopted in September 2010. essentially a technical task that should be performed by ANI had to pause operational work for half a year, then an administrative or investigative body and censored close all on-going verification procedures and restart and reviewed by the judiciary. them from scratch in line with the amended procedures, generating further delays in its anti-corruption efforts. After 2007, ANI initiated verification procedures based on complaints or ex-officio. Staff used relevant Over the years there have been frequent legal government databases (such as the companies initiatives21 in Parliament to curtail ANI’s powers. The register, vehicle registration register, police database) 2019 European Commission CVM report on Romania to crosscheck information provided by declarants. highlighted that in the previous two years, five legislative One of the most important features of the Romanian proposals modifying the integrity framework had integrity mechanism is the power of ANI to request been adopted, weakening certain provisions and the any type of data and information from both public ability of ANI to maintain its track record of cases. This and private entities, including financial information included a “relaxation” of the incompatibilities regime, from financial institutions regarding transactions, introducing a non-dissuasive sanctioning regime for the bank accounts or credits. This proved to be extremely local elected officials found to have conflicts of interest, useful when assessing the wealth accumulated by a and a general statute of limitation period of 3 years22 for public official during his mandate and in the process sanctioning conflicts of interest and incompatibilities in of verifying the accuracy of the disclosed data. Public ANI’s cases. officials were able to provide additional information during the verification process, and ANI’s findings were challengeable in court. Around 70% of ANI’s cases are challenged before courts. Achievements Following the Constitutional Court’s 2010 decision Confiscating unjustified wealth related to the procedure for controlling wealth, the September 2010 law introduced an additional filter. This Since the asset disclosure forms were first introduced was that ANI decisions would have to be analyzed by a in 1996, Romania has been one of the few countries commission of two judges and one prosecutor set up at that has aimed to control and sanction unjustified the level of each court of appeal. This is a combination variations23 of wealth of public officials by embedding of the initial institutional set-up of ANI and the old civil confiscation tools in its financial disclosure system. system of wealth control. If the commission agrees with Although other countries have civil confiscation tools in ANI’s findings, the case is sent to the administrative place, there are few systems where civil confiscation is litigation section within the Courts of Appeal with a so intertwined with the asset declaration system. final appeal to the High Court of Cassation and Justice. While ANI is limited to asking for further clarifications The original mechanism for verifying the accuracy of only from the subject of the investigation (the filer), asset declarations that was in place between 1996 the Wealth Investigation Commission attached to the and 2007 was rudimentary and difficult to use. The Court of Appeal (another filter) can gather its own procedure could start either with a complaint from the additional evidence and can hear other individuals public regarding unjustified variations of wealth (even than the subject of the investigation. A final finding of though at that point the declarations were not public) unjustified variation of wealth results in the confiscation 240 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 8 ASSET AND INTEREST DECLARATIONS of the wealth that the public official cannot adequately • In the case of a prominent political figure, account for. prosecutors notified ANI, based on their information, that a public official was hiding large sums of money in a foreign jurisdiction. ANI’s Sanctioning conflicts of interest and inspectors requested the Tax Administration incompatibilities to provide additional information about the official’s bank accounts abroad. This information As in the case of verification of unjustified variations was obtained at a later stage from the foreign of wealth, in the area of conflicts of interest and jurisdiction and ANI found this amount to be incompatibilities ANI can also conduct verifications an unjustified difference between legal income based on complaints or start investigations ex-officio. and assets and notified the Wealth Investigation The agency’s findings can be challenged in court (the Commission. administrative litigation section within Courts of Appeal with a final appeal to the High Court of Cassation and • In a case of corrupt police officers, judicial Justice) without the additional filter of the commission proceedings performed by prosecutors were that exists in the area of unjustified wealth. For conflicts doubled by the administrative wealth assessment of interest, the sanction is disciplinary24 and the act conducted by ANI’s inspectors, which led to concluded under the conflict of interest is annulled the non-conviction based confiscation of half a and parties must be reinstated to the initial state. In million euros (sums of money discovered by the practice, this means that disciplinary sanctions range prosecutors during the home searches). from salary reduction for a limited period of time to removal from the position. To deal with conflicts of • In a few hundred cases, ANI notified the prosecutors interest in the area of public procurement, an ex- about false statements or missing information from ante mechanism for identifying potential conflicts of the asset or interest disclosures. interests was introduced (see below). Bet ween 2011 and 2015, ANI identified both For incompatibilities, the sanction is the public official’s administrative conflict of interest and indications of dismissal from the public position unless s/he gives up possible criminal conflict of interest in the case of a the other position declared incompatible by the law. few dozen MPs. The conflict of interest was generated Between 2010 and 2019, 321 public office holders by the fact that they hired their own relatives to work were removed from their offices (MPs, mayors, heads as members of their parliamentary offices. On the of public authorities, civil servants, police officers etc.), administrative side, the courts confirmed ANI’s findings, while 635 had already left their offices before the ANI civil sanctions were applied and the interdiction to decision was enforced. occupy any other public office for three years was enforced. On the criminal side, prosecutors sent Besides dismissal, another dissuasive feature of the the cases to court, where most defendants received sanctions for incompatibilities and conflict of interest suspended prison sentences. is a three-year ban on occupying any other public position. The public officials under this prohibition are listed on ANI’s website. Using PREVENT to deal with potential conflicts of interest in public procurement Inter-agency cooperation Since 2013, the European Commission has constantly If inspectors find indications of other irregularities called upon Romania to strengthen integrity in the (administrative, fiscal or criminal), they have to notify public procurement system: “The penalties for officials relevant bodies, for example the tax administration, involved in fraudulent public procurement cases police, or prosecutors. The following are examples of continue to be very low and the law does not foresee a successful cases of cooperation between prosecutors possibility of a cancellation on the grounds of conflict of and integrity inspectors, with both using their interest of projects that have already been executed....A respective competences to tackle lack of integrity in more systematic approach to ex ante checks, most the public sector. logically a role for ANI (with new resources) that would Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 241 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 8 ASSET AND INTEREST DECLARATIONS also ensure a uniform and systemic implementation, recover losses incurred through corrupt procurement would offer a useful way forward.” processes. In June 2017, ANI launched PREVENT, a prevention As PREVENT is an automated system, it also managed to tool to detect and eliminate potential conflicts of monitor procurement procedures on a scale that would interest in procurement. The targeting of conflicts of have never been possible through manual processes. interest in public procurement procedures is due to: 1) It also fosters a collaborative approach to dealing with the magnitude of this sector—around 15 billion euros conflict of interest situations as the main outcome of the yearly; 2) the widespread perception of corruption in PREVENT procedures is not punishing individuals, but this area—8 out of 10 companies say that corruption rather pinpointing specific risk situations. in public procurement is a widespread problem; 3) a significant number of conflicts of interest found by ANI in the previous years were related to public procurement; and 4) EU-funded contracts are also subject to public procurement legislation. Results of the integrity system in Romania PREVENT automatically checks whether participants in a public bid are related or otherwise connected to the By the end of 2019, ANI had reviewed more than 18,000 management of the contractor. The system predicts cases, out of which 3,000 were confirmed to be integrity the likelihood of a potential conflict of interest through violations (significant differences between incomes a risk rating of each tender. The tool introduced and acquired assets, incompatibilities, administrative “integrity forms,” which bidders and procurement conflicts of interest, suspicions of criminal offenses i.e. committee members (who decide which bid to accept) conflicts of interest, false statements, money laundering, have to upload in the country’s electronic procurement suspicions of committing corruption offenses, including system. Using the forms, ANI verifies the composition crimes against the financial interests of the European of procurement committees and identifies potential Union). ANI applied more than 7,000 administrative conflicts of interest between committee members fines for non-compliance with the obligation to and bidders. In this process, ANI cross-checks the disclose. ANI’s final reports also include 1,954 cases of information from the integrity forms with other public incompatibility, 668 cases of administrative conflict of databases (company Register and National ID register, interest and 160 cases of unjustified wealth amounting which also includes data on birth and marriages). When to over 29.2 million euros. the PREVENT system identifies potential conflicts of interest (for example, a relative of a bidder being on Among high level officials, ANI found integrity incidents a procurement committee), ANI issues an integrity in the case of 141 MPs, 31 government officials, warning to the head of the contracting authority. The 1,755 local elected officials and 252 heads of public responsibility for removing the cause of the conflict institutions. 25 In around 1,400 cases, sanctions were of interest rests with the head of the contracting enforced and assets were confiscated and returned authority. If the latter fails to do so, ANI starts an ex- to the state budget. In the other cases, ANI’s findings officio verification on the consumed conflict of interest. were not confirmed by the courts or the officials no In other words, where prevention fails, sanctions are longer occupied positions in the public sector or the imposed. statute of limitations had passed. From June 2017 to December 2019, the PREVENT Moreover, the PREVENT system is acting as a strong system reviewed 43,008 procurement procedures, deterrent: The number of investigations opened into resulting in 117 integrity warnings. In 113 of those alleged cases of conflict of interest related to public cases amounting to 255 million euros, the contracting procurement contracts has significantly dropped (by authorities removed the cause that generated the almost 50%) since the system became operational.26 potential conflict of interest, while in the other four cases ANI started ex-officio verifications. By identifying and eliminating potential conflicts of interest early, the PREVENT system helped Romania to avoid spending time and resources on court proceedings to 242 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 8 ASSET AND INTEREST DECLARATIONS FIGURE 8.2 Final Findings of ANI Reports between 2008 and 2019 350 323 300 292 263 250 229 200 161 161 165 150 124 123 129 119 112 101 100 82 72 59 50 32 36 37 29 30 25 17 15 15 10 9 6 4 2 0 2008-2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Incompatibilities Administrative con icts of interest Unjusti ed wealth asset and interest declarations are in an unhealthy Reflections competition with criminal investigative bodies or believe that results are dependent on having Several key legal and operational factors have similar investigative powers as their colleagues on contributed to ANI’s track record of cases: the criminal side. • Dissuasive sanctions included in the law (ANI’s The institutional architecture also played an important findings on incompatibilities, conflicts of interest or role in the evolution of ANI. Integrity inspectors—the unjustified assets were followed up by sanctions or staff that carries out the analytical and operational confiscations of the unexplained amounts); work—appointed to their position following public competition have full autonomy and independence in • Access to information (any information can be their case files, i.e. they cannot receive instructions from requested and easily obtained from any private anyone, not even their superiors on the conclusions that or public entity or individual, including from tax they reach during the investigations. The quality of their authorities and financial institutions); work is assessed every year by an external independent audit report and every time a case file is challenged • Comprehensive methodologies and procedures in Court (judicial review). The management of ANI is developed and used by the operational staff (which performed by a president and a vice-president, who are include templates for communication, working also appointed based on public competition. They only methods and strategies, scenarios, etc.); fulfill management duties and do not have the right to intervene in the inspectors’ case files. • Constant communication with other stakeholders in the integrity system (communication with the Romania’s experience shows the benefits of a filers, judges, prosecutors, fiscal administration comprehensive approach that focuses on both inspectors, etc.); and prevention and sanctioning. In similar country contexts to Romania, where there are high levels of violations • Effective cooperation with other institutions related both to unjustified variations of wealth and involved in the fight against corruption. In some conflicts of interest, it is important to consider a countries, the institutions responsible for verifying comprehensive approach. Preventive measures alone Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 243 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 8 ASSET AND INTEREST DECLARATIONS will not be sufficient. At the same time, sanctions alone assistance from similar entities in other jurisdictions will be less effective than a combined approach. nor provide it. ANI cannot provide information to similar foreign institutions about bank accounts Transparency of asset and interest disclosures plays because the ANI integrity inspectors can only an important role. After declarations became public, access information if a specific verification file civil society groups, journalists and citizens were able is opened under the name of a Romanian public to check what public officials declared that they own27 official. and compare it with information from other sources. As a result, the public could demand investigations based • Paper-based system. One important operational on concrete information rather than just suspicions. challenge that prevents the further strengthening of Transparency also helped consolidate active citizenship the asset declaration system is the fact that it is still and public accountability, generating support for anti- paper based. As a result, ANI uses a lot of financial corruption institutions like ANI. and human resources to deal with the complexities of collecting, organizing, securing and making In implementing its asset and disclosure system, publicly available millions of declarations. This also Romania confronted strong and sustained opposition hampers the further development of its verification from individuals and groups that benefited from system. ANI launched at the end of 2019 a complex corruption. Public support and international pressure EU-funded project, which aims at developing the were essential to build political will and overcome technical platform for introducing electronic filing those trying to stifle reform. In particular, pressure from of declarations. The relevant legislation still needs the European Commission through the EU accession to be adopted by the Romanian Parliament. process and the Cooperation and Verification Mechanism ensured the country kept strengthening Romania’s experience also shows that it is a long way its asset and interest disclosure system and did not from identifying a violation to enforcement, particularly backtrack on its anti-corruption efforts. when it comes to elected officials. Sometimes, not even final court decisions guarantee enforcement. For example, the Romanian Parliament refused on several occasions to sanction its own members. 29 A truly Looking forward effective anti-corruption regime requires the support of all institutions, particularly those with the power to Despite the system’s successes, some ongoing bring significant change. challenges need to be addressed. Some of these are: • Use of third parties. Many assets are held under the names of third parties (relatives, business associates, companies, friends etc.) and this frequently makes it impossible to ascertain the size of a public official’s estate. Other countries that have faced this challenge have introduced the declaration of assets held by public officials and their family members as beneficial owners. • Assets held abroad. Another challenge is verifying the assets held abroad, such as real estate and bank accounts. While some very limited mechanisms are now in place (i.e. a treaty for avoiding double taxation) and others are under discussion (International Treaty on Exchange of Data for the Verification of Asset Declarations), 28 administrative entities responsible for verifying asset declarations face difficulties in tracing assets held abroad. Administrative entities like ANI can neither receive 244 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 8 ASSET AND INTEREST DECLARATIONS Notes 1. Rossi, Ivana M., Laura Pop, and Tammar Berger. 2017. Getting from judicial acts, visualize them, provide statistics, and merge the Full Picture on Public Officials: A How-To Guide for data from court decisions with other databases, including Effective Financial Disclosure. Stolen Asset Recovery (StAR) e-declarations. Series. Washington, DC: World Bank. doi:10.1596/978-1-4648- 0953-8. 12. NGOs compiled a list of the corruption prevention agency’s failures and urged parliament to disband it (http://nazkfails. 2. Idem, p. 24. antac.org.ua/eng). The OECD anti-corruption monitoring report outlined many challenges and deficiencies in the 3. See, in particular: Dmytro Kotlyar and Laura Pop. (2019). agency’s work – see OECD (2017), Fourth Round Monitoring E-filing asset declarations: benefits and challenges. World of the Istanbul Anti-corruption Action Plan, Anti-corruption Bank/Stolen Asset Recovery Initiative. https://star.worldbank. Reforms in Ukraine, p. 33-37, www.oecd.org/corruption/acn/ org/publication/e-filing-asset-declarations-benefits-and- OECD-ACN- 4th-Round-Report-Ukraine-ENG.pdf. challenges. 13. Cela (2018). Electronic Asset Declarations for Public Officials 4. As an example of such regional work, see the initiative on the – two years after its launch. A panacea against corruption? International Treaty on Exchange of Data for the Verification www.ua.undp.org/content/ukraine/en/home/blog/2018/the- of Asset Declarations in Southeast Europe, www.rai-see.org/ expectations-and-reality-of-e-declarations.html. regional-data-exchange-on-asset-disclosure-and-conflict-of- interest. 14. Rating Group (2016). Estimation of 2016 Events and Socio- political Moods of Population. http://ratinggroup.ua/en/ 5. Rossi, Ivana M., Laura Pop, and Tammar Berger. 2017. Getting research/ukraine/ocenka_sobytiy_2016_i_obschestvenno- the Full Picture on Public Officials: A How-To Guide for politicheskie_nastroeniya_naseleniya.html. Effective Financial Disclosure, cited above, p. 91. 15. Cela, 2018. 6. See also Dmytro Kotlyar and Laura Pop. (2016). Asset Declarations: A Threat to Privacy or a Powerful Anti-Corruption 16. The holding of two functions simultaneously despite this Tool? www.worldbank.org/en/news/opinion/2016/09/26/ being forbidden by law. asset-declarations-a-threat-to-privacy-or-a-powerful-anti- corruption-tool. 17. See http://declaratii.integritate.eu/. 7. See, among others, ICNL (2017). Analysis of the Draft 18. Initially those included memberships in political parties and Laws On Introducing Changes to the Tax Code and to NGOs, paid professional activities and shareholding rights in Some Other Laws to Ensure Public Transparency of the companies. Financing of Public Associations and the Use of International 19. SAR (2004). Coalition for Clean Parliament – Local and General Technic al A s sis tance. ht tps://mk0 rofifiqa2w3u89nud. Elections (Translated Title). http://sar.org.ro/coalitia-pentru- k i n s t a c d n.c o m / w p - c o n t e n t /u p l o a d s /o u r- w o r k _ I C N L- parlament-curat- 2004/. Analysis- of-the - Ukrainian- Draf t-L aw- on-Repor ting-for- C S O s . p d f ?_ g a =2.4 0 6 3 0 8 8 4 .773 5 6 6 4 87.159 218 9 2 0 0 - 20. S e e h t t p s: //e c .e u r o p a.e u / i n f o /p o l i c i e s / j u s t i c e - a n d - 2000779560.1592189200/.; Transparency International (2017). fundamental-rights/upholding-rule-law/rule-law/assistance- Proposed Amendments to a Law that Targets Ukrainian Anti- bulgaria-and-romania-under- cvm/reports-progress-bulgaria- corruption Groups Must Be Abolished. www.transparency. and-romania_en. org/news/pressrelease/proposed_amendments_to_a_law_ 21. “...the legal framework for integrity, the set of laws defining the that_targets_ukrainian_anti_corruption_groups; IFEX (2017). situations of conflicts of interests and incompatibilities for civil Ukraine: Drop government proposals that restrict NGO servants and elected or appointed officials, has been regularly activity. https://ifex.org/ukraine-drop-government-proposals- re-opened in Parliament.” CVM (2017a). Report from the that-restrict-ngo-activity; OSCE/ODIHR (2018). Joint Opinion Commission to the European Parliament and the Council: On on Draft Law No. 6674. & 6675. www.venice.coe.int/webforms/ Progress in Romania under the Co-operation and Verification documents/default.aspx?pdffile=CDL- AD(2018)006-e. Mechanism. https://ec.europa.eu/info/sites/info/files/com- 8. At the end of 2019, the agency connected the e-declarations 2017-44_en_1.pdf. and in the technical report, “In April 2017, register to other three important databases of the Ministry of unexpected modifications of the law on incompatibilities for Justice of Ukraine (registers of civil acts, powers of attorney Members of Parliament were adopted. A negative opinion had and inheritance). been issued by ANI but the amendment went ahead.” CVM (2017b). Romania: Technical Report. https://ec.europa.eu/info/ 9. See https://pep.org.ua/en. sites/info/files/swd-2017-25_en.pdf. 10. See, for example, https://ceeliinstitute.org/identifying- 22. Based on the earlier provisions in the law on ANI, the unexplained-wealth-of-public-officials-ceeli-assists-civil- assessment of conflicts of interest and incompatibilities society-in-developing-new- anti-corruption-tools, www. was carried out both during the exercise of public functions tisrilanka.org/tisl-launches-online-database-on-politically- by officials and civil servants, and for 3 years after their exposed-persons. termination. According to the same provisions, the sanction 11. Other noteworthy examples of watchdog tools established for a conflict of interest or incompatibility could be applied using information from the e-declaration system include: a) in maximum 6 months from the date ANI`s report remained Zaparkanom (“Over the Fence”, https://zaparkanom.com. definitive, i.e. confirmed by the court. For example, ANI could ua/) which used the e-declarations register to merge data have started an investigation in 2019 for a civil servant that on declarants, provide dashboard analytics, rate declarants committed a conflict of interest in 2015. Assuming that the by risks, and show links of declarants with other individuals case had been completed and gone through all the judicial and legal entities, b) DeclaCar (https://declacar.com.ua) stages by the end of 2020, then the sanction could have been which compared the value of cars declared by officials in applied at any time between January and June 2021. However, their disclosure forms with public data on the market value a new amendment was introduced stipulating “a general of cars to show inconsistencies, and c) Sud na doloni (“Court statute of limitations for civil, administrative and disciplinary on the palm”, http://court-on-the-palm.com.ua) which used liability for conflicts of interests and incompatibilities of three the open court decisions register to provide structured data years after the facts have been committed.” For this reason, Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 245 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 8 ASSET AND INTEREST DECLARATIONS References in this new form, in order to sanction an incompatibility or Barnes, Daniel W.; Berger, Tammar; Burdescu, Ruxandra; Gilman, conflict of interest, the deed must be discovered, ascertained, Stuart; Habershon, Alexandra M.; Recanatini, Francesca; Reid, and carried through all the judicial and administrative Gary J.; Trapnell, Stephanie E.. (2012).  Public office, private proceedings in less than 3 years from the date the facts have interests : accountability through income and asset disclosure been committed. One of the many consequences that this (English). Stolen Asset Recovery (StAR) initiative. Washington, modification has generated is that ANI has already dismissed D.C.: World Bank Group. http://documents.worldbank.org/ more than 200 ongoing cases, because more than 3 years cur ated/en/ 734201468152086402 /Public- of fice - private - passed from the date the acts had been committed. interests-accountability-through-income-and-asset-disclosure. 23. Of more than 10,000 euros between incoming cashflow and Dmytro Kotlyar and Laura Pop. (2016). Asset Declarations: A Threat outgoing cashflow. to Privacy or a Powerful Anti-Corruption Tool? www.worldbank. org/en/news/opinion/2016/09/26/asset-declarations-a-threat- 24. Disciplinary sanctions range from a warning, a salary cut, to-privacy-or-a-powerful-anti-corruption-tool. relegation to a lower function and dismissal. Dmytro Kotlyar and Laura Pop. (2019). E-filing asset declarations: 25. See ht t ps://w w w.integr it ate.eu /Nout atias px?Ac tion= benefits and challenges. World Bank/Stolen Asset Recovery 1&NewsId=2964&PID=21 Initiative. https://star.worldbank.org/publication/e-filing-asset- 26. CVM (2019a). Romania: Technical Report. https://ec.europa. declarations-benefits-and-challenges. eu/info/files/technical-report-romania-2019-swd-2019-393_ OECD (2011), Asset Declarations for Public Officials: A Tool en. to Prevent Corruption, OECD Publishing. http://dx.doi. 27. According to the 2019 Google Analytics Report, both ANI`s org/10.1787/9789264095281-en. website and the asset and interest disclosure portal have Rossi, Ivana M., Laura Pop, and Tammar Berger. (2017). Getting almost 280.000 unique visitors per year. the Full Picture on Public Officials: A How-To Guide for Effective 28. RAI (2019). International Treaty on Exchange of Data for the Financial Disclosure. Stolen Asset Recovery (StAR) Series. Verification of Asset Declarations. http://www.rai-see.org/ Washington, DC: World Bank. doi:10.1596/978-1-4648-0953-8. regional-data-exchange- on-asset-disclosure-and-conflict-of- interest/. Case Study 18: Reform of Asset and Interest Disclosure 29. Cooperation and Verification Mechanism report issued in January 2017 covering the previous 10 years – “There has in Ukraine also been a recurring problem concerning resistance to the Cela (2018). Electronic Asset Declarations for Public Officials implementation of the Agency’s reports, even when confirmed – two years after its launch. A panacea against corruption? by a court decision, and reluctance from the responsible www.ua.undp.org/content/ukraine/en/home/blog/2018/the- institutions and authorities to apply the sanctions required expectations-and-reality-of-e-declarations.html. (which consist normally in either dismissal of public function or administrative fines). In the last two years, the general situation IFEX (2017). Ukraine: Drop government proposals that restrict has significantly improved, but some decisions by Parliament NGO activity. https://ifex.org/ukraine-drop-government- have still appeared to question or delay the implementation of proposals-that-restrict-ngo-activity. final court decisions confirming the Agency’s reports.” CVM, ICNL (2017). Analysis of the Draft Laws On Introducing Changes to the 2017b. Tax Code and to Some Other Laws to Ensure Public Transparency In 2019, the European Commission maintained these criticisms: of the Financing of Public Associations and the Use of International “The November 2018 report pointed at delays and apparent Te c hnic al A s sis t ance. ht t ps://mk 0 rof if iqa2 w3u89nud. inconsistencies in the application of sanctions for Members of k i n s t a c d n . c o m / w p - c o n t e n t /u p l o a d s /o u r- w o r k _ I C N L- Parliament who were found to hold incompatible functions or A naly s is - of-t he - U k r ainian - D r af t- L aw - o n - Re p or ting -for- to be in a state of conflict of interest by a final court decision C S O s . p d f ? _ g a =2 . 4 0 6 3 0 8 8 4 . 7 7 3 5 6 6 4 8 7.159 2 18 9 2 0 0 - rendered on the basis of a report from ANI. It highlighted a 2000779560.1592189200/. possible divergent interpretation of the rules (notably when OECD (2017), Four th Round Monitoring of the Istanbul the integrity incident in question came in a previous mandate Anticorruption Action Plan, Anticorruption Reforms in Ukraine, or position)” CVM (2019b). Report from the Commission to pa. 33-37, www.oecd.org/corruption/acn/OECD-ACN-4th- the European Parliament and The Council: On Progress in Round-Report-Ukraine-ENG.pdf. Romania under the Cooperation and Verification Mechanism https://ec.europa.eu/info/sites/info/files/progress-report- OSCE/ODIHR (2018). Joint Opinion on Draft Law No. 6674. & romania-2019-com-2019-499_en.pdf. 6675. w w w.venice.coe.int /webforms/documents/default. aspx?pdffile=CDL-AD(2018)006-e. Rating Group (2016). Estimation of 2016 Events and Socio-political Moods of Population. http://ratinggroup.ua/en/research/ ukraine/ocenka_sobytiy_2016_i_obschestvenno-politicheskie_ nastroeniya_naseleniya.html. Transparency International (2017). Proposed Amendments to a Law that Targets Ukrainian Anti-corruption Groups Must Be Abolished. www.transparency.org/news/pressrelease/ proposed_amendments_to_a_law_that_targets_ukrainian_ anti_corruption_groups 246 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 8 ASSET AND INTEREST DECLARATIONS Case Study 19: Enhancing Effectiveness of Asset Declarations in Romania CVM (2017a). Report from the Commission to the European Parliament and the Council: On Progress in Romania under the Co-operation and Verification Mechanism. https://ec.europa. eu/info/sites/info/files/com-2017-44_en_1.pdf. CVM (2017b). Romania: Technical Report. https://ec.europa.eu/ info/sites/info/files/swd-2017-25_en.pdf. CVM (2019a). Romania: Technical Report. https://ec.europa.eu/ info/files/technical-report-romania-2019-swd-2019-393_en. CVM (2019b). Report from the Commission to the European Parliament and The Council: On Progress in Romania under the Cooperation and Verification Mechanism. https://ec.europa. e u / i nfo/s i te s / i nfo/f ile s /p ro g re s s - re p o r t- ro ma nia -2019- com-2019-499_en.pdf RAI (2019). International Treaty on Exchange of Data for the Verification of Asset Declarations. http://www.rai-see.org/ regional-data-exchange-on-asset-disclosure-and-conflict-of- interest/. SAR (2004). Coalition for Clean Parliament – Local and General Elections (Translated Title). http://sar.org.ro/coalitia-pentru- parlament-curat-200. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 247 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 9 Beneficial Ownership Transparency PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 9 BENEFICIAL OWNERSHIP TRANSPARENCY Introduction The release of the Panama Papers and Paradise Confronting corruption and the IFFs it generates Papers in 2016 and 2017 shone a spotlight on requires an end to secrecy surrounding company the extensive use of anonymous companies for ownership and an end to the abuse of anonymous concealing corrupt practices and proceeds. The legal structures for illicit financial gain. This requires sudden growth in publicly available information on this a shift in our thinking about confronting corruption. widespread practice has helped increase pressure on It means focusing on the financial centers and the policy makers to address the abuse of anonymously- jurisdictions that provide a “safe haven” for corrupt owned companies and other anonymous financial funds” in addition to strengthening the response to vehicles, and to take into account the role that they play corruption in developing countries. in facilitating corruption and illicit financial flows. These mega-leaks exposed abuses that toppled heads of Addressing anonymity is a key challenge. A study state and provided the information for law enforcement by the World Bank’s Stolen Asset Recovery Initiative actions that (by conservative estimates) helped recover (StAR) showed in 2011 that this kind of anonymity is a $1 billion for taxpayers around the world.1 As revealed core feature of grand corruption, with anonymously- by these leaks, anonymously-owned companies owned companies used in 70% of cases studied. registered in tax havens were the getaway vehicles for Since 2009, tax campaigners have also been drawing tax evaders, criminals, and corrupt politicians. The most attention to the use of anonymous companies for tax shocking insight from these public revelations is that abuse.5 Secrecy is a well-established norm, however, these cases are merely the tip of the iceberg, being just and access by law enforcement and other interested a few of the disreputable clients of a small number of parties to information about the beneficial owners of the law firms that provide these services. companies and legal entities remains a challenge. Regulatory loopholes in beneficial ownership This chapter provides an introduction to beneficial disclosure requirements in one country have serious ownership transparency. It explains the concepts, consequences globally because illicit financial reviews the existing global standards, identifies some flows (IFFs) are not constrained by national of the early impacts, and illustrates the policy and borders. Common practices employed for laundering technical challenges governments face in implementing corrupt proceeds adapt and evolve to seek out reforms. It also describes the growing international jurisdictions where legal structures offer the greatest commitment to ac tion by gover nment s and degree of privacy protection. Developing countries international policymaking bodies. Finally, it presents pay the heaviest price for these practices because of three case studies that chart the reform experience in lost revenues or funds that are diverted as a result of Nigeria, Slovakia, and the United Kingdom, to illustrate fraud, tax evasion, and the illegal exploitation of natural how governments have tackled some of the common resources. challenges. Estimates of the global volume of IFFs vary— precisely because the anonymity permitted by these services makes the problem hard to measure2—but most estimates put them in the trillions. It is difficult to estimate the value of financial assets held in tax havens for the same reasons. A 2012 report by the Tax Justice Network estimated that between USD21 trillion and USD32 trillion worth of financial assets was held in tax havens.3 The cumulative effects are devastating. In the Global South, IFFs are estimated to cause USD416 billion in tax losses, eroding service provision and trust in governance among the world’s most vulnerable populations.4 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 249 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 9 BENEFICIAL OWNERSHIP TRANSPARENCY BOX 9.1 What is a Beneficial Owner? The term “beneficial owner” refers to the natural person, i.e. the real, living person, who ultimately owns or controls a company or another asset, or who materially benefits from the assets held by a company. The control can be realized either directly or indirectly, for example via professional intermediaries, nominees, or through other contractual agreements. Control can be exercised in a variety of ways: for example by holding – directly or indirectly – a controlling legal ownership interest or a significant percentage of voting rights; by having the ability to name or remove the members of an entity’s board of directors; or by holding negotiable shares or convertible stock.   The difference between legal ownership and beneficial ownership A beneficial owner describes an individual who ultimately controls assets held by a company, while the legal owner is the person (or corporate structure) that holds the legal title. In a majority of cases, the beneficial owner and the holder of the legal title of a company will be the same – if the legal owner is holding the title on his/her own behalf. In illicit practices, where there is an intention to hide the identity of the true owner of the asset, the legal owner whose name appears in a company registry, land cadastre or bank account will be different from the beneficial owner. Common techniques to separate legal and beneficial ownership in order to conceal the identity of the beneficial owner include, inter alia, use of complex, cross-border ownership chains and control structures, use of informal nominees (straw men) as company directors or shareholders, use of professional intermediaries for company administration. The Financial Action Task Force (FATF) Standards, which set out global anti-money laundering and terrorist financing standards, distinguish between basic information about a company (which includes company name, registered office, proof of incorporation, list of directors, register of shareholders), and information about the beneficial ownership of a company). Corporate registries typically (at best) collect basic company information about legal owners of corporate entities. Increasingly, however, corporate registries, primarily in Europe, have started collecting and publishing information about beneficial owners as well.   For practical purposes, many countries adopt a numerical equity ownership threshold as a trigger for beneficial ownership disclosure requirements. The threshold used, for example, in the European Anti-Money Laundering Directives is 25% ownership interest, though some regulations require disclosure at lower thresholds of 5-20%, or even disclosure with no minimum threshold. How the corrupt abuse corporate structures and arrangements In many corruption investigations, investigators must first uncover who actually benefits from the ownership of an asset – for example a company or real estate that is involved in a corrupt scheme – since the beneficial owner may be hidden behind multiple layers of shell companies or nominee company directors. Beneficial owners with criminal intent can conceal their identity through a variety of different mechanisms, for example: by creating complex and opaque legal ownership structures with corporate owners registered in jurisdictions with weak transparency regulations, by using nominees or informal proxies (e.g. family members or friends) as company directors or shareholders, or by going through professional intermediaries who protect the identity of their clients, either with complicity or unwittingly. 250 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 9 BENEFICIAL OWNERSHIP TRANSPARENCY Evolving global standards on beneficial ownership transparency Even before the release of the Panama Papers, on the capacity of institutions to take on the task, international bodies were emphasizing the value including the verification of disclosed information; on of beneficial ownership information as a tool for the key priorities and vulnerabilities – related to money law enforcement authorities. Such information laundering or corruption – that governments are would help with investigations into corruption, money seeking to address with this tool; and in some cases on laundering and other financial crimes. The Financial data protection and privacy laws in that country. These Action Task Force (FATF), which sets global standards approaches include: on anti-money-laundering, requires that countries “take measures to prevent the misuse of legal persons • The central registry approach. A government and trusts for money laundering or terrorist financing authorit y collec t s, records, and maintains and to ensure that there is adequate, accurate and information on the beneficial ownership of timely information on the beneficial ownership and companies in a central registry. This information control of legal persons that can be obtained or may be held by a corporate registry, the tax accessed in a timely fashion by competent authorities.”6 authority, the securities regulator, the Central Since the revision of the Standards in 2012, which Bank, the Financial Intelligence Unit, or the included much more detail on what this obligation National Internal Audit Office. In some countries, entails and different mechanisms to obtain beneficial the registry is accessible only to law enforcement ownership information, a range of policy and regulatory and other government agencies (such as tax approaches have been adopted by national authorities. authorities), while other countries provide public These include requirements that companies collect access to the registry. their own beneficial ownership information and have it ready for inspection by law enforcement agencies (e.g. • The “gatekeeper” or licensed intermediary Hong Kong),7 and the creation of centralized public approach. The responsibility to collect and registers that collect beneficial ownership information record beneficial ownership information lies with for all companies registered in a jurisdiction. a professional service provider that is required to provide beneficial ownership information to Post-Panama Papers, the prospects for beneficial authorities – either on request or on a routine ownership transparency have been evolving basis. Intermediaries can be corporate service steadily. In 2014, the G20 Anti-Corruption Working provider s, financial ins titutions, not aries, Group endorsed High-Level Principles on Beneficial lawyers, auditors, tax advisors, or real estate O w ner s hip Tr ans parenc y. 8 Gover nment s and professionals. A critical feature of this approach international policymaking bodies are building on the is whether professional intermediaries are well- growing attention to this agenda to push increasingly regulated, subject to licensing requirements progressive reforms. In late 2019, the U.S. House of and anti-money laundering rules, and subject to Representatives voted to require companies to submit enforceable sanctions for misreporting. This model beneficial ownership information to the Treasury is more easily implemented in contexts where Department’s Financial Crimes Enforcement Network company registration already requires a licensed (FinCEN), a measure that gained bipartisan support in intermediary, as opposed to those where a private the US Congress.9 individual can set up a company directly. A risk- based application of this approach can focus on Governments are using a range of approaches in areas of the economy considered high-risk for requiring and managing the disclosure of beneficial corruption and money laundering, such as luxury ownership information to prevent the abuse of legal real estate, luxury goods, public procurement, structures for criminal purposes. These approaches infrastructure, or extractives. vary in their reliance on public access or transparency as an accountability mechanism. The approach taken has • The company approach. This is the mos t depended in part on existing regulatory frameworks; straightforward model in that it requires that Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 251 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 9 BENEFICIAL OWNERSHIP TRANSPARENCY companies collect and hold information about this direction include the following: their own beneficial owner(s) themselves and provide it to authorities when requested. However, • The UK and Ukraine were the first to launch national evidence from FATF’s mutual evaluations suggests public registers of beneficial ownership information that countries face challenges in ensuring that in 2016, with Slovakia following in 2017. Beneficial beneficial ownership information collected directly ownership registers can now be accessed by the from companies is accurate and up-to-date. public in Armenia, Denmark, Estonia, Poland, Reliance on this model alone, without any due Portugal, Slovenia, Ukraine, Slovakia, the UK, and diligence conducted by an independent party, is Sweden, though some of these registers impose not considered effective in guaranteeing accurate access requirements, such as fees. beneficial ownership information, as corrupt beneficial owners of shell companies are unlikely to • The EU’s Fifth Anti-Money Laundering Directive self-report their ownership interest to authorities (AMLD5), passed in 2017, requires all EU member or a government registry. states to collect and publish beneficial ownership information on companies registered in their • A combination of these approaches. Some countries jurisdiction by late 2020.12 combine elements of these approaches to great effect (e.g., the Slovak case study below). A • The Extractive Industries Transparency Initiative recent FATF report on Best Practices on Beneficial (EITI) launched a pilot sectoral approach to Ownership for Legal Persons, based on countries’ beneficial ownership transparency, to help mutual evaluations under FATF’s peer review confront the high risk of corruption in the extractive mechanism, emphasizes that a multi-pronged sectors. The EITI standard now requires all 52 approach to beneficial ownership information member countries to publish beneficial ownership disclosure and access has proven more effective data on extractive companies operating in their in preventing the misuse of legal persons than jurisdictions. any single approach.10 Given that a vital element of effective beneficial ownership disclosure • The UK Parliament voted in 2018 to require overseas is to ensure the veracity of the disclosure, the territories, including the British Virgin Islands ability of authorities to cross-check data across and the Cayman Islands, to adhere to the same different sources or the requirement that licensed transparency standards as the UK’s Companies intermediaries vouchsafe the reliability of disclosed House. In 2019, three Crown Dependencies, information11 is clearly more useful than frameworks including Guernsey, Jersey and the Isle of Man, that rely on self-reporting by companies. committed to meeting this standard by 2023.13 • Among members of the Open Government There is a growing momentum Partnership (OGP), the number of governments towards providing public access to making commitments to beneficial ownership beneficial ownership information reforms is growing year by year, with 18 active commitments in early 2020. Civil society advocacy groups, thinktanks and watchdogs have been contributing to policy • In 2019, the UK with OGP and OpenOwnership developments related to beneficial ownership launched an initiative inviting governments to disclosure. They have also been working to help endorse a new ‘global norm of beneficial ownership solve some of the technical challenges associated transparency’ and a set of ambitious Disclosure with establishing credible and effective public access Principles for Beneficial Ownership Transparency,14 disclosure systems, whether through centralized including a commitment to open data.15 This registers or other open data sources. Support for public ‘Beneficial Ownership Leadership Group’ includes access to beneficial ownership information gained Norway, Armenia, Mexico, Argentina, and Latvia, significant ground at the 2016 UK Anti-Corruption among others. Summit, where par ticipating governments made commitments to collect beneficial ownership data and T his momentum ha s strong p ar ticip ation make it accessible to the public. Other developments in from the private sector as well. In 2017, the B20 252 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 9 BENEFICIAL OWNERSHIP TRANSPARENCY recommended that all G20 countries establish combine and make use of such information.”17 beneficial ownership action plans in a policy paper that described the benefits of transparency for business: A wide variety of stakeholders now recognizes that chiefly, the market stabilization benefits of knowing the world cannot rely on mega-leaks to expose who you’re doing business with.16 Another benefit the scale and impacts of the abuse of corporate for the private sector was emphasized in a recent structures and arrangements. Stakeholders also European Public Sector Information Directive, which acknowledge that these practices need to be prevented refers to beneficial ownership information as a high- as a matter of policy, including through public access to value dataset that should be available free for access information, thereby leveraging the ‘disinfecting effect by the public, adding that open data can “promote the of sunlight.’ development of new services based on novel ways to Emerging signs of impact While a framework for beneficial ownership reforms to increase beneficial ownership transparency transparency is urgently needed, it is not yet are an indispensable tool in the fight against corruption clear which tools or approaches may be the most and financial crime: effective. There is a growing understanding that an effective framework for beneficial ownership 1. Beneficial ownership transparency is a deterrent. transparency—meaning that the disclosure mechanism UK registered companies have been implicated is accurate, up-to-date, and accessible—has the in several recent money laundering scandals, potential to offer tremendous value to governments, including the so-called Azerbaijani and Russian markets, and society in the fight against corruption. As Laundromats, involving up to £80 million in illicit an emerging policy area, however, there is an ongoing proceeds.19 When transparency advocates noticed debate over how to achieve those objectives in different a sharp increase in registrations of a unique type of country contexts. The first public beneficial ownership UK corporate entity—Scottish Limited Partnerships registers are only a few years old, and it is too soon (SLPs)—they brought this to the attention of the to meaningfully measure their impacts on preventing authorities. UK’s beneficial ownership disclosure the abuse of corporate entities for criminal purposes. requirements had not initially applied to SLPs. Ongoing analysis of the effectiveness of different tools Registrations of SLPs rose sharply after the and approaches will be needed. disclosure requirements were introduced, revealing a loophole in the law. Lawmakers then moved to Despite implementation challenges, well-planned include SLPs in the disclosure requirements, and reforms are achieving encouraging results. registrations plummeted. Transparency showed its Implementing effective beneficial ownership disclosure value as a deterrent both in changing behaviors poses significant technical and technological when the law was introduced, and in forcing corrupt challenges, and most countries are struggling to actors to seek new avenues for concealing illicit implement FATF standards on beneficial ownership proceeds after the loophole had been addressed. disclosure, particularly as it relates to the effectiveness of disclosure mechanisms.18 Governments may also face 2. Beneficial ownership disclosure helps in the resistance to reform, either because of vested interests enforcement of illicit enrichment laws. A number against increased transparency, or because the potential of countries have illicit enrichment laws. 20 When gains are misunderstood, or because of the added paired with effective disclosure systems (asset burden on companies (and/or intermediaries) engaged declarations and beneficial ownership disclosure), in legitimate business activity. However, there are some these laws can be a powerful tool to detect and promising experiences and signs of impact that should seize unexplained wealth. In financial centers, this provide encouragement. These emerging signs of tool can be useful to law enforcement, journalists progress demonstrate that carefully calibrated policy and NGOs in exposing foreign public officials Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 253 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 9 BENEFICIAL OWNERSHIP TRANSPARENCY (politically exposed persons) seeking to conceal, interest. Beneficial Ownership Registers thus have invest and enjoy illicitly acquired wealth abroad. a valuable role to play in the oversight of public Beneficial ownership transparency has played an procurement to prevent self-dealing by politically important role in the successful use of a recently connected individuals. introduced illicit enrichment tool in the UK. Unexplained Wealth Orders (UWOs)21 allow law 4. Beneficial ownership transparency is adding value enforcement to compel individuals suspected of to accountability data ecosystems. Open data having committed a crime, or Politically Exposed standards and advances in digital governance Persons (PEPs) with assets valued over £50,000 that are making transparency reforms more impactful: are disproportionate to their income, to explain the open data is becoming more accessible, data source of the wealth, and to seize the assets if no systems are increasingly interoperable, and reasonable explanation is provided. In the first use structured data enables the aggregation and of a UWO, law enforcement used the UK’s company linking of key datasets. In 2017, a coalition register to establish that the wife of a jailed Azeri of transparency organizations launched the banker had been the beneficial owner of a UK OpenOwnership Register, which collects and links company for one day in 2016. They subsequently beneficial ownership data from registers around used a UWO to investigate the assets and compel the world, allowing users to “follow the money” information from the owner. The company’s assets, across borders. 22 They are also supporting the valued at £10.5 million, were subsequently seized development of the Beneficial Ownership Data by UK authorities. Standard (BODS), a structured and standardized framework for representing beneficial ownership 3. Beneficial ownership transparency helps detect information, enabling beneficial ownership data and prevent conflicts of interest. In 2019, Czech to be connected to other key datasets, such as activists used the Slovakian beneficial ownership procurement or tax databases, locally and around register to establish that the Prime Minister was the the world. The BODS also enables more rapid beneficial owner of a company receiving European scaling-up by governments of existing sectoral Union subsidies. This is now under investigation by registers to systems with national coverage and the European Commission for potential conflict of supports the addition of new asset classes. Further reforms are in the pipeline These early signs of impact are highly encouraging, These reforms, in the UK and elsewhere, are and some reformers are expanding their beneficial intended to have a number of impacts: (i) to level ownership reform to include new stakeholders the playing field for businesses bidding for government and asset classes. For instance, the UK will collect contracts by making it more difficult to conceal conflicts information on the beneficial owners of overseas of interest using anonymously-owned companies; (ii) companies that are purchasing real estate property in to prevent real estate (and other luxury goods) from the UK in a special “overseas entities” register.23 It will being used as a destination for illicit funds; and (iii) to also include overseas companies that win government further close loopholes in the anti-money laundering contracts, requiring them to provide their beneficial framework. In a move that directly tackles the link ownership information as a condition of the award between money laundering and corruption, some of contract. Some UK lawmakers are also pushing for governments are also beginning to include beneficial the beneficial ownership of trusts to be made public ownership disclosure requirements in the income and (it is now held in a register only accessible by law asset declarations of public officials, thereby addressing enforcement, as required by the EU’s Fifth Anti-Money a significant blind spot in these tools (see Chapter 8). Laundering Directive).24 254 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 9 BENEFICIAL OWNERSHIP TRANSPARENCY BOX 9.2 The Beneficial Ownership Data Standard (BODS) Legal and beneficial ownership information consists of data about individuals, companies, and other legal entities and arrangements, and data about the relationship between them. Effectively identifying these elements requires a range of data points. To make this information open and accessible requires that the data be published in an open format that is standard across jurisdictions. A group of experts in anti-money laundering, company data, and data standardization have developed a tool that meets these requirements. This data tool is intended to help policy makers design beneficial ownership disclosure systems that fulfil the accountability goals of the disclosure requirement while balancing data protection and privacy considerations. The Beneficial Ownership Data Standard (BODS) is a framework for representing information about people, companies, and relationships as structured data, in a standardized format that can be replicated across countries and systems. The BODS expresses this information as statements that can be linked together into a “claim about beneficial ownership made by a particular source at a particular point in time.” The necessary elements to identify a beneficial ownership relationship are summarized in the table below. The Beneficial Ownership Data Standard includes the following elements: Data about individuals Data about companies Data about relationships • Name • Name • The type of relationship, e.g. shareholding, voting rights • Official identifiers, like tax ID • Official identifiers, like official registration numbers • The level of interest, e.g. • Nationalities and tax percentage of shares held, residencies • Jurisdiction in which the and whether it’s held directly company is registered • Date and place of birth or indirectly through another • Founding and dissolution date entity • Place of residency and contact address • Address • Start and end date of the relationship • Whether they are a politically exposed person The complete data standard can be found at: https://standard.openownership.org/en/v0-2-0/index.html Across all categories of data, it should be clear to users if a piece of information is missing, and why it is missing—for instance, that it was not reported, or that the company is exempt from reporting. Missing data is also important information, and may raise a red flag to reviewers or law enforcement, for instance, if a company of interest has failed to adequately report its beneficial ownership, or if a company of interest has not updated a beneficial ownership disclosure for a long time. Statements should also come with certain metadata— data about data—that enables users to understand when the statement was made and where it originated. That way, users can tell if the information is recent and from a reliable source. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 255 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 9 BENEFICIAL OWNERSHIP TRANSPARENCY Implementing beneficial ownership transparency: Common challenges but different paths to reform Even if many policy makers are no longer asking ef fective beneficial ownership transparency whether to implement beneficial ownership reforms rely on technologies that enable a range of transparency, many questions are being asked users and stakeholders to engage with the resulting about how to do it well. Governments face common data. Reformers thus need to get stakeholders challenges when implementing beneficial ownership engaged in developing a “data driven” approach transparency reforms. These include: to the design of policies and information platforms. 1. The need for effective means of verifying disclosed 4. Balancing privacy and transparency. Beneficial information. The criminal and corrupt have every ow ner s hip dat a incor p or ates id entif ying incentive to lie to preser ve their anonymity information about individuals. Reformers will and have developed increasingly sophisticated need to balance the objectives of disclosure with techniques to elude changes in disclosure growing obligations to protect personal data. obligations. The usefulness of any registry that holds beneficial ownership information—whether 5. Balancing fighting corruption and ease of doing it is publicly accessible or only accessible to business. Disclosure obligations and verification national authorities—will succeed or fail based on mechanisms impose administrative burdens on the veracity and timeliness of the information it companies and, in the “gatekeeper” model, on holds. Registries that operate on the basis of self- professional intermediaries as well. Careful policy reporting by companies are particularly unreliable design requires striking a balance between the in this respect. Further, corporate registries in many sometimes-competing objectives of fighting countries are archival in nature and not equipped corruption and enhancing the ease of doing to cross-check or verify beneficial ownership business. While the speed of company incorporation information submitted to them by companies; is rewarded as an indicator of the ease of “Doing and certainly unable to do so in real time, as Business” it is increasingly a risk factor in the abuse such information by its nature is much harder to of anonymous company structures.25 corroborate than basic company information. 6. Tailoring the approach to an understanding of the 2. Winning political support and maintaining the risks. Corruption risks are different in every country momentum of early efforts. Beneficial ownership and are continually evolving. An assessment of the transparency is a reform that touches many risks should inform decisions about approaches stakeholders and may involve multiple government to beneficial ownership transparency systems. 26 agencies and areas of law. While global standards The FATF’s 40 Recommendations (2012) require and initiatives can provide a platform and all jurisdictions to identify and assess the money opportunity for reformers to push for the creation laundering/terrorist financing (ML/TF) risks for of disclosure systems, incremental approaches their country and adopt a risk-based approach to may be needed to sustain momentum and scale up mitigating risks. This approach extends to ensuring transparency tools over time. beneficial ownership transparency and preventing the misuse of companies and trusts. The value of 3. The complex legislation and technical requirements beneficial ownership transparency extends beyond involved in setting up an effective beneficial addressing AML/CFT risks to include self-dealing ownership disclosure system. Effective mechanisms by connected elites and the capture of public funds for disclosing and verifying beneficial ownership and contracts by connected firms. These risks need information require adequate regulation of also to be considered in the design of beneficial registries, a mechanism for reporting discrepancies, ownership disclosure systems. and enforceable sanctions for misreporting. Further, 256 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 9 BENEFICIAL OWNERSHIP TRANSPARENCY BOX 9.3 Key Data Questions for Policy Makers to Consider Embedding Data Quality Considerations in Policy Design The impact of beneficial ownership transparency reforms relies on the use of the ensuing data by law enforcement, procurement agencies, tax authorities, and civil society. The data must therefore be reliable, detailed, and useful (Box 9.2 explains the Beneficial Ownership Data Standard). Considerations about data reliability and the needs of data users must therefore be at the heart of policy design. This means that determinations about what data can and will be available, where, and in what format need to be made while drafting laws and regulations, as these are often hard to adapt later. Some jurisdictions have approached this challenge by expressing principles in the legislation and leaving more specific requirements about data and data quality to the supporting regulations. Regulations are easier to change, meaning that governments can learn and adapt from early implementation experiences. These considerations are particularly important given that this is still a new policy area and norms and best practices relating to high- quality beneficial ownership data are only just emerging and have yet to be standardized. One of the goals of the UK-led Beneficial Ownership Leadership Group is to establish and standardize these norms through a set of Disclosure Principles based on OpenOwnership’s “Five characteristics of effective beneficial ownership data” https://www.openownership.org/ uploads/oo- characteristics-effective-bo-data.pdf. In designing effective policies, the following questions may need to be answered: Beneficial Ownership Information: Data Questions that Underpin Policy Design • What types of legal entity and natural persons will be covered by the policy? • What format will the data be published in, and what will be the access levels for the public? • What definition of beneficial ownership is being used? What means and percentage of control of legal entities will be covered by the disclosure requirement? • Will there be a threshold of control that shareholders or directors must cross in order to be considered beneficial owners? How will this data be represented? • Will intermediate companies (between the beneficial owner and the disclosing company) be disclosed? • How will historical data, about past beneficial owners of companies, be stored and published? • Are there reliable identifiers that can be used for legal entities and natural persons? • What will be the requirements on companies to submit and update beneficial ownership information, and how will compliance be ensured? • What sanctions will be put in place for non-compliance against the beneficial owner and/or legal entity for failing to declare, or declaring false information? • What steps will be taken to verify the information that is submitted, and analyze submissions to identify suspicious entries for investigation? As the list above illustrates, beneficial ownership transparency may also require changes to existing areas of law. OpenOwnership’s Policy Review Tool is intended to help reformers identify relevant policy areas where changes may be necessary: https://www.openownership. org/uploads/oo-beneficial-ownership-policy- reviewer.pdf Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 257 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 9 BENEFICIAL OWNERSHIP TRANSPARENCY 7. Ensuring effective enforcement of sanctions for or accountability blind spots to evade detection violations. A 2019 analysis of public data in the of their illicit activities. Law enforcement officials UK’s Companies House registry shows that a lack who routinely rely on cross-border cooperation of systematic verification of self-reported data, to obtain beneficial ownership information combined with a lack of enforcement of sanctions from foreign authorities are concerned that the for companies that don’t comply or that report introduction of public registries without proper incorrect information, leads to data quality issues regulation, systematic verification mechanisms, that undermine the effectiveness of the registry.27 and sanc tions enforcement would simply prompt criminals to develop more sophisticated 8. Increased transparency can have unintended concealment techniques, or move their money consequences. While increased transparency is a elsewhere, thereby increasing the scale of the vital element of accountability measures, well- challenge that beneficial ownership transparency intentioned policy reforms can have unintended seeks to address. consequences. Transparency regulations should be designed with the expectation that criminals will Approaches to addressing these common challenges react swiftly and exploit any regulatory loopholes are explored in the case studies and Box 9.3. Nigeria: Incremental reforms by leveraging existing initiatives and institutions Beneficial ownership transparency requires action sectors are undertaking beneficial ownership by governments to help solve a problem that is transparency as part of their EITI commitments. 30 global in scale. Existing international commitments Introducing this requirement at the sectoral level first, and initiatives thus provide a helpful springboard for by collecting data on companies that own extractive launching domestic reforms. The most prominent licenses, provides a useful testing ground for the policy, platforms for this policy agenda are the Open procedures and technology required. Nigeria is a good Government Partnership (OGP) and the Extractive example of this approach, despite having embraced a Industries Transparency Initiative (EITI). These platforms far more ambitious scope at the outset. At the London encourage implementers to meet baseline anti-money Anti-Corruption Summit in 2016, Nigeria committed to laundering and tax transparency standards (the FATF implementing a fully public central beneficial ownership Standard28 and the Standard set out by the Global register, reiterating this commitment in both their EITI Forum on Transparency and Exchange of Information beneficial ownership roadmap and their 2018 OGP for Tax Purposes 29) and to surpass them. They also National Action Plan. This reform found support at the provide support to governments in meeting these highest levels of government; in 2017, the Vice President goals. OGP has partnered with OpenOwnership to noted that the government expects this reform to provide technical assistance to member countries in benefit society and business too, “not only from the meeting beneficial ownership-related commitments better business climate that results when governments under Open Government National Action Plans. better serve their citizens but also from knowing who EITI is supporting governments to meet disclosure they are doing businesses with or competing against.”31 commitments in the extractive sectors. Nigeria’s EITI multi-stakeholder group (NEITI) set in motion a plan to deliver beneficial ownership Implementation of Nigeria’s transparency for the oil, gas, and mining sectors. commitment to transparency began NEITI worked with regulators in Nigeria’s Mining at the sectoral level Cadastral Office and Depar tment of Petroleum Resources to include a beneficial ownership disclosure A number of countries with large extractive requirement in sectoral regulation.32 They developed 258 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 9 BENEFICIAL OWNERSHIP TRANSPARENCY template forms and procedures and have since been Stakeholder engagement is a vital piece of the reform supporting companies to comply. While EITI Nigeria process since beneficial ownership transparency reform is still working to fulfill its EITI commitments, 33 this touches on a wide range of policy areas. The CAC will experience has helped pave the way for scaling be supported in engaging stakeholders as part of up disclosure requirements more broadly and Nigeria’s Open Government Action Plan. incrementally. Lessons learned Nigeria’s initial steps along the reform path Nigeria has a long way to go before being able to show progress in beneficial ownership Beneficial ownership requirements have since transparency. However, the initiation of the reform been introduced as part of a large bill reforming makes Nigeria a relevant illustration of how reforms the private sector (the 2018 Companies and that are politically and technically challenging can be Allied Matters Repeal and Re-enactment Act), introduced by leveraging international commitments which passed both houses of Parliament in 2019. and policy platforms, and by building on existing Embedding the beneficial ownership disclosure institutional frameworks. The need for new legislation, requirement within an existing institution—the institutions and resources can be significant stumbling Corporate Affairs Commission (CAC)—is a practical blocks for many countries. Scaling up these reforms measure that is helped by the fact that this move is greatly facilitated when the data is collected and coincides with the CAC’s reform and modernization of published from the outset in a structured, machine its data systems and online reporting tools. The CAC readable format, allowing each new data system to will be tasked with collecting beneficial ownership leverage existing data, thereby also reducing the information for all 3.1 million Nigerian companies, and compliance burden on users, and ensuring better data to make that information publicly available.34 A further quality. Datasets can then be compared to uncover important step in this incremental reform path will then inconsistencies or red flags and to identify reporting be to link this disclosure data to the oversight of public hurdles due to existing policy constraints or the procurement and to support the use of the data by the experiences of users. relevant authorities and interested civil society actors. Slovakia: Verifying the true owners of companies doing business with the State Slovakia was among the first countries to created for that purpose.37 The Register of Public Sector implement beneficial ownership transparency in Partners is administered by a District Court on behalf public procurement. Civil society groups called for of the Ministry of Justice. Slovakia’s approach differs a beneficial ownership register in response to long- from disclosure systems in other countries in many suspected corruption and conflicts of interest in the ways. It is particularly instructive because of the steps award of public contracts, and following public outrage Slovakia has taken to ensure the veracity of reported after the restructuring of a road construction company information. threatened to leave thousands of workers unpaid.35 The so-called Anti-Letterbox Act was passed in 2017.36 It International standards on beneficial ownership requires that companies wishing to either compete for transparency, including FATF and the EU Anti- government contracts, receive funds from the State or Money Laundering Directive, require that beneficial the EU, or obtain an extractive sector license must first ownership data be accurate and verified. This poses register as a Partner of the Public Sector in a registry an obvious challenge: where anonymity is being used Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 259 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 9 BENEFICIAL OWNERSHIP TRANSPARENCY to conceal illicit practices, the incentives to lie are very The public can query the veracity of strong. Verifying beneficial ownership information is a the data technical challenge (how can one verify a disclosure for which no other of ficial record exists?) and Free public access is another cornerstone of administratively difficult (who verifies, when, how often, Slovakia’s approach to verifying data. Anyone and against what thresholds?). can submit a claim establishing reasonable doubt as to the veracity of a disclosure to the registration authority in the District Court. If the Court finds the Slovakia makes “authorized persons” query reasonable, it holds a proceeding with the goal responsible for the verification of of verifying the data. Under Slovakian law, the Partner beneficial owners of the Public Sector is required to submit evidence that the beneficial ownership information is correct. If the The approach taken in many countries is to require evidence is unsatisfactory, the registering authority that companies and other legal entities self- can fine the company, remove it from the register, and report their beneficial owners, leaving the task cancel financial arrangements or contracts with the of verifying the veracity of the disclosure to the government. authority administering the register, or in some cases to a third party. 38 In Slovakia, companies are required to register as a Partner of the Public Sector Lessons learned through “authorized persons,” such as attorneys, notaries, banks, or tax advisors, who must have a Slovakia has reversed the burden of proof for registered place of business in the Slovak Republic, verifying beneficial ownership, shifting the cost of and no connection to the firm. The authorized person verification from the government to companies. submits an application to the registry on behalf of Over 70 investigations have been conducted since the the firm and is required to attach a verification form register was launched, one of which produced the first demonstrating that they have authenticated the identity fine ever levied against a company for misreporting of the beneficial owners (this includes a description of beneficial ownership.40 Five companies have chosen to the ownership and management structure of the firm). end contracts with the government rather than disclose The registry can object to incomplete applications, their beneficial ownership. The Slovakian approach with an explanation of the shortcomings, and request is intuitive in many ways: it provides incentives additional information. “Authorized persons” are for authorized persons to authenticate or correct responsible for submitting changes to a registration; disclosures, and provides greater confidence to the they must also re-authenticate the beneficial owner(s) users of the data and to Slovakian civil society that the annually while the contract or financial relationship with system is credible and effective in deterring the abuses the State is in effect. that gave rise to the widespread demand for reform. While the requirement that firms engage an “authorized person” to register them as a Partner of the Public Sector carries a cost for firms, this approach to authentication helps address the challenging (and costly) task of verification for the public sector. A noteworthy aspect of the Slovakian approach is in making the “authorized person” jointly liable for the veracity of the disclosure, in that they act as the guarantor of fines levied against companies that have misreported, unless they can prove they acted with “professional diligence.”39 The system thus leverages the potential reputational and financial risk for legal professionals as a way of shoring up the objectives of the system: to establish the true owners of companies doing business with the State. 260 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 9 BENEFICIAL OWNERSHIP TRANSPARENCY United Kingdom: Balancing transparency and privacy Critics of beneficial ownership registers have all UK registered companies (the Small Business, justifiable concerns about the implications for Enterprise and Employment Act of 2015). In the UK, data protection and privacy. Beneficial ownership beneficial owners are called “Persons of Significant information includes identifying data about individuals, Control” (PSCs), and their data is held and published most of whom may be using companies responsibly by Companies House in a fully public open data format. and would prefer not to have their corporate interests Currently, Companies House has data on over 4 million exposed. Champions of public data respond that the companies, associated with millions more beneficial right to privacy is not absolute and has been limited in owners. many cases, particularly when public safety or national security is at stake.41 International law recognizes that The UK has demonstrated that it is possible to limitations on expectations of privacy can be necessary approach the matter of privacy with nuance, to achieve legitimate policy aims. Stemming corruption offering transparency while mitigating its risks. It and illicit financial flows is clearly a legitimate policy goal. has done this in two ways: Disclosure systems need to find a balance between the accountability goals of transparency tools and rapidly • Publishing enough per sonally identif ying evolving concerns related to data privacy in the digital information to distinguish between beneficial age. Transparency, when implemented responsibly, is owners and officers, while withholding sensitive fully compatible with data protection laws. information (birthdate and residential address) for access by law enforcement for official purposes This is true even in contexts of strict data only. Public access is only given to month and year of protection laws, such as the EU’s General Data birth and a registered address for correspondence. Protection Regulation (GDPR). The GDPR gives data subjects rights over data about them, and requires • Allowing beneficial owners with privacy concerns to entities using personal data—data processors—to apply to have their information removed from the get their consent to do so. However, there are certain register. This process is rule-governed and permits exemptions to this requirement, one of which is exemptions under specific conditions unique to when there is a regulatory requirement to collect and the UK context; for instance, some companies are process data. This would be the case in any jurisdiction exempted because they fear their businesses will that requires beneficial ownership disclosure. In other be the target of protests.42 words, implementers will not be legally blocked from implementing beneficial ownership transparency for Perhaps surprisingly, the UK’s exemptions process privacy reasons; instead, they should consider privacy has not been widely popular. Out of millions of as a principle and responsibility they must take into registered beneficial owners in the UK, only around account in their implementation. A local privacy impact 300 have applied to have their information removed, assessment can help to identify any potential harm and only 30 of these applications have been granted. and suggest mitigating actions that the government It is important to note also that the UK is subject to the can take. GDPR, one of the world’s most stringent data protection regulations. While the UK provides a useful example, getting the balance right means that every jurisdiction The UK implements beneficial should conduct a privacy impact assessment for their ownership reforms while paying due context and design an exemptions process to fit. regard to privacy concerns Benef icia l ow ners hip refor ms ha ve been championed in the United Kingdom at the highest levels of government. This resulted in an amendment to the UK’s Companies Act to require disclosure from Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 261 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 9 BENEFICIAL OWNERSHIP TRANSPARENCY Notes 1. Dalby & Wilson-Chapman (2019). Panama Papers helps 9. Parker (2019). House Passes Bill to Expose Owners of Shell recover more than $1.2 billion around the world. https:// Companies. The Wall Street Journal. https://www.wsj.com/ www.icij.org/investigations/panama-papers/panama-papers- ar ticles/house-passes- bill-to-expose-owners-of-shell- helps-recover-more-than-1-2-billion-around-the-world/. companies-11571785516. 2. Estimates of the volume of IFFs are also made difficult because 10. FATF (2019). Best Practices on Beneficial Ownership for Legal there are different definitions of what constitutes illicit Persons. https://www.fatf-gafi.org/media/fatf/documents/ flows. On the difference between illicit financial flows, trade Best-Practices- Beneficial-Ownership-Legal-Persons.pdf. misinvoicing and tax avoidance see: Forstater (2018). Illicit 11. Slovakia, Jersey, Spain, and Uruguay have frameworks that rely Financial Flows, Trade Misinvoicing, and Multinational Tax on licensed professional intermediaries that can be held liable Avoidance: The Same or Different? https://www.cgdev.org/ for reporting incorrect information to the registry. sites/default/files/illicit-financial-flows-trade- misinvoicing- and-multinational-tax-avoidance.pdf. 12. The directive also requires states to create a register of beneficial ownership of trusts that is directly accessible 3. Henry (2012). The Price of Offshore Revisited: New Estimates to authorities and “obliged entities” subject to AML rules for “Missing” Global Private Wealth, Income, Inequality (financial institutions, lawyers, tax advisors) and accessible and Lost Taxes. https://www.taxjustice.net/wp-content/ upon request to others who can demonstrate a “legitimate uploads/2014/04/Price_of_Offshore_Revisited_120722.pdf. interest” tied to the directive’s purpose of combating money Assessing the scale of the abuse of anonymous structures for laundering. concealing illicit proceeds is made more difficult by the fact 13. BBC (2019). Secret company registers in Crown Dependencies that not all holdings in secrecy jurisdictions or tax havens are to be made public. https://www.bbc.com/news/world- illicit proceeds. europe-guernsey- 48677083. 4. Kohonen, Afari, Waris, Lopes-Filho, Lewis, Biyani, Rai, Lukin & 14. Declaration of national commitment to meet the Beneficial Pyakurel (2019). Trapped in Illicit Finance: How abusive tax and Ownership Transparency: Disclosure Principles (n.d.). https:// trade practices harm human rights. https://www.christianaid. www.openownership.org/uploads/oo-disclosure-principles. org.uk/sites/default/files/2019-09/trapped-in-illicit-finance- pdf. report-sep2019.pdf. 15. Open data means that it is freely downloadable, searchable, Global Financial Integrity (GFI) estimates that developing and reusable by the public, without a fee, proprietary countries lose almost USD one trillion per year through illicit software, or the need for registration. Open data is also financial flows of all kinds —a number that is perhaps most machine-readable, which means it can be read and processed usefully seen as suggesting the scale of the phenomenon. The by computers. Economic Commission for Africa of the United Nations (ECA) has used trade statistics to estimate that between 2001 and 16. B20 (2017). Promoting Integrity by Creating Opportunities 2010 African countries lost up to US $407 billion from trade for Responsible Businesses. .https://www.b20germany.org/ mispricing alone. fileadmin/user_upload/documents/B20/b20-ctg-rbac-policy- paper.pdf 5. Willebois, Halter, Harrison, Park & Sharman (2011). The Puppet Masters: How the Corrupt Use Legal Structures to Hide Stolen 17. Official Journal of the EU (2019). Directive (EU) 2019/1024 Assets and What to Do About It. https://star.worldbank.org/ of the European Parliament and of the Council of 20 sites/star/files/puppetmastersv1.pdf; June 2019 on Open Data and the Re-use of Public Sector Information. https://eur-lex.europa.eu/legal-content/EN/TXT/ Pacini & Wadlinger (2018). How Shell Entities and Lack of HTML/?uri=CELEX:32019L1024&from=EN. OwnershipTransparency Facilitate Tax Evasion and Modern Policy Responses to These Problems. Marquette Law Review. 18. The FATF standard for evaluating the effectiveness of ht tps://scholarship.law.marquet te.edu/cgi/viewcontent. Beneficial Ownership Transparency is Immediate Outcome cgi?article=5380&context=mulr. 5 (IO. 5): “Legal persons and arrangements are prevented from misuse for money laundering or terrorist financing, 6. The FATF was the first international body to introduce and information on their beneficial ownership is available to international standards on beneficial ownership in 2003 competent authorities without impediments.” According to an and strengthened it s Standards in 2012. Beneficial analysis of FATF mutual evaluations conducted by the World ownership transparency requirements are set out in FATF Bank, ratings of effectiveness related to beneficial ownership Recommendations 24 and 25. See FATF (2014). FATF Guidance: transparency were among the poorest overall, with 90% of Transparency and Beneficial Ownership. http://www.fatf-gafi. assessed countries rated as having either low or moderate org/media/fatf/documents/reports/Guidance-transparency- effectiveness and not a single country achieving a high level beneficial- ownership.pdf. of effectiveness. This analysis includes 97 Mutual Evaluation 7. Hower ton (2018). How to Comply With Hong Kong’s Reports (MERs) from FATF and FATF-style Regional Bodies New Beneficial Owner Law. https://ieglobal.vistra.com/ (FSRBs). blog/2018/3/how-comply-hong- kong-s-new-beneficial- 19. Transparency International UK (2017). Hiding in Plain Sight: owner-law. How UK Companies are Used to Launder Corrupt Wealth. 8. OECD (2014). G20 High-Level Principles on Beneficial https://www.transparency.org.uk /publications/hiding-in- O w ner s hip Tr ans pare nc y. ht t p://w w w.g20.utoro nto. plain-sight/. ca/2014/g20_high- level_principles_beneficial_ownership_ 20. The UN Convention Against Corruption defines illicit transparency.pdf. enrichment as a “significant increase in the assets of a public In 2014, the OECD issued a Common Reporting Standard, official that he or she cannot reasonably explain in relation to which requires data points on the beneficiaries of financial his or her lawful income”. account s. See ht tps://w w w.oecd.org /t a x /automatic- 21. For more background on Unexplained Wealth Orders see: exchange/common-reporting-standard/. https://star.worldbank.org/content/star-newsletter-january- 2019#spotlight 262 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 9 BENEFICIAL OWNERSHIP TRANSPARENCY 22. Open Ownership (2018). New on the OpenOwnership osinbajos-address- in-jakarta. Register - data from the Danish Business Register has been 32. NEITI (2018). Annual Progress Report. https://eiti.org/sites/ added. https://www.openownership.org/news/new-on-the- default/files/documents/neiti-apr-2018-280619.pdf. openownership-register-data-from-the-danish-business- register-has-been-added/. 33. By 2020, all EITI countries have to ensure that companies applying for or holding a participating interest in an oil, gas 23. Gov.UK (2018). Closed consultation: Draft Registration of or mining license or contract in their country disclose their Overseas Entities Bill https://www.gov.uk /government / beneficial owners. The EITI Standard also requires public consultations/draft- registration-of-overseas-entities-bill. officials—also known as Politically Exposed Persons—to 24. Joint Committee on the Draft Registration of Overseas be transparent about their ownership in oil, gas and mining Entities Bill (2019). Draft Registration of Overseas Entities Bill: companies. EITI standards also require that this information Report of Session 2017– 19. https://publications.parliament. be publicly available and published in EITI reports and/or uk/pa/jt201719/jtselect/jtovsent/358/358.pdf. public registries. Beneficial ownership disclosure of trusts is more challenging 34. Andah (2019). CAC Reveals Number Of Registered Companies to regulate and enforce in part because the control structure In Nigeria. https://www.concise.ng/2019/03/27/cac-reveals- of trusts is more complex than for companies, and because number-of- registered-companies-in-nigeria/. of the different legal purpose and nature of trusts in different 35. The Slovak Spectator (2015). Small businesses cut out in jurisdictions. FATF, for instance, has different disclosure Váhostav case. https://spectator.sme.sk/c/20056770/small- requirements for companies (and other legal persons) and businesses-cut-out-in- vahostav-case.html. trusts. There are also initiatives to support the creation of an international standard for the disclosure of ownership of all 36. Wessing (2017). World-Wide Rarity: Anti-Letterbox Companies asset classes that are susceptible to being used to move and Act in Slovakia. https://ceelegalmatters.com/slovakia/6605- conceal illicit wealth or evade taxes (real estate, luxury goods, world-wide-rarity- anti-letterbox-companies-act-in-slovakia. etc). See for example: https://www.taxjustice.net. 37. Firms receiving a one-off contract under EUR 100,000 in value 25. The World Bank’s annual Doing Business report compares are exempted. countries’ business regulations with a focus on promoting entrepreneurship. https://www.doingbusiness.org/en/data/ 38. In Jersey, for example, this task is assigned to corporate exploretopics/starting-a-business. On the risks associated service providers, which are licensed intermediaries with with high speed company incorporation, see: Medium specific expertise in this area. The argument has been made (2018). Open Corporates, Fireflies and algorithms — the that this is the most effective approach given that public sector coming explosion of companies. https://medium.com/@ entities (and the public) lack the expertise to verify beneficial op encor p or ates /fireflies -and -algor it hms -t he - coming - ownership. See Sharman (2016). Solving the Beneficial explosion-of-companies-9d53cdb8738f. Ownership Conundrum: Central Registries and Licenced Intermediaries. Griffith University, Australia, for Jersey 26. The World Bank assists countries in conducting National Finance. https://www.jerseyfinance.je/media/PDF-Marketing/ Risk Assessments (NRAs) to help them comply with FATF Jason%20Sharman%20Report%20- %20Solving%20the%20 Recommendations. Over 100 countries have used the WB Beneficial%20Ownership%20Conundrum.pdf. Governments NRA approach since 2015. The World Bank is updating are now exploring hybrid (public/private) approaches to its NRA tool with a module on legal persons to respond to verification. The UK has under taken a comprehensive new areas of risk, to help countries identify critical gaps in review of the available options to increase the reliability their beneficial ownership frameworks and determine where and transparency of its register of corporate entities, see: enhanced safeguards are required to prevent their misuse for Department of Business, Energy & Industrial Strategy (2019). criminal purposes. Corporate Transparency and Register Reform: Consultation on options to enhance the role of Companies House and 27. Global Witness found that despite the legal requirement that increase the transparency of UK corporate entities. https:// companies disclose the identities of people with significant asset s.publishing.ser vice.gov.uk /government /uploads/ control (PSC), over 300,000 companies simply reported that system/uploads/attachment_data/file/819994/Corporate_ they have no PSC; 9,000 companies named a foreign company transparency_and_re gister_reform.pdf. as their PSC; and nearly 7,000 companies listed a PSC who controls over 100 companies, suggesting a nominee owner. 39. “The responsibility for the correctness and accuracy of data While this may be in formal compliance with the requirement entered in the register, for the identification of the final that only those who own 25% or more of a company need to beneficiary and for the verification of the final beneficiary report, it is clearly in violation of the substantive definition identification shall lie with the public sector partner concerned of beneficial ownership as the natural person(s) at the end and with the authorised person entered in the register.” Fines of the ownership chain, who ultimately owns or controls the for incomplete or incorrect BO disclosures can be equal to the company. See Global Witness (2019). Getting the UK’s House profit gained from the contract or transaction, or a fine up to in Order. https://www.globalwitness.org/en/campaigns/ EUR 1,000,000 if the profit can’t be determined. corruption-and-money- laundering/anonymous-company- owners/getting-uks-house-order/. 40. The Slovak Spectator (2017). Medical supplier fined for Cypriot go-betweens. https://spectator.sme.sk/c/20471528/medical- 28. S e e h t t p : // w w w . f a t f - g a f i . o r g / p u b l i c a t i o n s / f a t f supplier-fined- for-cypriot-go-betweens.html. recommendations/?hf=10&b=0&s=desc(fatf_releasedate). 41. Open Ownership (2019). Privacy or Public Interest? Making the 29. See https://www.oecd.org/tax/transparency/. Case for Public Information on Company Ownership. https:// www.openownership.org/uploads/privacy-report-summary. 30. EITI requirements have prompted reform in 20 countries, pdf. which are now working on establishing public registers. See https://eiti.org/beneficial-ownership. 42. Gov.UK (2020). Restricting the disclosure of your information. https://www.gov.uk/government/publications/restricting- 31. EITI (2017). Nigerian Vice President Yemi Osinbajo’s address the-disclosure-of- your-psc-information/restric ting-the- in Jakarta. https://eiti.org/blog/nigerian-vice-president-yemi- disclosure-of-your-information. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 263 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 9 BENEFICIAL OWNERSHIP TRANSPARENCY References Andah (2019). CAC Reveals Number Of Registered Companies Justice-Network_Jan-2019.pdf. In Nigeria. https://www.concise.ng/2019/03/27/cac-reveals- number-of-registered-companies-in-nigeria/. Kohonen, Afari, Waris, Lopes-Filho, Lewis, Biyani, Rai, Lukin & Pyakurel (2019). Trapped in Illicit Finance: How abusive tax and B20 (2017). Promoting Integrity by Creating Oppor tunities trade practices harm human rights. https://www.christianaid. for Responsible Businesses. https://www.b20germany.org/ org.uk/sites/default/files/2019-09/trapped-in-illicit-finance- fileadmin/user_upload/documents/B20/b20-ctg-rbac-policy- report-sep2019.pdf. paper.pdf Medium (2018). Open Corporates, Fireflies and algorithms BBC (2019). Secret company registers in Crown Dependencies to — the coming explosion of companies. https://medium. be made public. https://www.bbc.com/news/world-europe- com/@opencorporates/fireflies-and-algorithms-the-coming- guernsey-48677083. explosion-of-companies-9d53cdb8738f. Dalby & Wilson-Chapman (2019). Panama Papers helps recover NEITI (2018). Annual Progress Report. https://eiti.org/sites/default/ more than $1.2 billion around the world. https://www.icij.org/ files/documents/neiti-apr-2018-280619.pdf. investigations/panama-papers/panama-papers-helps-recover- more-than-1-2-billion-around-the-world/ OECD (2014). 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Declaration of national commitment Jakarta. https://eiti.org/blog/nigerian-vice-president-yemi- to meet the Beneficial Ownership Transparency: Disclosure osinbajos-address-in-jakarta. Principles. ht tps://w w w.openownership.org/uploads/oo- disclosure-principles.pdf. FATF (2014). FATF Guidance: Transparency and Beneficial Ownership. http://www.fatf-gafi.org/media/fatf/documents/ Open Ownership (2018). New on the OpenOwnership Register - reports/Guidance-transparency-beneficial-ownership.pdf. data from the Danish Business Register has been added. https:// www.openownership.org/news/new-on-the-openownership- FATF (2019). Best Practices on Beneficial Ownership for Legal register-data-from-the-danish-business-register-has-been- Persons. https://www.fatf-gafi.org/media/fatf/documents/Best- added/. Practices-Beneficial-Ownership-Legal-Persons.pdf. Open Ownership (2019). Privacy or Public Interest? Making the Forstater (2018). Illicit Financial Flows, Trade Misinvoicing, and Case for Public Information on Company Ownership. https:// Multinational Tax Avoidance: The Same or Different? https:// www.openownership.org/uploads/privacy-report-summary. www.cgdev.org/sites/default/files/illicit-financial-flows-trade- pdf. misinvoicing-and-multinational-tax-avoidance.pdf. Open Ownership (2020). A Guide to Implementing Beneficial Global Witness (2019). Getting the UK’s House in Order. https:// Ownership Transparency. https://www.openownership.org/ www.globalwitness.org/en/campaigns/corruption-and-money- guide/. laundering/anonymous-company-owners/getting-uks-house- order/. Pacini & Wadlinger (2018). How Shell Entities and Lack of Ownership Transparency Facilitate Tax Evasion and Modern Gov.UK (2018). Closed consultation: Draft Registration of Overseas Policy Responses to These Problems. Marquette Law Review. Entities Bill. https://www.gov.uk/government/consultations/ ht tps://scholar ship.law.marquet te.edu/cgi/viewcontent. draft-registration-of-overseas-entities-bill. cgi?article=5380&context=mulr. Gov.UK (2020). Restricting the disclosure of your information. Parker (2019). House Passes Bill to Expose Owners of Shell https://www.gov.uk/government/publications/restricting-the- Companies. The Wall Street Journal. https://www.wsj.com/ disclosure-of-your-psc-information/restricting-the-disclosure- a r t i c l e s / h o u s e - p a s s e s - b ill - to - ex p o s e - o w n e r s - of- s h e ll - of-your-information. companies-11571785516. Henry (2012). The Price of Offshore Revisited: New Estimates Sharman (2016). Solving the Beneficial Ownership Conundrum: for “Missing” Global Private Wealth, Income, Inequality Central Registries and Licenced Intermediaries. Grif fith and Lost Taxes. ht tps://w w w.taxjustice.net /wp-content / Universit y, Australia, for Jersey Finance. ht tps://w w w. uploads/2014/04/Price_of_Offshore_Revisited_120722.pdf. jerseyfinance.je/media/PDF-Marketing/Jason%20Sharman%20 Re p o r t % 20 -% 20 S ol v ing% 20 t he% 20 B e nef ic ial% 20 Hower ton (2018). How to Comply With Hong Kong’s New Ownership%20Conundrum.pdf. Beneficial Owner Law. https://ieglobal.vistra.com/blog/2018/3/ how-comply-hong-kong-s-new-beneficial-owner-law. PW YP (2018). PW YP calls for commitments on beneficial ownership disclosure and protection of civic space. https:// Joint Committee on the Draft Registration of Overseas Entities w w w.publishwhat youpay.org/pw yp -news/pw yp - calls-for- Bill (2019). Draft Registration of Overseas Entities Bill: Report commit ment s - on - b eneficial - ow ner s hip - dis closure -and - of Session 2017–19. https://publications.parliament.uk/pa/ protection-of-civic-space/. jt201719/jtselect/jtovsent/358/358.pdf. The Slovak Spectator (2015). Small businesses cut out in Váhostav Knobel (2019). Beneficial Ownership Verification: Ensuring The case. https://spectator.sme.sk/c/20056770/small-businesses- Truthfulness and Accuracy of Registered Ownership Information. cut-out-in-vahostav-case.html. Tax Justice Network. https://www.taxjustice.net/wp-content/ uploads /2019/01/Beneficial- owner ship -verific ation _Tax- 264 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 9 BENEFICIAL OWNERSHIP TRANSPARENCY The Slovak Spectator (2017). Medical supplier fined for Cypriot go-betweens. https://spectator.sme.sk/c/20471528/medical- supplier-fined-for-cypriot-go-betweens.html. 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Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 265 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 10 Exchange and Collaboration with Tax Administrations PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 10 EXCHANGE AND COLLABORATION WITH TAX ADMINISTRATIONS Corruption is intrinsically linked to tax crimes, as (FIUs), financial institutions, anti-corruption authorities, corrupt persons do not report their income from and other enforcement agencies can strengthen efforts corrupt activities for tax purposes. The Financial to uncover cases of corruption through the sharing of Action Task Force (FATF) includes tax crimes in the set information. The variety of expertise, skills, knowledge of designated predicate offenses for money laundering and experience offered by cooperation, not only purposes, explicitly recognizing the linkages between provides joint teams with significant resources, but it tax crimes and money laundering. Moreover, the also ensures that all offenses are properly identified, extensive level of corruption related to tax has serious investigated and prosecuted. As the OECD has noted, implications for government revenues and thus many countries are looking at ways to enhance inter- economic development, as indicated in Box 10.1. agency cooperation so that they are working toward a common goal.2 Inter-agency collaboration strengthens the efforts of tax administrations to combat corruption. In There are multiple benefits that can be gained its 20101 recommendations, the OECD advocated from a joint effort to prosecute tax evasion and greater cooperation and better information sharing other financial crimes including: between different government agencies active in the fight against financial crimes both domestically • Ensuring evidentiary standards are met for all and internationally. Agencies, including financial charges through cooperation with the prosecuting intelligence units (FIUs), anti-corruption units, police, authority; customs authorities, and the public prosecutor’s office are also involved in countering corruption. While most • Access to mutual legal assistance from foreign law of the administration for prosecuting tax crimes related enforcement agencies; to corruption can be undertaken by tax authorities, they often require support in the form of information • Access to specialized tribunals, including tax sourcing or expertise from other agencies who are tribunals and anti-corruption tribunals, giving rise also combating corruption. Entering into inter-agency to a greater likelihood of success where the judicial collaboration may substantially enhance the efforts process may take more time; and of a tax administration and other agencies combating corruption. Guidance on how this can be achieved is • Prevention of any duplication of effort and any given in Case Study 20, along with references from likelihood of compromising the actions of one Africa and other regions of the world. agency. Investigating and prosecuting alleged corruption Case Study 21 explores the basic requirements for requires robust evidence, which is often scattered effective prosecutions of financial crimes, the role of across agencies that are accustomed to working the tax administrations, and the limitations that must independently. Data sharing is an initial gateway for be overcome for them to happen. Experiences are collaboration. In general, inter-agency cooperation highlighted from South Africa and Brazil. between tax administration, financial intelligence units BOX 10.1 The Extent of Corruption “...in countries perceived to be less corrupt; the least corrupt governments collect 4 percent of GDP more in taxes than those at the same level of economic development with the highest levels of corruption.....and if all countries were to reduce corruption in a similar way, they could gain $1 trillion in lost tax revenues, or 1.25 percent of global GDP ” - IMF Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 267 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 10 EXCHANGE AND COLLABORATION WITH TAX ADMINISTRATIONS CASE STUDY 20 CASE STUDY 20 EXCHANGE AND COLLABORATION WITH TAX ADMINISTRATIONS Inter-agency Collaboration to Detect Corruption These include issues such as: Introduction »» lack of interoperability among different IT systems, lack of secure email systems resulting The ability of a tax administration to share in inability to send high-security material and relevant information is often a key indicator of its widely differing software capabilities resulting effectiveness to proactively identify risks pertinent in information transfer capacity limitations; to its mandate. This requires mechanisms to ensure »» each agenc y seeking to preser ve it s that law enforcement and other tax authorities have independence and autonomy; full access to accurate and up-to-date information. If »» difficulty in synchronizing and coordinating adequately planned, inter-agency collaboration is one organizational procedures and working of the ways to combat corruption. From the perspective approach; of developing countries, the limited capacity of »» different organizational objectives among tax administrations could be in part overcome in collaborating agencies; cooperation with other law enforcement agencies. »» constituents bringing different expectations and pressures to bear on each agency; »» questions of who claims success for successful prosecutions; and Challenges encountered »» the time period for pursuing cases. by tax administrations, • Legal challenges: these include specific restrictions customs, FIUs and other and prohibitions, which may prevent an agency from obtaining access to relevant information from agencies counterparty agencies. Challenges to effective cooperation between • Operational barriers: these include time - tax administration and other law enforcement consuming or complicated procedures for agencies responsible for combating corruption and obtaining information from another agency, a lack other financial crimes include the following: of awareness of the availability of information or other mechanisms for cooperation. • Administrative challenges: traditionally, the obstacles to coordination between government • Political challenges: these include a lack of support agencies s tem from fundamental cultural for agencies to adopt the changes required to differences and motivations of different agencies. remove or reduce legal and operational barriers. 268 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 10 EXCHANGE AND COLLABORATION WITH TAX ADMINISTRATIONS 3. Spontaneous sharing of information Models for sharing An agency may have the ability to provide specific information categories of information spontaneously but can exercise its discretion in deciding whether to do A study by OECD on inter-agency cooperation so. Where this operates well, it can be at least as identifies the following four types of cooperation effective as the previous method. Information is among different agencies:3 shared spontaneously, but officials in the agency holding the data can exercise their judgement 1. Direct access to records and databases as to what to share. This model is particularly Tax authorities or other law enforcement agencies useful when it is backed by close cooperative involved in investigating and prosecuting financial working arrangements and a good understanding crimes may grant direct access to their records by officials in each agency of the information and information stored on their databases to requirements of the other agencies. Models for designated individuals within other agencies information sharing that allow discretion to be or tax authorities. This access may be for a wide exercised require clear rules for how this is to be range of purposes or restricted to specific cases done. For example, decisions as to whether or or circumstances. Direct access has the advantage not relevant information is to be shared may be that an agency requiring information can search limited to individuals in certain positions or levels for the information directly and, in many cases, of management. At the same time, guidelines may can obtain it in real time. For example, in Iceland, set out the factors that can be taken into account tax crime investigators within the Directorate of in making a decision. The effectiveness of this Tax Investigations have direct access to databases type of legal gateway is also based on the ability held by the tax administration. However, allowing of officials to identify relevant information and direct access carries the risk of access to data for their willingness to exercise discretion to provide purposes other than those for which it was initially information. However, where there is no previous contemplated. Countries may, therefore, seek to experience of inter-agency cooperation, the introduce safeguards to protect the confidentiality benefits to both agencies of sharing information of sensitive information, by taking measures such as must be made clear, or there may be a danger that restricting access to databases to a few nominated officials exercise their discretion and choose not to individuals and maintaining access logs. share valuable intelligence. 2. Mandatory sharing of information 4. Sharing information on request An agency may be required to provide specific An agency may provide information only when categories of information spontaneously, without specifically requested. This may be seen as requiring a request to be made. It has the the simplest of the four methods for sharing advantage that officials within the agency holding information, as there is less need for rules or the information identify what is to be shared, and mechanisms to identify information for sharing they are likely to have a greater understanding of or provide access to records. It also has the the information in their records. However, for this advantage of allowing officials to specify precisely to be effective, an agency must have clear rules the information they require. In the context of an and procedures in place to identify the information ongoing transaction where investigators have that must be shared. Spontaneous sharing may identified specific necessary information, this be straightforward where an obligation exists to can be a valuable mechanism. However, in many provide all information of a particular class, but it is cases, an agency may hold information that an more complicated where the exercise of judgement investigator is not aware of. This may mean that the must be made to identify information that would investigator is unable to request information or is be relevant to an investigation. Further, by itself, only able to do so at a later stage when the value of this method does not allow officials investigating the information may be reduced. to specify the information required. However, it may facilitate the detection of previously unknown criminal activity. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 269 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 10 EXCHANGE AND COLLABORATION WITH TAX ADMINISTRATIONS the tax administration and other law enforcement Successful practices agencies. Different agencies share information under all types of cooperation. It is, however, critical to protect Several countries have introduced different models the confidentiality associated with the information in or operational mechanisms to allow agencies addition to the integrity of work carried out by other to work together in lieu of “legal gateways.” agencies. Sweden has enacted a new Data Disclosure All countries assessed by the OECD 4 have legal Act, which provides for greater cooperation in tackling gateways in place to allow tax administrations to share organized crime.10 The law aims to facilitate the exchange information collected for the purpose of a civil tax audit of information between authorities that cooperate to or assessment with agencies conducting tax crime prevent or detect certain forms of crime. The information investigations and with the customs administration.5 sharing and data disclosure is limited to cases where However, in many countries, FIUs, the police or the the need for an effective exchange of information is public prosecutor are not obliged to report information particularly strong and grounds for the protection of to the tax administration to evaluate taxes, and vice privacy do not prevail over the benefits of disclosing versa. Belgium and Korea explicitly prohibit the tax information. Also, the information shared between administration from sharing information related to non- agencies through legal gateways is at all times required tax crimes.6 Fourteen countries assessed by the OECD to comply with the provisions of the Secrecy Act. prohibit the FIUs from obtaining tax information from the tax authority.7 Thus, despite the legal gateways Each country must design its own tailor-made to enable information sharing amongst agencies, model for inter-agency cooperation. The international some countries have introduced different models or community has recognized the value of inter-agency operational mechanisms to facilitate collaboration cooperation. Many developed countries have initiated between agencies. special programs based on inter-agency cooperation as an effective and efficient way of preventing, detecting, A whole- of- g over nment appro ach can be tracking and prosecuting corruption. A countr y particularly effective. Dif ferent government should take into account its specific needs, the legal agencies collect and hold information on individuals, and organizational structure it has adopted and the corporations and transactions, which can be directly particular risks that it faces in designing an appropriate related to the activities of other agencies in combating model for inter-agency cooperation. financial crime and tax evasion, including money generated from corruption. To be effective, a tax Finland has adopted a centralized approach for administration should establish cooperation with combating the grey economy.11 It has established the these law enforcement agencies, building a “whole Grey Economy Information Unit (GEIU) to promote the of government approach” to improve the prevention fight against the shadow economy by producing and and detection of financial offenses, leading to faster disseminating reports about grey economy activities and more successful prosecutions, and increasing and how they may be controlled. The GEIU is a division the probability of the recovery of the proceeds of of the Finland tax administration specifically established corruption.8 For example, Canada has established a to work closely with other government agencies. whole-of-government working group, which includes It collects information from different government the Canada Revenue Agency, the Public Prosecution agencies regardless of existing confidentialit y Service of Canada, the Department of Justice, the provisions. In preparing reports about grey economic Canada Border Services Agency, FINTRAC, the Royal activities, the GEIU has the right to receive, on request, Canadian Mounted Police and Public Safety Canada.9 necessary information held by other authorities, even In the working group, Canada’s response to financial where that information would not normally be available crime at large is discussed and opportunities to increase to the tax administration due to secrecy provisions. effectiveness are raised and studied, often resulting in recommendations for policy or legislative changes. The Netherlands has opted for a cooperative approach for tackling money laundering.12 It has Information sharing has to be balanced with established the Financial Expertise Centre (FEC), confidentiality and the right to privacy. Right to which is a joint project between the National Tax and privacy, coupled with confidentiality requirements can Customs Administration (NTCA), the Fiscal Intelligence also have an impact on the information sharing between and Investigation Service (which is structurally part of 270 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 10 EXCHANGE AND COLLABORATION WITH TAX ADMINISTRATIONS the NTCA), the National Police, the General Intelligence • Serbia: 16 All state authorities and organizations, and Security Service, the Public Prosecution Service, bodies of territorial autonomy and local the Netherlands Financial Markets Authority, De government are required to report spontaneously Nederlandsche Bank, and the Ministry of Finance to the tax administration all facts and information and Ministry of Security and Justice (who are involved detected in the performance of their duties that in regulating and monitoring activity in the financial are relevant to the assessment of tax liability. sector). The mission of the FEC is to monitor and strengthen the integrity of the financial sector, and tackle issues of financial integrity through inter-agency cooperation. This entails sharing information. Inter-agency cooperation is Giving tax administrations access to suspicious increasing across the globe transaction reports (STRs) would be beneficial in the fight against corruption. In many countries, The concept of inter-agency cooperation is there is no obligation on the police, public prosecutor widespread among EU countries. One such initiative or FIU to report information to the tax administration. is the establishment of the Croatian State Prosecutor’s In addition, many countries do not have legislation to Office for the Suppression of Organized Crime and allow the tax administration access to STRs. Allowing Corruption. This is a Croatian Agency, supervised by the such access will have several benefits, including an state attorney’s office but which also cooperates with improvement in the detection of money laundering the tax administration.17 Similarly, the Czech Republic offenses and proceeds from corruption, greater success has established Tax Cobra, a cooperation of police, in tax crime investigations and prosecutions, and an customs, and finance administration.18 Using smart increase in the actual quantity of tax assessed and technology to triangulate data shared by agencies recovery of the proceeds of crime. Further, access by would make dissemination even more effective. FIU to other information held by the tax administration, such as declared income, tax payments, real estate In Southeast Asia, Malaysia has established the as well as other property, cross-border financial National Revenue Recovery Enforcement Team transactions, and the results of tax audits, will help to (NRRET) to improve cooperation between law detect corruption, though this has not yet been widely enforcement agencies.19 The NRRET, which is headed implemented. by the Attorney General, is an inter-agency initiative aimed at fighting tax crimes and other financial crimes. In Italy, the FIU has direct access to the Account and Its members include the tax administration, Company Deposit Register (Anagrafe dei Conti) maintained by Commission Malaysia, Central Bank of Malaysia, the tax administration.13 The Account and Deposit Malaysian Anti-Corruption Commission and Royal Register includes information on accounts and financial Customs Department. Its role is to improve cooperation transactions carried out by financial intermediaries, between law enforcement agencies to ensure a holistic including banks, trust companies, brokerage companies approach to development, good governance, and and post offices. Legislation has also been passed, combating corruption, as well as to assist agencies in which allows the FIU direct access to the Tax Register fighting financial crimes. The NRRET also monitors the (Anagrafe Tributaria). Further, tax officials must report sharing of information and planning of joint operations to the FIU any suspicious transactions they encounter in among law enforcement agencies in high profile cases. the course of their work. In South Asia, India has set up the Economic Other examples of information sharing include: Intelligence Council (EIC), which acts as the main body to ensure coordination among various • Estonia: 14 The police and the Tax and Customs agencies. 20 The EIC meets twice a year and holds Board share information through a common extraordinary meetings as and when considered intelligence database. necessary. The EIC is mandated to discuss multiple aspects of intelligence relating to economic security • Iceland: 1 5 Directorate of tax investigations and to develop a strategy for the effective collection conducting tax crime investigations has direct and collation of intelligence and its dissemination to access to information contained in police databases. various law enforcement agencies. It reviews crucial Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 271 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 10 EXCHANGE AND COLLABORATION WITH TAX ADMINISTRATIONS cases involving inter-agency coordination and approves while sharing information with different agencies mechanisms for improving such coordination. As far tackling corruption. Blockchain technology may as sharing of information among multiple agencies is be an appropriate platform for developing a concerned, the EIC generally performs this through common database system accessible to the the meetings of its Regional Economic Intelligence agencies concerned. The Blockchain system may Councils (REICs). also facilitate the consolidation of information received by more easily identifying transactions undertaken by the same entity but reported by different companies/individuals. 21 The United Recommendations States Air Force is currently planning to test a Blockchain based database that will allow it to • Establish a bilateral agreement or memorandum of share documents internally as well as throughout understanding (MOU) to share information between the various branches of the Department of Defense the tax administration and agencies involved in and allied governments.22 detecting and preventing corruption. This ensures a clear legal framework for any information sharing • Review limitations in tax treaties on the sharing of with the agencies concerned. MOUs typically information with non-tax departments. This can contain details of the types of information that help in removing barriers to information sharing. will be shared, the circumstances in which sharing will take place, and any restrictions on sharing • Conduct capacity building exercises to develop information (e.g., the information may only be used a culture of cooperation with different agencies for specified purposes). It may also include other working together. For example, setting up joint terms agreed by the agencies, such as the format task forces or seconding personnel to different of any request for information, details of competent agencies to work together is an effective way of officials authorized to deal with requests, agreed enabling skills to be transferred while allowing notice periods and time limits, and a requirement personnel to build contacts with their counterparts for the agency receiving information to provide in another agency. feedback on the results of investigations in which the information was used. For example, in • Establish a system that balances the sharing of New Zealand, based on an information sharing information with confidentiality. A suitable system agreement between the Inland Revenue and the is one where the information can be shared only in New Zealand Police, the tax administration can cases where the need for an effective exchange of share information with the police for the prevention, information is particularly strong and grounds for detection or investigation of a serious crime, or the protection of privacy do not prevail over the for use as evidence of a serious crime. The Inland benefits of disclosing information. This helps to Revenue of New Zealand can also share taxpayer overcome the intense concerns about privacy and information with the police or other agencies in potential lack of trust among agencies. cases related to the administration of taxation, investigation of tax crimes, and the facilitation of asset recovery. • Establish a national task force. The task force Example 1: Kenya’s should be responsible for the timely collection and dissemination of relevant information to concerned success with inter-agency agencies and for developing a framework that cooperation to obtain and enables it to examine specific cases. This will help to use data identify a number of areas for further investigation across the full range of tax and economic crimes. Despite the myriad of laws in place to combat corruption, Kenya ranked 145th (out of 176 countries) • Ensure connectivity between agency databases. on Transparency International’s Corruption Perceptions Lack of interconnectivity of databases of different Index in 2016. To deal with the corruption, Uhuru government agencies is the biggest issue faced Kenyatta, the President of Kenya in 2016, directed the 272 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 10 EXCHANGE AND COLLABORATION WITH TAX ADMINISTRATIONS Office of the Attorney General and the Department property. One of the celebrated convictions involved of Justice to undertake a thorough review of the a former member of parliament who was found guilty legal, policy, and institutional framework for fighting of 9 corruption counts relating to the loss of KSh4.5 corruption in Kenya. A taskforce 23 was formed to million; the member of parliament, her husband, and oversee the whole process, drawing its membership 4 others were convicted and sentenced to payment of from all ministries, departments, and agencies charged KSh24.95 million (about USD2.495 million) and 18 years with fighting corruption in Kenya. One notable issue imprisonment.26 In respect to asset recovery, Kenya has identified by the taskforce was the lack of proper so far traced and recovered assets worth KSh9.8 billion coordination among agencies, resulting in duplication between 2005 and 2016. In March 2017, the President of effort. Combating corruption was an uphill task due reported that approximately KSh3 billion had been to the lack of a coordinated framework for reporting recovered or preserved. As of November 16, 2016, there corruption, information gathering, intelligence sharing, were 174 civil cases pending in court for recovery of and cooperation in investigation, among other areas. illegally acquired assets worth KSh3 billion.27 Further, in one interview, the EACC CEO Twalib Mbarak 28 revealed that “there are numerous governors, MPs, and county The birth of the multi-agency team officials and top government officials on its radar.” To tackle corruption and other economic crimes, Kenya established a multi-agency team (MAT)24 to ensure cooperation and synergies among a number of Challenges identified agencies involved in combating corruption. The MAT Despite some great successes, MAT has faced a number was composed of the Kenya Revenue Authority; Ethics of challenges: and Anti-corruption Commission (EACC); Office of the • The biggest challenge is the lack of legality of some Director of Public Prosecutions; Directorate of Criminal of MAT’s operations, which have been challenged Investigations; National Intelligence Service; Financial in the courts. Reporting Centre; Asset Recovery Agency; and Office • Archaic cour t procedures with respec t to of the President. acceptance of documentary evidence, which required the originator of the evidence to appear before the court, and at times injunctions that Terms of reference of the MAT derailed the prosecution, have made the work of The MAT’s terms of reference were:25 MAT difficult.29 • To enhance cooperation, coordination and • Politicization of the cases against high-ranked collaboration among the agencies; politicians has led to claims that MAT is • To engage other relevant agencies in order to discriminating against or favoring someone in the enhance the effectiveness of the graft war; war on corruption.30 • To identify resource needs for each agency and • Public awareness about the need for transparency lobby for the same; and is poor. • To develop effective communication strategies for awareness creation on the gains and achievements made in the fight against corruption. Lessons learned MAT has been largely successful in prosecuting corruption and recovering assets. Some of the lessons Successes of the MAT learned are: MAT has been successful in enhancing cooperation and • Individual institutions face capacity constraints and collaboration amongst the agencies and in providing combining the collective expertise and information real-time information gathering and intelligence sharing. pool certainly helps in combating corruption. As of October 2016, Kenya had 406 corruption and • A central depository for data is needed, not only economic crime cases pending in court. Out of these, on asset recovery but also for economic crimes and 98 involved high-profile personalities such as cabinet corruption-related cases. secretaries, members of parliament, and chief executive • The capacity of of ficers needs to be built officers of parastatals and state agencies. Kenya secured continuously through training and cooperation several convictions with various penalties, including with other similar bodies. imprisonment, mandatory fines, and restitution of Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 273 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 10 EXCHANGE AND COLLABORATION WITH TAX ADMINISTRATIONS The situation may be the result of not only the Example 2: Nigeria’s inadequate capacities of existing institutions but also challenges in achieving inter- the lack of a coordinated approach and undue rivalry among the anti-corruption agencies, including the agency cooperation to obtain tax authorities. Some government departments were and use data unwilling to share information and some responsibilities between agencies were duplicated. 33 Also, most Nigeria is an interesting example of an African country government systems are manual and therefore, retrieval where lack of effective inter-agency cooperation of information becomes difficult. This situation has is responsible for inefficiency in detecting and proved to be counter-productive, resulting in a string of prosecuting corruption. Until 1999, Nigeria was under losses of cases brought against high-profile suspects. military rule. In 1999, the former military head of In what counted as a major setback to the government, state, Olusegun Obasanjo, was elected as a civilian cases against Mike Ozekhome, a Senior Advocate president on the platform of addressing corruption. of Nigeria (SAN)34; Joe Agi, also a SAN; and Adeniyi In 2015, Muhammadu Buhari (current President re- Ademola, a Justice of the Federal High Court; and his elected in 2019), from the All Progressive Congress, wife, Olubowale, were all dismissed within a few days. won the election on a platform where the fight against In most of the cases, the judges cited lack of convincing corruption featured prominently. Upon assuming office, prosecution.35 he established the Presidential Advisory Committee on Anti-Corruption. Over the years, Nigeria established a range of anti-corruption institutions to address various Lessons learned aspects of the fight against corruption. These include A number of lessons can be drawn for countries moving the following key agencies:31 in a similar direction: • Institutions addressing corruption in public • Recognize the need for a clear policy and legal procurement: Bureau of Public Procurement; Code framework for cooperation; of Conduct Bureau; and Code of Conduct Tribunal; • Develop a common technology platform to • Institutions dealing with law enforcement: collect information and ensure interconnectivity of Economic and Financial Crimes Commission; databases; Nigerian Financial Intelligence Unit; Independent Corrupt Practices (and other Related Offenses) • Undertake capacity building exercises to train Commission; Special Control Unit on Money personnel on sharing information and building a Laundering; and culture of cooperation; and • Institutions dealing with public complaints, public • Establish a national agency responsible for information and government policy coordination: overseeing the sharing of information between Presidential Advisor y Commit tee agains t different agencies. Corruption; Public Complaints Commission; Technical Unit on Governance and Anti-Corruption Reform/Inter-Agency Task Team, Bureau of Public Service Reform. The government also established a National Anti- Corruption Strategy and Action Plan for the period 2017–2021. Despite having multiple regulator y agencies, including the tax authority, the nation still ranked 144th (out of 180 countries) on Transparency International’s Corruption Perceptions Index 32 and continues to grapple with corruption scandals amid calls for fiscal transparency and accountability in governance. 274 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 10 EXCHANGE AND COLLABORATION WITH TAX ADMINISTRATIONS CASE STUDY 21 CASE STUDY 21 EXCHANGE AND COLLABORATION WITH TAX ADMINISTRATIONS Sharing Evidence with Joint Prosecution Teams Tax administrations have a key role to play in Introduction addressing serious crime. They are granted access to and are highly trained in examining the financial The basic requirements for effective affairs, transactions, and records of millions of prosecutions individuals and entities.41 Alongside examining the affairs of taxpayers, tax authorities are enabled by I nvestig ating a nd prosecuting suspected law to issue demand notices requesting the payment perpetrators of corruption is very time-consuming of outstanding taxes and pursue payment through and requires collaboration, expertise and knowledge specialized tax tribunals or through mediation efforts of the law. The process of detecting and proving with the taxpayer. However, tax administrators are not corruption, fraud, tax evasion and other financial crimes always aware, especially in developing countries, either requires many hours of work, specialized expertise of the typical indicators of possible bribery, corruption, and sometimes expensive software or surveillance and other financial crimes not related to tax, or of their equipment. 36 Inter-agency cooperation between role in referring their suspicions to the appropriate law revenue authorities, financial intelligence units (FIUs) enforcement authority or public prosecutor.42 For this and other law enforcement agencies can be a force reason, as well as the way that key data is spread across multiplier, offering additional resources, expertise, and various agencies, inter-agency cooperation to share legal tools.37 Effective cooperation can provide “critical information, investigate alleged financial crimes and, cover in politically sensitive cases”, that can support ultimately, prosecute is imperative. law enforcement agencies to counteract any political risks.38 In order to successfully meet the objective of The different agencies need to be able to share prosecuting a suspect, Joint Investigation Teams must information effectively while abiding by data operate within the confines of the law, set a strong protection rules. Some of the agencies involved terms of reference determining the scope and role of may include the police, judiciary, public prosecutors, each agency, and ensure timely action. corruption investigation agencies, and financial intelligence units (FIUs). Each of these agencies/ The successful prosecution of corruption and institutions will already have some appreciation of the other financial crimes entails cooperation among links between their functions and mandates in tackling agencies with varying institutional cultures financial crime.43 In the course of their activities, the and differing scopes and objectives. The level of different agencies will collect and hold information cooperation between tax administrations and other on individuals, corporations, and transactions, which domestic law enforcement agencies is critical in may be directly relevant to the activities of other countering tax and financial crimes. 39 Whilst there agencies. However, legal gateways will need to be are several limitations on the scope of cooperation, established to enable the sharing of information.44 This opportunities exist in the form of existing cooperation will often be defined by domestic law and limited by models, the use of task forces and joint centers, and in regulatory restrictions governing the collection and applying international best practices.40 use of information (e.g. General Data Protection Rules Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 275 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 10 EXCHANGE AND COLLABORATION WITH TAX ADMINISTRATIONS in the EU).45 This requires balancing data protection effective prosecution. The ability to share information rights with inter-agency sharing of information. It is for purposes of inter-agency cooperation in prosecuting important to protect the confidentiality of information a financial crime is often dependent on the enabling and the integrity of the mandate being fulfilled by each framework in a country. In general, for purposes of agency.46 prosecution it is imperative that the agreement to cooperate is implemented in accordance with the Tax tribunals with less strict rules of evidence are an enabling provisions of the law. Countries can and have alternative to legal action. The decision to prosecute modified their laws to enable them to get better access will generally be anchored on access to lawfully to information. Some of the methods of cooperation obtained information (particularly regarding the rules include direct access to information contained in of evidence), which is collected and shared between agency records or databases; an obligation or ability to agencies through a mandated process. The collection provide information spontaneously; and an obligation and sharing of information for purposes of prosecution or ability to provide information only on request.49 can only be successful if relevant agencies utilize their technical capacities to identify a financial crime, the Based on a review of 51 countries, the OECD appropriate avenue for scrutinizing that crime and the found that some countries had barriers to the agency entitled to initiate action. Selecting the correct ability of tax administrations to share information agency is especially important for tax administrators with the police or public prosecutors in non-tax since tax evasion cases may be prosecuted by tax investigations. In 15 countries, there was no legal authorities in specialized tax tribunals. From time to obligation to report suspicions of serious non-tax time, the tax authority may negotiate with the taxpayer offenses to the relevant authorities. In two countries, to recover revenues, especially where the chances of a the tax administration was specifically prohibited from successful legal action are low. Specialized tax tribunals doing so.50 Mixed abilities to share tax information with often have less stringent rules of evidence and may be the FIU were found, together with the prohibition in two preferred where evidence has not been handled in line countries from sharing with the authority responsible with strict rules of evidence. In addition, where a legal for conducting corruption investigations.51 In contrast, action has little chance of success, the tax authority customs administrations, due to their role in countering may, at least, recover some revenue from the income illicit trade, were mostly allowed to share information generated by that asset. with the police or public prosecutors investigating non- tax offenses, and seven countries 52 even permitted The capacity to investigate may not always direct access to customs information. 53 Notably, translate into a capacity to prosecute. Investigation in almost all countries, legal gateways permit (not involves analyzing significant volumes of financial, obligate) the police or public prosecutor to provide banking, and accounting documents, including tax or information to the tax administration for purposes of customs records in order to identify illegal schemes, administering taxes and, generally, enable sharing with follow the money and gather financial intelligence.47 the FIU.54 Overall, while all other agencies that tend Prosecution will require similar expertise, but will to be involved in the prosecution of a financial crime also require gathering and presenting evidence were permitted to share information with the police or for confiscation, seeking judicial authorization for public prosecutor, the limitation on tax administrations specialized investigation tools and presenting the case and the lack of an obligation for the police and public to the court.48 prosecutors to share relevant information are likely to impede an effective prosecution. Tax administrations hold a wealth of personal and The role of tax administration company information that is a valuable source and limitations to joint of intelligence for other agencies tasked with identifying financial crimes. 55 Such information prosecution relates to income, assets, financial transactions and banking information, among others. Tax agencies are In many countries, the limitations imposed on the enabled to engage in exchange of information on tax authority’s ability to obtain information from request (EOIR), spontaneous exchange of information other agencies pose a significant challenge to an or automatic exchange of information (AEOI) for tax 276 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 10 EXCHANGE AND COLLABORATION WITH TAX ADMINISTRATIONS purposes on the basis of either tax treaties, or Tax money laundering, tax evasion and hidden assets and Information Exchange Agreements (TIEA). AEOI and the investigation has, so far, resulted in criminal fines, EOIR provide tax authorities with a framework to tax penalties and recovered assets amounting to USD15 request and obtain specific information relating to a billion and 1,400 years in prison sentences.65 Brazil’s taxpayer in a foreign jurisdiction; this information can National Strategy to Combat Corruption and Money be used to carry out a risk assessment and/or trigger Laundering (ENCCLA) was set up as an inter-agency a tax investigation.56 This may be beneficial to other organization to fight money laundering and corruption law enforcement agencies investigating a financial through coordination and joint policy making among crime. However, there are limitations on the sharing of public officials.66 information. For instance, tax authorities should refrain from engaging in fishing expeditions or requesting Criminal investigations can be affected by a information that is not likely to be relevant to the tax country’s limitation on the tax authority’s sharing affairs of a taxpayer. 57 In addition, the information of information. Where criminal prosecutions are received must be treated with proper confidence and concerned, the tax administration is often able to can only be shared with authorities involved in the ensure that individuals and companies are required assessment, collection, enforcement or prosecution of to pay tax on all of their income. This includes income a tax related offense.58 Information can be exchanged derived from criminal activities, on which the tax with other law enforcement agencies where money administration can deny a deduction for expenses.67 laundering, corruption and terrorism financing may However, in the event that information valuable to a be concerned, but the supplying jurisdiction must be criminal investigation is uncovered in a country that informed and authorize this.59 can limit the ability of tax administrations to share information, there is a likelihood that some elements of Since the proceeds or tools of corruption will often a financial crime may go undetected. In addition, where involve the use of other jurisdictions, exchange the tax administration may be limited from taxing the of information between tax authorities can prove direct proceeds of a crime, cooperation with other law advantageous to an inter-agency initiative to enforcement agencies could provide an avenue for prosecute. Where gathering evidence will require alternative charges to be brought against a suspect. the cooperation of foreign authorities, mutual legal assistance can be key, particularly where prosecution is A joint prosecution must be carried out within concerned, in executing proceedings or extradition.60 the confines and structures of the law, which can Mutual legal assistance can be provided via agreements make prosecutions more difficult. For instance, if the between countries, the UN Convention against law provides that information obtained from the tax Corruption (UNCAC), or on the basis of reciprocity administration may be used for investigative purposes where no agreement exists. In Asia and the Pacific, but not as evidence in proceedings, this would present some of the barriers to effective international legal a barrier to successful prosecution.68 Some laws may assistance include the lack of legal basis for cooperation, require that a formal criminal procedure is initiated differences in legal and procedural frameworks, under the authority of a public prosecutor or a court language barriers, resource limitations and evidentiary order obtained before an anti-corruption authority issues.61 In addition, a relationship of trust combined may receive tax information.69 Although this ensures with a strong and clear request for assistance was an important balancing with protecting personal or found to be key in enhancing mutual legal assistance.62 confidential information, it may delay and increase the Other agencies can provide tax administrations with costs of the process. Countries should introduce laws to important information about ongoing or completed streamline this process and adapt the legal framework investigations that could influence the reopening of a to enable sharing of information for purposes of tax assessment or initiate a tax crime investigation.63 providing evidence in a formal case. In the Brazilian Petrobras investigation, tax Globally, jurisdictions apply different frameworks auditors supported the transnational corruption for prosecution of tax and financial crimes. Some investigation by analyzing suspects’ tax and countries, such as Burkina Faso and Mexico, have a customs data and sharing this with the police and central prosecution authority that is also responsible public prosecutor as permitted by law.64 With that for criminal investigations, whilst others do not involve information, officials were able to uncover evidence of public prosecutors in the investigations that will be Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 277 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 10 EXCHANGE AND COLLABORATION WITH TAX ADMINISTRATIONS carried out by the police or specialized agencies.70 In enforcement agencies; several countries, including New Zealand and Nigeria, • The agency’s need to preserve autonomy and law enforcement agencies, including the police, tax independence throughout the process to protect administrations or anti-corruption authorities, may the integrity of its mandate; prosecute cases directly.71 In a number of jurisdictions, for example Ghana, Rwanda, and Malaysia, public • Organizational routines and procedures that may prosecutors responsible for the prosecution of a be difficult to synchronize and coordinate; financial crime may either have the authority to delegate • Obser ving the rules of evidence to ensure performance of significant elements of an investigation admissibility in court; to a number of the agencies identified above, or they may not participate at all in the investigation process.72 • Differing organizational objectives between the collaborating agencies, which need to be balanced; Tax administrations generally carry out a separate • Differing expectations and levels of pressure from process of prosecuting tax-related cases through and for each agency to deliver some element of specialized tax courts or tribunals, which are the work; and found in most developed and developing countries. In most jurisdictions, the enforcement of taxes and • Differing and incompatible technical platforms. the prevention of tax crime is the tax administration’s responsibility.73 The process of investigation for tax purposes will involve specialized audit teams accessing the financial and other information of a person; this The importance of enabling process and the powers to access the information of a taxpayer are provided for by law. Taxpayers are law often required to exhaust the tax procedural process The mandate of a joint prosecution effort must before the courts are approached. The coordination be clear and each agency must act within its of this process with the overall joint prosecution is key, empowering provisions. However, even where since a failure in the specialized tribunal or inability to empowering provisions exist, political interests may prosecute may weaken an overall case, particularly with often undermine the legitimacy of a joint investigation regard to money laundering. Where a taxpayer agrees team. In addition, the support of policy makers to to comply with the orders of the tax administration introduce an enabling legal framework will be key. and pay the outstanding taxes, this is likely to affirm the allegation of a tax crime having been committed Where extensive empowering provisions are and efforts to determine whether money laundering not available, a Memorandum of Understanding occurred will be further justified. If joint teams opt to (MOU)75 can affirm and evidence the objectives initiate prosecution in specialized tax tribunals, they of inter-agency cooperation to prosecute. Under will need to ensure that the tax investigation is distinct Project Wickenby, the Australian Tax Office has direct from the overall investigation. Pursuing an action in access to information collected by the Australian FIU the specialized tax tribunal should be considered (AUSTRAC) and an MOU with AUSTRAC.76 Such an MOU where a criminal prosecution might not be possible or should be compliant with the law and provide details is unlikely to succeed. This may remove at least part on existing regulations, provide modalities of exchange of the proceeds of crime from the criminals by taxing of information, and facilitate shared objectives. It the income generated from that asset and would entail should not create legally binding obligations on the less stringent requirements for evidence. Where tax agencies, but it should foster a common understanding authorities are involved in a joint prosecution process, of objectives, procedures, and roles, and build trust they may make strategic decisions about whether or between agencies. not to combine charges for tax crimes, corruption, and other financial crimes into a single prosecution.74 Recognizing tax crimes as predicate Obstacles to coordination between government offenses agencies may arise from systemic and practical differences: The ability of tax administrations to be involved in prosecuting financial crimes is often made easier • Lack of political will and distrust amongst law 278 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 10 EXCHANGE AND COLLABORATION WITH TAX ADMINISTRATIONS when tax crimes are recognized as predicate Alongside laws defining the mandate of government offenses to money laundering. The Financial Action agencies to cooperate, countries should introduce a Task Force (FATF) recognized this in 2012, when they wide definition of tax crimes as a predicate offense revised the Recommendations to include tax crimes to money laundering. This could enable cooperation as a predicate offense. Predicate offenses are types of in investigations that involve a broad range of tax criminal activity that give rise to funds or assets that crimes. Although there is no recommended definition can be laundered to obscure the illegal source.77 Where of a tax crime, countries seeking to introduce them a tax crime is designated as a predicate offense, it as a predicate offense should amend their AML laws means that a person may be charged with the offense to define the offense and the elements that make it of money laundering and the predicate offense, in this a serious offense.83 Countries should also ensure that case tax evasion. This is important because it gives joint tax crimes committed in a foreign jurisdiction are prosecution teams greater scope to secure a conviction considered tax crimes. The legal provisions should or impose greater penalties, pursue cases of tax crimes provide a broad set of tax-related offenses that involving other jurisdictions and recover the proceeds of constitute predicate offenses to money laundering. In crime through mutual legal assistance.78 The definition particular, fiscal offenses relating to indirect and direct of a tax crime should be broad enough to cover the taxes should be included.84 This could ultimately entail violation of all direct and indirect tax obligations. straightforward non-payment of direct and indirect A narrow definition could limit the role of the tax taxes being considered as a predicate offense to money administration. It also requires financial institutions and laundering, or, potentially, certain cases of aggressive Designated Non-Financial Businesses and Professions tax avoidance. In addition, countries will need to:85 to report suspicions of any predicate offenses relating to the proceeds of tax crimes; this will generally require • Establish, either through legislation or case some awareness of the risks and indicators amongst precedent, that the predicate offense need not be reporting entities and greater cooperation with tax proven in order to convict for money laundering, as administrations. established in the FATF recommendations; According to an OECD survey of 31 jurisdictions, • Prepare internal guidelines, handbooks and in- the inclusion of tax crimes as a predicate offense person training for investigators; and had practical and positive impacts on their work.79 The most reported impact was better inter-agency • Introduce policies or directives that establish the cooperation, including an increased ability to work with mandatory requirement of opening a parallel other agencies on particular cases and on strategic financial investigation in every investigation of a and policy matters. 80 Greater awareness amongst predicate offense. other law enforcement agencies, intelligence agencies and the private sector of the possibility of tax crimes The introduction of tax crimes as a predicate occurring and better avenues for communication with offense needs to be effective. This will generally entail other agencies were also reported.81 Notably, some countries ensuring that law enforcement agencies, other jurisdictions reported an increase in prosecutions and agencies required to provide information in accordance that prosecutions were easier to undertake.82 with the AML requirements, and Designated Non- Financial Businesses and Professions undergo thorough The EU 4th Anti-Money Laundering (AML) Directive training and awareness raising. introduced a requirement for member states to introduce tax crimes as a predicate offense. While no definition was specified, countries were expected Showing regard for the right to privacy to have effected this amendment by 26 June 2017, and by 1 January 2018 tax authorities were to gain Particular care is required to ensure that access to data collected under AML laws. Ultimately, cooperation between agencies does not lead to the European Commission had to open infringement any curtailing of the right to privacy. Enabling procedures for non-communication of transposition legislation is an important feature in framing the measures against 20 member states. Of the 20, three scope of each agency in the process of prosecuting countries, including Ireland, were referred to the Court financial crimes. However, an MOU can also provide an of Justice. enabling framework for the authorities to cooperate. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 279 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 10 EXCHANGE AND COLLABORATION WITH TAX ADMINISTRATIONS The role of the tax administration can only extend as necessary to the investigation to be undertaken.89 far as a tax crime may be concerned and the process will entail a simultaneous prosecution in alignment Joint teams should set the criteria for information with tax procedures as mentioned above. Clearly sharing. These should be based on the indicators of setting out the roles of each authority throughout the suspicious features that fall within the prevention of tax prosecution process and ensuring strict adherence abuses and money laundering initiatives to ensure that to the law ensures that the case cannot be dismissed the process of prosecution does not infringe upon the based on procedural matters. Alongside respecting right to privacy. The criteria should include: the rule of law, the right to privacy entitles persons to • Transactions with no real business purpose protection from arbitrary interference or intrusion from (substance over form); the state. Although the right is not absolute, limitations regarding banking secrecy and money laundering in • The use of offshore accounts, trusts or companies general are often clear. The tax administration must which do not support any economic substance; evaluate whether sharing of information is in line with • Tax schemes that involve high-risk jurisdictions the requirements of the Constitution or Bill of Rights of (particularly jurisdictions with high levels of secrecy their jurisdiction. Any limitations to the right to privacy and low or no taxes); should be balanced by some determination of whether it would be reasonably necessary for the attainment of • Highly complex tax structures; the objectives underlying the joint investigation. • Unexplained wealth;90 In making this assessment, the obligation of • Short-term businesses involved in importing or sharing taxpayer information with other agencies exporting; and for purposes of investigating a financial crime • Use of cash transactions instead of appropriate must be balanced against the potential impact financial instruments. on the integrity of the tax system. 86 A tax administration’s information sharing to address serious crime is acceptable as long as it is fit for purpose. In addition, balancing the right to privacy and the benefits to society must be evaluated based on the following:87 Conclusion • The nature of the serious crime in question and the The obstacles to effective prosecutions go beyond scope of the information required; the limitations imposed by legislation. The attention • The authority to access the information and the drawn to legal challenges is warranted by the potential ability of the tax administration to provide it; consequences of a failure to operate within the confines of the law. These failures include the inadmissibility • The intended and potential use of the information; of evidence, the consequence of which will result in and rendering the entire process redundant. Joint teams • The risk of misuse. may be limited by distrust amongst the enforcement agencies, differing expectations on the delivery of Investigating agencies will need to determine to outcomes, and a lack of harmonized institutional what extent the information is available and will procedures particularly regarding the use of technology be shared. The 4th AML Directive provides that the to collect, hold, and share data. processing of personal data should be limited to what is necessary for the purposes of complying with the Joint prosecution teams must have a clear requirements of the Directive. Financial investigations mandate based on the law, clearly defining the role are, by nature, intrusive and will result in obtaining the of each agency and determining clear procedures private information of an individual.88 Law enforcement for cooperation. They must remain aware of their agencies must remain aware of their country’s human limitations as any breach may result in a failed process, rights legislation, which protects the right to privacy and be prepared to receive any additional support and associated considerations. They should therefore to ensure they meet the procedural requirements. be able to justify such investigations as proportionate, Tax administrations will need to operate within the non-discriminator y, legitimate, accountable, and specialized courts and ensure that sharing of any 280 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 10 EXCHANGE AND COLLABORATION WITH TAX ADMINISTRATIONS information is enabled by the legal framework or any line with the Prevention of Organized Crime Act.92 The reasonable exceptions. In order to do so, countries order froze an estimated R44 million held in two bank should consider introducing tax crimes as a predicate accounts belonging to Tannenbaum and his associate. offense in order to facilitate: • Increased sharing of information and awareness Cooperation and legal mandate of SARS about the nature of tax crimes. • Mutual legal assistance. SARS’s five-year priority initiative proposed to adopt a whole-of-government approach in managing • Prosecution of money laundering based on tax the customs border environment. This included crimes involving foreign jurisdictions. continuing to strengthen risk management capabilities • Expanding the tools, skills, and resources available, as well as international agreements and links with including for asset recovery. other jurisdictions. Further, SARS’s strategic plan emphasized a whole-of-government approach through • Extending the statute of limitations through linking collaboration with other government agencies to to money laundering. improve the government’s overall value chain. SARS is mandated to conduct criminal investigations into all criminal offenses created under the Tax Example: South Africa Administration Act. This applies to all tax acts whether (Tannenbaum case)91 indirect or direct taxes, excluding offenses under the Customs and Excise Act.93 SARS is also the only authority assigned the legal mandate to officially lay Brief facts of the case a criminal complaint with SAPS in respect of a Serious Tax Offense.94 In general, South Africa recognizes tax The following South African agencies cooperated in a crimes as a predicate offense to money laundering. four-year investigation of Barry Tannenbaum that led to • Section 73 of the AML/CFT Act provides that prosecution in 2009: any investigation instituted in line with the Act, • South African Reserve Bank (SARB); including those on the property, financial activities, affairs or business of any person, must be reported • South African Revenue Services (SARS): responsible to the Commissioner of SARS or any officials for the collection of revenue and enforcement of with a view to mutual cooperation and sharing of compliance with tax and customs legislation (semi- information. autonomous); • Section 70(3) (c) of the Tax Administration Act • South African Police Ser vice (SAPS) Serious 2011, provides for the disclosure of information to Economic Offences Unit: tasked with preventing, the FIC where such information is required for the combating and investigating economic crime; purpose of carrying out their duties and functions. • The Financial Intelligence Centre (FIC): assists in the identification of the proceeds of unlawful In general, South Africa’s system provides an enabling activities and combating of money laundering environment for SARS to cooperate in a joint prosecution activities, amongst others; and and review information obtained by other agencies with regard to the alleged tax crime. • National Prosecuting Authority (NPA). Tannenbaum was accused of setting up a Ponzi scheme Process of cooperation that involved at least 800 investors in South Africa, Germany, US, and Australia. The scheme promised The five agencies coordinated their efforts, ensuring investors returns of 200% per year in investments that clear terms of reference identified each agency’s related to fraudulent pharmaceutical imports. On 30 scope and mandate. The joint team determined a plan July 2009, the North Gauteng High Court granted the of action for the high-level investigation into serious Asset Forfeiture Unit in the NPA a preservation order in allegations of fraud, money laundering, tax evasion and Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 281 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 10 EXCHANGE AND COLLABORATION WITH TAX ADMINISTRATIONS foreign exchange control violations. The responsibilities mandate that permits the sharing of information were set out as follows: between agencies where reasonable and the recognition of tax crimes as a predicate offense; • NPA: freezing or forfeiture of assets of the main suspect and associates and determining whether • Ensure cost effectiveness; to prosecute any of the persons or entities involved • The possibility of extradition where suspects in the scheme; may be based in foreign jurisdictions may arise • SARS: raising tax assessments and generating and teams must remain aware of the potential attachment orders; implications for the case and the need for a speedy process; • SAPS: supporting with seizure and arrest where possible; • Determine clearly whether illegal schemes are taxable; • FIC: tracing the movement of finances; and • Ensure clear frameworks for any information • SARB: accessing banking information, which sharing with foreign institutions; revealed the use of Tannenbaum’s personal accounts to channel money out of the country. • Consider the role of victims or investors not only as witnesses, but also in pressing charges; and SARS reviewed Tannenbaum’s tax filings in the period • Information management—ensure that a member 2004–2009 and alleged that he had under-declared of the directorate of public prosecution is part his income, resulting in tax, penalties and interest.95 of the team to enable the quick turnaround of ex Through investigations into Tannenbaum’s accounts, parte applications. they discovered that he received about USD415 million and about USD324 million was paid to investors and agents in the scheme.96 With regard to asset tracing and recovery: • Evaluate the appropriate time to implement The issuance of arrest warrants could not be enforced preventative measures, including the freezing since Tannenbaum had fled to Australia and one of of assets; this should be done in the interest of his associates was based in Switzerland. Although ensuring that the person of interest is not alerted extradition proceedings were pursued, the process has too early or too late; taken many years and prosecutors were not optimistic that Australia would agree to the extradition request.97 • Understand the constraints existing in the Tannenbaum has also managed to evade authorities requested country; in Australia. The prosecution of Tannenbaum and his • Since cooperation with foreign jurisdictions will associates tied up state resources for several years be imperative to the tracing and identification of with little progress made. In addition, investors and assets for recovery and taxation purposes, ensure overall victims of the scheme have pursued litigation in that there is a legal basis for assistance, no barriers efforts to recover their assets. Several of the businesses will prevent cooperation and the appropriate legal registered as part of the scheme are attached to instrument is chosen; different associates, whilst others are insolvent. This has had implications for recovery of assets by SARS. • Freezing of assets at the domestic level: determine how fast the judiciary can respond, what kind of coordination will be required, the asset management framework available and the costs associated with holding certain assets whilst Recommendations proceedings are taking place; and • Freezing of assets in foreign jurisdictions: since this For purposes of joint prosecution efforts, inter-agency will require mutual legal assistance, with foreign teams should evaluate the following and encourage authorities and comply with the differing rules of governments to strengthen any areas of weakness: procedure. • Introduce enabling laws, including a broader legal 282 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 10 EXCHANGE AND COLLABORATION WITH TAX ADMINISTRATIONS Whilst the ultimate outcome may not have been a successful prosecution of the alleged offenders, the South African joint team was able to effectively coordinate efforts and engage in a process that should lead to more effective future investigations of financial crimes. The outcome does not take away from the commendable efforts made by the prosecution team and the recommendations made above represent the main lessons drawn by the involved agencies for future joint efforts. Example 2: Brazil Some additional lessons may be drawn from Brazil’s experience with Operation Car Wash, which involved 44 other countries where investigations were being carried out. This required the negotiation of new agreements with several states, including the United States and Switzerland.98 Using information obtained by the tax authority on the purchase of a luxury car by the daughter of a former director of Petrobras, the invoice revealed a connection with an operator of the corruption scheme whom the director had denied knowing.99 Further analysis of the director found that he was the beneficial owner of an offshore company owning a luxurious apartment where the operator once lived.100 Although the investigation is still ongoing, the authorities were able to engage in international legal cooperation that proved essential to obtaining relevant evidence of major crimes and in recovering illicit assets in foreign jurisdictions.101 Brazil had an array of regulations dealing with cooperation, including international treaties and agreements, direct assistance, extradition, and enforcement of foreign court decisions. To facilitate successful prosecution, enabling legislation must go beyond obligations for domestic institutions and establish cooperation across jurisdictions. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 283 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 10 EXCHANGE AND COLLABORATION WITH TAX ADMINISTRATIONS Notes 1. OECD (2010). OECD Council Recommendation to Facilitate 22. Mearian (2020). U.S. Air Force to pilot blockchain-based Co-operation between Tax Authorities as well as other Law database for data sharing. https://www.computerworld. Enforcement Authorities to Combat Serious Crimes, 14 2010, com/article/3519917/us-air- force-to-pilot-blockchain-based- C(2010)119 October. https://www.oecd.org/tax/crime/2010- database-for-data-sharing.html. recommendation.pdf. 23. Task Force on the Review of the Legal, Policy and Institutional 2. OECD (2017a). Effective Inter-Agency Cooperation in Fighting Framework for Fighting Corruption in Kenya (2015), see Tax Crime and Other Financial Crimes, 3rd Ed. 2017, pg. Gazette Notice No. 2118 of 30th March 2015. 131. Available online at: https://www.oecd.org/tax/crime/ effective-inter-agency-co-operation-in-fighting-tax-crimes- 24. Oyugi (2016). Country Statement by Ambassador Michael AO and-other-financial-crimes-third-edition.pdf. Oyugi, Ambassador/Permanent Representative of the Republic of Kenya to the UN and the International Organisations 3. OECD (2017b). Effective Inter-Agency Co-operation for in Vienna, Austria and Leader of Delegation. 15 November sharing the information in Fighting Tax Crimes as well as other 2016, 7th session of the Meeting of the Implementation Financial Crimes (Third Edition) – Part 1 – 2017. Review Group of the UN Convention Against Corruption, Vienna, Austria. https://www.unodc.org/documents/treaties/ 4. OECD (n 2 above), page 14 UNCAC/WorkingGroups/ImplementationReviewGroup/14- 5. Australia, Austria, Azerbaijan, Belgium, Brazil, Burkina Faso, 16November2016/Statements/Kenya.pdf. Canada, Chile, Colombia, Costa Rica, the Czech Republic, 25. Kenya Law (2015). The Kenya Gazette (Special Issue), 31st Denmark, Ecuador, El Salvador, Estonia, Finland, France, March,2015. http://kenyalaw.org/kenya_gazette/gazette/ Georgia, Germany, Ghana, Greece, Hungar y, Iceland, volume/MTE1NQ-- /Vol.CXVII-No.33/. India, Ireland, Israel, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, Malaysia, Mexico, the Netherlands, New 26. Kenya Law, 2015. Zealand, Norway, Peru, Portugal, Serbia, Singapore, the Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, 27. Ibid Turkey, Uganda, the United Kingdom and the United States. 28. Obala (2020). EACC Boss: We Have Recovered SH22 6. OECD, 2017, page 69. Billion of Stolen Assets. https://www.standardmedia.co.ke/ article/2001356289/eacc-boss- interview-a-year-in-office. 7. OECD (n 2 above), page 15 29. Kihiu (2018). Govt Agencies Say Injunctions Frustrating Graft 8. AU/UNECA. (n.d.). Report of the High-Level Panel on Illicit Fight. ht tps://w w w.capitalfm.co.ke/news/2018/08/gov t- Financial Flows from Africa commissioned by the AU/ECA agencies-say-injunctions- frustrating-graft-fight/. Conference of Ministers of Finance, Planning and Economic Development. https://www.uneca.org/sites/default/files/ 30. Ibid. PublicationFiles/iff_main_report_26feb_en.pdf. 31. Ibid. 9. OECD (2017a). Effective Inter-Agency Cooperation in Fighting 32. Transparency International, 2018. Tax Crime and Other Financial Crimes, 3rd Ed. 2017, pg. 131. Available online at: https://www.oecd.org/tax/crime/ 33. AU/UNECA. (n.d.). effective-inter-agency-co-operation-in-fighting-tax-crimes- 34. This is a title conferred on legal practitioners in Nigeria who and-other-financial-crimes-third-edition.pdf, page 26. have distinguished themselves in the legal profession 10. OECD, 2017a, page 21. 35. Punch (2017). Inter-agency rivalry hurting anti-corruption 11. OECD, 2017a, page 27. war. https://punchng.com/inter-agency-rivalry-hurting-anti- corruption-war/. 12. OECD, 2017a, page 27. 36. CAPI (2016). Center for Advancement of Public Integrity (CAPI) 13. OECD, 2017a, page 22. at Columbia Law School“, September 2016, pg. 2, https:// 14. OECD, 2017a, page 92. www.law.columbia.edu/sites/default/files/microsites/public- integrity/files/leveraging_resources_and_relationships_- _ 15. OECD, 2017a. capi_community_contribution_-_september_2016_0.pdf. 16. OECD, 2017a, page 22. 37. Ibid. 17. S Hodzic, 2016, ‘National report: Croatia’ paper presented 38. Ibid. at the conference ‘Improving tax compliance in a globalised world’, Rust, Austria, 30 June-2 July 2016. 39. Bernd Schlenther (2017), “Tax administrations, financial intelligence units, law enforcement agencies: How to work 18. D Nerudova & J Tepperova, 2016, ‘National report: Czech together”, in Jeffrey Owens et. al., Inter-Agency Cooperation Republic paper presented at the conference ‘Improving tax and Good Tax Governance in Africa, 2017 Pretoria University compliance in a globalised World Rust, Austria, 30 June-2 July Law Press, pg.85 2016. 40. Ibid. 19. OECD, 2017a, page 24. 41. OECD (2013), ‘The role of tax examiners and tax auditors’, 20. OECD, 2017a, page 25. OECD, 2013, pg. 15. Available online at: https://www. o e c d - i l i b r a r y. o r g /d o c s e r v e r / 9 78 9 2 6 4 2 0 5 3 76 - 5 - e n . 21. Julia de Jong, Alexander Meyer, and Jeffrey Owens (2017). pdf?expires=1583685923&id=id&accname=guest&checksum Exploring How Blockchain Technology Could Enhance =E3DC053922746958894C2 0B18F5AA90B Financial Transparency through Registers of Beneficial Ownership. https://www.eventleaf.com/Attendee/Attendee/ 42. Ibid. ViewE xhibitorDocument?eId=3PiaJfTLiwOIvrBoR XLDRg %3D%3D&edId=bzzywXcAnmHwF7rqxGz ovg%3D%3D. 43. Ibid 284 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 10 EXCHANGE AND COLLABORATION WITH TAX ADMINISTRATIONS 44. OECD (2017), Effective Inter-Agency Cooperation in Fighting 68. OECD & World Bank (2018), pg.46 Tax Crime and Other Financial Crimes, 3rd Ed. 2017, pg. 13. Available online at: https://www.oecd.org/tax/crime/ 69. OECD & World Bank (2018), pg.46 effective-inter-agency-co-operation-in-fighting-tax-crimes- 70. OECD & World Bank (2018), pg.27 and-other-financial-crimes-third-edition.pdf 71. OECD & World Bank (2018), pg.27 45. Bernd Schlenther, 2017, pg. 86 72. OECD (2017), pg.49 46. OECD (2017), n.11, pg. 13 73. OECD & World Bank (2018), pg.30 47. Jean-Pierre Brun, Larissa Gray, Clive Scott & Kevin Stephenson, (2011), Asset Recovery Handbook: A Guide for Practitioners, 74. OECD & World Bank, (2018), pg.35 World Bank, pg. 23 75. See Note on Inter-Agency Collaboration to Obtain and Use 48. Ibid Data to Detect Potential Corruption for model MOU. 49. OECD (2017). n.11, pg. 13 76. Bernd Schlenther, (2017), pg.95 50. OECD (2017), n.11, pg.14 77. OECD (2017), “Fighting tax crime: The ten global principles”, 2017, pg. 53-54, http://www.oecd.org/tax/crime/fighting-tax- 51. OECD (2017), n.11, pg. 14 crime-the-ten- global-principles.pdf 52. Costa Rica, Czech Republic, Estonia, Finland, Iceland, 78. Ibid Luxembourg and Sweden 79. Ibid 53. OECD (2017), n.11, pg.14 80. OECD (2017), pg. 55 54. OECD (2017), n.11, pg. 13-14 81. OECD (2017), pg. 55 55. OECD & World Bank (2018), Improving Co-operation between Tax Authorities and Anti-Corruption Authorities in Combating 82. OECD (2017), pg. 55 Tax Crime and Corruption, OECD & World Bank, 2018, 83. OECD (2017), pg.55 pg.13. Available online at: http://documents.worldbank.org/ curated/en/461181540209894462/pdf/131110-2018-10-19- 84. IMF Legal Department (2012), ‘Revisions to the FATF Standard OECD-World-Bank-Improving-Co-operation- between-Tax- – Information Note to the Executive Board’, IMF, 2012, pg. Authorities-and-Anti-Corurption-Authorities-in-Combating- 7-10. Available online at: https://www.imf.org/external/np/pp/ Tax-Crime-and-Corruption.pdf eng/2012/071712a.pdf 56. Global Forum (2019), ‘The 2019 AEOI Implementation Report’, 85. FATF (2018), Annual Report 2017-2018, FATF, 2018. Available OECD, 2019, pg.2. Available online at: https://www.oecd.org/ online at: https://www.fatf- gafi.org/publications/fatfgeneral/ tax/transparency/AEOI-implementation-report-2019.pdf documents/annual-report-2017-2018.html 57. Commentary to Article 26 (Paragraph 1) of the OECD Model 86. Bernd Schlenther (2017), pg.99 Tax Convention 2017 87. Bernd Schlenther (2017), pg.99 58. Commentary to Article 26 (Paragraph 2) of the OECD Model Tax Convention 2017, para. 12 88. FATF (2012), ‘Operational issues: Financial investigations guidance’, FATF, June 2012, pg.7. Available online at: 59. Ibid https://www.fatf- gafi.org/media/fatf/documents/reports/ Operational%20Issues _ Financial%20inves tigations%20 60. OECD (2013), ‘Mutual Legal A s sis t ance and other Guidance.pdf for ms of C o o p er atio n Bet we e n L aw Enforce me nt Agencies’ OECD, 2013, pg.6. Available online at: 89. Ibid ht tps://w w w.oecd.org/corruption/acn/lawenforcement / MLAandOtherFormsCooperationLawEnforcementAgencies_ 90. For more see Rita Julien (2019), “Unexplained wealth orders ENG.pdf (UWOs) under the UK’s Criminal Finances Act 2017: The role of tax laws and tax authorities in its successful implementation”, 61. Asian Development Bank & OECD (2017), Mutual Legal WU International Taxation Research Paper Series No. 2019 Assistance in Asia and the Pacific – Experiences in 31 – 02, https://papers.ssrn.com/sol3/papers.cfm?abstract_ Jurisdictions‘, ADB & OECD, 2017. Available online at: id=3465485 https://www.oecd.org/corruption/ADB-OECD-Mutual-Legal- Assistance-Corruption-2017.pdf 91. See Annex I 62. Ibid 92. South African Government (2009), “R43 million Ponzi scheme money frozen”, ht tps://w w w.gov.za/r43-million-ponzi- 63. Ibid scheme-money-frozen 64. Ibid 93. OECD (2017), pg.77 65. Ibid 94. OECD (2017), pg. 77 66. Shruti Sudarsan (2018), ‘Operation car wash: As Brazil faces 95. Larr y Schlesinger (2013), “The runaway Ponzi scheme challenges ahead, a silver lining appears’, Cornell SC Johnson ‘mastermind’ holed up on the Gold Coast”, 25 June 2013, Smart College of Business, September 2018. Available online at: Company, https://www.smar tcompany.com.au/business- https://business.cornell.edu/hub/2018/09/14/operation-car- advice/legal/the-runaway-ponzi-scheme-mastermind-holed- wash-brazil-challenges/ up-on-the-gold-coast/ 67. OECD (2017), pg. 23 96. Ibid Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 285 PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 10 EXCHANGE AND COLLABORATION WITH TAX ADMINISTRATIONS 97. Rob Rose (2013), The Grand Scam: How Barry Tannenbaum OECD (2017a). Effective Inter-Agency Cooperation in Fighting Conned South Africa’s Business Elite, 2013, Penguin Random Tax Crime and Other Financial Crimes, 3rd Ed. 2017, pg. 131. House South Africa. Available online at: https://www.oecd.org/tax/crime/effective- inter-agency-co-operation-in-fighting-tax-crimes-and-other- 98. Marcos Tourinho (2017), ‘Brazil in the global anti- financial-crimes-third-edition.pdf. corruption regime’, RBPI, October 2017, pg.1. Available online at: http://www.scielo.br/pdf/rbpi/v61n1/1983-3121- OECD (2017b). Effective Inter-Agency Co-operation for sharing rbpi-0034-7329201800104.pdf the information in Fighting Tax Crimes as well as other Financial Crimes (Third Edition) – Part 1 – 2017. 99. OECD & World Bank (2018), pg.64 Oyugi (2016). Country Statement by Ambassador Michael AO OECD & World Bank (2018), pg.64 100. Oyugi, Ambassador/Permanent Representative of the Republic 101. Leaders League (2020). ‘International cooperation and its of Kenya to the UN and the International Organisations in relevance in Brazil’s legal system’. https://www.leadersleague. Vienna, Austria and Leader of Delegation. 15 November com/en/news/international-cooperation-and-its-relevance- 2016, 7th session of the Meeting of the Implementation in-brazil-s-legal-system Review Group of the UN Convention Against Corruption, Vienna, Austria. https://www.unodc.org/documents/treaties/ UNCAC/ WorkingGroups/ImplementationReviewGroup/14- 16November2016/Statements/Kenya.pdf. Punch (2017). Inter-agency rivalry hurting anti-corruption war. References ht t ps://p unc hng.com / inter-agenc y- r ivalr y- hur ting -anti - corruption-war/. OECD (2010). OECD Council Recommendation to Facilitate S Hodzic, (2016), ‘National report: Croatia’ paper presented at the Co-operation between Tax Authorities as well as other Law conference ‘Improving tax compliance in a globalised world’, Enforcement Authorities to Combat Serious Crimes, 14 2010, Rust, Austria, 30 June-2 July 2016. C(2010)119 October. https://www.oecd.org/tax/crime/2010- recommendation.pdf. OECD (2017). Effective Inter-Agency Cooperation in Fighting Case Study 21: Sharing Evidence with Joint Tax Crime and Other Financial Crimes, 3rd Ed. 2017, pg. 131. Prosecution Teams Available online at: https://www.oecd.org/tax/crime/effective- Asian Development Bank & OECD (2017), Mutual Legal Assistance inter-agency-co-operation-in-fighting-tax-crimes-and-other- in Asia and the Pacific – Experiences in 31 Jurisdictions‘, financial-crimes-third-edition.pdf. ADB & OECD, 2017. Available online at: https://www.oecd. o r g /c o r r u p t i o n /A D B - O E C D - M u t u a l - L e g a l - A s s i s t a n c e - Corruption-2017.pdf Case Study 20: Inter-agency Collaboration to Detect Bernd Schlenther (2017), “Tax administrations, financial intelligence Corruption units, law enforcement agencies: How to work together”, in AU/UNECA. (n.d.). Report of the High-Level Panel on Illicit Financial Jeffrey Owens et. al., Inter-Agency Cooperation and Good Tax Flows from Africa commissioned by the AU/ECA Conference Governance in Africa, 2017 Pretoria University Law Press, pg.85 of Ministers of Finance, Planning and Economic Development. CAPI (2016). Center for Advancement of Public Integrity (CAPI) https://www.uneca.org/sites/default/files/PublicationFiles/iff_ at Columbia Law School“, September 2016, pg. 2, https:// main_report_26feb_en.pdf. www.law.columbia.edu/sites/default/files/microsites/public- D Nerudova & J Tepperova, (2016), ‘National report: Czech integrity/files/leveraging_resources_and_relationships_-_capi_ Republic paper presented at the conference ‘Improving tax community_contribution_-_september_2016_0.pdf. compliance in a globalised World Rust, Austria, 30 June-2 July FATF (2012), ‘Operational issues: Financial investigations guidance’, 2016. FATF, June 2012, pg.7. Available online at: https://www.fatf-gafi. Julia de Jong, Alexander Meyer, and Jeffrey Owens (2017). org/media/fatf/documents/reports/Operational%20Issues_ Exploring How Blockchain Technology Could Enhance Financial%20investigations%20Guidance.pdf Financial Transparency through Registers of Beneficial FATF (2018), Annual Report 2017-2018, FATF, 2018. https://www. Ownership. https://www.eventleaf.com/Attendee/Attendee/ fat f-gafi.org/publications/fat fgeneral/documents/annual- V i e w E x h i b i t o r D o c u m e n t ?e I d =3 P i a J f T L i w O I v r B o R X L D report-2017-2018.html. Rg%3D%3D&edId=bzzywXcAnmHwF7rqxGzovg%3D%3D. Global Forum (2019), ‘The 2019 AEOI Implementation Report’, Kenya Law (2015). The Kenya Gazette (Special Issue), 31st March, OECD, 2019, pg.2. https://www.oecd.org/tax/transparency/ 2015. http://kenyalaw.org/kenya_gazette/gazette/volume/ AEOI-implementation-report-2019.pdf MTE1NQ--/Vol.CXVII-No.33/. IMF Legal Department (2012), ‘Revisions to the FATF Standard – Kihiu (2018). Govt Agencies Say Injunctions Frustrating Graft Fight. Information Note to the Executive Board’, IMF, 2012, pg. 7-10. https://www.capitalfm.co.ke/news/2018/08/govt-agencies-say- https://www.imf.org/external/np/pp/eng/2012/071712a.pdf injunctions-frustrating-graft-fight/. Jean-Pierre Brun, Larissa Gray, Clive Scott & Kevin Stephenson, Mearian (2020). U.S. Air Force to pilot blockchain-based (2011), Asset Recovery Handbook: A Guide for Practitioners, database for data sharing. https://www.computer world. World Bank, pg. 23. com/article/3519917/us-air-force-to-pilot-blockchain-based- database-for-data-sharing.html. Larry Schlesinger (2013), “The runaway Ponzi scheme ‘mastermind’ holed up on the Gold Coast”, 25 June 2013, Smart Company, Obala (2020). EACC Boss: We Have Recovered SH22 Billion of Stolen https://www.smartcompany.com.au/business-advice/legal/the- Assets. https://www.standardmedia.co.ke/article/2001356289/ runaway-ponzi-scheme-mastermind-holed-up-on-the-gold- eacc-boss-interview-a-year-in-office. coast/. 286 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART II KEY INSTRUMENTS FOR FIGHTING CORRUPTION CHAPTER 10 EXCHANGE AND COLLABORATION WITH TAX ADMINISTRATIONS Leaders League (2020). ‘International cooperation and its relevance in Brazil’s legal system’. https://www.leadersleague. com/en/news/international-cooperation-and-its-relevance-in- brazil-s-legal-system. Marcos Tourinho (2017), ‘Brazil in the global anticorruption regime’, RBPI, October 2017, pg.1. Available online at: http://www.scielo. br/pdf/rbpi/v61n1/1983-3121-rbpi-0034-7329201800104.pdf. OECD (2013), ‘The role of tax examiners and tax auditors’, OECD, 2013, pg. 15. Available online at: https://w w w. o e c d - i l i b r a r y . o r g / d o c s e r v e r / 9 7 8 9 2 6 4 2 0 5 3 76 - 5 - e n . p d f ? e x p i r e s =15 8 3 6 8 5 9 2 3 & i d = i d & a c c n a m e = g u e s t & checksum=E3DC053922746958894C20B18F5AA90B. OECD (2017), Effective Inter-Agency Cooperation in Fighting Tax Crime and Other Financial Crimes, 3rd Ed. 2017, pg. 13. https:// www.oecd.org/tax/crime/effective-inter-agency-co-operation- in-fighting-tax-crimes-and-other-financial-crimes-third-edition. pdf. OECD & World Bank (2018), Improving Co-operation between Tax Authorities and Anti-Corruption Authorities in Combating Tax Crime and Corruption, OECD & World Bank, 2018, pg.13. http:// documents.worldbank.org/curated/en/461181540209894462/ pdf/131110 -2018-10 -19-OECD-World-Bank-Improving-Co- operation-bet ween-Tax-Authorities-and-Anti-Corurption- Authorities-in-Combating-Tax-Crime-and-Corruption.pdf. OECD (2013), ‘Mutual Legal Assistance and other forms of Cooperation Between Law Enforcement Agencies’ OECD, 2013, pg.6. https://www.oecd.org/corruption/acn/lawenforcement/ MLAandOtherFormsCooperationLawEnforcementAgencies_ ENG.pdf. OECD (2017), “Fighting tax crime: The ten global principles”, 2017, pg. 53-54, http://www.oecd.org/tax/crime/fighting-tax-crime- the-ten-global-principles.pdf. Rita Julien (2019), “Unexplained wealth orders (UWOs) under the UK’s Criminal Finances Act 2017: The role of tax laws and tax authorities in its successful implementation”, WU International Taxation Research Paper Series No. 2019 – 02, https://papers. ssrn.com/sol3/papers.cfm?abstract_id=3465485. Rob Rose (2013), The Grand Scam: How Barry Tannenbaum Conned South Africa’s Business Elite, 2013, Penguin Random House South Africa. Shruti Sudarsan (2018), ‘Operation car wash: As Brazil faces challenges ahead, a silver lining appears’, Cornell SC Johnson College of Business, September 2018. https://business.cornell. edu/hub/2018/09/14/operation-car-wash-brazil-challenges/. South African Government (2009), “R43 million Ponzi scheme money frozen”, https://www.gov.za/r43-million-ponzi-scheme- money-frozen. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 287 PART III Role of Institutions in Fighting Corruption Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 289 PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 11 Anti-Corruption Agencies Can Anti-Corruption Agencies be Successful in Combating Corruption? PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 11 ANTI-CORRUPTION AGENCIES Introduction Anti-Corruption Agencies (ACAs) have, over the project funding, have supported these efforts as past 2 decades, received a great deal of attention evidence of a country’s anti-corruption commitment. and criticism because of the high visibility of However, in a misreading of UNCAC, the focus on their work and their seemingly limited impact combining both Article 6 and 36 responsibilities has compared to the resources devoted to them. meant that these new agencies are often expected to Although they are a new institutional response to take on a disparate range of roles, which may include corruption (as suggested by de Sousa, 2010), ACAs national anti-corruption strategies, covert intelligence are often misunderstood and insufficiently analyzed. and money laundering investigations, asset disclosure A few authors have tried to systematically evaluate and registration, and awareness programs for civil the ef fectiveness of ACAs.1 This chapter builds servants and citizens. on this literature and focuses on three less known experiences (UK, Lithuania, and Bhutan) to emphasize Despite the increase in the number of ACAs, their the importance of having a political commitment to success has been mixed and limited. Experiences tackling the problem of corruption, developing a from countries show that most of these agencies have deep understanding of the nature of the corruption fallen short of achieving the organizational standards problem, and mapping the existing institutional set by UNCAC. The independence of the institutions landscape before establishing a new anti-corruption (functional, budgetary and appointments), strategic agency if it is to be effective. focus, human and financial resources, and mechanisms for collaboration and coordination fall short of what would enable them to be effective. They have therefore Is a stand-alone agency the best not been successful in delivering according to their model? mandates and in line with citizens’ expectations, and in many cases have not had any significant impact A structured response to corruption often on the trends, types and levels of corruption in their draws heavily on the United Nations Convention jurisdictions. Against Corruption (UNCAC) as a comprehensive practitioner framework. UNCAC Article 6 requires The pervasive institutional limitations raise States Parties to establish (or ensure the existence questions as to whether the model of a stand- of) anti-corruption body/bodies to take ownership alone multi-functional ACA is the right one, or of the corruption prevention policies, practices and whether the need can be addressed through procedures required by Article 5. Article 36 requires existing institutions. Focusing at tention on States Parties to ensure the existence of a body or bodies organizational inadequacies essentially ignores basic or persons specialized in combating corruption through questions such as: Have ACAs been able to address law enforcement. Both Articles propose standards the corruption ‘problem’, which is what they were set for such institutions, including that they should be up to do? More importantly, is a dedicated agency independent, specialized, staffed, and have sufficient the effective response, as part of a country risk-based resources to meet their roles and responsibilities. anti-corruption strategy? These questions direct the focus onto a few relevant issues that give rise to further Many governments, multilateral and bilateral questions: (i) Was the ‘problem’ sufficiently defined donors have sug g ested or opted for the to justify the need for a dedicated and often new establishment of a sing le agency —an anti- agency? (ii) Does such a definition provide the basis corruption agency (ACA)—to undertake both from which to design a fit-for-purpose body and ensure Articles’ functions. This approach has been reinforced its effective functioning? and (iii) Were wider issues, by the perceived success of the Hong Kong experience. such as the agency’s organizational development and This route has resolved the reluctance of many donors maturity, and its fit within its external institutional and to engage with existing inadequate and compromised operating environment taken into account? These three public sector and law enforcement institutions. Many relevant issues will be returned to later in this chapter. donors have therefore welcomed the establishment of To provide the context, it is necessary to look at two a single agency to focus on ‘corruption’ and, through aspects of these basic questions. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 291 PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 11 ANTI-CORRUPTION AGENCIES Corruption and the environment Corruption has all too often been regarded as a of democratization, economic development, human stand-alone issue that can be addressed though the rights, and the rule of law. establishment of a stand-alone agency. Corruption is considered a core inhibitor of issues related to In most cases, countries do not develop a national democratization, economic development, human rights anti-corruption strategy in advance of establishing and the rule of law. While UNCAC provides an adequate an ACA and so do not tailor the design of such an summation of the types of offenses and unacceptable agency to the problem. 2 In the absence of such a conduct that it considers corruption (and by implication strategy, there is often no pre-agency assessment of indicates a range of institutions that should be involved exactly what type of corruption is to be addressed and in combating it), it silos corruption as a stand-alone whether a dedicated ACA is an appropriate response. issue. Accordingly, an ACA is a stand-alone response, There is also limited understanding of the roles and from both the causes of the problem and from other responsibilities of the ACA and of its mandate with areas of financial crime, as well as from other inhibitors respect to other law enforcement and public sector 292 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 11 ANTI-CORRUPTION AGENCIES institutions. Knowing the problem and clarifying responsibility more properly taken on by other bodies. how it is to be addressed ensures that an ACA can This is partly a consequence of the antecedents of be designed to be focused and fit-for-purpose, and UNCAC, partly its use of mandatory and optional avoid getting involved in areas that do not fall within classifications, and partly its presentation as a legal the normal understanding of corruption or becoming document suitable for treaty purposes. Hence, it is a essentially the institutional repository of anything that prescriptive document (rather than a working document has a ‘corruption’ dimension.3 At the same time, there is amenable for updating, revision and adaptation) and often a lack of clarity over the roles and responsibilities a continuing driver for addressing corruption at the of other key institutions which also play a role in multilateral or bilateral level to the point where not combating corruption, as well as the mechanisms and having such an ACA becomes the exception to the incentives to ensure the inter-connectedness and inter- norm. The prescriptive nature of UNCAC, reinforced dependence of the institutional landscape. by its current review process, lacks an approach that recognizes corruption’s developmental and country- UNCAC itself does not recognize the dynamics specific trajectories as the starting point to assess the of corruption as an operating environment. This most effective strategic and institutional response to includes not only where corruption causes the most a dynamic phenomenon. Further, continuing to see harm, promoting exclusion and inequality, or how far it corruption as a stand-alone issue has implications may be rooted in legacy and cultural issues. It does not when it becomes less an end in itself than as a necessarily identify addressing corruption as a means facilitator of issues being addressed by other agendas to other developmental ends, such as fixing countries’ and agencies (for example, that of money laundering tax bases. Nor does it allow for the need to adjust as a cornerstone of the fight against international illicit or adapt the work of ACAs, or—by not specifying money flow, people trafficking, terrorist finance, and the roles of organizations—ensure the allocation of organized and serious crime). Agency and the environment Answering the ‘problem’ and ‘need’ and the relationship with the agency’s external questions institutional and operating environment. This results in an expectation of high-level performance and quick Establishment of a dedicated ACA based on results. Such outcomes, however, are predicated on an a successful model from another country is a ‘ideal type’ organizational platform, without too much commitment to address corruption without thought about what is required in organizational terms considering the country-specific institutional to deliver the expectations. At the same time, the point environment which is long recognized as playing when an ACA is established is often the point at which it a significant role in determining the likely is loaded with most, if not all, the roles and expectations effectiveness of an ACA. 4 Although the success of to address corruption without giving due consideration the Hong Kong model (i.e., the establishment of the to parallel roles in the institutional landscape and Independent Commission against Corruption) can be complementary reforms in the wider environment. explained by the specific institutional circumstance, It has implications for the longer-term organizational it is frequently seen as an explicit and immediate capacity, capabilities, maturity, and credibility of the commitment to anti-corruption. It has also been ACA, its perceptions among citizens, and its impact on assumed that the fully-formed replica, as the distillation the ‘corruption’ problem. of good operational prac tice and appropriate organizational arrangements, can become active Rather than seeing the establishment of an “ideal and effective immediately, irrespective of both the ACA” as a panacea to address corruption, one necessity of the UNCAC standards for such agencies’ could explore other options. One solution is to use organizational development and maturity in practice, the country’s vision as articulated in the National Anti- Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 293 PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 11 ANTI-CORRUPTION AGENCIES Corruption Strategy (NACS) to determine whether an looks to support organizational maturation issues ACA is needed or whether an alternative response may until such point as the ACA is consistently able to do be found among the existing institutional arrangements. something achievable well within its existing resources Another solution, if an independent and new agency and capabilities. Further, and perhaps more importantly, is considered necessary, may lie in supporting its it is seen to do something well. This means working establishment and evolution over time. This in turn toward the ‘good enough’5 (or best possible) ACA and requires defining ‘success’ in organizational terms and beyond until it is robust, credible and fit for the purpose ensuring the necessary competences and approaches for which it was intended (so long as that purpose has that support the evolution of the organization within its been identified). The next pages offer three examples external environment to achieve the desired outcomes. of such alternative solutions and their effectiveness in Such a consideration may require an approach which addressing corruption at the country level. Model I: Building an anti-corruption response from the existing institutional landscape The United Kingdom (UK) was increasingly seen as other agencies is framed by strategies or plans a safe haven for illicit financial capital. The label (such as the police fraud strategy, the 2014 Anti- ‘Londongrad’6 exemplified the longstanding preference corruption Plan [now the UK anti-corruption strategy of politicians and other Politically Exposed Persons 2017-2022], the serious organized crime strategy, the (PEPs) for London as a safe investment and relatively cybercrime strategy, and so on). There are high-level relaxed regulatory regime for a high-end net worth boards and inter-agency arrangements to facilitate resident lifestyle. As the media often commented, intelligence, case-sharing or inter-agency work. law enforcement or other dissuasive actions had Within such a patchwork institutional landscape, been limited. The scale of the laundering of criminal all of whom have been the subject of year-on-year proceeds, as the UK’s National Crime Agency warned financial cuts and of competing policy agendas, the in its 2015 threat assessment, was ‘a strategic threat to cost associated with investigating bribery allegations the UK’s economy and reputation’. The government’s in foreign jurisdictions, and the cost of identifying, Anti-Corruption Plan (2014) aimed to more effectively tracking and recovering the proceeds of corruption, tackle ‘those who engage in corruption or launder their severely limited the response options. Certainly, a corrupt funds in the UK’ as well as return the proceeds new dedicated agency was never on the table but a of corruption (a core tenet of UNCAC in Article 3 but possible reconfiguration of existing expertise within imperfectly applied thereafter by most developed existing institutional arrangements was. countries).7 This commitment was reinforced by Prime Minister David Cameron at the ‘International Anti- The UK established the International Corruption corruption Summit’ in London in 2016. Unit through a reconfiguration of expertise within existing institutional arrangements. The The UK’s plethora of agencies with different and Department for International Development (DFID) competing mandates and administrative costs took the lead through a senior official who operated limited any coordinated response to investigating as the institutional ‘boundary-spanner’8 in negotiating international corruption and the proceeds of between agencies and adapting responses to changing international corruption. There are nearly 50 police circumstances. The official was authorized to commit, forces in the United Kingdom and a smaller number of ring-fence and oversee dedicated resources and agencies with a national remit, notably the National influence the selection of likeminded officials to lead Crime Agency (NCA), the Serious Fraud Office (SFO) the initiative operationally.9 This enabled the allocation and the Crown Prosecution Service (CPS). Much of of dedicated investigation and intelligence units within the effort to develop agencies’ relationships with existing law enforcement agencies, who were able to 294 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 11 ANTI-CORRUPTION AGENCIES draw upon their agencies’ in-country liaison officers UK) to facilitate information-sharing. Staff expertise and other technical support, with access to dedicated is enhanced by NCA financial investigator training, as CPS prosecutors. Practice demonstrated the need for well as bribery investigations training run by the City of greater flexibility as well as removing demarcation London Police. Specialist support is accessible through issues between the various units and agencies for more NCA intelligence collection techniques, which the NCA effective coordination and cooperation, as well as can deploy in pursuit of its crime reduction mandate intelligence-gathering and information-sharing. Thus, as well as the international liaison network of NCA further reconfiguration within existing law enforcement officers attached to embassies overseas. In terms of arrangements was achieved in terms of amalgamating organizational impact, the ICU currently has a caseload intelligence- and investigation-based work. The of 23 cases, and with current resourcing, they can outcome was the establishment of the International handle in the region of 23-25 cases. By 2018, the value Corruption Unit (ICU) within the NCA, which also of assets restrained in the UK and overseas exceeded houses the UK Financial Intelligence Unit. The NCA also £683 million, while the cumulative amount of assets managed the ICU’s administrative, human resources, confiscated exceeds £55 million. training, and other functions, with salaries, expenses and travel still largely funded by DFID. The key role played by the ‘boundary-spanner’ cannot be over-emphasized. The ICU’s achievement The ICU was given dedicated staff and budget, very much reflects the intentions of UNCAC Article 36 and its capacity was enhanced, including support and has relied on the flexibility of existing institutions from the NCA, which yielded positive results. The and the availability of the ‘boundary-spanner’—a senior ICU has had an annual budget of some £4 million official with a clear focus and a degree of executive and a staff of 45 persons, of whom 30 were frontline and financial authority as well as trust from relevant investigators. It also has seconded officials from the institutions to deliver the necessary institutional SFO and the Financial Conduct Authority (the regulator reconfigurations and maintain, to date, its organizational for financial services firms and financial markets in the development and consolidation. Model II: A ‘best possible’ agency A deep understanding of the institutional and located as a unit within the Ministry of Interior and was operating environment is crucial for the design of able to handpick experienced staff on enhanced terms. a dedicated agency. Lithuania’s post-Soviet transition The STT also drew on Ministry resources and technical to democracy was impacted, not surprisingly, by expertise internally, as well as US expertise and resources former Soviet-led institutions and bureaucracy. As part and then EU consultancy programs externally.10 While of accession to the European Union, the European the model may (to some11) seem like the three-function Commission insisted that Lithuania address corruption, Hong Kong model, the Lithuanians saw the model as which, given the legacy issues, meant that the solution ‘the FBI model which was the most viable, economically would be a political issue. The government recognized feasible, and efficient’.12 The FBI provided the STT with the necessity to secure external support to address early advice and support. The model in practice was very corruption with an aim to secure membership of much a law enforcement-defined agency that focused relevant western liberal democratic groupings, such as on embedding its functions and competences. It did the European Union and NATO, and later OECD. not over-extend itself within an evolving democratic context with pre-existing patterns of corruption and new Following its establishment, the new agency ones emerging. In this context and against widespread benefited from internal and external guidance and citizen perceptions of corruption, the STT reflected followed a shrewd path. After due deliberations by what might be termed as an evolution towards a ‘good commissions and with cross-party support, the Special enough’ agency that was able to maintain organizational Investigation Service (STT) was established. It was competence, resilience, and shape. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 295 PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 11 ANTI-CORRUPTION AGENCIES In the early years of democratization, Lithuania year). The recent years indicate a gradual reduction benefited from a number of international programs of staff turnover (to 3%), which ensures continuity to improve its law enforcement areas and help as well as retention of expertise and institutional it to assume the obligations of EU membership. memory. The primary focus was on strengthening the STT’s investigative, intelligence and analytic functions. 3. STT benefited from a continuous practitioner and From the establishment of STT within the Ministry of technical training program. Although the initial Interior in 1997 to its establishment as an independent focus on the criminal investigation of corruption agency by law in 2002, it reported to the President appeared to commit significant resources to minor and Parliament, which helped it to avoid isolation. This offenses, the accumulation of competence and also addressed all the organizational issues that a new, experience has been reflected in more recent years independent agency was perceived to have suffered in an increasingly higher level of offender, primarily from in other countries. The STT was able to access senior public sector and criminal justice officials. in-house technical services and practitioner training and guidance that reinforced its own perceptions of its 4. STT’s effectiveness resulted from the combination roles and requirements. STT’s successful progression of a strategic approach taken on the basis of from an agency under a ministry to an independent fit- informed intelligence and specific technical for-purpose agency can be attributed to a number of approaches. Both cover t and ‘open source’ factors: intelligence informed strategic thinking as well as investigations. This, coupled with technical 1. From the outset, the STT was seen as a quasi-law approaches and analysis, helped in corruption enforcement agency focusing on corruption (which case management and in mapping the corruption in turn is largely limited to bribery and abuse problem by type and function, thus providing a of office offenses). Its functions also included better understanding of the drivers and location of corruption prevention and corruption awareness, the risk (some of which informed its prevention and but these were seen as subordinate to its core awareness work). function. It had strong leadership committed to its core function, who had direct involvement in 5. STT established early in its development the need directing the early shape and ethos of the agency; for a 5-year strategy supplemented by an annual in 2006, about 83 percent of the STT budget was business plan and a performance management allocated for criminal prosecution and by 2014 regime. The budget was maintained, rising nearly two-thirds of staff continued to work in this moderately in recent years, allowing it to maintain area (just over 10% work in the areas of prevention and recruit staff. This in turn enabled it to function and awareness). effectively without significantly overloading the organization in terms of caseloads or cases that 2. STT had the right human resources. Its original stretched the capacity and competency of the employees, a number of whom moved later organization especially in the early years. into management roles within the agency, had experience of work in other law enforcement 6. STT succeeded in developing links with domestic institutions and were usually university graduates. and overseas organizations that were able to The pattern (and method) of recruitment (by type, provide valuable guidance to the newly established background and educational level) has largely been agency. It managed to negotiate the difficult maintained. Despite losing staff when the original formative years and sur vived counter vailing enhanced-salary scheme was ended and when influences and agendas as a consequence of both private sector posts had greater attraction, the STT its strong but politically-connected leadership and managed to maintain both its staff complement its equally strong esprit de corps among its staff. at around an average of 250, as well as the type This was facilitated by methods of recruitment of staff it wanted to appoint. This contributed to and internal promotions, as well as its focus on maintaining a continuing organizational culture. a law enforcement approach to its investigative It also has taken a robust approach to those functions. considered unsuitable for the organization (at times moving out up to 10% of staff in a particular 296 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 11 ANTI-CORRUPTION AGENCIES Model III: A specialized agency: The importance of assessing the institutional landscape and operating environment Moving towards a democratic society that has a detailed Operations Manual, began public opinion a strong traditional culture has both benefits as surveys in 2007 and rolled out a National Integrity well as unintended consequences for addressing Assessment model in 2009, developed together with corruption. This is demonstrated by Bhutan, a country the South Korean Anti-Corruption Agency. This later that began the process of democratization from an incorporated the corruption perception surveys. It environment where the society and state were largely also began to conduct system studies, based on based on personal connections and kinship. The investigations and complaints from both citizens and consequence, according to a 2007 external review, was the media. strong concentration of powers; weak or non-existent checks and balances; poor transparency; undefined Furthermore, despite the ver y challeng ing discretionary powers; unclear rules and procedures; environment, the ACC was set up without an and patronage. institutional and corruption risk assessment, which could have helped identify institutional gaps The Bhutan Anti-Corruption Commission (ACC) and weaknesses that the ACC could have begun to was established as part of the 2005 constitutional address in its work. This lack of strategic planning had arrangements, with the aim of rooting out consequences for the agency’s impact. Efforts of the corruption right from the beginning. It was very much ACC were not complemented by a wider set of reforms a pre-emptive move announced by the Royal Decrees that needed to focus on developing a public service to anticipate the consequences of social, economic, ethics culture, as well as on mitigating some of the and political change and curb ‘self-interest leading to effects of particularism in practice through more robust corrupt practices’. The corruption ‘problem’ appeared internal controls. This led to the uneven development to relate more to the risks posed by the emerging of the wider institutional landscape and operating democratization process than to what may be described environment, with the following consequences: as traditional cultural behavior. Little attention was given to the potential consequences of criminalizing 1. Many reforms did not address past cultural heritage such practices or to the effect of democratic notions issues. Such issues included the presence of of public accountability and merit-based decision- personal connections, kinship and hierarchy, which making on the existing currency of social and political fostered a clientelist sub-climate that favored relationships within the state. the political and business elites. This underlines the wider failure of educational and information The ACC as a single agency had an extensive processes, which should have derived from a portfolio of responsibilities and its staff and national anti-corruption strategy. Not all awareness activities were quickly ramped up. It was expected and educational responsibilities should be located to address criminal behavior and had powers to prevent within a single institution. Further it presents the and investigate corruption. The ACC began work in ACC with continuing challenges because it has to 2006, with 3 commissioners and 8 staff. Within 5 years focus on what it interprets as a corruption problem, it had 3 commissioners, 16 staff in investigations, 5 in but which is more rooted in the traditional cultural prevention, as well as 18 management and support norms and values. This is confirmed both by the staff. By 2018, there were over 50 staff in investigations recent ACC Integrity Assessment reviews and its (including technical staff), 14 in prevention and 45 latest (2018) Annual Report: management and support staff, making a total of around 120 staff. Within 5 years it drafted the first National Corruption in the form of favoritism and Anti-Corruption Strategy (2008–13) (NACS) as part of nepotism are prevalent in public service delivery. its duty under the Act to operationalize the government This corroborates with the significant number policy of ‘Zero Tolerance to Corruption’. It developed of complaints received by the ACC on abuse Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 297 PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 11 ANTI-CORRUPTION AGENCIES of functions,…Abuse of function is the highest 4. The civil service, as a whole, is uneven in its approach type of alleged corruption offenses constituting to the establishment of a basic ethical framework more than 50 percent and over the last five years built on public ethics, accountability and merit. the trend in the percentage has been increasing This is generally reflective of the slow progress on annually. Further, majority of the complaints that embedding the expectations of the NACS. The civil qualified for investigation pertained to abuse of service also appears reluctant to integrate into their function (48.6%)…the decentralization process work plans the increasing amount of information in the country is expected to aggravate the produced by the ACC on areas of vulnerability corruption vulnerabilities with more authority and risk. The roles of parliamentary oversight and resources for the LG functionaries.13 and accountability have not been developed as per the revised NACS. The efforts of ministries to 2. The ACC’s ‘ownership’ of the NACS did not include promote ethical environments are still a learning means to ensure parallel engagement by other process. There is also a lack of clarity as to the public organizations. The first NACS—and thus the exact relationship between the legislature and the one that sets the stage—was a broad statement of civil service, and where the general responsibility intent that did not require the ACC’s substantive for governance should lie. In terms of the strategy, engagement with all the relevant ministries and shifting primary responsibility for prevention to agencies. Of the 21 objectives, only 7 involved ministries has not yet been achieved. the ACC in conjunction with other institutions, while implementation was the responsibility of The first national anti-corruption strategy did not the Committee of Secretaries. Furthermore, there have the intended impact. As explained above, the were no measurable actions, activities or outputs, lack of an environmental and corruption risk assessment although this was rectified in the revised strategy. had consequences for the NACS’s impact. Several The ACC itself noted in 2009 that ‘fighting additional reasons were identified in a 2013 review:15 corruption is perceived as an ACC battle…without the concerted and conscious effort of all actors, the • Only a few depar tments and agencies have cadre’s lone battle against corruption will continue conducted strategic reviews of institutional to remain an action of sorts at best and a mockery capacity to prevent and combat corruption, or at worst’.14 implement plans to strengthen this capacity, despite the availability of practical tools to do so 3. The ACC’s efforts were not complemented by developed by the ACC and external partners; increases in the capacity of other institutions, as envisioned in the National Internal Control • Implementation of the NACS was perceived to Framework. The State Audit Institution (RAA) be the sole responsibility and accountability of in 2017 pointed to the continuing levels of the ACC; this is likely to be one of the key reasons inappropriate or inadmissible payments for why the NACS is little known and governance- contracts, services and expenses. It also noted that related reforms are not seen in connection with the these were primarily due to the lack of effective NACS. There is limited awareness that measures accountability mechanisms, weaknesses in internal to strengthen good governance, focusing on controls and the tolerance of unethical conduct. transparency and accountability, have a direct and Some 270 staff in the RAA were insufficient to audit highly important impact on reducing corruption some 930 agencies with nearly 1,300 accounts; only risks; and 50% could be reviewed annually. With less than 50 internal auditors in the internal audit service • Communication around implementation of the (IAS), internal control risks are not addressed. The NACS was inadequate. In addition, the absence National Internal Control Framework, which was of clarity about leadership and implementation set up in 2013, had envisaged that the IAS would roles in relation to the NACS resulted in a lack of not only fulfil its responsibilities to assess risks and systematic monitoring, oversight and evaluation of strengthen internal control mechanisms at various implementation. This can partly be attributed to levels of management, but would also supplement the aspirational and voluntary nature of the NACS. the mandates of the RAA and ACC. 298 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 11 ANTI-CORRUPTION AGENCIES Some external reviews have noted the ACC as a the heart of our relatively young democracy. It may well-organized agency, reflecting good practice create a pervasive culture of corruption that could approaches to management and delivery of its result in a governance which systematically favors functions. For example: “the ACC has made important the rich over the poor and the well-connected over contributions to citizens’ awareness and understanding the disconnected. Corruption may seep into the of the meaning and consequences of corruption. It has fabric of our government, making policy decisions to managed to acquire a strong reputation very quickly favor the privileged few rather than the public good and has built institutional capacity to carry out an thereby creating a legacy of patronage.17 extensive mandate and detailed functions. The ACC is a consolidated institution with a clear mandate, a clear This emphasizes how the ACC’s position in vision, well-established capacities and a strong esprit the institutional landscape should have been de corps.”16 determined at the time of its establishment. A more coherent and coordinated approach to the wider On the other hand, the consequences described anti-corruption environment and the responsibilities of above indicate the size of the challenges still the wider institutional landscape was never developed. facing the ACC. They not only identify the weaknesses As a result, the ACC does not fit entirely into this associated with the wider reform process but also an environment and the environment does not fully ACC chasing a continuing corruption problem rooted facilitate its purpose. This could and should have been in both the culture and the democratization process: anticipated at the time the ACC was established. The question should have been: what should come first – This is a serious cause for concern because money the NACS or the ACC? in politics will fundamentally erode and eat away at Comparing the three models and their possible impact Impact as organizations arrangements, it is a ‘fit-for-purpose’ agency with a managed portfolio of roles and functions, adequate The operational impact on the ground of the UK’s resourcing, and strong professional leadership. This ICU has been substantial, though this is not always was recognized by OECD’s review, which reported that recognized by the media. Its impact is primarily ‘all representatives at the on-site visit were unanimous reflected in the increase in the number of corruption in their praise for the STT’s professionalism and cases under investigation. The ICU has also diversified efficiency ’ as Lithuania sought (and achieved in 2018) to the countries to which its cases relate and built membership of the OECD. Lithuania has demonstrated strong relationships with overseas law enforcement its willingness to cooperate with other countries and to authorities. While the work of the NCA18 is often set up networks for its law enforcement practitioners.19 reported in the media, that of specialist units is only In terms of external domestic impact, therefore, public sporadically mentioned. This is often a consequence of perceptions may now consider it a ‘good enough’ the complexity of the institutional landscape and the agency. Many of the continuing corruption issues may tendency of the UK media not to spend too much time be more of a consequence of delays in embedding explaining specialist functions to a general readership. wider reforms. On the other hand, in terms of the types of corruption that face a consolidating democracy, the STT is seen as a credible agency addressing more agency may be considered as a ‘best possible’ agency significant corruption issues, such as its criminal and fit-for-purpose for the increasingly complex and justice corruption investigations, international significant corruption problems facing the country. corporate bribery, and the financing of political parties. In terms of the organizational and institutional The Bhutan ACC is seen as a well-organized Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 299 PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 11 ANTI-CORRUPTION AGENCIES agency, reflecting good practice approaches to engagement with citizens lies primarily with surveys management and delivery of its functions. The of perceptions and attitudes, and its awareness and ACC is highly visible in Bhutan and recognized as a prevention efforts are largely targeted at risk sectors, champion of good governance. Due to a significant promotional material, and (probably decreasing) joint amount of outreach, the ACC is gradually gaining trust work with voluntary and civil society bodies to promote within Bhutanese society, which was initially sceptical of education and values. an additional law enforcement type agency,20 and has been a notable force in promoting the anti-corruption This may reflect not only the agency’s prioritization message and in investigating and prosecuting corrupt of resources, but also weaknesses in partner officials.21 It has determined its roles and responsibilities organizations. In the case of STT, the Ministry of and established a strategy that integrates the Education failed to give full support to Lithuania’s anti- three areas of activity: education, prevention and corruption education programs, thus hampering their investigations. It has managed to improve the quality of effectiveness. Indeed, one of the issues of longer-term complaints through education, investigate substantive impact is how far a specific agency is responsible for complaints, and use the evidence from investigated cultural and social change, and how far that must lie cases to inform its review of system weaknesses through with governments, ministries, and so on, to find the its system studies. It is developing its preventative appropriate means to change social mores. responsibilities through the Integrity Assessments and system reviews. Organizationally, it has developed In Bhutan, the key issue concerned the balance an accessible and open management approach, with between democratization and traditional cultural detailed and documented procedures. It has also built values. The impetus for reform was predicated on awareness, through its change management program, an understanding that an absolutist monarchy was of the need to self-assess and review what it does and not sustainable and that Bhutan’s delicate relations how it does it, with enough time to allow organizational with neighboring countries would not be shored up consolidation and a level of organizational stability by not engaging with the international community. and focus. Its main issue, however, is its position in the While the commitment to democratization has institutional landscape and a continuing balancing act been genuine, it has also been partly tempered between how much it influences, or is influenced by, its with ‘defensive democratization’. This means a operating environment. move toward universalism adapted to maintain elite privilege, hierarchical management and many of the societal facilitators of traditional cultural norms and Impact on corruption values.22 Thus, development along the particularistic- universalism continuum would appear to be predicated The ICU has achieved a coherent set of responses on preserving the country’s cultural traditions. Not that reflect both UNCAC and the UK government all of these are amenable to (and may even seek to rhetoric, and is therefore well placed to implement influence) democratization and the development new initiatives to address the investigation of of public accountability and merit-based decision- international corruption and the proceeds of making in the public sector. This has consequences international corruption. The identified corruption for the demands on, and the effectiveness of the work problem led to a specific need that did not require a of, the ACC. As its own integrity assessment noted dedicated agency response. The response that was in 2016, there continued to be a need ‘to reinforce devised was carried out within existing institutional coordinated efforts towards improving service delivery, arrangements and, in terms of this particular corruption strengthening accountability mechanisms, ethical issue, is being addressed in a law enforcement context. leadership and corruption prevention measures in the agencies to improve the level of integrity’.23 The Lithuanian STT and Bhutan ACC have had less success in terms of their impact on the general presence, prevalence and perceptions of corruption. Indeed, the collateral damage from the existing and emerging corruption types and trends is that the STT is not necessarily seen as environmentally – as opposed to organizationally – effective. The STT’s approach to 300 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 11 ANTI-CORRUPTION AGENCIES Conclusion The alternative models discussed in this chapter so decided, designed to be focused and fit-for- highlight three issues relating to the need for, or purpose. This also entails determining the roles design of, an ACA. and responsibilities of other institutions, as well as the mechanisms and incentives to ensure the 1. The essential first step in any proposal for the connectedness of the institutional landscape and a establishment of an ACA is a risk or threat-based collective approach to addressing corruption from review of the existing institutional and operating a range of perspectives. environment. Such review ideally can help identify the corruption problem and provide an understanding of the political landscape and the space for reform. It helps to answer the following questions: (i) What is the corruption problem that such a body/bodies would address? (ii) Is the problem sufficiently defined to justify the need for a dedicated entity or agency? (iii) Does such a definition provide the basis for the design of a fit- for-purpose body and ensure that the standards noted above will suppor t its organizational development and maturity? 2. Practitioners and government officials must pay attention to wider issues, such as the agency’s organizational development and maturity, and its fit within the existing institutional landscape and operating environment. Simply supporting an ACA is not enough; it must be designed to address— and adapt to—its institutional and operating environment. The environment in turn should be encouraged to develop in ways that complement and facilitate not only the work of the ACA but also the roles and responsibilities of other institutions. A lesson from the experiences of the UK, Lithuania and Bhutan is the centrality of the ownership, implementation and monitoring of national anti- corruption strategies in determining the need for an ACC and, if there is, ensuring complementary reforms in the external environment. 3. The design of an ACA should involve an understanding of the corruption problem and a recognition of the importance of the inter-connectedness and inter- dependency of the institutional landscape. While the donor tendency has been to allow an over-focus on one agency, national anti-corruption strategies have generally under-achieved in improving the institutional landscape and operating environment. Understanding the corruption problem and clarifying modalities to address it ensures that the need for an ACA can be established, and if Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 301 PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 11 ANTI-CORRUPTION AGENCIES Notes 1. Recanatini, F. 2011. Anti-Corruption Authorities: An Effective 9. The same official led the extensive discussions between Tool to Curb Corruption? in International Handbook on DFID, the SFO and other agencies to agree a set of general the Economics of Corruption, Susan Rose-Akerman and principles (issued by the SFO and CPS in June 2017) intended Tina Soreide, eds., 2011; Doig, A., & Norris, D. (2012). to ensure that overseas victims – affected states, organizations Improving anti‐corruption agencies as organisations. and individuals – of bribery, corruption and economic crime, Journal of Financial Crime, 19(3), 255-273. https://doi. are able to benefit from asset recovery proceedings and org/10.1108/13590791211243101. compensation orders made in the UK. 2. For a review and discussion of country-level AC strategies, 10. A subjective observation was that most of the ‘consultants’ please see Norton Rose Fulbright. 2016. Countries Curbing from the US and the UK in the early years were serving law Corruption: An Examination of 41 National AC Strategies. enforcement and public sector officials whose level of practitioner expertise and technical competence offered 3. Such as the powers of the Thai NACC in relation to malfeasance a peer-to-peer experience that was compatible with STT in office – which may include intentional exercise of power expectations and aspirations, facilitating knowledge transfer. contrary to the provisions of the Constitutions or any law - or the multiple remits (such as bribery, fraud, money laundering, 11. In 2013 an UNCAC review team managed to misinterpret asset disclosure, ethical standards, inspec tions and the STT as ‘one of the most successful “copies” of the Hong whistleblowing) of the Ugandan Inspectorate of Government. Kong’s Independent Commission against Corruption model’. 4. Huther, J. and Shah, A. 2000. Anti-corruption Policies and 12. Kuris, G. (2012). Balancing Responsibilities: Evolution of Programs: A Framework for Evaluation. World Bank Policy Lithuania’s Anti-Corruption Agency, 1997-2007. Princeton Research Working Paper No. 2501. Washington: World University: Innovations for Successful Societies. p5. Bank; Shah, A. 2007. ‘Tailoring the Fight Against Corruption to Country Circumstances’. In Shah, A. (ed). Performance 13. Bhutan Anti-Corruption Commission. 2018. Annual Report Accountability and Combating Corruption. World Bank: 2018. Thimphu: Bhutan Anti-Corruption Commission: 81. Washington. 14. Quoted in: UNDP/UNODC. 2010. Bhutan: Capacity 5. Drawn from Bruno Bettelheim (1988). A Good Enough Assessment of the Anti-Corruption Commission. Bangkok: Parent. Vintage Books; 1st Vintage Books Ed edition). UNDP/UNODC: 22. Expanded in Doig, A., Watt, D. and Williams, R. 2007. ‘Why 15. Basel Institute on Governance. 2013. National Anti-Corruption Developing Countr y Anti-corruption Agencies Fail To Strategy (NACS) of Bhutan 2008-13: Evaluation Report. Basel: Develop: Understanding The Dilemmas Of Organisational Basel Institute on Governance. Development, Performance Expectation, And Donor And Government Cycles In African Anti-corruption Agencies’. 16. Transparency International. 2015. Anti-corruption Agency Public Administration and Development. 27. pp1-9; 2006 Strengthening Initiative: Assessment of the Bhutan Anti- ‘Hands-On or Hands-Off? Anti-Corruption Agencies in Action, corruption Commission. Transparency International: Berlin. Donor Expectations, and a Good Enough Reality’. Public 17. Bhutan Anti-Corruption Commission, 2018. Administration and Development. 26. pp163-172. These articles were in turn based on an empirical study: Doig, A., 18. For example, in relation to the use of Unexplained Wealth Watt, D. and Williams, R. 2004. ‘Measuring ‘success’ in five Orders or the establishment of the National Economic Crime African Anti-Corruption Commissions - the cases of Ghana, Centre. Malawi, Tanzania, Uganda & Zambia. U4 (www.u4.no). Here it is argued that, like good enough parenting, sponsoring 19. OECD. 2017. Phase 2 Report on Implementing the OECD Anti- bodies should not try to create the agency they would like Bribery Convention In Lithuania. Paris: OECD: 42, 43. to have at the outset, but should instead recognize that the 20. Swiss Agency for Development and Cooperation. 2016. best they can do is to help the agency toward a successful Bhutan: We Can Win the Fight Against Corruption. Asia Brief. future by providing the means and mentoring to give it the SDC: Bern. organizational confidence and competence to do so until – and when – it reaches organizational maturity. 21. Ber tels mann Stif tung. 2018. Transformation Index. Bertelsmann Stiftung: Brussels. 6. ‘Londongrad’ is shorthand for the concerns summarized in 2016 by Roberto Saviano, the Italian investigative journalist, 22. See, for example, G. E. Robinson. 1998. ‘Defensive who said: ‘If I asked you what is the most corrupt place on Democratisation in Jordan’. International Journal of Middle Earth you might tell me it’s Afghanistan, maybe Greece, East Studies. 30. Nigeria, the South of Italy, and I will tell you it’s the UK. It’s not the bureaucracy, it’s not the police, it’s not the politics but 23. Anti-Corruption Commission. 2016. National Integrity what is corrupt is the financial capital.’ Assessment 2016. Thimphu: Bhutan. 7. See World Bank /St AR. 2009. Stolen Asset Recovery. Management of Returned Assets: Policy Considerations. Washington: World Bank and Proceeds of Corruption: Frameworks for the Management of Returned Assets. Draft Concept Note. World Bank and UNODC/StAR. 2014. Left out of the Bargain. Settlements in Foreign Bribery Cases and Implications for Asset Recovery. Washington: StAR. 8. 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(2007). ‘Why Developing C o unt r y A nticor r uptio n Ag e ncies Fail To Develo p: Understanding The Dilemmas Of Organisational Development, Performance Expectation, And Donor And Government Cycles In African Anticorruption Agencies’. Public Administration and Development, p.1-9. G. E. Robinson. (1998). ‘Defensive Democratisation in Jordan’. International Journal of Middle East Studies, p. 30. Huther, J. and Shah, A. (2000). Anti-corruption Policies and Programs: A Framework for Evaluation. World Bank Policy Research Working Paper No. 2501. Washington: World Bank; Shah, A. 2007. ‘Tailoring the Fight Against Corruption to Country Circumstances’. In Shah, A. (ed). Performance Accountability and Combating Corruption. World Bank: Washington. Kuris, G. (2012). Balancing Responsibilities: Evolution of Lithuania’s Anti-Corruption Agency, 1997-2007. Princeton University: Innovations for Successful Societies, p.5. Norton Rose Fulbright. (2016). Countries Curbing Corruption: An Examination of 41 National AC Strategies. OECD. (2017). Phase 2 Report on Implementing the OECD Anti- Bribery Convention In Lithuania. Paris: OECD: 42, 43. Recanatini, F. (2011). Anti-Corruption Authorities: An Effective Tool to Curb Corruption?, in International Handbook on the Economics of Corruption, Susan Rose-Akerman and Tina Soreide, eds., 2011. Swiss Agency for Development and Cooperation. (2016). Bhutan: We Can Win the Fight Against Corruption. Asia Brief. SDC: Bern. Transparency International. (2015). Anti-corruption Agency Strengthening Initiative: Assessment of the Bhutan Anti- corruption Commission. Transparency International: Berlin. UNDP/UNODC. (2010). Bhutan: Capacity Assessment of the Anti- Corruption Commission. Bangkok: UNDP/UNODC: 22. UNODC/StAR. (2014). Left out of the Bargain. Settlements in Foreign Bribery Cases and. Implications for Asset Recovery. Washington: StAR. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 303 PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 12 Supreme Audit Institutions PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 12 SUPREME AUDIT INSTITUTIONS Introduction Why are SAIs so important? open up the audit process for active citizen engagement as a part of their anti-corruption mechanisms such as Supreme Audit Institutions (SAIs) are the chief hotline and fraud net. auditors of the government and play a pivotal role in ensuring transparency and accountability. The The central role of SAIs in combating corruption is independence and operating capacity of SAIs are that of prevention through the promotion of sound important foundations for providing fiscal oversight financial management and robust internal control through presenting credible and timely audit results to mechanisms in public entities. Sound financial legislatures, government, civil society, and the general management, with effective financial reporting and public. The primary purpose of an SAI is to report on disclosure of any deviations, is an effective deterrent the management of public funds and the quality and to fraudulent and corrupt activities. SAIs can help credibility of governments’ reported financial data. Its public bodies strengthen their corruption prevention recommendations can help strengthen institutions. framework (or build a more comprehensive framework) With adequate independence and capacity, SAIs can by assessing the efficiency and effectiveness of the contribute to combating corruption both through framework and recommending the relevant authority directly reporting on transactions and internal controls, to address the shortcomings identified during the and by assessing ways to improve the accountability audit. 2 SAIs contribute to building public awareness and performance of government agencies and anti- of corruption and financial impropriety through timely corruption bodies. They can also contribute through and periodic public disclosure of audit findings. SAIs undertaking “performance audits” of government may strengthen other pillars of the national integrity or quasi-government entities. The International system through close collaboration and coordination Organization of Supreme Audit Institutions (INTOSAI) with other institutions in the public sector. has issued ISSAIs, the international standards of SAIs for the delivery of effective audit reports. SAIs are not SAIs are expected to raise red flags that would primarily responsible for tackling corruption and fraud. deter and detect fraud and corruption and assist However, given the nature of the work performed law enforcement agencies to bring perpetrators to by SAIs, including checking government accounts, justice. Prevention, detection and response activities reviewing regulatory compliance, and assessing the are interdependent and mutually reinforcing to some performance of government institutions, SAIs are extent. Early detection is a powerful prevention capable of contributing to the anti-corruption agenda. method that sends a clear message to the potential perpetrators. Detection is also useful to assess the SAIs play a unique role in detecting and preventing appropriateness of preventive measures. SAIs may corruption, when they have the mandate, tools and use detected fraud or corruption cases for publicity, trust of the government to take on the fight against to attract the attention of parliament, citizens and corruption.1 SAIs’ audit mandate generally is broad media, and put additional pressure on government to enough to cover the entire public sector and flexible fix the problems effectively. Surprise audits that may enough to examine government activities at any level. be conducted for detection, act as a good deterrent. This could range from individual financial transactions, Some SAIs have institutionalized the detection function specific business practices, such as procurement, to by setting up a designated unit and developing forensic a comprehensive corruption prevention system of an and investigative audit guidelines and manuals. In entity or whole-of-government. SAIs at the minimum order to vitalize the forensic audit function, SAIs may have financial, compliance, and performance audits also require a firm statutory position, strong leadership, in their tool list, which enables them to evaluate the an integrity-first organizational culture, audit staff with legality, integrity, efficiency, and effectiveness of relevant capacity, access to data and information, and government operations. Last but not least, SAIs are one collaboration with key stakeholders. of the most trustworthy institutions, which helps them Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 305 PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 12 SUPREME AUDIT INSTITUTIONS How can SAIs strengthen their effectiveness? Detecting fraud and corruption requires proper In an environment where corruption is widespread, guidance and training for auditors. 3 Detecting establishing the integrity of SAIs can be a corruption is neither easy nor straightforward, since challenge. 5 As SAIs move closer to the frontline of it is fundamentally a crime of deception and deceit. fighting corruption, the temptations and risks to the Fraudsters use all sorts of deception techniques auditors will grow, as will stakeholders’ expectations to conceal illegal acts. Auditors may also interfere on the SAI’s integrity. Top management of the SAI inadvertently with potential future legal proceedings or must lead by example in maintaining high integrity and investigations. Training on forensic or fraud audits helps establishing zero tolerance regarding staff violations, auditors to be better prepared to detect irregularities failing which they will not be able to administer or and collaborate with the law enforcement agencies. propagate an organizational culture of integrity. Another The more auditors know about what perpetrators are potential challenge that SAIs face is the modality likely to do, the better are their chances of finding to reconcile the individual case-based approach of the red flags associated with potential fraud and detection (i.e., forensic audits) and the system-based corruption. With good understanding on fraud and approach of prevention (i.e., traditional audits).6 corruption schemes and professional skepticism, auditors can distinguish anomalies or potential red Different external audit systems, Westminster7, flags from regularity. Judicial or Board model, have their strengths and weaknesses that may have implications for their To be more effective, SAIs need to strengthen their effectiveness in combating corruption. These three relationship with parliaments and anti-corruption models can be distinguished, at least theoretically, in agencies. Strong external relations and partnerships is terms of centralization or decentralization of authority, one of the key indicators to evaluate the effectiveness susceptibility to political influence, openness and of an SAI. In fragile situations where state building or transparency, and ability to enforce audit findings.8 The rebuilding is in progress, SAIs are confronted with many distinguishing aspects—leadership, independence, difficult challenges in building such partnerships.4 In accountability, and effectiveness—are all recognized the context of weak parliamentary oversight and lack as the fundamental principles of public auditing. Rapid of a proper feedback mechanism of audit results into convergence among the different types of SAI models has the budget-setting process, parliamentarians do not taken place since the introduction of ‘The International take the audit findings or budget settlement process Standards of Supreme Audit Institutions’ (ISSAIs). seriously. In such an environment, it is important to raise awareness on the role of SAIs and the value of While the effectiveness of an SAI largely depends audit findings through briefings for new and relevant on its operational and financial independence, it is members of parliament. This can be enhanced by also influenced by the external audit model they ensuring that audit reports are user friendly and follow, the country context, and the associated easily understood. SAIs can help build the capacity norms of behavior. The two case studies discussed of members of parliament and their staff through, for below demonstrate the effectiveness of the SAIs in two example, joint study visits and exposure to advanced different contexts. The case study of SAI Ghana is an countries where SAIs and parliaments work together interesting example of an overlapping or hybrid model effectively. Similarly, when the rule of law is weak, of a Westminster type SAI equipped with sanction suspected fraud or corruption cases transmitted by powers. Other Westminster type SAIs have established the SAI are not pursued by law enforcement agencies. forensic audit functions, though the Westminster SAIs could establish formal collaboration agreements model is known to focus more on the supporting role with law enforcement agencies, where the scope of of SAIs, targeting prevention of corruption rather than collaboration extends to information sharing, joint detection or sanction. The second case study on India, conferences and workshops to share knowledge and also a Westminster model, demonstrates the key role experiences, referred case follow-up, staff exchanges played by the Comptroller and Auditor General (CAG) and joint agenda setting. in unearthing major inappropriate financial transactions costing the government huge sums of money. 306 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 12 SUPREME AUDIT INSTITUTIONS Case study 1: Role played by Ghana’s Supreme Audit Institution Corruption perception has been a long-standing the Economic and Organized Crime Office (EOCO), concern in Ghana. For instance, the Governance and and the Financial Intelligence Centre (FIC). However, Corruption Survey conducted by the Ghana Centre for many of these bodies struggle with issues that limit Democracy and Development (CDD Ghana) in 2000 their ability to effectively perform their duties, such as found that 75% of the Ghanaian households surveyed a severe lack of resources.9 For example, the CHRAJ, regarded corruption as a serious national problem; 59% despite being the leading anti-corruption institution of households saw corruption as a major problem in the in Ghana, does not have the power to prosecute, nor private sector; and 86% saw it as a major problem in the required budget autonomy. Both the CHRAJ and the public sector. A later survey in 2005 conducted by EOCO have been reported to face interference from the the Ghana Integrity Initiative (GII) also indicated that executive, due to the structure of their boards and the Ghanaians perceived corruption as equally serious, with appointment of directors and commissioners. Similarly, 92.5% of urban households in Southern Ghana citing in his various writings and a public lecture given at the corruption as prevalent in the country while 90% of University of New York in January 2019, Mr Whittal, a those surveyed considered it a serious problem. Commissioner at CHRAJ, has consistently proposed the need to remove the appointment procedures from Whilst some efforts have been made to address the executive: “the time has come to amend the laws on corruption, independent assessors find that the the appointment of the heads of state anti-corruption country has made little progress, as measured by institutions—EOCO,CHRAJ and including the Financial global rankings in recent years. Amidst a growing Intelligence Centre (FIC)—to wean them off excess perception of corruption amongst public officials, control by the executive.” As a result, perceived public the public has become increasingly cynical about the confidence in the mandated constitutional bodies government’s commitment and ability to effectively against anti-corruption has been fast eroding. tackle corruption. In 2015, Ghana ranked 56th in the world on Transparency International’s Corruption The National Anti-Corruption Action Plan (NACAP) Perception Index (TI-CPI) but slipped quickly over the reflected an awareness by the government of the years to 80 th place in 2019. Ghana’s position in the main drivers of corruption. In 2014, the Government World Governance Indicator’s Control of Corruption launched the 10-year NACAP, which acknowledged measure has improved from 53 rd place in 2015 to and listed the various drivers of corruption in Ghana, 49 th place in 2017, before regressing to 53rd place in including institutional weaknesses, low salaries, 2018. Corruption is perceived to exist in all branches a skewed incentive struc ture, and insuf ficient of the Ghanaian Government and has been a highly enforcement of laws within the patrimonial social and politicized issue since the country’s transition to a multi- political context. In addition, the document described party democracy in 1992. In 2017, the new government the reasons for the failure of past efforts to curb the undertook several measures, introducing electronic drivers of corruption and specified new measures to services and digitization to reduce the human interface tackle the issues in a more holistic and coordinated in the delivery of several public services, including the manner. The accompanying foreword to the Ghana issuance of electronic passports. National Anti-Corruption Action Plan (NACAP) (2012- 2021) acknowledges that the absence of the Ghana Ghana has several institutions to fight corruption, Audit Service (GAS) in developing the plan was a but they are fragmented and face persistent missed opportunity that the country could have implementation challenges. Besides the traditional pursued to better understand some of the core drivers law enforcement agencies such as the Ghana Police of corruption in the country. Service (GPS), the Bureau of National Investigations (BNI) and the courts, the other institutions established Similar to other SAIs globally, GAS has a mandate to curb corruption in Ghana are the Commission on to promote and uphold financial integrity, but Human Rights and Administrative Justice (CHRAJ), its impact had been limited.  The GAS derives its Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 307 PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 12 SUPREME AUDIT INSTITUTIONS mandate from Ghana’s Constitution. Articles 184, 187 all previous Audit Reports to reveal instances where and 286 of the 1992 Constitution established a broad the powers of disallowance and surcharge may mandate covering the activities for the Auditor General be applied to recover lost public funds. Between (AG), including to (i) audit the public accounts of Ghana June 2017 and November 2018, the GAS issued and any other public office, (ii) take into custody the 112 surcharge certificates and returned a total asset declarations of persons who hold public offices, amount of GHS67.3 million (USD12.2 million) back (iii) determine and approve the form or manner in which to government coffers. This achievement inspired public accounts are kept, (iv) submit audit reports, other African SAIs to pass similar legislation on draw attention to irregularities, and make appropriate disallowances and surcharges. In 2019, the GAS recommendations on the Ghanaian public accounts stopped publishing special reports on disallowance and the Central Bank’s statement of foreign exchange and surcharge activity, and instead incorporated it receipts and payments, and lastly (v) the AG may in their usual audit reports to Parliament as a step disallow any item of expenditure contrary to the law and towards establishing it as a fixed and regular part impose a surcharge on the person responsible. While of the audit process. this entailed powerful and far-reaching authority for the AG, it was a common view that implementation of these • Audit of persistent arrears powers was weak, and that audit reports produced by Ghana’s persistent fiscal slippages were mainly the GAS were reduced to mere “journalistic reports of driven by weaknesses in the public financial events”10 with little real impact. management (PFM) commitment control systems. In 2017, the AG worked closely with the World Bank Since the appointment of a new AG in December and the IMF to undertake an audit of government 2016, GAS’s core financial oversight role has gained payment arrears that had accumulated over the renewed prominence, which has in turn enhanced period 2013–2016. The audit was to: (1) verify the its contribution to anti-corruption efforts. Several types and amounts of arrears accumulated; (2) key undertakings have contributed to GAS’s impact on identify the root causes for the arrears; (3) limit the financial integrity: future accumulation of arrears; and (4) develop a coherent strategy for managing and clearing the • Judicious use of disallowance and existing stock of arrears. As part of the audit, all surcharge powers MDAs were required to submit their outstanding In 2017, the Supreme Court ruled that the AG be liabilities to GAS for validation, which was tediously required to exercise its powers of disallowance undertaken by examining and cross-checking the and surcharge to commence the recovery of supporting warrants, contract documents, invoices, public funds that have been found to be illegally procurement records, and other documentation. spent or lost through negligence or misconduct.11 Bank statements of the respective MDAs were These powers enable the AG to disallow any also checked to ensure that the liabilities were not unlawful expenditure and impose a surcharge already settled. In prior years, such arrears were on the person(s) responsible. Anyone aggrieved commonly settled and paid for without verification. by a disallowance or a surcharge can appeal to the High Court as provided for by Article 187(9) The outcome of the audit revealed several corrupt of the Constitution within 14 working days of the practices and led to the recovery of substantial surcharge. To facilitate the process, particular sums of money, strengthening of commitment courts were identified and assigned by the Chief controls and prosecution of offenders. The total Justice to hear these appeals. outstanding commitments submitted by the MDAs for verification of arrears amounted to GHS11.3 The refusal of previous AGs to exercise the billion (USD2 billion), 51% of which were rejected disallowance and surcharge powers had resulted in by GAS as invalid arrears due to fraudulent a loss of almost GHS2.5 billion worth of public funds reasons, such as double or triple payments to through ministries, departments, and agencies contractors for the same services rendered. The (MDAs) alone from 2003 to 2014, and GHS5 billion audit also revealed weak control mechanisms and through public boards, corporations, and other poor record-keeping practices by the MDAs that statutory institutions between 2009 and 2014. The facilitated corrupt activity. Internal auditors at new AG established a special task force to review the MDAs reported abuse and silencing through 308 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 12 SUPREME AUDIT INSTITUTIONS threats, transfers, or invitations to participate in selected state institutions in 2018. One such corrupt schemes. The findings of the report were example was an investigation of the Ghana subsequently shared with Parliament and civil Broadcasting Corporation (GBC), where it was service organizations (CSOs). Any payment of revealed that the corporation had under-stated invalid arrears thereafter would lead to a surcharge revenue realized for the 2014 World Cup by against the person who authorized, made, or GHS3.5 million (USD626,273). The management received the payment. was advised to update the financial statements accordingly to account for the disparity, a failure • Audit of ghost workers in the public to do so would result in the officers responsible sector bearing a surcharge of the amount in question. In the past two decades, Ghana’s macro-economic instability has persistently been driven by two main The leadership of the AG himself has also been drivers: the level of debt and the size of the wage bill. an important contributor to GAS’s impact, as he With the support of the World Bank-financed Public championed initiatives beyond the usual activity of Financial Management Reform project, the AG GAS. The AG’s firm and untiring anti-corruption stance partnered with the Special Prosecutor, the Ghana has led GAS to undertake interests that spill over into Police, CSOs, other anti-corruption bodies and what a robust anti-corruption agency might pursue in heads of MDAs to undertake a government-wide other countries: verification of genuine government employees. The aim of this was to eliminate ghost workers • Being a voice of reason in safeguarding who artificially inflated the payroll and allowed the public purse corrupt officials to steal the surplus. Employees in As a result of his public crusade and determined all the institutions were asked to produce authentic actions against corrupt officials, the AG has emerged individual employment documents, following which as a strong figure in Ghana’s anti-corruption war. In the list of genuine government employees was various speeches, and through joint platforms with matched against the payroll list kept by the Controller CSOs, he has been instrumental in sensitizing the and Accountant General. In January 2020, GAS public on the dangers of corruption and urging reported that the audit found 10,689 ghost workers the media and the public to expose corrupt public on the public sector payroll. A final invitation was officials, prompt investigations, reinforce the works issued to these employees to verify themselves, and of anti-corruption bodies and put pressure on the a failure to do so within the stipulated timeframe government to change laws and legislation that would result in their being disallowed from remaining create enabling platforms for corruption in the on the payroll, and a surcharge on the salaries paid country. He has also consistently advocated for to these ghost workers would be imposed on the effective collaboration between GAS, the public, heads of the MDAs involved. the private sector, and CSOs in fighting corruption. The public has been responsive to his call, and over • Certification of Public Financial time they have become instrumental in providing Management Systems important pieces of information that have assisted in In Ghana, the AG is responsible for certifying the GAS’s audits and investigations. In 2019, the AG was PFM systems that are used by the government. voted Integrity Personality of the year at the Ghana Once a system is developed and its objectives are Integrity Awards, owing to his strong stance against articulated, it is subject to review by GAS to ensure corruption. that the internal control arrangements in place are strong and that the system will not allow the • Partnering with CSOs enabling of corruptive breaches. One of the key The AG has often partnered with CSOs to name aspects that is reviewed by the AG is the extent to and shame corrupt officials and institutions based which there is an appropriate segregation of duties on the findings of his annual and special audits, to prevent collusive practices, which have been and lobby for changes in laws and legislation that known to underpin corruption in Ghana. facilitate corruption. This has generated deterrent mechanisms that were not present before he took • Undertaking of special audits office. The AG embarked on several special audits on Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 309 PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 12 SUPREME AUDIT INSTITUTIONS • Using the Right to Information Law in Ghana are subject to the supervision of the In May 2019, Ghana’s President signed the Right Ministry of Finance, GAS maintains its operational to Information (RTI) Act into law, implementing control, with minimal external interference in the public’s constitutional right to information held decision making or the appointment or removal by any public institution and fostering a culture of of staff. In addition, the Parliament is accustomed transparency and accountability in government. to providing GAS with the financial resources it Even though the RTI is provided for in the 1992 requires yearly, as stipulated in the annual budget Constitution, the country struggled for years to pass GAS submits. the relevant law. The AG partnered with CSOs to lobby for the passing of the law and has been vocal 2. Personal conviction and knowledge of the AG: in supporting the use of it for CSOs, the public and Besides a strong mandate, the AG’s personal media in providing GAS with crucial and relevant convictions and deep-rooted knowledge of the information to investigate and prosecute corrupt legal and constitutional authority of the office have officials. enabled GAS to be effective in the fight against corruption. • Pushing for transparent asset disclosure 3. Provision of quality reports that are accessible to The AG has been critical of the weak enforcement the public: Audit reports are made publicly available and flaws of the asset disclosure system in Ghana. to increase the transparency and accountability of As per the current laws, asset declarations by public institutions. public officials are sealed in an envelope and marked secret, only to be opened in the event of a 4. A direct reporting relationship to Parliament: corruption investigation or if ordered by the court. GAS reports directly to Parliament, although it The AG has deemed this to be ineffective and has a Board whose role is merely advisory on key urged public officials to declare their assets publicly. policy matters. The Audit Service Board according Working with the Special Prosecutor, he has also to article 189 is responsible for employing staff demanded that the provisions of Article 286 of the (except AG) for the audit service and determining Constitution and Public Office Holders (Declaration their conditions of service. The Public Accounts of Assets and Disqualification) Act 1998 (Act 550) Committee has at certain times exerted pressure be observed. This requires all qualifying public on audited bodies to comply with GAS’s officers to submit written declarations of all assets recommendations. owned within three months after taking office and at the end of four years. Unlike in previous years, the 5. An effective arrangement with the Internal Audit AG has partnered with CSOs to name and shame Agency: GAS works very closely with the Internal officials that have not yet met this requirement. Audit Agency using ISSAI 9150 and has established One such example was the refusal to confirm the a memorandum of understanding to ensure there appointment of the new Chief Justice in 2019 until is an appropriate exchange of information on she had shown evidence of having declared her corruptive practices. assets over the previous four years. 6. Continued capacity building: For example, GAS has undergone the World Bank Integrity Vice Factors behind GAS’s impact Presidency’s preventive and forensic training on matters of evidence and follow-through on SAIs are not always able to play an effective role in corruption leads. promoting financial integrity. In Ghana, its impact has been aided by several factors: GAS’s achievements in recent years owe partly to the strong leadership and conviction of the 1. Financial and administrative autonomy: GAS’s current AG, posing a risk for the sustainability financial and administrative independence has of GAS’s momentum and impact on the anti- been instrumental in allowing it to maintain corruption war in the future. A change in AG may impartiality, counter corruption effectively, and jeopardize the current traction that the GAS has in fulfil its mandate. While most public bodies curbing corrupt practices and bringing offenders to 310 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 12 SUPREME AUDIT INSTITUTIONS justice. Nonetheless, the progress achieved and public for future AGs and GAS to continue the fight against support garnered in recent years are likely to create the corruption. necessary pressure, as well as enabling environment, Case study 2: The role of the Supreme Audit Institution in India In India, the Office of the Comptroller & Auditor of the audit in strengthening accountability, General (CAG) is the SAI responsible for ensuring transparency and governance across the public accountability and oversight of government sector. Some of these performance audits caught the functionaries and programs. The CAG is mandated public and media’s attention because they exposed by the Constitution to audit the accounts of the Union misallocations of public assets at undervalued prices. Government and of all the State Governments of The public discourse and investigations triggered India, including institutions substantially financed by by these findings resulted in policy reforms and the the Government of India. The CAG is also mandated removal of several government officials that were to prescribe the accounting format and standards that involved in the alleged corruption. While critical audit public institutions must adhere to. Employing more than findings have not always led to prosecution of the 45,000 employees across 141 field offices,12 the CAG accused individuals, they have contributed to a higher mainly undertakes three types of audits: (i) Financial risk of detection for those contemplating corrupt acts. audits that ascertain if financial statements are properly The investigations undertaken by the CAG gained prepared and present financial information fairly; (ii) traction with the public and made a significant impact Compliance audits that examine if the applicable in the fight against corruption in India as a result. laws, rules or regulations are complied with; and (iii) Performance audits that are independent assessments of the extent to which a public institution operates Performance audits by CAG economically, efficiently and effectively, and fulfills the objectives that it set for itself. All of the CAG’s audit Telecom licenses. In 2008, the CAG undertook a reports are laid before the Parliament and Legislatures performance audit of the issuance of telecom licenses of the States.13 and award of spectrum. The performance audit report revealed gaps in policy implementation, and an Over the years, the CAG has strengthened its estimated loss of public funds based on deviation from audit capacities and shifted its emphasis to risk- prescribed rules. CAG’s report tabled in the Parliament based performance audits. The CAG’s staff has exposed corruption amounting to several billion dollars undergone continuous training to better conduct and to the public exchequer, something that attracted the report audits, as well as conform to national auditing attention of the media and civil society. In 2012, the standards and international best practices. This Supreme Court of India ruled that the 2G spectrum capacity building was partly supported by the World allocation in 2008 was “unconstitutional and arbitrary” Bank. In 2007, the CAG’s office also shifted its focus and cancelled 122 licenses and spectrum allocated to to conduct more performance audits that promote eight companies. economical, effective and efficient governance. As practiced in more advanced SAIs globally, the CAG also Coal blocks. In 2012-13, the CAG published a started undertaking more risk-based audits, detecting performance audit report that revealed the inefficient and prioritizing high-risk and high-value areas where allocation of coal blocks to private and public sector efforts can be concentrated to draw maximum impact. enterprises between 2004 and 2009. The report14 highlighted the delay in the introduction of competitive Beginning in 2008, the CAG undertook several bidding for the allocation of coal blocks for captive high-profile performance audits that generated mining, despite making the decision to operationalize public awareness and helped transform the role competitive bidding since 2006. In the final report Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 311 PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 12 SUPREME AUDIT INSTITUTIONS submitted to Parliament, the CAG reported “an absence of a single point of authority and accountability estimated USD26 billion in financial gains made and the lack of a clear governance structure, a multiplicity by private coal block allottees, part of which could of co-ordination committees were created, disbanded, have accrued to the exchequer if the competitive and reconstituted at different points of time. This bidding process had been implemented.”15 The CAG approach was not methodical, consistent and effective, report notes ‘’this allocation lacks transparency and and also led to complete diffusion of accountability. objectivity.”16 The CAG’s findings led to investigations The argument of urgency was used to obviate the surrounding the issues of nepotism and collusion in the regular process of tendering for award of contracts. We allocation of national resources. The issue, popularly found numerous instances of single tendering, award referred to as “Coalgate” by the media, eventually led on “nomination basis”, award of contracts to ineligible to investigations by the Central Bureau of Investigation vendors, inconsistent use of restrictive Pre-Qualification against the public officials involved as well as the (PQ) conditions to limit competition to favour particular firms allotted the coal blocks. The CAG report also vendors, inadequate time for bidding, cancellation, and resulted in the formation of an Inter-Ministerial Group re-tendering of contracts, and inexplicable delays in to deliberate the forfeiture of coal blocks that were contract finalization, all of which seriously compromised not developed on time. The Inter-Ministerial Group transparency and economy.”22 eventually recommended the deallocation of 13 blocks and the forfeiture of bank guarantees for 14 allottees.17 All of the above examples of performance audits The Parliamentary Standing Committee also reported raised the profile and relevance of the CAG and the allocation of all coal blocks between 1993 and created awareness amongst the public on the role of 2008 as unlawful, and the Supreme court eventually the SAI as a primary catalyst for improved governance, cancelled a total of 214 coal blocks that were awarded accountability and public service delivery in India. improperly during this time.18 Dismissing a public The audits by the CAG thus became an important interest litigation that challenged the CAG’s power to instrument to expose alleged corruption, nepotism, conduct performance audits, the Supreme Court of and abuse of power in the public sector. India further ruled that “the CAG’s work to investigate into austerity, efficiency, and effectiveness by which In addition to the disclosure of audit findings, the government has used its resources is embedded several other factors have aided the CAG’s in the 1971 Act. Performance Audit Reports prepared effectiveness in fighting corruption in the past under the Regulations should be viewed accordingly. decade. Since 2008 it has undertaken a number of The Court did not see any unconstitutionality in the actions that have improved the scope and usefulness regulations.”19 of its outputs, enhanced its credibility and renewed public confidence in the CAG to expose and combat Commonwealth Games. The CAG also undertook two corruption. These were: performance audits20 pertaining to the Commonwealth Games XIX (CWG), held in New Delhi, India in October • Continuous institutional capacity building. The 2010. In 2003, the right to host the CWG-2010 was CAG has worked continuously to strengthen its awarded to Delhi on the guarantee of the Government audit capabilities, thereby improving the visibility of India, in conjunction with the Government of and credibility of its audit reports. In addition to the National Capital Territory of Delhi, to bear the staff training, the CAG modernized and upgraded expenditures of hosting the games. The Indian audit software and infrastructure for both the CAG’s government laid out substantive plans to upgrade office and its state branches. In 2008, the CAG froze infrastructural facilities within the city in preparation for new recruitments in the clerical cadre and focused the games. The objective of the CAG’s performance hiring at the assistant audit officer level, ensuring audits post-completion of the games in 2011 was to that recruits had the required qualifications such assess the (i) adequacy and effectiveness of budgeting as a commerce or accounting background, to and financial management, and (ii) effectiveness and undertake more complex risk-based audits. As a efficiency of agencies in planning and executing the result of these efforts, the CAG’s reports came to be infrastructure projects for the event.21 The performance perceived as credible and reliable source materials audit found incidences of improper planning, for use not only by the public and media, but also procurement, and contract management that drove up by legislative committees, courts, investigative the cost of the games. The CAG report states: “In the agencies and international organizations. On the 312 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 12 SUPREME AUDIT INSTITUTIONS international front, the CAG became a member the conference, the CAG’s office sought feedback United Nations Board of Auditors in 2014, serves from the public on the water pollution problems in the Committee of the International Organization they faced through various means, including an of Supreme Audit Institutions (INTOSAI), and also advertisement in the newspapers. The office assists in the capacity building of SAIs in other received more than 700 letters and e-mails, which countries in the region.23 it used to frame the objectives and questionnaires for the audit. The CAG also started teaming up with • Production of more user-friendly, timely and social action groups, tapping into their knowledge impactful audit reports. Prior to this, the CAG’s and expertise on issues of public concern. audit reports left little impact on Parliament, the media or the general public, as each report typically The CAG serves as an example of how SAIs can took 2 to 3 years to publish and was usually long become more effective and successful in exposing and difficult to read. However, the CAG worked to and preventing corruption, by prioritizing high- produce shorter and punchier 10- to 20-page audit impact audits, continually strengthening capacity reports, and significantly shortened the time taken and improving citizen engagement. The efficacy to publish a report to 8 to 9 months. The previous of the CAG’s office in stirring public interest and in time lag made it difficult to hold public attention, initiating corrective measures through its audits was thus lessening the impact of the audits undertaken. enhanced following a range of reforms made within The quicker publication not only mitigated this, but the office since 2008. Strong leadership of the CAG also ensured accountability as concerned public had also facilitated these reforms and pushed through officials still held their posts within the shorter time the release of impartial, but often uncomfortable audit frame, and faults in government programs could findings to the public and media. A combination of be quickly resolved. these factors has enabled the CAG’s office to properly conduct independent and critical evaluations of the • Maintained independence and integrity. CAG’s performance of high-value government projects, as independent position as a constitutional authority well as provide critical insights for further investigations continues to provide grounds for the criminal by other law enforcement and anti-corruption agencies, investigations and court cases from its reports. The and for the implementation of corrective and preventive CAG’s office can disseminate reports to the media measures to avoid reoccurrence of any wrongdoing regularly and is a powerful force for accountability or inefficiency. Like many public sector institutions, and transparency in India. the CAG’s office also needs to continuously invest in improving its capacity, both human resources and • Strong leadership and determination of the CAG. systems. Through these ongoing improvements, this Besides having an adequate legal mandate, CAG’s office continues to command the respect of the public leadership has enabled the office of the CAG to and is a huge deterrence against corruption and rent be very effective in the fight against corruption seeking behaviors. It has a number of international and rejuvenated the public image of the office affiliations and memberships, and the CAG of India and its work. All three of the audits described has been elected as Chair of the UN Panel of external above, alongside several other audits that gained auditors for the year 2020. prominence, were undertaken underpinned by strong leadership. • Increased engagement with the public. The CAG’s office increased its outreach to the public and other stakeholders to seek inputs and determine the scope of audits. For example, prior to conducting a social audit on water pollution, a two-day conference involving civil society experts, government agencies, and international and regulatory bodies, was organized by the CAG in March 2010 to exchange knowledge and share concerns regarding the issue. Following the Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 313 PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 12 SUPREME AUDIT INSTITUTIONS Notes 1. The Congress of the International Organization of Supreme 15. Para 4.3 of the above report and Executive Summary of the Audit Institutions (INTOSAI), held in 1998 in Montevideo, Report Page V, (equivalent of Rs 1.86 lakh crores or USD 26 Uruguay, discussed and delivered concrete recommendations billion as per the report). for SAIs to make an effective contribution to the fight against corruption. See also U4. 2018. “The Role of Supreme Audit 16. CAG, 2013. Institutions in Fighting Corruption” for a more detailed 17. Press Trust of India. 2012. Govt decides to deallocate two overview. more coal blocks. https://www.news18.com/news/india/govt- 2. ISSAI 5700 “Guideline for the Audit of Corruption Prevention”. decides-to-deallocate- two-more-coal-blocks-524663.html. https://www.issai.org/pronouncements/guid-5270-guideline- 18. Rajagopal, Krishnadas. 2014. Supreme Cour t quashes for-the-audit-of- corruption-prevention/. allocation of 214 coal blocks. The Hindu. https://www.thehindu. 3. According to the survey conducted in 2010 by INTOSAI com/news/national/supreme-court-quashes-allocation-of-all- Working Group on Fight Against Corruption and Money but-four-of-218-coal-blocks/article6441855.ece; and Ministry Laundering (WGFACML), only one-third of SAIs (18 out of of Law and Justice. 2014. The Coal Mines (Special Provisions) 54) responded positively on the questions of availability of Second Ordinance, 2014. No.7 of 2014. https://coal.nic.in/ audit staff and training program specialized in audits related sites/upload_files/coal/files/curentnotices/291214_2_0.pdf. to corruption or money laundering. See http://wgfacml.asa. 19. CAG. (n.d.) Important Judgements. https://cag.gov.in/hi/ gov.eg/. content/important-judgements#chapter1. 4. INTOSAI. CBC Workstream in support of Auditing in Complex 20. Two audits were conducted, facts are represented from both and Challenging Contexts (ACCC). https://www.intosaicbc. reports, one was tabled in August 2011 and one in 2012. org/accc/. 21. CAG. 2011b. Report No. 6 of 2011 – Performance Audit of 5. INTOSAI provides IntoSAINT, a tool to assess the vulnerabilities XIXth Commonwealth Games. https://cag.gov.in/content/ and the maturity of the integrity controls of SAIs and to report-no-6-2011- %E2%80%93-performance-audit-xixth- strengthen integrity in SAIs. See https://www.intosaicbc.org/ commonwealth-games. intosaint/ 22. CAG, 2011. 6. INTOSAI Working Group on Values and Benefits of SAI (WGVBS) plans to develop a guide on potential risks and 23. CAG, 2016. challenges by incorporating the investigative powers among their functions. See http://www.wgvbs.org.mx/wp-content/ uploads/2018/10/01-SAIs-investigative-powers-14mar19.pdf. 7. A model where the work of the SAI is intrinsically linked to the system of parliamentary accountability. 8. DFID. 2004. Characteristics of Different External Audit Systems. Briefing. http://gsdrc.org/docs/open/pf31.pdf. 9. Poor funding, coupled with inordinate delays in releasing budgeted funds, has often delayed investigations and implementation of planned programs, in addition to increasing the cost of operations (CHRAJ -SEVENTEENTH ANNUAL REPORT 2010) 10. News Ghana. (2017, Jan 20). Auditor General Agrees with Occupy Ghana On Disallowance and Surcharge Powers. Retrieved from https://www.newsghana.com.gh/auditor- general-agrees-with-occupy-ghana-on-dis-allowance-and- surcharge-powers/ 11. The decision materialized as a result of an action filed against the government by Occupy Ghana on claims that the powers have never been exercised by the AG. The court ruled that the AG must act on its annual reports, take steps to retrieve any public funds found to have been misappropriated and ensure enforcement of the orders including criminal prosecution where necessary. 12. CAG. 2016. CAG Performance Report 2014 -2015. https://cag. gov.in/sites/default/files/performance_activity_report/CAG_ Performance_Report_2014-15.pdf. 13. See https://cag.gov.in/hi/content/audit-report. 14. CAG. 2013. Report No.7 of 2012-13, August 2012- Performance Audit of Allocation of Coal Blocks and Augmentation of Coal Production, Ministry of Coal. Retrieved from https://cag.gov. in/content/report-no-7-2012-13-%E2%80%93-performance- audit-allocation-coal-blocks-and- augmentation-coal. 314 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 12 SUPREME AUDIT INSTITUTIONS References Afrobarometer. (2018). Ghana summary of results (2017). Audit. https://ghaudit.org/web/2020/01/28/public-notice- https://afrobarometer.org/sites/default /files/publications/ nation-wide-payroll-and-personnel-verification-audit-nppva-2/ Sommaire%20des%20r%C3%A9sultats/gha_r7_sor_10042019. pdf. Ghana Legal Information Institute. (2017). OCCUPY GHANA VRS ATTORNEY-GENERAL. https://ghalii.org/gh/judgment/ Arthur-Mensah. (2019, Jan 3). Disallowance and Surcharge to Supreme%20Cour t/2017/10/OCCUPY%20GHANA %20%20 Become Part into Audit Process. https://www.ghananewsagency. %20%20VRS%20THE%20ATTORNEY%20GENERAL.pdf. org/economics/disallowance-and-surcharge-to-become-part- into-audit-process-143681. GII. (2005). Voice of the people Survey – an Urban corruption perception survey in Southern Ghana. CAG. (2010). Report No.19 of 2010. Performance Audit Report on the Issue of Licenses and Allocation of 2G Spectrum by INTOSAI. CBC Workstream in support of Auditing in Complex the Department of Telecommunications. https://cag.gov.in/ and Challenging Contexts (ACCC). https://www.intosaicbc.org/ content/report-no-19-2010-performance-audit-issue-licences- accc/. and-allocation-2g-spectrum-union. ISSAI 5700 “Guideline for the Audit of Corruption Prevention”. CAG. (2011a). Report No. 4 of 2011 - Performance and Compliance https://www.issai.org/pronouncements/guid-5270-guideline- Audit on Commonwealth Games Government of Delhi. for-the-audit-of-corruption-prevention/. https://cag.gov.in/sites/default/files/audit_report_files/Delhi_ Jagota. (2013). Goodbye Vinod Rai, The CAG’s Attack Dog. https:// CWG_2011_exe-sum.pdf. blogs.wsj.com/indiarealtime/2013/05/22/goodbye-vinod-rai- CAG. (2011b). Report No. 6 of 2011 – Performance Audit of XIXth the-cags-attack-dog/. Commonwealth Games. https://cag.gov.in/content/report-no- Ministry of Law and Justice. (2014). The Coal Mines (Special 6-2011-%E2%80%93-performance-audit-xixth-commonwealth- Provisions) Second Ordinance, 2014. No.7 of 2014. https://coal. games. nic.in/sites/upload_files/coal/files/curentnotices/291214_2_0. CAG. (2013). Report No.7 of 2012-13, August 2012- Performance pdf. Audit of Allocation of Coal Blocks and Augmentation of Coal Mitra. (2011). How the CAG has undergone sea change under Production, Ministry of Coal. https://cag.gov.in/content/report- Vinod Rai. Retrieved from https://economictimes.indiatimes. no-7-2012-13-%E2%80%93-performance-audit-allocation-coal- com/how-the-cag-has-undergone-sea-change-under-vinod- blocks-and-augmentation-coal. rai/articleshow/8273335.cms. CAG. (2016). CAG Performance Report 2014 -2015. https://cag. News Ghana. (2017, Jan 20). Auditor General Agrees with Occupy gov.in/sites/default/files/performance_activity_report/CAG_ Ghana On Disallowance and Surcharge Powers. https://www. Performance_Report_2014-15.pdf. newsghana.com.gh/auditor-general-agrees-with-occupy- CAG. (n.d.) Important Judgements. https://cag.gov.in/hi/content/ ghana-on-dis-allowance-and-surcharge-powers/. important-judgements#chapter1. News Line Ghana. (2018, Feb 6). Auditor General blows MDAs’ CDD-Ghana. (2000). The Ghana governance and corruption Cover; Calls for Power to Prosecute. https://newslinegh. survey evidence from households, enterprises and public com/2018/02/06/auditor-general-blows-mdas-cover-calls-for- officials (English). Washington, D.C. : World Bank Group. http:// power-to-prosecute/. documents.worldbank.org/curated/en/749401468253174124/ Nyabor, Jonas. (2018, Oct 5). ‘Secret assets declaration by public The-Ghana-governance-and-corruption-sur vey-evidence- officials serves no purpose’ – Domelevo. https://citinewsroom. from-households-enterprises-and-public-officials. com/2018/10/secret-assets-declaration-by-public-officials- Centre for Budget and Governance Accountability. (2014). serves-no-purpose-domelevo/. Reporting in Public Interest: Value and Impact of CAG’s Audits. Press Trust of India. (2012). Govt decides to deallocate two ht tp://w w w.cbgaindia.org/wp - content /uploads/2016/03/ more coal blocks. https://www.news18.com/news/india/govt- Repor ting-in-Public-Interest-Value-and-Impac t-of- CAGs- decides-to-deallocate-two-more-coal-blocks-524663.html. Audits.pdf. PRS Legislative Research. (2012). CAG Per formance Audit Damani. (2016). The History of Telecom Spectrum in India: The Summary – Allocation of Coal Blocks and Augmentation of 2100MHz and 2300MHz Auctions. https://gadgets.ndtv.com/ Coal Production. https://www.prsindia.org/administrator/ telecom/features/the-history-of-telecom-spectrum-in-india- uploads/general/1345207063_CAG%20Coal%20Block%20 the-2100mhz-and-2300mhz-auctions-828448. Allocation%20report%20summary.pdf. DFID. (2004). Characteristics of Different External Audit Systems. Rahman, Kaunain. (2018, Sep 11). U4 Helpdesk Answer 2018:21: Briefing. http://gsdrc.org/docs/open/pf31.pdf. Overview of corruption and anticorruption in Ghana. https:// Ghana Audit Service. (2019, Jan 6). OccupyGhana Salutes Auditor- w w w.u4.no/publications/over view-of-corruption-and-anti- General on Disallowances And Surcharges And Urges The corruption-in-ghana-2018-update.pdf. Prosecution Of Persons Found Culpable. https://ghaudit.org/ Rajagopal, Krishnadas. (2014). Supreme Court quashes allocation web/2019/01/06/occupyghana-salutes-auditor-general-on- of 214 coal blocks. The Hindu. https://www.thehindu.com/news/ disallowances-and-surcharges-and-urges-the-prosecution-of- national/supreme-court-quashes-allocation-of-all-but-four-of- persons-found-culpable/ 218-coal-blocks/article6441855.ece. Ghana Audit Service. (2019). Report of the Auditor-General on Republic of Ghana. (2011, Dec 20). National Anti-Corruption Special Audits Carried Out on Selected State Institutions in the Action Plan (2015-2024). http://sia.arapghana.eu/web/uploads/ Year 2018. https://www.graphic.com.gh/images/pdfs/report- documents/NACAP_2015-2024.pdf. of-the-auditor-general-on-special-audits-carried-out-on- selected-state-institutions-in-the-year-2018.pdf Shaban. (2019, May 22). Ghana President Assents to Right to Information Bill. https://www.africanews.com/2019/05/22/ Ghana Audit Service. (2020, Jan 28). Notice of Intention to Disallow ghana-president-assents-to-right-to-information and Surcharge – Nation-wide Payroll and Personnel Verification Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 315 PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 13 Justice System PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 13 JUSTICE SYSTEM Introduction Defining the justice system The justice system is more than a loosely connected set of independent institutions. These The justice system plays a key role in fighting institutions constitute a network of interdependent the various forms of corruption across all sectors. actors. The performance of each of them is affected The justice system is understood to comprise “the by the performance of the others. Courts are at the institutions that are central to resolving conflicts arising core of dispute resolution and are supported in this over alleged violations or different interpretations of function by a range of other justice sector institutions, the rules that societies create to govern members’ including the prosecution service, public defenders, behavior; and that, as a consequence, are central to bar associations, state and civil society legal aid strengthening the normative framework (laws and rules) providers, police, alternative dispute resolution that shapes public and private actions.”1 This normative mechanisms, adminis tr ative adjudic ation and framework includes the rules about preventing and enforcement mechanisms, customary and community- sanctioning corrupt practices. based institutions, anti-corruption and human rights commissions, ombuds offices, judicial academies, and Beyond these rules, the justice system has the more. key task of upholding the rule of law more broadly, including by providing checks and balances on abuse of power by the executive and legislative branches Preventing and sanctioning corrupt of government. As the World Development Report practices 2017 summarizes it, the rule of law at its core is “the impersonal and systematic application of known rules The justice system plays both a preventive and a to government actors and citizens alike” and requires repressive role in the fight against corruption. On that both “be bound by and act consistently with the the repressive side, it empowers citizens, businesses, law.”2 This task is particularly relevant in contexts of and other stakeholders to actively fight corrupt practices elite capture and grand corruption, because they result by denunciating perpetrators and bringing facts and in the normative framework itself being skewed. Justice evidence to the attention of relevant justice institutions. institutions then become the last resort to ensure the While the starting point may vary and lawsuits in civil supremacy of fundamental principles of rule of law, or administrative courts may proceed, the criminal fairness, and equality. justice chain is generally the one that is ultimately set Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 317 PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 13 JUSTICE SYSTEM in motion to sanction perpetrators. On the preventive held accountable for that, which in turn strengthens side, justice institutions also play a key role in enforcing the effective implementation of this anti-corruption the rules put in place to prevent corruption. Thus, framework. Moreover, the effective functioning of when government officials, for example, do not comply the criminal justice chain sends a strong signal of with transparency requirements, even ahead of yet to deterrence, including by increasing the likelihood of materialize subsequent corrupt behavior, they can be being caught in case of wrongdoing. The roles of the different institutions Justice institutions play different roles in fighting the performance of institutions that participate in their corruption, but each institution’s performance proceedings or contribute to earlier stages of the process counts. While it is important for the overall justice prior to indictment. The effectiveness and quality of the system to perform effectively so anti-corruption efforts investigations led by the prosecution service and/or the can succeed, each institution plays a particular role. police in terms of the comprehensiveness, timeliness, Below is an overview of the role of the key institutions. and quality of evidence, and compliance with legal requirements are ultimately reflected in the quality of the case presented to the court. While the courts The courts have the ultimate decision power, they do not operate in isolation. They depend on a range of other justice For most observers of anti-corruption efforts, one of the sector institutions to carry out their mandate. most visible moments is when someone is convicted of a crime by a criminal court, with or without a jury trial depending on the country. These can be specialized The prosecution service anti-corruption courts, specialized anti-corruption chambers, or just the general criminal courts. The prosecution service is a key part of the criminal justice chain that, on behalf of society and in the public The role of other courts for anti-corruption efforts is interest, ensures the application of the law where the less visible, but nonetheless important. Lawsuits in breach of the law carries a criminal sanction. 5 This civil courts can provide an effective complement to includes legislation criminalizing corrupt practices. In more commonly used criminal approaches as a way criminal justice systems, public prosecutors normally (i) to recover stolen assets.3 Insolvency proceedings can decide whether to initiate or continue prosecutions; (ii) be used to recover corruption proceeds.4 Depending conduct prosecutions before the courts; and (iii) may on the jurisdiction, civil or administrative courts can appeal or conduct appeals concerning all or some court hear cases filed by journalists who are denied access decisions.6 Thus, without a well-performing prosecution to information in violation of freedom of information service, the effectiveness of the fight against corruption legislation. More broadly, administrative courts offer a would be seriously undermined, because corruption venue for citizens and civil society to challenge abusive cases may not be successfully brought to the court or or simply illegal (in)actions by public authorities and their the court would not be able to adequately sanction officials. Proving corruption in a public procurement perpetrators, due to the low quality of the indictments. case may be more challenging than proving the illegal nature of an administrative (in)action. While this does Moreover, in many criminal justice systems, public not normally result in a criminal sanction of the public prosecutors also (i) implement the national crime policy; official or the corruptor, the ultimate (in)action sought (ii) conduct, direct or supervise investigations; (iii) by the corruptor can be annulled or declared void this decide on alternatives to prosecution; and (iv) supervise way. the execution of court decisions.7 They carry out their mandate while taking into account both the rights of The effectiveness of courts in fighting corruption is not the individual and the necessary effectiveness of the just a function of their own performance, but also of criminal justice system in the fight against corruption. 318 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 13 JUSTICE SYSTEM BOX 13.1 Romania’s National Anti-Corruption Directorate (DNA) For a long time, Romania’s DNA was a success story in the fight against corruption. The EU has praised the DNA for being effective and proactive and credited it with significant achievements in cracking down on corruption. The DNA increased the number of indictments by 50% between 2012 and 2017. 8 An evolving political environment and subsequent justice sector reforms negatively affected this positive record. 9 The Group of States against Corruption (GRECO), the Council of Europe’s anti- corruption body, has voiced deep concerns in a 2018 report criticizing the justice system reforms adopted by the Romanian parliament, undermining the effectiveness of the fight against corruption.10 For example, public prosecutors have to scrutinize the individual’s fundamental rights and freedoms; and (iv) lawfulness of police investigations at the latest when provide assistance and service functions to the public.12 deciding whether a prosecution should commence or Whatever the exact relationship between the police and continue. the prosecution service in a given jurisdiction,13 weak performance of the police will result in the prosecution These considerations apply to prosecution services in service not being able to proceed with indictments general, but also to anti-corruption agencies that some for corruption. Illegal police actions, in particular, are countries have chosen to equip with such prosecution likely to jeopardize the chances of indictments being functions.11 Whether general prosecution services or successful or of indictments being brought to court by specialized agencies with prosecutorial functions, units the prosecution service. with specialized and multi-disciplinary expertise within these institutions are often created to ensure adequate prosecutorial expertise in highly technical areas, for Other justice institutions example in financial matters. The performance of the courts, the prosecution service, The effectiveness of the prosecution service in fighting and the police as the primary institutions of the criminal corruption depends on the effectiveness of the whole justice chain in the fight against corruption is more justice system. Where the political environment is or less directly affected by the performance of other adversely affecting the justice system, the public justice sector institutions as well. Without going into prosecution service will be impacted. This is illustrated detail, they include bar associations (often tasked with by Romania’s National Anti-Corruption Directorate taking disciplinary measures to sanction lawyers who act (Box 13.1) as vehicles for corruption),14 judicial and prosecutorial councils (often tasked with managing the performance of judges and prosecutors or with disciplining them The police for corrupt behavior), the Ministry of Justice (often tasked with setting national policies and managing The police is a also a critically important justice judicial infrastructure, including facilities and ICT for institution in the fight against corruption, intervening courts), judicial inspections, forensic institutions, and mainly in the preparatory phase of the criminal justice judicial training institutions, which play an important chain. Under the rule of law, the main purposes of role in providing training relevant for the fight against the police in this context are to (i) detect crime; (ii) corruption. prevent and combat crime; (iii) protect and respect the Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 319 PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 13 JUSTICE SYSTEM What specifically causes weak performance of justice sector institutions in the fight against corruption? Capacity constraints and under-resourcing in regimes, the capacity in the criminal justice chain terms of financial and human resources as well and the level and quality of resources (e.g. financial as infrastructure, particularly in low-income resources, human resources, ICT, and infrastructure) countries, pose severe constraints to the effective tend to be relatively higher because, based on the elite operation of justice sector institutions. At the bargain in place, criminal justice institutions are needed same time, the World Development Report 2017 on to maintain the status quo. But the incentives will then Governance and the Law has identified weakness in not result in this capacity to be prioritized for the fight institutional performance not primarily as a function against corruption. of weak capacity, but as a result of the elite bargain in place.15 Institutions are often meant to be weak for a These issues result in often observed performance reason. Were well-functioning justice institutions and weaknesses in justice institutions, whose strong the fight against corruption a priority within the existing performance is needed in the fight against elite bargain, the institutions would be resourced, corruption. These weaknesses include delays at all equipped, and managed as a matter of priority, albeit stages of the process, from police to prosecution to the within the country’s overall limitations in terms of GDP courts. The low level of effectiveness of the police in and capacity. While a complete and nuanced list of investigating corrupt practices results in very few cases, what specifically causes weak performance of justice if any, reaching the prosecution service. The same institutions in different country settings is beyond ineffectiveness there and in the courts often means the ambition of this analysis, the following provides a that nobody, other than maybe political opponents, summary of some key aspects. is ever convicted for corruption. The population knows the situation and therefore has no reason to First, the governance of justice sector institutions initiate cases with the objective of holding anybody relevant to the fight against corruption is often accountable for wrongdoing. They understand that deficient. Courts and the prosecution service are applicable legal frameworks are deliberately kept weak not sufficiently independent and free from undue and that even when they are improved, for example interference based on capture, cronyism, corruption, upon donor insistence, their application is likely to and political relevance. In authoritarian environments, remain unpredictable, biased, and selective, without these institutions as well as the police protect the generating results, unless there is a change in political interests of those in power and are actively utilized to will. It is not uncommon for countries to instill fear in crack down on opposition, including at times under order to keep people in place by threatening them with the pretext of fighting corruption. Beyond the actual jailtime or fines for challenging state institutions and influence on specific decisions, capture, cronyism their officials.16 and corruption also impact appointments to relevant positions and promotions within the justice institutions Aspects of the weak performance of justice themselves, resulting in a playing field skewed against institutions not only limit the effectiveness of anybody who would challenge the status quo. To the fight against corruption elsewhere, they also the extent that these institutions are not needed to create a market for corruption within justice support the elites in place, they are not managed for sector institutions themselves. This is especially true performance and service delivery is weak as a result. for cases that are of no particular political relevance. Systemic delays, arbitrary application of the law, and Second, justice sector institutions in many lack of performance accountability offer opportunities developing countries are chronically under- for petty corruption to speed things up, slow things resourced, though that is not necessarily true for down, or influence the outcome of cases, depending all parts of the system. Higher echelons of the system on the needs of the corruptor, thus further weakening are generally better resourced, because those working the credibility and effectiveness of the police, the at that level are part of the ruling elites. In authoritarian prosecution service and the courts. 320 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 13 JUSTICE SYSTEM How can justice sector institutions improve their performance in fighting corruption? Implementation of laws to fight corruption must potential for improvements through purely technical be backed by political commitment. Based on the approaches is marginal at best, leading to a gap findings of the World Development Report 2017 on between the beautiful laws on the books and the weak Governance and the Law, the performance weaknesses implementation on the ground. Such a system is like a are primarily the result of the elite bargain in place. A “Potemkin village” with institutions potentially designed paradigm shift to improve the effectiveness of justice based on international best practice, but merely as institutions in fighting corruption in truly systemic a façade that conceals what is really happening, as terms therefore primarily requires strong commitment explained in Box 13.2 below. at the political level. Without such a commitment, the BOX 13.2 Specialized Anti-Corruption Courts: Political Commitment or Implementation Gaps Despite the benefits of specialized anti-corruption courts, technical solutions to address corruption will fail unless there is political commitment because of an implementation gap. A 2016 survey has identified roughly 20 countries that have implemented specialized anti- corruption courts worldwide.17 Additional courts have been created since, notably in 2019, in Albania, Ukraine, and Madagascar.18 From a technical point of view, there are arguments in favor of and against specialized anti-corruption courts. Advantages are that the institution is created from scratch and can more easily receive preferential treatment in terms of resourcing (financial resources, human resources, ICT, and infrastructure) so they are adequately equipped for the fight against corruption. Doing this for the entire court system or focusing such resources on the parts of the broader system that are particularly relevant for the fight against corruption is more challenging. At the same time, it takes time for new institutions to be established and perform, increases institutional complexity and overheads, and can lead to disagreements about jurisdiction. Politically, the establishment of specialized anti-corruption courts can send a strong signal of government commitment. While some of these specialized anti-corruption courts were successful and had strong local ownership, international donors have played a pivotal role in the creation of many of these institutions, for example as conditions to the provision of budget support. At times, this results in a lack of ownership translating into a significant implementation gap, with these externally imposed institutions often looking impressive on paper but falling short of achieving their declared objectives due to a lack of political commitment.19 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 321 PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 13 JUSTICE SYSTEM If the commitment at the political level exists, it The overarching goal is for the entire justice requires an adequate communication strategy as system to work properly, and in today’s world, this well as sound technical solutions to translate it into requires international cooperation. Domestically, the tangible improvements. Putting in place an adequate justice system is based on the mandates of the police, normative framework to fight corrupt practices is often prosecution service and the courts within the given a starting point, but it is at the level of implementation jurisdiction. But in an increasingly interconnected world, through justice institutions where the rubber really hits mutual legal assistance and other forms of international the road to translate the political commitment into cooperation between jurisdictions are crucial to results on the ground. In the case of the Philippines, effectively fight against cross-border corruption, as Box such results have not materialized and in the case of 13.4 explains. Indonesia these results, while initially promising, are disappointing (Box 13.3). BOX 13.3 Specialized Anti-Corruption Courts in the Philippines and Indonesia The Philippines’ Sandiganbayan is the oldest specialized anti-corruption court in the world. It has operated since 1979 without interruption and witnessed several amendments since its creation. Sandiganbayan is at the level of a Court of Appeals, but functions as a court of first instance. It has original jurisdiction over anti-corruption cases provided they are (1) brought against a senior public official; and (2) involve a sufficiently large amount of money. Its decisions may be appealed to the Supreme Court. The Office of the Ombudsman has exclusive authority to bring cases to the Sandiganbayan. In addition to the political signal to the population, the main declared rationale in creating Sandiganbayan was to expedite anti- corruption cases. They have struggled to meet that objective. Sandiganbayan experienced, over the years, substantial inefficiencies and delays in deciding anti-corruption cases, in part due to limitations at the Office of the Ombudsman. 20 In 2002, Indonesia’s specialized anti-corruption court , known as the Tipikor, was established at the same time as the Corruption Eradication Commission, known as the KPK. Due to a Constitutional Court ruling in 2006, criticizing the legal dualism established by these specialized institutions, the entire anti-corruption judicial system underwent a major legal reform in 2009. Initially, there was one Tipikor court in Jakarta. Only the KPK had competence to bring cases before this court, while the public prosecution brought cases only before the general courts. The Tipikor had a conviction rate of 100% in 250 cases, while only 51% of cases prosecuted by the public prosecution resulted in a conviction. The 2009 reform decentralized the system by creating 34 Tipikor courts, one in each Indonesian province. Both the KPK and the public prosecution can bring cases. Prior to the 2009 reform, the integrity of the specialized judges before the Tipikor was not questioned. They were perceived as rather overzealous in achieving a 100% conviction rate. With the decentralization and the convictions of several specialized judges for corruption, the belief that these judges are clean and trustworthy outsiders to the system has been undermined. 21 The recent KPK law risks reducing the institution’s effectiveness at attracting high-quality employees and its independence in gathering information. This could partly reverse the remarkable progress in controlling high-level corruption since the institution’s establishment. 322 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 13 JUSTICE SYSTEM BOX 13.4 International Cooperation and Mutual Legal Assistance (MLA) The legal basis required for states to provide MLA can come either from domestic law, rogatory letters, or multilateral and bilateral agreements. 22 For instance, China adopted the Internal Criminal Judicial Assistance (ICJA) into law in 2018. 23 The ICJA provides for both rules on domestic anti-corruption enforcement and rules for China’s cooperation with foreign authorities in connection with criminal investigations and prosecutions. The ICJA is intended to fill the gap for countries where China does not have MLA treaties and clarifies the terms, roles and responsibilities of relevant government agencies in the process of providing or requesting judicial assistance. Cross-border plea deal settlements reached in cases like Airbus and Odebrecht show that this cooperation is key. Airbus: In 2020, Airbus struck a deal with the UK, France and the United States by signing a corporate plea deal to settle several probes into allegations of bid-rigging and bribery in exchange for aircraft contracts. 24 Courts in all jurisdictions with open investigations have approved the Airbus settlement that totaled EUR 3.6 billion. The signed settlement was published and acts as a powerful deterrent to multinational companies not to engage in future corruption, both to avoid high financial fines and significant reputational damage. Odebrecht: When Operation Car Wash, 25 a codename for the biggest corruption scandal in Brazil, became public in 2014, it shone a light on the misconduct of this Brazilian conglomerate active in the fields of engineering, construction, chemicals and petrochemicals in Latin America. It also challenged the independence of judges and revealed bribes paid to elite high officials. The Odebrecht case led to multiple settlements amounting in total to USD2.6 billion and to prison sentences issued against its senior officials. Moreover, this case unraveled a network of bribes spreading all through Latin America, involving, notably, a Colombian Senator, the Vice President of Ecuador, the President of Venezuela, and four former Presidents of Peru. 26 More than USD10 million in bribes were paid in Mexico. Former Brazilian President Luiz Inacio Lula da Silva was convicted of bribery charges and served a prison sentence. Operation Car Wash had numerous repercussions around the continent and the way jurisdictions cooperated. Intensive MLA played a crucial part in untangling these corruption cases in Latin America. Transparency International counted 484 MLA requests mostly related to the Odebrecht case, between 2014 and June 2018, made by Brazil (250 requests) and 55 other countries (234 requests). 27 An adequate communication strategy needs to communicating the political will and actively engage support the anti-corruption effort, externally with all those who in the end will implement the with the population and internally with justice technical solutions. Lack of communication can leave stakeholders. Externally, it is absolutely key to internal resistance unaddressed and result in delays continuously inform the population about measures with implementation or in derailed technical solutions. taken and the impact they have. This builds trust in Thus, to the extent possible stakeholders need to be the leadership of the anti-corruption effort and in on board, for which effective communication with them the judicial system. Internally, continuous dialogue and among them in support of the reform effort is a key with and among stakeholders is required to continue requirement. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 323 PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 13 JUSTICE SYSTEM Addressing the challenges at three levels Justice institutions need to address performance Reforms at this highest level to increase performance and internal corruption challenges in order to in the fight against corruption should also target the strengthen their fight against corruption. At the process of selection, evaluation, and promotion level of implementation, justice institutions need to of judges, prosecutors and court staff. Indeed, maintain a dual focus on (1) improving their performance the selection process needs to be as merit-based in the fight against corruption, and (2) fighting and apolitical as possible, for example through corruption within the justice institutions themselves. involvement of a broader range of stakeholders other Tackling these challenges effectively is vital as weak than politicians, including justice professionals, civil institutional performance undermines the effectiveness society and academia with high technical credentials. of the justice system as a whole. The challenges should Other reforms seek to create islands of excellence in be addressed at three levels: system-wide, at the parallel to an existing institutional landscape, whose criminal justice chain level, and at the institutional level. performance may take too long to improve in the eyes of reformers. Often driven by the need to show quick results, they focus on establishing specialized 1. System-wide national level anti-corruption agencies, prosecution services, courts or a combination thereof, instead of trying Domestically, the first level is the system-wide to fix the existing institutions in the criminal justice national level, i.e. the government, including senior chain in charge of the fight against corruption. All of leadership of the judicial branch. At this level, these reforms are likely to require constitutional and/ questions regarding the governance of the justice or legislative changes. system need to be addressed; for example: How best can judicial and prosecutorial independence Questions of adequate resourcing and equipment be ensured so that decisions are made without also need to be addressed at this level. The question undue interference, while encouraging judges and of resources includes the overall level of resourcing, prosecutors to be accountable to the public for but also the allocation and availability of the required their performance, including for non-compliance resources in all relevant parts of the system. with integrity requirements? The sequencing here is important. If there has been a regime change with justice system officials compromised through Criminal justice chain level 2. involvement in abuse of power, cronyism and corruption, a vetting may be warranted as a first The institutions of this chain need to be effectively step. The second step is to increase independence, interconnected and bottlenecks in inter-institutional but only hand in hand with greater accountability communication addressed effectively through a to the public for performance. Many countries have joint committee or roundtable at the institutional made the mistake of increasing independence as a leadership level. This provides a forum where inter- first step. It meant that the second step of creating institutional challenges can be raised and addressed accountability mechanisms was much more difficult right away and where progress can be monitored or even impossible to implement. Putting in place towards achievement of joint performance targets a performance measurement and management to be agreed upon between all of them, targets that system to ensure performance accountability to the can be adjusted over time. Other relevant justice public may then encounter resistance that becomes institutions should be involved as needed. insurmountable, not least because judges at the Supreme Court or Constitutional Court themselves tend to have the last word in case of disagreement Institutional level 3. between branches of Government. It is therefore important to have the right pool of personnel and Each institution itself needs to diagnose two then balance independence and accountability. things: (1) its performance bottlenecks, and (2) Providing independence unconditionally as a first the corruption challenges it faces internally. The step is not the way to go. performance weaknesses of any one institution 324 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 13 JUSTICE SYSTEM BOX 13.5 Court User and Multi-Stakeholder Justice Surveys Court user surveys generate data about the experience of court users, which is one of the best proxies to measure the quality of services. If designed correctly, they can capture all kinds of service delivery bottlenecks, including the vulnerabilities for corruption. In places where it is known that there are challenges, such surveys tend to be resisted by those supplying justice services, i. e. judges, prosecutors and administrative staff. Multi-stakeholder justice surveys provide opportunities for all stakeholder groups to participate and to share their view, thus making it easier for professionals in the institution to accept that users are also consulted. The triangulation of the data and the analysis of the discrepancies of views then offer an opportunity to start a dialogue and to reach an agreement on challenges. The World Bank has carried out such multi-stakeholder justice surveys in the context of the EU accession process in 2014 in Serbia 28 and 2018 in Montenegro. 29 A series of cross-country multi-stakeholder justice surveys are currently under implementation in countries of the EU’s Eastern Neighborhood. of the criminal justice chain weakens the chain society, with the aim of agreeing on what specific as a whole, because the chain can only be as actions will be taken to address the challenges (by strong as its weakest link. So overall institutional whom, by when, with what resources). To ensure performance matters. The very first step in this effective implementation of these actions, they should process is for the institution to acknowledge that be captured in a performance improvement action plan. these challenges actually exist. Court user and A key aspect at the institutional level is a commitment multi-stakeholder justice surveys have proven to to manage the institution for improved integrity and be a useful tool in this diagnostic phase (see Box performance in terms of service delivery. A strong 13.5). Indeed, justice institutions themselves are initial signal of such a commitment is full transparency not exempt from corruption and capture that affect about the survey findings. Transparency along the the broader public sector. Police is a common first implementation process, including the communication interface for citizens with the justice system and of whether and to what extent reform targets have surveys worldwide indicate that many citizens in been reached, remains critical for reformers to retain developing countries have had experience with credibility with the public. police corruption, for example with police stopping or arresting vulnerable people in particular to Measures to increase the institutional performance extort a bribe or other favors. Corruption among can focus on the processing of identifiable judges and court staff often involves the speeding corruption cases by prosecution services and the up and slowing down of case processing, or other courts. They can be tracked, monitored, and prioritized, manipulations of case files. Surveys also indicate potentially supported by ICT-based case management that many developing countries struggle with a systems and performance dashboards. However, lack of integrity among judges and prosecutors, measures should not focus on such identifiable cases influencing their decision-making. alone, because the “anti-corruption” segment of an institution is not necessarily an easily distinguishable Once the cha lleng es a re identif ied a nd workstream separate from its overall work. Broader acknowledged, consultations will be needed. Such solutions can cover a very wide range of activities, from consultations should involve the relevant institutional business process reengineering followed by automation stakeholders, if possible in conjunction with civil to backlog and delay reduction programs, workflow Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 325 PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 13 JUSTICE SYSTEM improvements through better spatial arrangements, is often overlooked. Examples include: capacity building, tools to improve the coherence of adjudication, improvements in the management for • Establishing effective complaint mechanisms as service delivery of financial and human resources as well well as disciplinary systems as ICT and infrastructure, and support to disadvantaged • Strengthening institutions investigating and court users through simplified procedures for small sanctioning integrity breaches (e.g. judicial claims, effective provision of free legal counsel to the inspection) indigent, self-help guides for specific types of cases and groups with access challenges, and legal information • Preventive measures, such as asset and income for various types of court users to only name a few. disclosure requirements of justice sector officials There is no blueprint for that. This is a broad field and and strengthening of conflict of interest legislation much depends on the specific challenges in the local • Information and communication technology context and the resources available to address them. One aspect that remains key in any context, however, • Random assignment of cases to judges and is the commitment to achieving real improvements and prosecutors based on an adequate algorithm. 30 the implementation of technically sound solutions. This can eliminate or limit the ability of parties, their lawyers, or those in the system assigning cases to When it comes to measures to specifically address judges and prosecutors (e.g. administrative staff in corruption challenges within justice sector the intake office or court presidents), to ensure that institutions themselves, the range of options is the case reaches the “right” decision maker in the narrower. Some tend to feature prominently across system (see Box 13.6 below). many countries, while the potential of other measures BOX 13.6 Trade of Influence in the Judiciary The ability of parties to “shop” for specific judges deemed to be favorable to their cause undermines the integrity of the judicial process. Moreover, the ability of people inside the judicial system to allocate specific cases to specific judges to ensure particular outcomes creates opportunities for corruption. In Bulgaria, for example, the European Union’s Cooperation and Verification Mechanism highlighted this kind of trade of influence in the judiciary as a major risk, 31 but the phenomenon is widely spread. The Quality of Judicial Processes Index of the World Bank’s Doing Business report and its chapter on Enforcing Contracts therefore includes the criterion of the existence of an automated random case assignment system to make such trade of influence more challenging. 32 326 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 13 JUSTICE SYSTEM Increasing transparency The establishment of prosecutorial and judicial Providing parties with clear information and databases and systematic publication of decisions guidance can also limit the need for parties to with online access for lawyers and the general resort to petty corruption. “Facilitators” in many public and a well-performing search function developing countries offer their services at the court increases transparency. This also supports judges building and promise effective access to the relevant and prosecutors in their effort to provide legal staff and prompt processing against additional certainty through consistency in decision making and remuneration. If the pathways are simple with adequate adjudication. The ability of artificial intelligence (AI) signage and adequate information and required forms to process large amounts of data also provides an provided to parties online or at a physical helpdesk additional tool for analyzing the consistency of decision (e.g. about procedural steps to file a claim, required making, and to identify biases as well as inconsistency documentation, court fees), the journey becomes more among specific judges and prosecutors. Some law predictable and parties less prone to intimidation firms tout the ability to identify “friendly” judges due by those who are eager to market their services. In to their knowledge about the judges and their practice, this respect, legal aid can make a big difference in but the potential for specifically using AI in the fight empowering poor and marginalized populations to against corruption seems to remain largely unexplored even just dare to engage in the process of claiming their for now. 33 However, simple solutions such as the rights. establishment of forms for common types of cases and provision of standard building blocks for formulating Identifying corrupt practices requires considerable decisions in these cases gently increases the pressure effort, but the results make it worthwhile. While it on judges and prosecutors not to make changes to the is challenging to root out corrupt practices in justice forms unless there are good reasons for digressing. institutions and elsewhere, such efforts contribute to improving service delivery, enhancing transparency, Audio and/or video-recording of proceedings can and increasing accountability for performance to the also increase transparency. A common face of general public. Communication to the population corruption in the courts is that those in charge of the about the commitment, actions taken, and their impact minutes are biased towards one party and draft the will contribute to rebuilding trust in the institutions. records accordingly. Or the minutes are deliberately of such poor quality that the judge retains discretion on which facts and evidence, if any, to retain. Recordings accessible to the parties of the trial provide an objective basis for appeals in case the decision is not based on facts or evidence provided. Insufficient attention is g iven to judicial infrastructure. In many developing countries, adjudication takes place in judges’ chambers, thus limiting access of the public and transparency. Reorganizing the spatial arrangements can have an impact on corruption practice, e.g. by limiting access of lawyers or the public to the area of the court where the judges and prosecutors have their offices. In modern courthouses, there is a functional separation of spaces, establishing entirely separate pathways for the general public and lawyers, judges and prosecutors, and detainees, pathways that only intersect in the courtroom.34 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 327 PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 13 JUSTICE SYSTEM Conclusion Policy makers today have access to an arsenal internally as well as externally to the broader public. of tools that justice reform practitioners have For courts and prosecution services, this can be a tricky developed to improve the way justice sector question due to the need for adequate protection of institutions contribute to fighting corruption, judicial and prosecutorial independence. Ultimately, including corruption within justice institutions this independence is less a privilege of the individual themselves. As outlined above, many lessons have official, but an entitlement of the population: the been learned over the last couple of decades, right of citizens to an impartial judge and prosecutor. including about areas and sequencing of reforms. Four Transparency is a key ingredient for this accountability lessons, however, truly stand out. They revolve around to be effective. transparency, accountability, the role of civil society, and – above all – political will. Role of civil society Transparency Strengthening the role of civil society organizations and free media is impor tant for accountability Increasing transparency is absolutely paramount mechanisms to deploy their full potential in the fight for the success of anti-corruption efforts. In terms of against corruption. While they do not require major transparency about the operation of justice institutions, funding either, they need a sufficiently open space there is a broad range of entry points. Publishing to operate in. The potential and actual beneficiaries relevant performance data can be done at low cost of the justice system are very dispersed, they are not and dissemination requires only basic technology like a well-organized group with adequate agency. Civil a website. The same is true for providing authoritative society organizations and free media are therefore key guidance to users on what is needed to access and to act on behalf of the broader population to uncover navigate services. The use of ICT, however, is a game- wrongdoings and ensure that adequate sanctions are changer, but these solutions can be costly and may imposed on the perpetrators. not be implementable within the short term. ICT has a tremendous potential for truly transformational impact. Technology standardizes practices and can Political will limit the ability of individuals to manipulate business processes without leaving a trace, for example through Finally, while technically sound solutions are a key an ICT-based case management system in the courts or requirement for success, the breadth and depth of prosecution service. Technology can increase people’s impact ultimately hinges upon the extent of commitment ability to access information about what is happening at the political level, both outside and inside the justice within a justice institution, and for the institution to system. While it is important for policy makers to be collect and disseminate performance data to the public. able to show short-term victories to citizens and other In terms of transparency about the people working in stakeholders to maintain or increase the momentum justice institutions, the establishment of mechanisms of anti-corruption efforts, the sustainability of these for asset and income disclosure of justice officials can reforms is not primarily a function of the soundness be impactful. of the technical solutions. Long-term impact and its sustainability depend on the extent to which the fight against corruption has become part of the DNA of the Accountability political system. Even the most successful reforms, such as the Romanian Anti-Corruption Directorate, fade Increasing accountability is of fundamental importance away when the commitment at the political level dries for successful anti-corruption efforts and does not up. Integrity achievements are not a one-time victory. require major allocation of resources. The important Maintaining them requires a renewed social contract question is: Who needs to be accountable to whom and that fully embraces this dimension and holds those to for what? There is a need for accountability of justice account who try to find ways around it. officials for compliance with ethics and rules, both 328 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 13 JUSTICE SYSTEM Notes 1. Hammergren, Linn; Dory Reiling and Adrian Di Giovanni 16. See one example of many: BTI (2018), Ber telsmann (2007), Justice Sector Assessments – A Handbook, World Transformation Index, Morocco Country Report 2018 (under Bank (Washington, DC: 2007), available online at http:// Political Participation – Freedom of Expression). Available siteresources.worldbank.org/INTLAWJUSTINST/Resources/ online at https://www.bti-project.org/en/reports/country- JSAHandbookWebEdition_1.pdf. reports/detail/itc/MAR/. 2. World Bank. 2017. World Development Repor t 2017: 17. See Matthew C. Stephenson (2016), “Specialised Anti- governance and the law: Main repor t (English). World corruption Courts: A comparative mapping”, Series editor: Development Repor t. Washington, D.C.: World Bank Sofie Arjon Schütte U4 Issue December 2016 No 7, p 7. G r o u p . h t t p: //d o c u m e n t s .w o r l d b a n k . o r g /c u r a t e d / en/774441485783404216/Main-report. 18. In 2019, Albania, Ukraine, and Madagascar have established specialized anti-corruption courts. See Exit News (2019), 3. For details see World Bank (2014), Public Wrongs, Private Special Anti-Corruption and Organized Crime Cour ts Actions – Civil Lawsuits to Recover Stolen Assets (Washington, Es tablished in Albania, available at ht tps://exit.al/ DC: 2014), available online at https://star.worldbank.org/ en/2019/12 /19/special-anti- cor r uption-and - organized - publication/public-wrongs-private-actions. crime- courts-established-in-albania/. See UNIAN (2019), “Ukraine launches High Anti-Corruption Court’, available at 4. For details see World Bank (2019), Going for Broke: Insolvency https://www.unian.info/politics/10513461-ukraine-launches- Tools to Support Cross-Border Asset Recovery in Corruption high-anti-corruption-court.html. See Florian Schatz (2019), Cases, (Washington, DC: 2019), available online at https://star. “Madagascar’s Specialised Anti-Corruption Court: The quest worldbank.org/publication/going-for-broke. to end impunity”, Series editor: Sofie Arjon Schütte, U4 Brief 5. Council of Europe (2000), Recommendation Rec(2000)19 of 2019:2, pp1-2. Available at https://www.u4.no/publications/ the Committee of Ministers of the Council of Europe on the madagascars-specialised-anti-corruption-court-the-quest-to- Role of Public Prosecution in the Criminal Justice System, end-impunity.pdf. available online at https://rm.coe.int/16804be55a. 19. For example, in Afghanistan, Albania, Indonesia, Madagascar, 6. Ibidem. Malaysia, Nepal, Palestine, Uganda, and Ukraine, see Matthew C. Stephenson (2016), p. 8-9. 7. Ibidem. 20. Matthew Stephenson (2016), Specialised Anti-Corruption 8. See Emerging Europe (2018), The Fight Against Corruption is in Courts: Philippines, U4 Brief, July 2016:3. Romania’s DNA, June 23, 2018 available at https://emerging- europe.com/interviews/the-fight-against-corruption-is-in- 21. Sofie Arjon Schutte (2016), Specialised Anti-Corruption romanias-dna/. Courts: Indonesia, U4 Brief, July 2016:4. 9. See News Europe (2018), The Corruption of Romania’s Anti- 22. Several multilateral treaties have dispositions on MLA, such Corruption fight, December 17, 2018, available at https://www. as the Inter-American Convention against Convention (article neweurope.eu/article/corruption-romanias-anti-corruption- XIV), the OECD Anti- Bribery Convention (article 9), and the fight/ UN Convention against Corruption (UNCAC, article 46). See Marie Terracol (2015), Mutual Legal Assistance and corruption, 10. See GRECO (2018), Ad hoc Report on Romania (Rule 34) No 2015:17, available at https://www.u4.no/publications/ adopted by GRECO at its 79th Plenary Meeting, (Strasbourg, mutual-legal-assistance-and-corruption.pdf. 19-23 March 2018) available at https://rm.coe.int/ad-hoc- report-on-romania-rule-34-adopted-by-greco-at-its-79th- 23. See Hughes Hubbard & Reed (2019), Alert - FCPA & Anti- plenary-/16807b7717; see Romania Insider (2018), Council Bribery, p 150, available at https://files.hugheshubbard.com/ of Europe anti-corruption body slaps Romania on justice files/HHR-Fall-2019- FCPA-Alert.pdf#page=13. changes, April 12, 2018, available at https://www.romania- 24. See Transparency International (2020), Airbus Briber y insider.com/greco-slaps-romania-justice-changes/. Investigation Highlights Power of International Cooperation 11. Not all anti-corruption agencies have prosecution functions, in Tackling Corruption. https://www.transparency.org/news/ as this depends on the specifics in each jurisdiction. pres srelease/air bus _ briber y_ inves tigation _ highlight s _ power_of_international_cooperation. 12. Council of Europe (2001), Recommendation Rec(2001)10 of the Committee of Ministers to member states on the European 25. See Watts (2017), Operation Car Wash: Is this the biggest Code of Police Ethics, available online at https://rm.coe. corruption scandal in history?, The Guardian, June 1, 2017 int/16805e297e. available at https://www.theguardian.com/world/2017/jun/01/ brazil-operation-car-wash-is-this-the-biggest-corruption- 13. There are countries where the police are placed under scandal-in-history. the authority of the public prosecution or where police investigations are either conducted or supervised by the public 26. Anthony Faiola (2018). The corruption scandal started in prosecutor. In other countries the police are independent of Brazil. Now it’s wreaking havoc in Peru, The Washington the prosecution service. Post, available here https://www.washingtonpost.com/world/ the_americas/the-corruption-scandal-started-in-brazil-now- 14. For examples from Mongolia as well as South and East Africa its-wreaking-havoc-in- peru/2018/01/23/0f9bc4ca-fad2-11e7- see Transparency International (2007), Judicial Corruption 9b5d-bbf0da31214d_story.html. Report 2007 – Corruption in Judicial Systems, Cambridge University Press (Cambridge, NY: 2007). Available online at 27. See Gillian Dell and Andrew McDevitt (2018), Exporting https://www.transparency.org/whatwedo/publication/global_ Corruption, Progress Report 2018: assessing enforcement corruption_report_2007_corruption_and_judicial_systems. of the OECD Anti-Briber y Convention, Transparency International, p 109 https://www.transparency.org/whatwedo/ 15. World Bank. 2017. World Development Repor t 2017: publication/exporting_corruption_2018. governance and the law: Main repor t (English). World Development Repor t. Washington, D.C.: World Bank G r o u p . h t t p: //d o c u m e n t s .w o r l d b a n k . o r g /c u r a t e d / en/774441485783404216/Main-report. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 329 PART III ROLE OF INSTITUTIONS IN FIGHTING CORRUPTION CHAPTER 13 JUSTICE SYSTEM References 28. MDTFJSS (2014). Experiences and Perceptions of Justice Anthony Faiola (2018). The corruption scandal started in Brazil. in Serbia: Results of the survey with the general public, Now it’s wreaking havoc in Peru, The Washington Post, enterprises, law yers, judges, prosecutors and cour t https://www.washingtonpost.com/world/the_americas/the- administrative staff. http://www.mdtfjss.org.rs/archive//file/ corruption-scandal-started-in-brazil-now-its-wreaking-havoc- Experiences%20and%20Perceptions%20of%20Justice%20 in-peru/2018/01/23/0f9bc4ca-fad2-11e7-9b5d-bbf0da31214d_ in%20Serbia%20-%20EN.pdf. story.html. 29. Svircev (2018). Experiences and Perceptions of Judicial BTI (2018), Bertelsmann Transformation Index, Morocco Country Performance in Montenegro. World Bank. http://documents. Repor t 2018 (under Political Par ticipation – Freedom of wor ld b ank .org /c ur ate d /e n /6738 81525871078 0 07/p d f/ Expression). Available online at https://www.bti-project.org/en/ Experiences-and-Perceptions-of-Judicial-Performance-in- reports/country-reports/detail/itc/MAR/. Montenegro.pdf. Council of Europe (2000), Recommendation Rec(2000)19 of the 30. The effectiveness of random case assignment requires the Committee of Ministers of the Council of Europe on the Role consideration of other factors as well. If the court fees are of Public Prosecution in the Criminal Justice System, available very low and the system does not prohibit multiple filing, online at https://rm.coe.int/16804be55a. the lawyer can play the random case assignment lottery until the case is assigned to the right judge. All duplicate cases Council of Europe (2001), Recommendation Rec(2001)10 of the would then be withdrawn. 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Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 331 COUNTRY SPOTLIGHT Malaysia’s Approach to Fighting Corruption Evolution, Failures and Successes of Malaysia’s Anti-Corruption Efforts COUNTRY SPOTLIGHT: MALAYSIA’S APPROACH TO FIGHTING CORRUPTION Overview M ala ysia’s case study hig hlig hts both the party that had been in power for over 60 years. The new opportunities and challenges of building and government—a loosely formed coalition of opposition sustaining an effective anti-corruption drive parties led by a former Prime Minster— stressed over time. Despite having a rich history of public the “rule of law” and took upon itself to revitalize the administration since independence and drawing on institutions that were put in place to fight corruption and international best practices, Malaysia continued to to re-establish limits on the power of the Prime Minister. fair badly in global perception surveys on corruption. Yet, without the parliamentary majority needed to make Indeed, many of the institutions that were set up to changes in the Constitution, the scale of changes was detect and sanction corruption became gradually necessarily limited. The actions taken by the Pakatan compromised with increasing concentration of political Harapan (PH) government during its two years in office power. Only when the magnitude and scale of corruption boosted Malaysia’s ratings in global surveys of corruption in the 1MDB sovereign wealth fund became widely perceptions. With the collapse of the PH government known to civil society and the global media, did citizens in March 2020, there is uncertainty whether the anti- become so outraged that they voted out the political corruption reform momentum will be sustained. Background Malaysia’s anti-corruption institutional framework, establishment of the Anti-Corruption Agency (ACA) dating back to the 1950s, has evolved through in 1967. In 2004, the National Integrity Plan (NIP) was the years and to a large extent has been shaped introduced with an aim to improve the effectiveness of at any point in time by the country’s political and the anti-corruption efforts. The NIP traced factors that economic developments. As shown in the table below, might undermine integrity among individuals, including graft prevention efforts started back in the 1950s with government systems and procedures, the structure the Prevention of Corruption Ordinance and led to the of institutions, and the culture of organizations. To Year Trajectory of Anti-Corruption Laws and Agency Evolution in Malaysia The Prevention of Corruption Ordinance replaced previous laws introduced in the Federated Malay State, 1950 State of Johor and that Straits Settlement. 1959 Corruption Prevention Unit formed 1961 Prevention of Corruption Act 1967 Formation of Anti Corruption Agency (ACA) 1970 The Emergency (Essential Powers) Ordinance 1973 Introduction of National Bureau of Investigation 1982 Anti-Corruption Agency (established by PCA 1961) 1997 Anti-Corruption Act 1997 Anti-Corruption Agency (established by PCA 1961) 2009 Malaysian Anti-Corruption Commission Act 2009 Malaysian Anti-Corruption Commission reports to Prime Minister 2019 Malaysian Anti-Corruption Commission reports to Parliament Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 333 COUNTRY SPOTLIGHT: MALAYSIA’S APPROACH TO FIGHTING CORRUPTION coordinate, advise and monitor the efforts of the NIP, an intent to empower the anti-corruption body with the Malaysian Institute of Integrity (IIM) was established greater independence and autonomy to investigate in 2004 (later rebranded to INTEGRITI in 2015). cases. It could secure documents and witnesses, Together, the NIP and INTEGRITI were to form the arrest and prosecute offenders, and propose reforms crux of a national integrity system for comprehensive that would insulate key decisions from undue political reform in Malaysia. The approach stressed individual interference. The reforms that took place in 2009 were and institutional ethics, beyond formal laws and partly in response to the growing frustration from regulations, with a goal of maximizing integrity at all the public and civil society over the overall quality levels as a prophylactic against corruption. INTEGRITI of government, level of service delivery, problems has assumed a new role under the current National around red-tape and lack of anti-corruption efforts. Anti-Corruption Plan (NACP). It was not until 2009 that However, for several reasons, including gaps in policy the ACA was converted from a government agency or implementation (discussed later in the case), most into a commission—the Malaysian Anti-Corruption of these reforms fell short of achieving the desired Commission (MACC). The MACC was established with outcome. Boost to governance reforms: 2018 Malaysia’s anti-corruption efforts received a major NACP include mandatory asset declaration for Cabinet boost in 2018 with the election of the Pakatan Ministers and the Prime Minister’s Directive on the roles Harapan government that came to power with the and responsibilities between ministers and secretaries- promise of a clean, accountable and transparent general to improve the accountability framework of the regime that resonated well with people following administration. Some of the key initiatives and reform the 1MDB scandal. One of the first steps in this effort efforts that are underway and in line with the objectives was to set up the National Centre for Governance, of the plan, but not necessarily limited to the NACP, are Integrity and Anti-Corruption (GIACC), as secretariat listed below: of the Special Cabinet Committee for Anti-Corruption (JKKMAR), reporting directly to the Prime Minister. 1. Strengthening the Parliament: Reintroducing the The GIACC, in consultation with other agencies Parliamentary Services Act 1963, to provide greater and depar tments, formulated and launched the independence and autonomy to parliament to National Anti-Corruption Plan (NAPC) and is currently ensure checks and balances on the functioning of overseeing its implementation. The main enforcement the executive.  agency continues to be the Malaysian Anti-Corruption Commission (MACC), the two together being the main 2. Asset Declaration: The policy for asset declaration anti-corruption bodies in the country. is now in place for all executives and is being extended to members of parliament (MPs). The The NACP outlines the government’s strategies Asset Declaration information has been published and measures around combating corruption, on the MACC portal. The next step is to ensure its stren g thenin g g over n a nce , inte g r ity a nd extension to all the elected MPs. transparency in government operations. The five- year plan has a total of 115 initiatives, categorized under 3. Prime Minister’s tenure: The initiative to limit the 6 strategic thrusts: (i) strengthening political integrity, Prime Minister’s tenure to no more than two terms (ii) accountability and effectiveness of public service requires amendments to the Federal Constitution, delivery, (iii) efficiency and transparency in public a process that has not yet started. procurement, (iv) enhancing the credibility of the legal and judicial system, (v) institutionalizing the credibility 4. Procurement reform: Efforts on various procurement of law enforcement agencies, and (vi) inculcating good reforms are on track with a plan to table the governance in corporate entities. Early initiatives of the Procurement Act in the Parliament in 2020. 334 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption COUNTRY SPOTLIGHT: MALAYSIA’S APPROACH TO FIGHTING CORRUPTION 5. Strengthening the Judiciary: Special courts have 11. Organisational Anti-Corruption Plan (OACP) been established to expedite trials on corruption and Anti Bribery Management System (ABMS): cases. It is compulsory for all government agencies to have an OACP specific to their workflow and the 6. Strengthening the Electoral System: The Election implementation of ABMS has been launched Commission is reviewing the entire electoral government-wide after a pilot project last year. system, including the area of political financing, with the aim of publicizing all the political funders. While GIACC functions as an anti-corruption planning unit focusing on policy desig n , 7. Independent Police Complaints and Misconduct implementation, monitoring and assessment, Commission (IPCMC): The draft IPCMC Bill is under enforcement is under MACC and other enforcement discussion with the Chambers of Attorney General. authorities. One of GIACC’s key roles is monitoring the progress of the JKKMAR’s decisions, from inception 8. Ombudsman: The Ombudsman Act, in draft to completion. JKKMAR members include the prime stages, is meant to replace the Public Complaints minister as chair, the deputy prime minister as deputy Bureau with the aim of improving the management chair, senior ministers, the chief secretary to the of public complaints in Malaysia. government, the director-general of the Public Service Department, the secretary-general of the Treasury, 9. Reform of Government-Linked Companies (GLC): the attorney general and auditor general, the director- The Ministry of Finance is finalizing guidelines for general of the GIACC, chief commissioner of the the appointment of senior management, Chairman MACC, and all secretaries-general of ministries. The and Board of Directors in GLCs and subsidiary JKKMAR met monthly for the first 6 months following companies, banning all political appointments in its establishment, and every two months thereafter. GLCs. GIACC presents progress reports to the JKKMAR at regular intervals, using “traffic light” (green, yellow, 10. Support Letters: A new policy that forbids politicians red) status indicators. from issuing support letters for government tenders and projects has been introduced. Key changes with some early results Malaysia’s performance on international indicators gave Malaysia a marked improvement score for 2020 and rankings on governance, accountability and for improvements in electoral process and pluralism, transparency have improved as a result of some where it received 9.17 out of 10 in the Democracy Index. of these reforms and other on-going efforts. Its It had scored only 7.75 in 2018. ranking has improved from 61st in 2018 to 51st in 2019 on Transparency International’s (TI) Corruption Perception Malaysia has also been recognized for its efforts to Index (CPI). On the Edelman Barometer on Trust in pursue corporate governance reforms and broader Government, Malaysia shot up by 20 points in 2018 to institutional reforms that complemented the anti- 60 points from 40 points in 2017. Press Freedom also corruption and governance reforms agenda. Based saw an improvement from being ranked 145th in 2018 on the ACGA Corporate Governance Watch 2018, the to 123rd in 2019. Malaysia moved from 15th to 12th in the aggregate company scores moved most significantly for World Bank’s Doing Business 2020 Ranking. The Asian Malaysia, where improvements in the Enforcement sub- Corporate Governance Association (ACGA) placed category and optimism about political change drove Malaysia 4th out of 12 Asian economies in 2018, up from scores up 7% from 2016. Malaysia’s ranking of 12th in the 7th place in 2016. The Economic Intelligence Unit (EIU) World Bank’s Ease of Doing Business 2020 Report is a Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 335 COUNTRY SPOTLIGHT: MALAYSIA’S APPROACH TO FIGHTING CORRUPTION testament to the ongoing reform initiatives to enhance the private sector, but also to public officials who are competitiveness, productivity and governance for sitting on Boards of corporate entities. It is here that the businesses. The improvement in the Democracy Index Executive and Legislative Branch must contend that any is a result of some of the electoral reforms and changes political appointments made to statutory bodies and/ in political campaigning guidelines. Despite the or GLCs must be cognizant of the fiduciary duties and improvement in overall ranking, Malaysia still features liabilities of such appointments under the Act. in the “flawed democracy” segment, but it has for the first time moved into the top half of the category. The Malaysian Government’s resolve to take swift Another step to address financial crimes was the setting action on corruption scandals is on-going, as can be up of the National Anti-Financial Crime Centre (NFCC) seen from some of the high-profile cases that are and Corporate Governance Committee to track and being pursued. The strong mandate, independence and report dubious financial transactions. The NFCC Act resources accorded to the GIACC and MACC to carry 2019 provides the NFCC with the legal provision to out their roles and functions constitute an important coordinate and collaborate with enforcement agencies step towards the strengthening of institutions. The in matters related to the reporting and prevention of commitment outlined in the 5-year national plan financial crimes. around anti-corruption enabled the reforms to bear early results. Key areas like political funding, public Another key reform was the amendment of the procurement and political interference are being MACC Act in 2018 to incorporate, among others, addressed by putting in place more transparent a new Section (17A) on corporate liability for systems and processes with a robust monitoring and corruption. The new Section not only establishes a evaluation plan. The government moved swiftly to new statutory corporate liability offense of corruption follow up on some of the big scandals like the 1MDB, by a commercial organization under Malaysian law, but Federal Land Development Authority (FELDA), KWAP also deems any director, controller, officer, partner or (Statutory Body for Public Sector Pension) and Tabung manager of a commercial organization to be personally Haji (Haji Pilgrims Fund Board) to name a few. This was liable for the same offense if the commercial organization followed by the arrest of several political leaders and is found liable, unless the relevant individual can prove figures who were later charged by MACC for abuse of that the offense was committed without his or her power, corruption and money laundering, and brought consent, and that he or she had exercised the requisite to the courts. Several concurrent cases involving the due diligence to prevent the commission of the offense. highest echelon of leadership in the country prior to This change was expected to be fully enforced in June the 2018 general elections are currently being heard in 2020. It is key that the relevance and consequences of the courts. this change are communicated effectively not only to Shortcomings of the previous reform efforts P revious nationa l level reform effor ts on than on bringing about structural changes. The anti- governance and anti-corruption had a limited corruption institutions were focused on mid-level impact for several reasons. In 2004, the government corruption rather than grand corruption involving introduced the National Integrity Plan (NIP) and set up the highest echelon of government leadership. the Malaysian Institute of Integrity (IIM) to coordinate, The NACP for that reason has singled out political advise on and monitor initiatives outlined in the NIP. interference as one of the major impediments of past The NIP tried to trace factors that might undermine reform efforts. The interference affected prudence in integrity among individuals, systems and procedures, administrative and financial management in areas such structure and institutions, and culture. The impact as public procurement and resulted in half-hearted was limited as the focus was on advocacy rather implementation of reforms. 336 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 337 COUNTRY SPOTLIGHT: MALAYSIA’S APPROACH TO FIGHTING CORRUPTION The anti-corruption institutional framework complaints were likely to be registered. This resulted suffered from limitations, including a lack of in less than encouraging rates of whistleblowing from independence and autonomy granted to key the system. Since 2018, the MACC has been working on institutions mandated with the task. There was streamlining procedures and institutional arrangements over-centralization of power in the Executive, and both for a more effective discharge of the whistleblowing the MACC and Attorney General’s Chambers lacked and witness protection act. the independence to deal with grand corruption cases, such as the 1MDB and FELDA when they were initially Efforts were made to limit the role of politicians unearthed. The MACC Act lacked the teeth to accord a in statutory bodies and GLCs, and the government mandatory minimum sentence for offenders, resulting successfully implemented this in all GLCs with in lighter punishments. The Auditor General’s reviews the exception of Khazanah Nasional. The GLC were limited to government agencies and auditing of Transformation Plan, which was introduced in 2008, GLCs and government-linked investment companies attempted to make GLCs more performance-based, only in the event of a complaint. including in the appointment of senior management and members of the board. However, transparency While the introduction of the Whistleblower of board and senior management appointments Protection Act in 2010 was a step in the right with clear performance tied to these appointments direction, it was incapacitated by the weak witness remained elusive. Lack of institutionalization of these protection infrastructure. Agencies tasked to oversee reforms by way of law and regulations has resulted the whistleblower act and witness protection policy in the dismantling of some of the reforms previously were placed under the Prime Minister’s Department and introduced. Political appointments continued to be enforcement agencies. This institutional arrangement made to board and chairman positions, making it resulted in a low trust environment and the fear of difficult to separate political and business interests. retaliation by the very authorities against whom the Unfinished reforms The recent change in government in March 2020 some state governments. Further reforms, including, has resulted in some changes at the top level but not limited to, procurement, political funding, asset and the key is to maintain the momentum and declaration, politically-linked board appointments in continuity of the reforms around anti-corruption statutory bodies, and effectiveness of the oversight and governance. The change in government led to of regulatory bodies, need to be taken to their logical the resignation of the Attorney-General and the Chief conclusion. Reforms carried out in the judiciary, Commissioner of the MACC. It has resulted in the parliament, election commission and the public service changing of the guard in several GLCs and government- provide a good foundation for institutionalizing the linked investment companies. However, the new changes. Reform efforts taking place at the Federal level government has formed its Cabinet and has signalled need to be cascaded to other levels of government, that it is committed to carrying forward these reforms, namely states and local authorities. which are still being led by the Cabinet Committee on Anti-Corruption, the GIACC, and the MACC and others An early stage reform to ensure responsible and under the framework outlined in the NACP. These credible media reporting has been initiated by plans are not clear yet, but of critical importance is for setting up the National Media Council. The next Malaysia to review the regulations of all its statutory step will be to set up governance structures around bodies, develop clear regulatory and oversight bodies the quality and authenticity of journalism and media that will oversee corporate governance, and drive reporting. Media can be a very powerful tool for the political governance and anti-party hopping laws government to reach its citizens and for the citizens to which caused the fall of the federal government and hold the government accountable. 338 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption COUNTRY SPOTLIGHT: MALAYSIA’S APPROACH TO FIGHTING CORRUPTION The Public Service Act, which is at the draft across the different branches of government. stage, is another vehicle to accord greater transparency and accountability and separation The reform of the GLCs and state-owned of powers between elected representatives enterprises is on-going and it is unclear if the and public officials. This includes clarity and next stage of reforms would include those at the accountability in the approval process, appointments, subnational levels. This is a complex and politically rewards and performance management, amongst difficult but important reform area, given its centrality in others, and strong governance structures, including the Malaysian economy. It is also an area that standard gender mainstreaming. This would ensure an apolitical setting bodies must develop to assist countries with public service with greater clarity and accountability complex and tiered public sector structures. Lessons learned from Malaysia The Malaysian experience in combating corruption strong mandate from the country’s top leadership and improving governance provides three important to coordinate the implementation of the National lessons. Anti-Corruption Plan. The GIACC was also assigned as the secretariat of the Cabinet Committee on 1. A well-functioning institutional framework that Anti-Corruption, which provided it with a high- provides for checks and balances in government level top leadership platform to discuss, monitor is key. When the anti-corruption and governance and report on the implementation status of the bodies—the GIACC and MACC—were accorded NACP. more powers and resources to deliver their mandate without undue political interference, 3. It is important to have a broader coalition of the message and intentions were clear. Grand reformers that is not limited to public institutions corruption cases could be investigated with and other formal institutions of government. The greater autonomy and independence and brought role played by civil society groups, the media, to trial. Likewise, the passage of the Public Services businesses, academia, international partners and Act and the Ombudsman Act and institutionalizing other concerned parties also complemented some of the on-going reforms will be important for the efforts of the MACC and GIACC to combat their sustainability in the long run and will minimize corruption. Their involvement was not just on the the risk of reversal with a change in government. technical front; at times they also provided the needed support to keep the reform agenda on 2. Strong support and a clear mandate from the top track. leadership is a pre-requisite to pursue difficult reforms. The newly created GIACC was given a Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 339 Conclusions CONCLUSIONS Political realities will always constrain the menu of instruments and institutions that may have previously policy responses from which leaders may choose, been ineffective, can be injected with new life and but they need not be a permanent barrier in the revived to achieve the desired results. fight against corruption. Several cases in this report show that technical solutions alone are insufficient to Unfortunately , the impact of focused anti- have an impact on corruption, nor can they be merely corruption initiatives may not always be measured transplanted from one country context to another. in quantifiable savings or a jump in global survey The World Bank’s 2017 WDR emphasized that the rankings. Each of the cases featured in this report power asymmetries in societies—rich and poor alike— has demonstrated a positive contribution to the fight constrain the policy making environment. The impact against corruption, as reflected in the views of public of this “elite bargaining” is so strong that governments officials, local media reports, or citizen groups. Yet none are rarely able to pursue the policies that would bring of the cases has included an empirical study that would optimal development outcomes. As a result, countries allow one to see the quantitative change in corruption remain “stuck” in sub-optimal development trajectories before and after the intervention. Such studies are because well-positioned elites are unwilling to risk rare because of the difficulty of establishing a credible their loss of power. Change is nearly impossible to baseline on the magnitude of corruption prior to the achieve unless influential actors agree for it to happen. policy action, and the equal difficulty of quantifying it However, all is not lost, as the WDR acknowledged, after the intervention. Enterprise surveys conducted by “elites may voluntarily agree to limit their influence in the World Bank have helped give a quantitative aspect their own self-interest.” Citizens can play an important to measurements of corruption, but they only focus role in applying pressure to influence the outcome. The on a narrow range of actions. Likewise, international WDR further states that one particular policy—fiscal indices, such as the Worldwide Governance Indicators transparency—is effective because it “ties not only the are too aggregated to reflect the impact of a single hands of current elites but also those of successors.” intervention. Because of this measurement challenge, reform champions may need to develop other tools Corruption is stubborn but not intractable, and to gauge public sentiment about the trajectory of the dozens of cases presented in this report corruption in their country or the impact of a reform in demonstrate that progress is possible. The a specific government function or service. contemporary news may tempt one to believe that corruption is impossible to curtail and that citizens Grand corruption has proven to be a particularly have no choice but to accept it. Yet, while it is true that challenging area for public officials and citizens new schemes and vulnerabilities emerge daily, with to address, notwithstanding the progress made in ever higher monetary costs (e.g., Malaysia’s “Billion- confronting petty corruption. Automation and the Dollar Whale”), there is an often-untold reality that streamlining of bureaucratic procedures have enabled governments are tightening the marge de manœuvre many countries to lower the incidence of small bribes at for many would-be corruptors. What emerges from this the point of service delivery. However, grand corruption report is that the progress governments make is not is usually the most difficult to address precisely because necessarily from the large government-wide initiatives those who are most empowered to take action may also that garner extensive press coverage. Nor do they be the ones who benefit from the system. Elite capture necessarily result in high-profile arrests or convictions, is typically one of the biggest barriers to effective though some do. Rather, the cases of anti-corruption action against grand corruption, where public officials documented in this report show that the more focused and private interests see mutual benefit from the status efforts of governments may sometimes go unobserved. quo. However, we see through the case studies that They evidence how governments seize an opportunity even when there is strong vested interest, there are within a specific sector or function to enhance a few factors that, when combined, can contribute to governance. They also highlight how specific policy greater accountability among stakeholders. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 341 CONCLUSIONS Sharpening the anti-corruption toolkit Effective anti-corruption strategies typically of GovTech tools can be used to strengthen the capacity include multiple measures, often combining sector- of core institutions, as well as enhance the effectiveness specific interventions with transparency and of tools such as asset and interest declarations and accountability measures that apply to the whole beneficial ownership registries. Similarly, the most of the public sector. Corruption manifests itself in promising opportunities to limit corruption in public specific functions and sectors of government, and infrastructure, public procurement, and SOEs rely upon the report emphasizes the relevance of this sector- strong institutional oversight, coupled with technology based perspective. A better understanding of the platforms that allow enhanced transparency in potential entry points and opportunities for corruption government dealings. Strong ACAs have contributed within a specific sector or function helps develop an to the effectiveness of asset and interest declaration appropriate risk mitigation strategy. The incentives that systems. Data analytics and machine learning are drive corrupt behavior, as well as the political economy also enabling tax administrations to contribute more constraints to address them, will surely vary by sector effectively to anti-corruption efforts through the or function within each country context. On the other identification of illicit wealth and tax evasion. hand, the evidence is overwhelming in this report, that sector specific interventions alone are generally Many of the strategies suggested are cross- insufficient. Corruption at the sectoral level may flourish cutting and are relevant to more than one sector or because of broader social norms and a governance function. For example, the issues and recommendations ecosystem that either tolerates or encourages offered for public procurement are also relevant for the corruption. Broader governance measures may include provision of public infrastructure. Potential measures to both strengthening the institutions that help to combat mitigate corruption risks in SOEs can also be informed corruption and implementing specific tools or policy by the discussions on public procurement given the measures that make it harder to hide corrupt activity large volume of procurement that SOEs themselves (and the associated proceeds). Governments need to undertake, though often under different regulatory critically examine the effectiveness of an instrument or provisions than ministries and agencies. The lessons on a strategy in their country-context. The chapters in this PPPs in infrastructure point back to the need to manage report have highlighted some of the lessons learned the whole of the procurement cycle from tendering about what does and does not work. to contrac t management. Beneficial ownership transparency may help reduce conflict of interest in Strengthening core institutions and targeted public procurement as well as in the business of SOEs. policy actions are mutually supportive and should Transparency and citizen engagement have proven be adopted in tandem. Transparency and openness, critical in encouraging integrity in the operations for example, should be embedded in many of the policy of SOEs, as well as in the implementation of public instruments and institutional approaches; and a number infrastructure projects. What drives effective corruption approaches? While many factors may contribute to the some combination in each of the cases. Why are they effectiveness of anti-corruption, there are six so important? cross-cutting drivers of anti-corruption reforms that are worth noting: Political Leadership, • Strong and determined political leadership is Institutions, Incentives, Technology, Transparency, often needed to provide vision for reform and a and Collaboration. Not every driver is evidenced in commitment to support increased integrity in the every case study, but these six elements are present in face of opposition from vested interests.  342 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption CONCLUSIONS • Countries benefit as institutions become more capture comprehensive data that helps establish capable, contributing to checks and balances and accountability for a wide range of transactions. fostering accountability. Without strong institutions to assure implementation, reforms risk being short- • Transparency can promote greater compliance lived or only superficial. and improve human behavior. Open government policies and access to information help make • Incentives drive behavior and the entry points for corrupt actions harder to hide and contribute to corruption vary across functions of government. their prevention, particularly when they are linked Therefore, corruption needs to be tackled at a to engaged and empowered communities and micro-level, with a focus on its manifestations in official processes. specific sectors or functions and changing the incentives of those who assess the benefits and • We increasingly, see that effor ts that foster risks of corrupt activity. collaboration among multiple stakeholders, including across international borders, to pursue a • Technology is enabling countries to standardize common goal achieve greater success. processes, minimize human interaction, and Political leadership Political leadership drives the reform process in chapter also highlights the importance of political several of the case studies and its importance leadership. Reform may not always be as dramatic is emphasized in virtually all of the sectors as in Georgia and Rwanda, but as the Madagascar featured in Part I. Leadership manifests itself in and Afghanistan case studies show, reforms in the different ways. The chapters on Procurement, Public sector take time and reformers within the customs Infrastructure, and SOEs, for example, highlight that administrations require sustained political support to leadership from the most senior level is necessary show results. because the economic decisions related to investments in these areas are often influenced by those in high Leadership also manifests itself in setting a tone positions and there is a risk that proceeds are used and culture of openness and transparency that is for political party financing. Changing the “rules of required for some technocratic policy responses the game”, reducing the opportunities for political to be effective. Policy instruments featured in Part II, influence in economic decisions, and enforcing the such as asset and interest disclosure, in particular, have regulatory framework on conflict of interest require implications for who may hold a position in government. strong political leadership. The case study on SOEs in Moreover, institutions that shine the spotlight on Angola, as well as the procurement case study in Chile, suspicious activity need to be supported at the political demonstrate the impact of political leadership. While level, rather than undermined. Broader initiatives such there is a risk that reform actions taken after a change of as open government, fiscal transparency, and citizen government will risk being seen as a ‘settling of scores’ engagement are also dependent on the direction and or politically motivated rather than a genuine reform of culture that are set by senior government officials. the system. Similarly, a change of government can lead Similarly, assuring the independence and capacity to a reversal of positive reforms. Thus, what may matter of the justice system requires leadership at the most most is the institutionalization of those reforms so that senior levels. Astute leadership within an organization they will not be reversed so easily. The case studies in can also be transformative in building capacity and the AID chapter (Romania and Ukraine) highlight that voice, as seen in the SAI cases taken from Ghana and anti-corruption initiatives are vulnerable to changes in India. the political environment. The customs administration Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 343 CONCLUSIONS Institutional capacity Reforms need to be institutionalized if they are constitutional changes which were not possible. to be sustained, and increasing the capacity of Following a change of government in early 2020, it is integrity institutions is central to legitimizing now unclear whether the momentum on anti-corruption a country’s anti-corruption strategy. Part III of reforms will be sustained. the report discussed the role that key institutions can play in supporting anti-corruption efforts, while Oversight bodies have a vital role to play in ensuring acknowledging the challenges that confront them in that reforms are institutionalized. For the technical doing so. For example, the SAI examples of Ghana reforms in procurement and public infrastructure to and India start with a historical backdrop in which their be effective, the relevant oversight bodies need to be role was quite limited, but with the right intervention sufficiently equipped and empowered to be able to they became re-energized and their audit findings had act on the information at hand. In public infrastructure, greater impact. In the two AID examples, the newly for example, they need to be able to ensure that strong and independent institutions in the countries project identification and selection is based on merit were critical to making the asset disclosure system and that changes proposed by contractors during more than just a requirement on paper and giving implementation are well justified and not merely a it real “teeth”. The importance of a well-functioning method to enrich themselves in exchange for bribes. justice system to enforce the rule of law and impose Moreover, as digitalization expands across the public sanctions on those responsible for corrupt activity sector and creates an audit trail for government is obvious—without a well-functioning enforcement transactions, one needs capable institutions with well- system, all the preventive mechanisms become trained staff to be able to analyze the data, detect essentially toothless. red flags, and then to act on those findings through appropriate enforcement channels. The procurement The country spotlight on Malaysia underlines how and infrastructure chapters highlight how the advances policy responses to corruption can be put at risk in e-GP systems are improving the ability to detect without the corresponding institutionalization of informality and irregular activity, but they need to be processes and rules. The country has gone through further exploited. Colombia’s experience highlights several reforms, including those initiated by the a positive example of innovations in the procurement government that came into power in 2018. Some of platform that are increasing competition and value. the reforms could not be completed as they required Incentives Of course, corruption is driven by incentives, because the information was already public. In Ukraine, where the perceived benefits of corrupt activity major changes to the health financing system upended outweigh the perceived risk of being caught. Many the incentives that had previously been in place to of the initiatives in this report are aimed at increasing extract bribes from patients and from prospective the risk of detection, though some are also focused on medical school students. Though the system is far from reducing the benefits or opportunities from corruption. perfect, it has helped to constrain one of the channels In the Madagascar customs example, the performance for corruption that had endured for decades. pay approach aimed to increase the benefits of good behavior, but tough sanctions for bad behavior At times, government officials need to seek proved to be a stronger incentive, especially when out an alignment of incentives among different stronger data monitoring raised the risk of detection. stakeholders if they hope to tackle corruption. In Automation of land records in Rwanda helped reduce the case of Nigeria’s ports, the international shippers’ the value of paying bribes to land registry officials association had strong commercial incentives to 344 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption CONCLUSIONS reduce corruption, while the UNDP and three of they have now made the legal entities who represent the government’s anti-corruption agencies were all companies liable for the updating and confirmation of motivated to show positive results. This alignment of beneficial ownership information on their clients. This objectives helped foster collaboration on reforms. A shifts the compliance burden from the state to the similar alignment of incentives is evident in Slovakia’s corporate representatives, who are ultimately better approach to developing and maintaining beneficial placed to obtain and confirm the corporate data, and ownership registries. Through a change of regulations, risk suffering a reputational risk if they do not. Technology Information technology is a common driver of digitization of information in the public and private reform in many of the cases, because of the key role sectors. Brazil’s federal court of accounts (TCU) has it plays in enhancing transparency and reducing applied AI as a decision support tool for identifying human discretion. Applying an appropriate level of transactions and payments ex ante that are at a high risk technology—adapted to the country capacity—brings for fraud and corruption. India’s Andhra Pradesh (AP) increased benefits when part of a broader policy state has progressively leveraged digital government change. For example, in low capacity environments, platforms and emerging technologies to improve public such as Madagascar and Afghanistan, automation of services, while also reducing the opportunities for customs clearance procedures has been an important fraud and corruption in key areas, such as taxation and foundation of reform, but it has been accompanied construction permitting. They have used a combination by other efforts to prevent “gaming the system.” In of tools that included drones, GIS mapping, processing Ukraine, a digital eHealth platform connected to the with artificial intelligence, E-governance dashboard, reimbursement system was established, to ensure etc., to provide an integrated picture of government greater transparency in payments for health services. services. Even in very advanced countries, there is a In Nigeria, the Corporate Affairs Commission (CAC) need to remain vigilant and to anticipate new schemes will be relying on modernization of its data systems that may emerge. For example, Singapore developed and online reporting tools to help the government an AI application to help flag fraudulent training implement new beneficial ownership disclosure providers in its SkillsFuture program (a several million- requirements on all 3.1 million registered Nigerian dollar grant program for training). The GovTech chapter companies. of this report details many tools that governments may avail themselves of, but the ability to leverage them Reformers must also take advantage of the is often impeded by silos within government and the opportunities that emerging technologies may broader ecosystem of “analog” processes and culture offer, especially to leverage the rapidly growing that are harder to reform. Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 345 CONCLUSIONS Transparency Transparency has been a cornerstone of many Reducing corruption in public procurement and of the reform efforts, but it is made even more public infrastructure is particularly challenging, impactful when accompanied by increased citizen and most of the measures that are promising engagement. The AID cases in Romania and Ukraine rely on transparency and citizen engagement, in both rely on public access to wealth declaration conjunction with data. Each of the CoST examples forms as a central characteristic to making them an from Honduras, Thailand, and Ukraine embodies effective anti-corruption measure. When the content mechanisms for transparency in contract management, of the declarations was known only to a few officials coupled with a multi-stakeholder group to enhance in government, the requirement had little impact. But the accountability of government officials and private once civil society and the media had access to the companies. Reflecting the specific challenges to information, the level of scrutiny increased significantly, managing PPP contracts for public works and the risk making it harder for corrupt individuals to hide. Positive of unjustified cost-escalation, governments such as experiences with beneficial ownership transparency Chile, Australia, and the EU are defining transparent are emerging in the cases of Slovakia, UK, and Nigeria, processes and frameworks for renegotiation subject though at different speeds. Such information is critical to external audit. The cases of Colombia, Chile, and to identify potential conflicts of interest in public Bangladesh show how e-GP systems have been used as procurement, as well as to support tax administrations a foundation for introducing greater transparency in the in flagging potential profits from illegal activities. public procurement system. While there are differences Supreme audit institutions in Ghana and India have in their stages of development, each of the countries enjoyed a stronger contribution to anti-corruption in has seen an increase in competition as information their countries due to the public accessibility of their going to potential bidders becomes more standardized audit findings and the public outcry that has resulted. and trust in the system has increased. Andhra Pradesh’s And while the experiments with participatory budgeting experience involves extensive investment in technology, in Ethiopia and Kenya were not directly aimed at but with the aim of increasing transparency on property fighting corruption, they have nevertheless helped to tax assessments on the one hand, and in construction increase the accountability of local officials to citizens permitting on the other. and reduce the scope for bribes in public service provision that comes from lack of public knowledge. Collaboration Co l l a boration a mon g sta ke ho lders is a n across agencies and resolving data inconsistencies will increasingly important success factor in anti- governments be able to exploit the benefits of machine corruption efforts; and better collaboration learning and to flag irregularities. As noted in chapter amongst public agencies is a starting point. 10, tax administrations have significant untapped The success of AP’s reforms depended also on potential to aid in the fight against corruption by inter-agency collaboration, pulling together data accessing third-party data from across government from many sources to develop an accurate status of agencies and beneficial ownership registries to service provision on which to act. Indeed, for many identify illicit financial flows. Where data held by tax governments seeking to leverage the benefits of authorities can be accessed by justice-related bodies, digitalization and emerging technologies, it is essential on the other hand, it may enhance governments’ ability that they break down the institutional silos that impede to prosecute individuals who have engaged in corrupt effective data sharing. Important data may be spread activities. Prosecution of corruption is a critical final across different agencies, who have created their own leg in the anti-corruption platform, and the chapter constraints to sharing. Only by tapping into databases on justice systems emphasizes how all three pillars— 346 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption CONCLUSIONS police, prosecutors, and courts—need to work well between government, civil society, and the private together. Similarly, anti-corruption agencies (ACAs) sector to be effective. rely on collaboration with other public institutions to be most effective; countries setting up or refining the Finally, collaboration can extend beyond national mandate of their ACAs should take into account their borders to combat the globalization of corruption roles and competencies relative to other bodies. and the shifting of assets offshore. Countries can gain inspiration from Brazil’s success in detecting and Collaboration with external stakeholders— prosecuting corrupt activity in the Odebrecht case, journalists, civil society, and the private sector— which stemmed in large part from their ability to is also an important theme across the cases. In collaborate with other financial investigative units across Nigeria, private firms found a common interest with national boundaries. Indeed, as schemes become more anti-corruption bodies to work together on governance complex and the channels for hiding and moving assets of ports. For the countries who are using CoST to become more sophisticated, governments will need to improve infrastructure governance, social accountability leverage collaborative agreements with other countries mechanisms are an integral part of their strategy to link and develop forensic capacity to use the trove of data the interests of the public and private sector. In the available through international conventions. Stopping Columbia EPM case, the quality of SOE governance corruption at its source will always prove elusive, but first began with legislative foundations for corporate governments can benefit from emerging technologies responsibility, but what enabled EPM to stand out as to detect illicit financial flows and to provide evidence an SOE was its commitment to public engagement needed to recover stolen assets. Collaboration among and transparency with customers, communities, and national law enforcement agencies is also becoming shareholders. Moreover, anti-corruption instruments, increasingly important to the pursuit and prosecution such as asset and interest disclosure and beneficial of corrupt individuals, who are otherwise able to move ownership transparency rely heavily on collaboration assets across jurisdictions with ease. Looking ahead to sharper tools Sustaining the momentum for corruption- sectors that absorb substantial public resources and mitigating reforms is not easy, but it could be aided have an impact on development. But the best designs by having better ways to measure their impact. As for anti-corruption strategies will be able to establish noted earlier in this report, the current tools that are the bridge between the corruption entry points that used internationally to measure corruption have the are common to a sector generally and those that are common problem of relying on the perceptions of specific to that sector/function in country X and at a experts. While there is some benefit from such surveys specific point in time. The incentives for corruption and as a broad proxy, they are not a substitute for having a the vulnerabilities that can be exploited need to be more quantitative or evidence-based set of indicators. better understood first at a sectoral/functional level, Enterprise surveys are one of the few such evidenced- before drilling down to a specific national/local level. based tools, but they only track a narrow range of Some CSOs and international organizations are already services, mostly targeting bribes for public services. A beginning to mine this area for insights, but more work future research agenda for the international community remains to be done. could be to develop other types of survey approaches that would expand the breadth of corruption Countries’ urgent responses to the COVID-19 monitoring. pandemic should not be at the expense of the ongoing fight against corruption. There is an understandable More also needs to be known about how corruption pressure to address immediate and urgent needs in manifests itself within specific sectors and/ healthcare, social safety nets, and economic stimuli. or functions. Part I of this report provided a brief Responding with speed may mean that the standard overview of corruption entry points in a few specific procurement and other accountability procedures Enhancing Government Effectiveness and Transparency: The Fight Against Corruption 347 CONCLUSIONS have to be relaxed. As such, government officials must balance the need for discretion in public spending with maintaining accountability and transparency mechanisms. Simplification of procedures may be necessary, while at the same time preserving sufficient records to permit an accurate stock-take and review of expenditure after the crisis is over. Yet, the risks of corruption are real; countries should be wary that in accelerating public expenditures, public procurements could be captured by well-connected elites and fraudulent agents. In the medium term, governments should quickly restore those systems that are critical for integrity and not do lasting damage to the systems of checks and balances that have been put in place. In this time of dislocation and uncertainty, the core tools of fiscal transparency, citizen engagement, and social accountability become ever more important. Achieving long -term economic growth and shared prosperity depends upon governments, companies, and communities working together to address corruption and its corrosive impacts. We are reminded in this report that the challenges to confronting corruption are deep-rooted, but not impossible to overcome. Each case study gives evidence of impact in reducing the risk of corruption, spanning a variety of country contexts: fragile states, low-income, and advanced countries. Public policy practitioners and civil society advocates will want to adapt this menu of approaches to their own political economy contexts. But in the not-too-distant future, as digitalization expands across the public sector and disruptive technologies become more commonplace, the tools with which to detect corrupt activities and to track down illicit financial flows should become even sharper. When that happens, the ‘disinfecting effect of sunlight’ will be even more powerful than it is now. 348 Enhancing Government Effectiveness and Transparency: The Fight Against Corruption