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Global Corruption Report 2006
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Global Corruption Report 2006
Transparency International
Pluto P Press
LONDON ANN ARBOR, MI
TRANSPARENCY
I NTERNATI ONAL
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First published 2006 by Pluto Press
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www.globalcorruptionreport.org
Transparency International 2006
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Edited by Jana Kotalik and Diana Rodriguez
Contributing editors: Taslima Ahmed, Michael Griffin, Robin Hodess, Caroline Tingay and
Marie Wolkers
Every effort has been made to verify the accuracy of the information contained in this report,
including allegations. All information was believed to be correct as of July 2005. Nevertheless,
Transparency International cannot guarantee the accuracy and the completeness of the contents.
Nor can Transparency International accept responsibility for the consequences of its use for other
purposes or in other contexts. Contributions to the Global Corruption Report 2006 by authors external
to Transparency International do not necessarily reflect the views of Transparency International or
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Contents
Acknowledgements x
Preface xii
David Nussbaum
Foreword xiv
Mary Robinson
Executive summary xvi
Part one: Corruption and health
1 The causes of corruption in the health sector: a focus on health care systems 3
Why are health systems prone to corruption? 4
William D. Savedoff and Karen Hussmann
A tale of two health systems 14
William D. Savedoff
Corruption in health care systems: the US experience 16
Malcolm K. Sparrow
Corruption in Cambodias health sector 22
Lisa Prevenslik-Takeda
2 The scale of the problem 25
Case study: Grand corruption in Costa Rica 26
Emilia Gonzlez
Measuring corruption in the health sector: what we can learn from public
expenditure tracking and service delivery surveys in developing countries 29
Magnus Lindelow, Inna Kushnarova and Kai Kaiser
Local-level corruption hits health service delivery in the Philippines 37
Omar Azfar and Tugrul Gurgur
Corruption is bad for your health: findings from Central and
Eastern Europe 39
Richard Rose
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Global Corruption Report 2006 vi
Citizens audit in Mexico reveals paper trail of corruption 43
Helena Hofbauer
Fighting fraud and corruption in Britains National Health Service 46
Jim Gee
3 Corruption in hospitals 48
Corruption in hospital administration 49
Taryn Vian
Cash registers inject transparency and revenue into Kenyas
Coast Provincial General Hospital 53
Taryn Vian
Hospital waiting lists open for scrutiny in Croatia 55
Ana First
No bribes for healthy business: Indias Transasia Biomedicals 58
Michael Smith
4 Informal payments for health care 62
Paying for free health care: the conundrum of informal payments in
post-communist Europe 63
Sara Allin, Konstantina Davaki and Elias Mossialos
Gift, fee or bribe? Informal payments in Hungary 71
Pter Gal
Informal payments take a toll on Moroccan patients 74
Azeddine Akesbi, Siham Benchekroun and Kamal El Mesbahi
5 Corruption in the pharmaceutical sector 76
Pharmaceuticals and corruption: a risk assessment 77
Jillian Clare Cohen
US pharmaceutical company fned for payments to charity headed by
Polish health offcial 78
The corrupting influence of money in medicine 85
Jerome P. Kassirer
Promoting trust and transparency in pharmaceutical companies:
an industry perspective 91
Harvey Bale
Fighting corruption: the role of the medical profession 94
John R. Williams
The fight against counterfeit drugs in Nigeria 96
Dora Akunyili
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Corruption in the Ministry of Public Health, Thailand 100
Stuart Cameron
Malpractice in the Offce of the Drug Controller in Karnataka, India 101
Stuart Cameron
6 Corruption and HIV/AIDS 103
The link between corruption and HIV/AIDS 104
Liz Tayler and Clare Dickinson
Accountability in a time of crisis: corruption and the Global Fund 108
Toby Kasper
Corruption in Kenyas National AIDS Control Council 112
Kipkoech Tanui and Nixon Nganga
Part two: Country reports
7 Lessons learned from anti-corruption campaigns around the world 119
Cobus de Swardt
8 Country reports
Algeria Djilali Hadjadj 123
Bangladesh Iftekhar Zaman, Sydur Rahman and Abdul Alim 126
Bolivia Guillermo Pou Munt Serrano 130
Brazil Ana Luiza Fleck Saibro 133
Burkina Faso Luc Damiba 136
Cameroon Jean-Bosco Talla and Maurice Ngufack 139
China Guo Yong and Liao Ran 142
Costa Rica Roxana Salazar 146
Croatia Ana First 149
Ecuador Andrs Tobar 152
Finland Santeri Eriksson 154
France Antoine Genevois 157
Georgia Daria Vaisman 160
Greece Markella Samara 164
Guatemala Alejandro Urizar 168
Ireland Elaine Byrne 172
Israel Doron Navot 176
Japan Transparency International Japan 181
Kazakhstan Sergey Zlotnikov 184
Kenya Wachira Maina and Noelina Nabwire 188
Kuwait Kuwait Economic Society 191
Kyrgyzstan Aigul Akmatjanova 195
Malaysia Mehrun Siraj and Sunita Chima 199
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Morocco Azeddine Akesbi, Siham Benchekroun,
Kamal El Mesbahi, Rachid Filali Meknassi
and Michle Zirari 203
Nepal Rama Krishna Regmee 206
New Zealand Shane Cave 210
Nicaragua Roberto Courtney 213
Panama Anglica Maytn Justiniani 216
Papua New Guinea Transparency International Papua New Guinea 220
Peru Samuel Rotta Castilla and
Leonardo Narvarte Olivares 223
Poland Julia Pitera 227
Romania Adrian Savin 230
Serbia Nemanja Nenadic 235
Slovakia Emilia Sickov-Beblav 239
South Africa Ayesha Kajee 242
South Korea Geo-Sung Kim 246
Spain Manuel Villoria 250
Sri Lanka Anushika Amarasinghe 253
Switzerland Jeffrey Nilsen, Anne Schwbel and Stefanie Teickner 257
Uganda Charles Mubbale and Paul Onapa 261
Ukraine Transparency International 265
United Kingdom Transparency International (UK) 267
United States of America Nancy Izzo Jackson with Michael Johnston,
Mark Glaze, Holly Gregory and Chris Yukins 272
Vanuatu Anita Jowitt 277
Venezuela Transparencia Venezuela 280
Part three: Research on corruption
9. Introduction 287
Robin Hodess
10. Ten years of the CPI: determining trends 292
Johann Graf Lambsdorff
11. Corruption Perceptions Index 2005 298
Johann Graf Lambsdorff
12. Governance matters IV: new data, new challenges 304
Daniel Kaufmann, Aart Kraay and Massimo Mastruzzi
13. Corruption in the United States of America 308
Edward Glaeser and Raven Saks
14. Transparency and its impact on financial fragility 312
Saadia Zahidi
15. Budget transparency survey 315
Pamela Gomez
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16. Beyond the rhetoric: measuring revenue transparency in the oil and gas industry 319
Elizabeth Lort-Phillips and Vanessa Herringshaw
17. Benchmarking corporate reputation: an incentive for good anti-corruption practice 323
Transparencia Mexicana
18. Officials asset declaration laws: do they prevent corruption? 325
Ranjana Mukherjee and Omer Gokcekus
19. Tax evasion, fines and corruption in Mozambique 329
Ralf Lanwehr
20. The V4 index: corruption propensity in four Visegrd capitals 333
Michal ticka
21. Efficiency of federal transfers to municipalities in Brazil 336
Marcos Jose Mendes
22. Integrity Index for Public Institutions: evaluating Colombias health sector 339
Transparencia por Colombia
23. Corruption in the public health service in Bangladesh 343
Iftekhar Zaman and Alim Abdul
24. Governance in Bulgarias pharmaceutical selection and procurement systems 346
Patrick Meagher
25. Survey research sheds light on Latin Americans experience with corruption 350
Eric Kite and Margaret Sarles
26. Corruption in Palestinian society 354
TI Palestine/the Coalition for Accountability and Integrity (AMAN)
Index 357
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Global Corruption Report 2006 x
Acknowledgements
The editors of the Global Corruption Report 2006 would like to thank all the individuals
who made the production of this report possible, above all our authors.
We are particularly grateful to our Editorial Advisory Panel for their ongoing
commitment to the Global Corruption Report and in particular for their large contribution
to the thematic section of this years report: Sir George Alleyne, Harvey Bale, Zainab
Bangura, John Bray, Sarah Burd-Sharps, Laurence Cockcroft, Dennis de Jong, Jean de
Kerguiziau de Kervasdou, John Makumbe, Anke Martiny, Phil Mason, Devendra Raj
Panday, William D. Savedoff, Frank Vogl and Alexandra Wyke.
Many thanks are due to the countless colleagues across the Transparency Inter-
national movement, from the Secretariat in Berlin to national chapters around the
world, who made our challenging task easier with their ideas and advice. TI national
chapters deserve special mention for making a tremendous contribution to the expanded
country reports section.
Outside the TI network, thanks are also due to the many people who generously
devoted their time and energy to the report: David Abouem, Jens Andvig, Frank
Anechiarico, Ben Aris, Salahuddin Aminuzzaman, Guitelle Baghdadi, Manuhuia
Barcham, Predrag Bejakovic, Peter Birle, Gerry Bloom, Martin Brusis, Richard Calland,
Rowan Callick, Marianne Lala Camerer, Neil Collins, Aurel Croissant, Nicolas Dssen,
Luis de Sousa, Phyllis Dininio, Gideon Doron, Tim Ensor, Aleksandar Fatic, Judith
February, Mark Findlay, Ursula Giedion, se Grdeland, Djilali Hadjadj, Clement Henry,
Paul Heywood, Sorin Ionita, Fernando Jimnez, Claude Kabemba, Nancy Kane, John-
Mary Kauzya, Stuti Khemani, Grazyna Kopinska, Joe Kutzin, Johann Graf Lambsdorff,
Peter Larmour, Azzedine Layachi, Nelson Ledsky, Robert Leonardi, Henrik Lindroth,
Joan Lofgren, Roy Love, Xiaobo Lu, Stephen Ma, Muiris MacCarthaigh, Charles Manga
Fombad, Susan Foster, Martin McKee, Timo Moilanen, Philippe Montigny, James
Mormon, Ed Mountfeld, Gregory Mthembu-Salter, Olga Nazario, Naison Ngoma,
Jeremiah Norris, Abissama Onana, Katarina Ott, Heiko Pleines, Pierina Pollarolo, Gail
Price, Miroslav Prokopijevic, Vronique Pujas, Gabriella Tuason Quimson, Mouin
Rabbani, Vivek Ramkumar, Bernd Rechel, Peter Roberts, Nicholas Rosen, Alan Rousso,
Greg Salter, Olaf Schmitz-Elvenich, Peter Schnhfer, Amy Schultz, Hubert Sickinger,
Leo Sisti, Bruno Wilhelm Speck, Gopakumar K. Thampi, Rajib Upadhya, Nubia
Uruena, Shyama Venkateswar, Marcin Walecki, Steve Weiss, Laurence Whitehead
and Tom Zanol.
A special thank you to Gerard Waite for his work during the early stages of
commissioning the report, and to TI interns Conny Abel, Sarah Hees, Tom Lavers, Hazel
Mowbray, Georg Neumann, Mathilde Piard, Amber Poroznuk and Aaron Rajania.
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Finally, we thank our publisher, Pluto Press, for their ongoing enthusiasm for our
publication, and our external editor, Michael Griffn, for his fair, diligence and unfailing
talent.
The Global Corruption Report receives fnancial support from the government of
Germany.
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Global Corruption Report 2006 xii
Preface
David Nussbaum, Chief Executive, Transparency International
When my wife went to the hospital they examined her and prescribed some pills.
They said that none were available there, but if we paid 20 or 30 dirhams, someone
could provide the free medication. The problem is we cant afford the drugs.
These are the words of a man in Casablanca interviewed by Transparency International
Morocco, but they could have been uttered by any number of people in any number
of countries. This simple example illustrates the serious consequences of corruption
in the health sector. Corruption might mean the difference between life and death
for those in need of urgent care. It is invariably the poor in society who are affected
most by corruption because they often cannot afford bribes or private health care. But
corruption in the richest parts of the world also has its costs. Hundreds of millions of
dollars are lost each year to insurance fraud and corruption in rich countries, including
the United States and the United Kingdom.
Fighting corruption in the health sector is a complex challenge. At one end of
the scale are doctors and nurses who charge small informal payments to patients to
supplement inadequate incomes. At the other end, and far more pernicious, are the
corrupt suppliers who offer bribes, and the health ministers and hospital administrators
who accept bribes, or siphon millions of dollars from health budgets, skewing health
policy and depleting funds that should be spent building hospitals, buying medicines
or employing staff.
Three of the UNs eight Millennium Development Goals intended to halve poverty by
2015 relate directly to health: reducing child mortality, improving maternal health and
combating HIV/AIDS, malaria and other diseases. Transparency Internationals Global
Corruption Report 2006 demonstrates that fulflment of these goals by the target date is
severely hampered by the pervasiveness of corruption in the health care system.
Transparency Internationals work around the world includes analysing and reducing
corruption in the health sector, principally by redressing the information imbalance
between governments and service providers on the one hand, and patients on the other.
TIs national chapters in Argentina, Germany, Niger and Senegal, to name a few, have
done pioneering work in this feld. As highlighted in this volume, dedicated journalists
and representatives of watchdog bodies are other inspirational fgures: they dared to
confront powerful government and industry fgures, often at great personal risk.
In addition to exploring the health sector, the Global Corruption Report in its annual
country overviews, takes stock of corruption-related developments. One especially
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Global Corruption Report 2006 xiii
encouraging recent development is the entry into force of the UN Convention
against Corruption, which provides a common framework for all countries in tackling
corruption. Particularly noteworthy are its provisions on cross-border cooperation,
refecting the increasingly international nature of corruption and the movement of
its illicit gains.
A pervasive challenge is to ensure that lessons on how to fght corruption are adopted
with rigour and commitment by the people entrusted with power around the world.
Too often anti-corruption rhetoric is not followed up with action. The Global Corruption
Report 2006 charts the corruption-driven collapse of a number of regimes that rose to
power promising moral integrity and fscal probity. It also shows how institutions, laws
and mechanisms, ostensibly aimed at fghting corruption, can be rendered toothless if
they are not granted the resources and independence necessary to perform.
Another challenge is to build stronger ties between the anti-corruption movement
and movements concerned with other aspects of good governance. This report shows
that, although money lost directly to corruption is the most obvious and immediate
cost, the negative effects of corruption in terms of quality of government and the
well-being of a population are much longer term. The potential gains from fghting
corruption such as more and better health care, stronger judiciaries and legitimate
politics are immense.
The challenges facing the anti-corruption movement have changed markedly over
the last decade. When Transparency International was formed in 1993, national and
international leaders wilfully ignored calls to tackle corruption; it was a challenge
even to be heard. Now the body of evidence is too large, and the pervasive impact of
corruption recognised as too great, to ignore. In countries rich and poor around the
world, corruption ruins lives.
Corruption is a powerful force, but it is not inevitable or unavoidable. Diminishing
its impact restores diverted resources to their intended purpose, bringing better health,
nutrition and education to victims of corruption around the world, and with them,
opportunity and hope.
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Foreword
Mary Robinson
1
The human rights community needs to pay even more attention to corruption.
The highest attainable standard of health is one of the fundamental rights of every
human being, incorporated in article 12 of the International Covenant on Economic,
Social and Cultural Rights. Corruption alongside poverty, inequity, civil confict,
discrimination and violence is a major issue that has not been adequately addressed
within the framework of these basic rights. It leads to the skewing of health spending
priorities and the leaching of health budgets, resulting in the neglect of diseases and
those communities affected by them; it also means that poor people often decide
against life-saving treatment, because they cannot afford the fees charged for health
services that should be free.
Corruption in the health sector affects people all over the world, as the essays
featured in the Global Corruption Report 2006 refect. Money that should be spent
on alleviating poverty and illness ends up instead in private pockets. In this way,
corruption literally violates human rights, as people are denied the care that their
governments are obliged to provide.
But while the concern is global, there are populations for whom the consequences
of ill health are particularly bleak. If corruption and a lack of transparency are not
addressed as integral to health care strategies, HIV/AIDS and other infectious diseases
threaten to reverse hard-won development gains, especially in Africa. In many of these
countries, it is women who suffer most through discrimination in service provision,
and because they lack the capacity to access adequate health care or to act upon
prevention information.
Central to a human rights approach to health is ensuring that essential medicines
are available, accessible and of good quality. Availability means that these drugs must
be on offer in suffcient quantity within countries where there is a need for them.
Accessibility means that they should be easily obtainable on a non-discriminatory
basis to those who require them. Good quality signifes that the drugs have to be
scientifcally and medically approved.
Corruption hampers compliance with each of these obligations. The unpredictability
of disease, coupled with opaque spending decisions and aggressive marketing practices
by medicines producers and suppliers, generate ample opportunities for corruption.
This affects the quality of medicines, for example, when regulators are bribed to
exercise less than rigorous checks or hospital administrators purchase cheaper, less
effective drugs and embezzle the proceeds. The consequences may be further reaching
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than failure to treat todays patients: the use of poor-quality medicines stimulates
drug-resistant strains of killers such as malaria.
The Global Corruption Report 2006 unpacks the issues related to corruption and
health, that as members of governments, international institutions, the private sector
and civil society, we need to take into account if we are serious about safeguarding
the right to health. The challenge is immense, and can only be tackled if we work
together, making use of the moral and legal arguments provided by the international
human rights framework, as well as the practical tools and strategies, many of which
are highlighted in this book, that are needed to address the problems associated with
ill health around the world effectively.
There is a particular urgency about the issues in this 2006 report. For the years
up to 2015 we will see a steep increase in the aid budgets of donor countries, and
much of this aid will go to support health areas in developing countries. Unless we
improve donor coherence, transparency and the willingness of developing countries
to have rigorous systems of accountability, we could see corruption becoming more of
a problem, and miss out on an important opportunity to strengthen primary health
care systems.
This book should be on the table of every policy-maker who cares about development.
Note
1. Mary Robinson is former UN High Commissioner for Human Rights and former president
of Ireland. She is the founder and president of Realizing Rights: The Ethical Globalization
Initiative.
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Executive summary
Every year, the world spends more than US $3 trillion on health services, most of which
is fnanced by taxpayers. These large fows of funds are an attractive target for abuse.
The stakes are high and the resources precious: money lost to corruption could be used
to buy medicines, equip hospitals or hire badly needed medical staff.
The diversity of health systems worldwide, the multiplicity of parties involved, the
paucity of good record keeping in many countries, and the complexity in distinguishing
among corruption, ineffciency and honest mistakes make it diffcult to determine the
overall costs of corruption in this sector around the globe. But the scale of corruption
is vast in both rich and poor countries. In the United States, which spends more on
health care 15.3 per cent of its GDP than any other industrialised nation, the two
largest US public health care programmes, Medicare and Medicaid, estimate that 510
per cent of their budget is lost to overpayment. In Cambodia, health practitioners
interviewed for the Global Corruption Report 2006 estimate that more than 5 per cent of
the health budget is lost to corruption before it even leaves central government.
Corruption deprives people of access to health care and can lead to the wrong
treatments being administered. Corruption in the pharmaceutical chain can prove
deadly: in the words of Dora Akunyili, head of Nigerias Food and Drug Authority and a
winner of the TI Integrity Award in 2003, drug counterfeiting, facilitated by corruption,
kills en masse and anybody can be a victim. The authority she heads has found cases
of water being substituted for life-saving adrenaline and of active ingredients being
diluted by counterfeiters, triggering drug-resistant strains of malaria, tuberculosis and
HIV, the worlds biggest killers.
The poor are disproportionately affected by corruption in the health sector, as they
are less able to afford small bribes for health services that are supposed to be free, or
to pay for private alternatives where corruption has depleted public health services.
A study of health care delivery in the Philippines fnds that poor and middle-income
municipalities report longer waiting times at public clinics than rich ones, and a higher
frequency of being denied vaccines when corruption is rampant.
Corruption affects health policy and spending priorities. Examples in this years
Global Corruption Report from Mexico and Kenya illustrate how public offcials have
abused their power to divert funds to pet projects, regardless of whether they are in
line with agreed health policy. There are also incentives for a distortion in payments at
the service delivery level. When caregivers are paid on a fee-for-service basis, they have
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incentives to provide unnecessary treatment to maximise their revenue. If instead they
are paid per patient, they can proft by failing to provide needed services.
Reducing corruption can inject revenues back into the health sector. In the United
Kingdom, the National Health Services anti-fraud unit reports it has stopped corruption
totalling more than 170 million (US $300 million) since 1999, and the total fnancial
benefts to the NHS (which also includes recovery of losses due to fraud and reduction
in measured losses due to intervention by the counter-fraud service) have been four
times that. That is enough to build 10 new hospitals.
Transparency International defnes corruption as the abuse of entrusted power
for private gain. In the health sphere corruption encompasses bribery of regulators
and medical professionals, manipulation of information on drug trials, the diversion
of medicines and supplies, corruption in procurement, and overbilling of insurance
companies. It is not limited to abuse by public offcials, because society frequently
entrusts private actors in health care with important public roles. When hospital
administrators, insurers, physicians or pharmaceutical company executives dishonestly
enrich themselves, they are not formally abusing a public offce, but they are abusing
entrusted power and stealing precious resources needed to improve health.
Why is the health sector so prone to corruption?
Certain characteristics make all health systems whether public or privately funded,
in rich and poor countries vulnerable to corruption:
An imbalance of information prevails in health systems: health professionals have
more information about illness than patients, and pharmaceutical and medical
device companies know more about their products than public offcials entrusted
with spending decisions. Making information available can reduce losses to
corruption. A study from Argentina showed that the variation across hospitals
in prices paid for medical supplies dropped by 50 per cent after the ministry
began to disseminate information about how much hospitals were paying for
their supplies.
The uncertainty in health markets not knowing who will fall ill, when illness will
occur, what kinds of illnesses people get and how effective treatments are is
another challenge for policy-makers, as it makes it diffcult to manage resources,
including the selection, monitoring, measuring and delivery of health care services
and the design of health insurance plans. The risk of corruption is even higher in
humanitarian emergency situations when medical care is needed urgently and
oversight mechanisms are often bypassed.
The complexity of health systems, particularly the large number of parties involved,
exacerbates the diffculties of generating and analysing information, promoting
transparency, and detecting and preventing corruption. The relationships between
medical suppliers, health care providers and policy-makers are often opaque and
can lead to distortions of policy that are bad for public health.
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The types of corruption in health
Regulators, payers, health care providers, suppliers and consumers face a complex mix
of incentives that can lead to corruption. Forms of corruption in the health sector
include:
Embezzlement and theft from the health budget or user-fee revenue. This can occur
at central or local government level or at the point of allocation to a particular
health authority or health centre. Medicines and medical supplies or equipment
may be stolen for personal use, use in private practice or resale.
Corruption in procurement. Engaging in collusion, bribes and kickbacks in procurement
results in overpayment for goods and contracted services, or in failure to enforce
contractual standards for quality. In addition, hospital spending may include large
investments in building construction and purchase of expensive technologies,
areas of procurement that are particularly vulnerable to corruption.
Corruption in payment systems. Corrupt practices include waiving fees or falsifying
insurance documents for particular patients or using hospital budgets to beneft
particular favoured individuals; illegally billing insurance companies, government
or patients for services that are not covered or services not actually provided,
in order to maximise revenue; falsifcation of invoice records, receipt books or
utilisation records, or creation of ghost patients. Other forms of corruption that
relate to payment structures are: buying business from physicians by creating
fnancial incentives or offering kickbacks for referrals; physicians improperly
referring public hospital patients to their private practice; and performing
unnecessary medical interventions in order to maximise fee revenue.
Corruption in the pharmaceutical supply chain. Products can be diverted or stolen at
various points in the distribution system; offcials may demand fees for approving
products or facilities for clearing customs procedures or for setting prices; violations
of industry marketing code practices may distort medical professionals prescribing
practices; demands for favours may be placed on suppliers as a condition for
prescribing medicines; and counterfeit or other forms of sub-standard medicines
may be allowed to circulate.
Corruption at the point of health service delivery can take many forms: extorting or
accepting under-the-table payments for services that are supposed to be provided
free of charge; soliciting payments in exchange for special privileges or treatment;
and extorting or accepting bribes to infuence hiring decisions and decisions on
licensing, accreditation or certifcation of facilities.
Recommendations for the health sector
Anti-corruption measures must be tailored to ft the particular context of a countrys
health system. As with any sector, health system corruption is less likely in societies where
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there is broad adherence to the rule of law, transparency and trust, where the public
sector is ruled by effective civil service codes and strong accountability mechanisms,
and where there is an independent media and strong civil society. Preventative measures
including procurement guidelines; codes of conduct for operators in the health sector,
both institutional and individual; and transparency and monitoring procedures are
all pressure points for honest behaviour which are not part of the law but which can
be effective mechanisms to combat corruption.
Transparency
It is essential that governments and health authorities publish regularly updated
information on the Internet on health budgets and performance at the national,
local and health delivery centre levels. Government departments, hospitals, health
insurance entities and other agencies handling health service funds must be
subject to independent audits.
Governments and health authorities have responsibility to ensure that information
about tender processes, including offers to tender, terms and conditions, the
evaluation process and fnal decisions, is publicly available on the Internet.
Effective nationwide systems for reporting adverse drug effects must be implemented
wholeheartedly by governments, in order to provide a mandate and an incentive
for physicians to report such information.
A public database listing the protocols and results of all clinical drug trials needs
to be developed. Reporting by the drug industry on clinical drug trials should be
mandatory, as well as the disclosure of all fnancial contributions made to medical
research units from pharmaceutical companies.
Donors must be open and explicit about what they are giving, when and to whom,
and should evaluate their programmes in terms of health outcomes and not level
or speed of disbursement. Donors also have the duty to coordinate their support
to the health sector, using the same accounting and auditing mechanisms to
reduce transaction costs, improve effciency and reduce risks of corruption.
Codes of conduct
The introduction and promotion of codes of conduct, through continued training
across the health system, is a must for regulators, medical practitioners, pharmacists
and health administrators. These codes ought to make explicit reference to
preventing corruption and conficts of interest that can lead to corruption, detail
sanctions for breaches and be enforced by an independent body.
It is imperative for pharmaceutical, biotech and medical device companies to adopt
the Business Principles for Countering Bribery, through which a company commits
to refraining from bribery in its operations and implementing a comprehensive
anti-corruption programme.
1
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Civil society participation and oversight
Health authorities must introduce avenues for public oversight, which improve
accountability and transparency. These should oversee procurement and drugs
selection at facility level and health delivery at community and local health board
level.
It is essential for public policies, practices and expenditures to be open to public
and legislative scrutiny, while all stages of budget formulation, execution and
reporting should be fully accessible to civil society.
Whistleblower protection
Governments need to introduce whistleblower protection for individuals working
in procurement bodies, health authorities, health service providers and suppliers
of medicines and equipment.
Pharmaceutical companies must also introduce whistleblower mechanisms and
protection.
Reducing incentives for corruption
In order to ensure that treatment is dictated by patient need and not by opportun-
ities for proft, governments must continuously monitor payment mechanisms
(whether fee-for-service, salary, capitation, global budgeting or other).
Doctors, nurses and other health professionals have to be paid a decent wage,
commensurate with their education, skills and training.
Conflict of interest rules
Regulators have the responsibility to adopt confict of interest rules that disqualify
individuals or groups with an interest in the manufacturer from participating in
clinical drug trials.
Governments must push for transparency in drug regulation processes, reduction
in the excessive promotion of medicines, tougher restrictions on doctors
overprescribing drugs, and closer monitoring of relationships between health
departments and the drugs industry.
Medical licensing authorities need to defne the specifc rules for physician
behaviour regarding conficts of interest (in particular in relationships with the
pharmaceutical and medical device industries) and obtain the necessary resources
to enforce these rules.
Integrity pacts and debarment
An Integrity Pact a binding agreement by both bidders and contracting agencies
not to offer or accept bribes in public contracting needs to be applied to major
procurement in the health sector.
2
GC2006 00 pre 20 8/11/05 17:53:08
Global Corruption Report 2006 xxi
Companies found to have engaged in corrupt practices must be debarred by
governments from participating in tender processes for a specifed period of
time.
Rigorous prosecution
It is essential for prosecuting authorities to strengthen the message that corruption
has consequences by rigorously pursuing corrupt acts that are clearly proscribed
by law. Producers of counterfeit drugs and the public offcials who collude with
them must be prosecuted and duly sanctioned.
Special anti-corruption and fraud agencies to detect corruption and promote
preventative measures in the health sector must be equipped with the necessary
expertise, resources and independence to carry out their functions, and be backed
by functioning independent courts.
Health is a major global industry, a key responsibility and budget expense for governments
and businesses; but more than that, it is a global human right. Corruption deprives
people of access to health care and leads to poor health outcomes. There are no simple
remedies for tackling corruption in the health sector, but the recommendations outlined
above and the initiatives highlighted in the Global Corruption Report could prevent,
reduce and control corruption. These are addressed as a call to action to researchers,
governments, the private sector, the media and citizens the world over.
Notes
1. For more on the Business Principles for Countering Bribery and its supporting guidance
document and suite for implementation and monitoring tools, see www.transparency.org/
building_coalitions/private_sector/business_principles.html
2. For more on the TI Integrity Pact, see www.transparency.org/integrity_pact/index.html
GC2006 00 pre 21 8/11/05 17:53:08
GC2006 00 pre 22 8/11/05 17:53:08
FarI ona
6orrupIIon and haaIIh
GC2006 01 part1 1 8/11/05 17:54:47
GC2006 01 part1 2 8/11/05 17:54:47
Tha oausas oI oorrupIIon In Iha haaIIh saoIor 8
1 Tha oausas oI oorrupIIon In Iha haaIIh saoIor.
a Ioous on haaIIh oara sysIams
Corruption exists in all types of health care systems. William Savedoff and Karen
Hussmann look at the reasons why the health sector is especially vulnerable to
corruption, and ask whether the vulnerabilities are different in kind and in magnitude,
depending on the type of system chosen. An analysis of Colombia and Venezuela shows
that very different manifestations of corruption emerged as the two countries health
care models diverged.
If there is corruption, no matter which system is opted for, and how well it is funded,
health spending may not lead to commensurate health outcomes. In the United States,
Americans spend more on health care than many other industrialised countries, yet
health outcomes are arguably no better. At the opposite end of the scale is Cambodia,
An Iraqi trainee nurse works with newborns in the special care baby unit of Yarmouk Hospital
on 10 May 2005 in Baghdad, Iraq. Despite spending hundreds of millions of dollars on
the health ministry, endemic corruption has led to a lack of drugs and helped keep infant
mortality and malnourishment rates as high as during the Saddam Hussein era. (Scott Peterson/
Getty Images)
GC2006 01 part1 3 8/11/05 17:54:48
6orrupIIon and haaIIh 4
which is reliant on hundreds of millions of dollars per year in overseas development
assistance to prop up its health care system, and where known cases of tuberculosis
are increasing.
why ara haaIIh sysIams prona Io oorrupIIon?
William D. Savedoff and Karen Hussmann
1
Corruption in the health sector is not exclusive to any particular kind of health system.
It occurs in systems whether they are predominantly public or private, well funded or
poorly funded, and technically simple or sophisticated. The extent of corruption is, in
part, a refection of the society in which it operates. Health system corruption is less
likely in societies where there is broad adherence to the rule of law, transparency and
trust, and where the public sector is ruled by effective civil service codes and strong
accountability mechanisms.
These general factors affect the extent of corruption in any sector, but the health
sector has a number of dimensions that make it particularly vulnerable to abuse. No
other sector has the specifc mix of uncertainty, asymmetric information and large
numbers of dispersed actors that characterise the health sector. As a result, susceptibility
to corruption is a systemic feature of health systems, and controlling it requires policies
that address the sector as a whole.
Two other factors that contribute to corruption in health care are worth mentioning.
First, the scope of corruption in the health sector may be wider than in other sectors
because society frequently entrusts private actors in health with important public roles.
When private pharmaceutical companies, hospitals or insurers act dishonestly to enrich
themselves, they are not formally abusing public offce for private gain. Nevertheless,
they are abusing the publics trust in the sense that people and organisations engaged
in health service delivery are held to a higher standard in the interests of protecting
peoples health. The medical profession, in particular, is given great latitude in most
countries to police itself in return for assuming professional responsibility to act in the
best interests of patients (see Fighting corruption: the role of the medical profession,
Chapter 5, page 94).
Second, the health sector is an attractive target for corruption because so much
public money is involved. The world spends more than US $3.1 trillion on health
services each year, most of it fnanced by governments. European members of the OECD
collectively spend more than US $1 trillion per year and the United States alone spends
US $1.6 trillion.
2
In Latin America, around 7 per cent of GDP, or about US $136 billion,
is consumed by health care annually, of which half is publicly fnanced. In lower-
income countries, private health spending is often greater than public health spending,
although the latter is still a signifcant amount. The share of total government revenues
spent on health care ranges from under 5 per cent in Ethiopia, Egypt, Indonesia and
Pakistan to more than 15 per cent in Ireland, Germany, the United States and Costa
Rica. These large fows of funds represent an attractive target for abuse.
GC2006 01 part1 4 8/11/05 17:54:48
why ara haaIIh sysIams prona Io oorrupIIon?
No other sector of society has the specifc mix of uncertainty, asymmetric information
and large numbers of dispersed actors that characterise the health sector. These features
combine in ways that systematically create opportunities for corrupt behaviour,
while making it diffcult to ensure the transparency and accountability that would
inhibit this.
Uncertainty is a central feature of the health sector and has far-reaching implications,
as was frst argued by Kenneth Arrow in 1963.
3
Arrow showed that uncertainty regarding
who will fall ill, when illness will occur, what kinds of illnesses people get and how
effcacious treatments are make the market for health care services very different from
other markets in terms of the scope for market failure. Due to uncertainty, medical care
service markets and health insurance markets are both likely to be ineffcient.
Uncertainty pervades the health care sector. People may not even know that they
are ill or that they could beneft from health care services as frequently happens to
people with high blood pressure, anaemia or the early stages of diabetes. When people
fall ill and seek medical care, they cannot judge whether the prescribed treatment is
appropriate. If they get better, they may not know whether the treatment was necessary
for their recovery. For example, people with viral infections are often prescribed
antibiotics that are useless against viruses.
This uncertainty makes it diffcult for those demanding medical care patients
or their families to discipline suppliers of medical care, as occurs in other markets.
Patients cannot shop around for the best price and quality when they are ignorant of
the costs, alternatives and precise nature of their needs. In such situations, consumer
choices do not refect price and quality in the normal fashion, and other mechanisms
such as the licensing of professionals and facilities or even direct public provision
are introduced to allocate resources and determine what kinds of care are provided.
As an additional consequence, the poor functioning of markets creates opportunities
for corruption, and the uncertainty inherent in selecting, monitoring, measuring and
delivering health care services makes it diffcult to detect and assign responsibility for
abuses.
The uncertainty surrounding health care leads people to insure themselves against
illness. But the functioning of voluntary insurance markets leaves too many people
without insurance and encourages the provision of too much health care for those
who have it.
4
A common social response has been to establish mandatory health
insurance coverage, which may resolve the market failures in health insurance but
also introduces problems associated with ineffective public sector functioning.
5
The
resulting engagement of public policy in the provision or regulation of health insurance
is another signifcant avenue for corruption.
But the degree of uncertainty is not identical for everyone in the health sector,
leading to a second systemic feature, namely asymmetric information. Information is
not shared equally among health sector actors and this has signifcant implications for
a health systems effciency and its vulnerability to corruption. Health care providers
GC2006 01 part1 5 8/11/05 17:54:49
are better informed of the technical features of diagnosis and treatment than patients;
pharmaceutical companies know more about their products than the doctors who
prescribe them; individuals have certain kinds of information about their health that
are not available to medical care providers or insurers; and providers and insurers may
have better information about the health risks faced by certain categories of individuals
than the individuals themselves.
When combined with differing interests among health sector actors, asymmetric
information leads to a series of problems that are usefully analysed within the framework
of principalagent relationships.
6
In such a framework, the principal hires an agent
to perform some function. When the agent has interests that differ from those of the
principal and when the principal cannot get complete information about the agents
output, it is diffcult to fnd contracts that are optimal. These two characteristics
diverging interests and incomplete information are inherent and widespread in the
health sector. For example, doctors have an interest in improving the health of their
patients, but their choices of treatments and medications also may affect their income,
professional status and working conditions. Whether doctors are hired by patients in the
private sector or by public health services, they are entrusted with making decisions in
the best interest of the patient, but may be tempted to provide substandard services or
prescribe expensive treatments. Doctors are not the only agents in the health system.
Those who manage health facilities, pharmaceutical companies, equipment suppliers
or insurance agencies face complex incentives that may encourage them to reduce the
quality of care, or promote the use of unnecessary diagnostics or treatments. When
political interests are involved, any of these agents may be pressured to take actions
that undermine health care or increase its costs.
While principalagent problems in the health sector have mainly been analysed
in terms of their impact on health system effciency, these same problems increase
opportunities for corruption. Furthermore, the diffculty of fully monitoring the actions
of doctors, hospitals, pharmaceutical companies and regulators makes it hard to hold
them accountable for the results of their actions. For example, patients usually lack
information to monitor decisions made on their behalf, or judge whether they have
been appropriately billed; insurance auditors have a hard time assessing whether billing
is accurate and whether services rendered were necessary; regulatory agencies are hard-
pressed to assure the quality of drugs and medical equipment, and the accuracy of labels
and expiration dates. All of this establishes a system that is prone to corruption, and
in which identifying and punishing corrupt practices is inherently diffcult.
Finally, health systems are prone to corruption because of the large number of actors
involved and the complexity of their multiple forms of interaction. These actors can
be classifed into fve main categories (see Figure 1.1): government regulators (health
ministries, parliaments, specialised commissions); payers (social security institutions,
government offce, private insurers); providers (hospitals, doctors, pharmacists);
consumers (patients); and suppliers (medical equipment and pharmaceutical companies).
The presence of so many actors exacerbates the diffculties of generating and analysing
information, promoting transparency and even identifying corruption when it occurs.
It increases the number of opportunities for corruption; for example, funds can be
GC2006 01 part1 6 8/11/05 17:54:49
diverted or misallocated at a ministry, state hospital board or local clinic by individuals
working as managers, procurement offcers, health professionals, dispensers, clerks or
patients. And the involvement of so many actors multiplies the number and kinds of
interests that might encourage corrupt behaviour. Actors may be tempted to abuse
their positions for direct fnancial gain, to increase their prestige, political infuence
and power, or to expand their market share. When corruption is detected, it may be
diffcult to attribute it to a particular individual, or to distinguish corruption from a
misjudgement or error.
Figure 1.1: Five key actors in the health system
These three features uncertainty, asymmetric information and large numbers of
actors systematically increase the likelihood that corruption will occur and that it
will be diffcult to detect, punish and deter in three distinct ways. First, they impair
the normal functioning of a competitive market that might otherwise be harnessed
to constrain illicit behaviour.
7
Second, they encourage the involvement of the public
sector as a direct provider of health services, as insurer and/or as regulator, opening
additional opportunities for corruption. Finally, these three features constrain efforts
to generate reliable information, establish transparency and enforce accountability.
State capture
Definition and
approval of norms
Government
regulator
Other
Supplier
(e.g. construction)
Payer
(Social security, private
or public health
insurance)
Drug & equipment
Supplier
Provider
(Public or private
hospitals, physicians)
Patients
Influence on
decision-makers
Extortion
by
inspectors
State capture
Drug approval & control
Equipment norms
Bribes to
overlook
compliance
Influence on
decision-makers
Prescription practices
Drug & equipment procurement
Procurement
(facilities, ambulances)
Negative
incentives
to save costs
Over-provision
Absenteeism
Overbilling
Phantom patients
Fraud in beneficiary ID use
Understatement of income
Informal payments
Unnecessary treatment & prescriptions
GC2006 01 part1 7 8/11/05 17:54:49
6orrupIIon and haaIIh B
hoW ara oorrupIIon and Iraud manIIasIad In Iha haaIIh saoIor?
Roles and responsibilities within health systems are split between regulators, payers,
health care providers, suppliers and consumers in ways that make good decision-making
diffcult, even when everyone is thoroughly honest. When individuals who are willing
to take advantage of this system are factored in, things become even more entangled.
To see how this works, it is useful to consider, in turn, how each actor can use its
position to defraud others.
Regulators (ministries of health, parliaments, supervisory commissions)
The basic uncertainty in health care services creates a potential role for government to
protect consumers through supervision and improved information. It is common for
governments to assume the role of verifying that medications are safe and effective,
that health care practitioners have completed approved courses or have proven skills,
and that facilities are adequately staffed and equipped. However, the existence of
regulations opens avenues for corrupt activities. Pharmaceutical companies can skew
research studies, infuence review boards or simply bribe regulators to approve or speed
up the processing of their applications. Health care providers and facilities may be
tempted to pay a regulator to overlook lapses in licensing requirements. As in any
sector, government inspectors can be tempted to abuse their position to extract bribes
even when providers are in compliance.
Payers (social security organisations, health insurers)
Payers can be defrauded by other actors, but they can also engage in corrupt practices
themselves. The public sector can act as a payer either through direct provision of care or
as a public insurance agency. In the private sector, payers include commercial insurance
frms and non-proft insurance organisations. Individuals can also be considered payers
when they pay fees directly to providers (see Patients below).
When the public sector provides services directly, it generally allocates resources
through the normal public budgetary process. This creates opportunities for political
interests to contravene decisions that are in the best interest of patients. For example,
decisions may be made to favour regions governed by political allies, rather than
following criteria of equity and effciency.
When the public sector manages an insurance fund, as is common in countries
with mandatory social insurance, corruption can occur when offcials embezzle funds.
The public insurer can also allocate resources for political gain and at the expense of
patients or taxpayers.
Private insurers, whether for-proft or non-proft, can engage in corrupt activities
when they collaborate in public programmes, or are subjects of regulation. They may
defraud public sector programmes that subsidise health care through fraudulent billing.
They may reject insurance claims that they are committed to reimburse by law. And
they may bribe insurance regulators to ignore illegal practices.
GC2006 01 part1 8 8/11/05 17:54:49
Health care providers (hospitals, doctors, nurses, pharmacists)
Health care providers have a wide range of opportunities to engage in corruption
because they have such a strong infuence over medical decisions, including prescribing
medications, determining the length of a hospital stay, ordering tests and referring
patients for additional consultations or services. In making these decisions, health
care providers may act in ways that are not in their patients best interests, whether
motivated by direct fnancial gain, increased prestige, greater power or improved
working conditions. These risks are one of the reasons that health care professionals
are generally bound by professional standards and ethical codes that are expressly
aimed at deterring corruption.
Patients generally defer to health care professionals in determining what course of
action should be taken to treat an illness. Consequently, health care providers are in the
unique position of telling the consumer what service to buy. When providers are paid
fee-for-service (that is, a fee for each service that they provide), it is in their fnancial
interest to provide more services, and more costly services, than might otherwise be
indicated by the individuals health condition. When providers are paid on a capitated
basis (that is, a single fee to cover any services required by a patient enrolled in their
care, regardless of how many are actually provided) then it is in their fnancial interest
to provide fewer services than would otherwise be indicated by the individuals health
condition alone. When providers are paid a fxed salary, independent of the volume
of services provided, there are no fnancial incentives to oversupply or undersupply
services, but there is a tendency to be less productive and provide less care.
8
In the case of publicly employed health providers, a wide range of abuses can occur.
They can abuse their public sector job by referring patients to their parallel private
practice (or use public facilities and supplies to serve their private patients). They may
defraud the public sector by accepting a full salary while absenting themselves to provide
private consultations elsewhere. They may steal drugs and medical supplies for resale
or use in other places, and solicit bribes from patients for services that are supposed to
be free. Although these practices are generally illegal, they may be excused in many
countries by people who see them as acceptable strategies for coping with low pay and
poor working conditions.
9
Health care providers are also in a position to defraud payers in several ways. Most
payment systems have to rely on the honesty of providers to state the kind and intensity
of services that have been provided. Health providers may create phantom patients to
claim additional payments. They can order tests to be conducted at private laboratories
in which they have a fnancial stake, or prescribe expensive drugs in exchange for
kickbacks or bribes from pharmaceutical companies.
In addition to health care providers, health facility offcials may accept kickbacks to
infuence the procurement of drugs and supplies, infrastructure investments and medical
equipment. In so doing, they may pay higher prices or overlook shoddy work.
Patients
Consumers or patients can also participate in corrupt behaviour. In many systems,
patients try to get free or subsidised care by underreporting their personal or family
GC2006 01 part1 9 8/11/05 17:54:49
income. In other systems, patients misrepresent their enrolment in an insurance plan
by using the insurance cards of friends or family members. This has been documented
in Canada where the province of Ontario detected numerous people using forged cards
to gain access to free public care.
10
A patient may bribe a doctor to obtain benefts
for non-health issues, such as a health certifcate to obtain a drivers licence, to avoid
military service or to obtain disability payments.
Paying bribes to get privileged access to public care is also a common form of
corruption. In some countries, such bribes are socially acceptable and excused as a way
to compensate poorly paid, public sector health professionals, or as an understandable
response by people who may be in dire need of care. When such bribes become
institutionalised, however, it creates a situation in which wealthier people are likely to
get better attention than those who are poorer and unable to pay bribes (see Chapter 3,
Corruption in hospitals).
Suppliers (producers of medical equipment, pharmaceutical companies)
Medical equipment suppliers and pharmaceutical companies have privileged
information about their own products and deliveries that assist them to corrupt the
health care system. Suppliers can skimp on the quality of equipment or repackage
expired medications. They can short-change deliveries and bribe procurement offcers
to authorise higher prices. They can induce providers to use their products at infated
prices, even when cheaper, equally effective alternatives are available. In the mid-1990s,
Germany investigated 450 hospitals and more than 2,700 doctors on suspicion of taking
bribes from manufacturers of heart valves, life support equipment, cardiac pacemakers
and hip joints.
11
Suppliers can bribe public health authorities in any of their normal
procurement processes, including kickbacks from companies that want to win lucrative
hospital construction tenders (see Global Corruption Report 2005).
Finally, suppliers can bribe regulatory agencies to develop policies in their favour. For
example, pharmaceutical companies may infuence governments to impede competition
from generic drug manufacturers, or equipment producers may try to change regulations
so that licensed facilities will be required to purchase their products.
Proving intent is difficult
Though all fve actors are generally present in each system, their relative power and
incentives will vary dramatically. For example, doctors paid on a salaried basis have
no way to overcharge insurers, and systems that prohibit insurers from establishing
exclusive provider networks have less leeway to control costs and billing practices.
In all cases, however, detecting corruption in the health system is diffcult. As strange
as it sounds, distinguishing an act of self-enrichment from systemic ineffciency, human
error or just poor judgement is hard. The line between abuse and honest mistakes is
frequently blurred. For example, when providers bill the government for treatments that
are not medically indicated (or not even provided), it may still be diffcult to determine
whether the decision represented an intentional effort to defraud the government, poor
training or a simple mistake.
These diffculties in proving intent encourage a situation in which impunity is
commonplace. Efforts to convict individuals or frms for corruption can be further
GC2006 01 part1 10 8/11/05 17:54:50
stymied when professional medical associations or industrial lobby groups use political
pressures to shield their members from what may be viewed or characterised as
prosecutorial zealotry.
12
One response can be to sidestep prosecution and instead use
public leverage to induce more transparent and honest behaviour. For example, the
US Department of Health and Human Services sought to reduce fraudulent billing of
Medicare (the United States public health insurance for the elderly) by documenting
discrepancies and developing compliance programmes. Thus, whether the practices
of upcoding, miscoding or unbundling that led to overpayments were due to errors,
misinterpretations or intentional malfeasance was simply sidestepped in favour of
assuring that future billing would be in compliance with the law. The compliance
programmes required a hospital to develop written standards of conduct, train staff
in the appropriate use of codes, establish hotlines for complaints and monitor its own
compliance, among a wide range of measures.
13
oas oorrupIIon vary aoross haaIIh sysIams?
Though health care providers, payers, consumers, regulators and suppliers are active in
all health systems, the actual relationships, responsibilities and payment mechanisms
will vary. Some countries have relatively well fnanced public health services that
are directly provided by national or local governments (Sweden, Spain). In other
high-income countries, the public sector pays for health services that are provided
by private and public health care providers (Canada, Germany). In most low- and
middle-income countries, the health system is fragmented. It may include a public
insurance scheme for formal sector workers; direct public provision of health care for
the indigent; private insurers and providers contracted by wealthier households; and
a large share of private practitioners who are paid directly by their patients, both rich
and poor (Mexico, South Africa).
14
Abuses in the health system aimed at personal gain are not exclusive to any particular
country or health system. But the forms of abuse may differ depending on how funds
are mobilised, managed and paid. For this reason, it is useful to classify health systems
into two broad categories based on their institutional structure: systems in which the
public sector fnances and directly provides health care services, and systems that
separate public fnancing from provision.
In the case of direct public provision of health care services, the most common
forms of abuse involve kickbacks and graft in procurement, theft, illegally charging
patients, diverting patients to private practice, reducing or compromising the quality
of care, and absenteeism. In systems that separate public fnancing from provision,
the most common forms of abuse involve excessive or low-quality medical treatment,
depending on the payment mechanism used, and fraud in billing government or
insurance agencies.
Systems with direct public provision
In many countries, public health systems have been established to provide health care
to the population at little or no cost at time of service. The most common structure for
GC2006 01 part1 11 8/11/05 17:54:50
6orrupIIon and haaIIh 1Z
such systems involves a health ministry, or its equivalent, which hires the necessary
administrative, medical and support staff, builds facilities, and organises the purchase
and distribution of medications, equipment and supplies. Many European countries
follow this model. Integrated public health systems display a wide range of structural
differences, whether through decentralisation (as in Spain) or experimenting with
autonomous health facilities (Sweden), but they share common approaches to allocating
budgets and delivering services.
In developing countries, successes involving direct public provision of health care
services are rare. In the most effective ones, health services do reach the bulk of the
population (Chile, Cuba, Malaysia). In most cases, however, the public systems have
been unable to reach large segments of the population, or to provide adequate services
(Venezuela, Indonesia). In the absence of complete coverage, countries sometimes
fnance, or at least subsidise, non-proft health care institutions, such as mission
hospitals in Africa or NGO health clinics in the Americas.
The evidence available on corruption in health systems with direct public provision
is largely focused on informal, or illegal, payments for services in developing or
transitional economies. This form of corruption has a particularly negative impact
on access to care for the poor when they cannot afford these payments. In China and
many former communist countries of Eastern Europe and Central Asia, the apparent
existence of such illegal payments has led observers to conclude that the health care
system has been privatised, that it functions like a private health care market and is
only nominally public.
15
The next most common focus for studies of corruption in health systems with
direct public provision is theft by employees, self-referral of patients, absenteeism
and the illicit use of public facilities for private practice. Kickbacks and graft in the
purchase of medical supplies, drugs or equipment have also been studied in health
systems with direct public provision, but these forms of corruption are more diffcult
to detect and document. Some studies have been able to estimate the magnitude of
overcharges to the public sector for medical supplies and drugs by comparing prices
paid by different hospitals.
16

Systems that separate public financing from provision
In many health systems, the entity that fnances health services is separate from the
entity providing those services. This is common in countries with social insurance
systems such as France and Germany, in large federated countries such as Brazil and
Canada, and in systems with public safety nets such as Medicaid and Medicare in the
United States. This separation of public fnancing and provision is rare in low-income
countries, but is common in high-income countries and in the middle-income countries
of Latin America and Asia.
When public fnancing is separated from provision, the character of abuses is likely
to change, focusing on ways to divert the fow of payments and reimbursements. One
central aspect infuencing the type of abuse is the payment mechanism chosen by the
fnancers to pay providers for their services. For example, medical professionals who
GC2006 01 part1 12 8/11/05 17:54:50
are reimbursed on a fee-for-service basis have no incentive to be absent from work, but
dishonest ones may be tempted to overcharge for services, bill for services that were
not provided, or order tests and procedures that are not medically indicated. Provider
payments on a capitation basis may introduce the right incentives for providers to
focus more on preventive than on curative care, but it may also motivate the dishonest
ones to neglect the provision of necessary care or to reduce quality below acceptable
standards.
The public fnancing agent itself may be a focus for corruption, with offcials diverting
funds to improper uses or for personal fnancial gain. Furthermore, public reimbursement
of private providers, in systems where this is permitted, raises a wide range of regulatory
issues. The government frequently establishes regulations to assure that private providers
meet minimum quality standards. Such regulations create opportunities for corruption
in licensing procedures and inspections.
Whether countries directly provide health services or separate public fnancing from
provision, their systems are not immune to corruption. Only the forms and scale of
corruption are likely to vary (see Box 1.1).
Common forms of corruption in all health systems
Cutting across both types of systems are forms of abuse in the processes of allocating
public funds and transferring public funds between national and sub-national entities.
Sometimes there is large-scale diversion of funds at the ministerial or senior management
levels of a health system; in other cases, funds are diverted from their intended purposes
when they are transferred to lower-level political administrators. Though these forms of
embezzlement can potentially cost the system more than other forms of corruption that
occur at the facility level, they are studied less often and are poorly documented.
Both types of health systems share the vulnerability to abuses related to counterfeit
drugs, selling faulty equipment, misrepresenting the quality or necessity of medical
supplies and conflicts of interest between purchasers, providers, suppliers and
researchers.
6onoIusIon
Health systems are prone to corruption because uncertainty, asymmetric information
and large numbers of actors create systematic opportunities for corruption. These three
factors combine to divide information among different actors regulators, payers,
providers, patients and suppliers in ways that make the system vulnerable to corruption
and that hinder transparency and accountability.
When regulations are put in place to remedy these problems, efforts to infuence
regulators become a new potential source of corruption. Powerful interest groups,
including suppliers, payers and health providers, may capture regulators in order to
evade their responsibilities, or further their interests at public expense. Consumers
generally lack the organisation and power to discipline other actors by voicing criticism
or choosing different health care providers. In addition, abuses can be hidden behind
simple administrative ineffciencies or, if challenged, be justifed by claiming that the
GC2006 01 part1 13 8/11/05 17:54:50
8ox 1.1 k IaIa oI IWo haaIIh sysIams
A closer look at two countries demonstrates how corruption manifests itself differently
across health systems. Colombia and Venezuela are neighbouring Latin American countries
with comparable incomes that share many similarities in history, culture and language.
Until 1990, the two countries also had similarly fragmented health systems, comprised
of a large social security institution serving the formal sector, national or state-level
governments that directly provided health care services to the rest of the population,
and an active private sector which relied predominantly on direct payment for services
by patients and their families.
In the early 1990s, Colombia engaged in a series of dramatic health reforms that
decentralised public services to the municipal level and, in parallel, created a mandatory
universal insurance system with the participation of non-governmental insurers (for-proft
and non-proft). Under the new insurance system, individuals were given the option
of choosing their insurer. The content and price of the beneft package was defned
at the national level with the hope that insurers would compete on quality of care
and service.
To make the system more equitable, the reform created a national fund that taxed away
a portion of the relatively high contributions made by upper-income individuals so as to
subsidise the relatively low contributions made by lower-income individuals. As a result
of this system, insurers are now guaranteed a fxed premium for each member, adjusted
by age and sex, which should be invariant to the individuals actual income. In this way,
Colombia shifted from a segmented system dominated by large public institutions with
integrated provision, to an increasingly universal system dominated by a separation of
payers and providers.
Unfortunately, both countries have experienced a great deal of corruption across sectors,
and the health system is no exception. A comparison between the two countries in the late
1990s suggested that corruption was widespread, but had taken somewhat different forms
as their health systems diverged. For example, a large share of staff in public hospitals in
both countries reported a range of irregularities, including theft, graft, absenteeism and
bribe taking.
1
However, 59 per cent of staff surveyed in Bogots public hospitals reported
that such irregularities had declined since implementation of the health reform. Staff in
Venezuelan hospitals reported that doctors were absent from work about 37 per cent of
the time while absenteeism in Colombias public hospitals apparently accounted for less
than 6 per cent of doctors time. Although the available evidence is sparse, and certainly
not conclusive, the differences suggest that public hospitals under the new system in
Colombia may have been characterised by fewer irregularities.
On the other hand, Colombias health reform opened an entirely new avenue for corrupt
activities. The large fows of funds involving contributors, non-governmental insurers
and government subsidies for low-income subscribers became targets for abuse. In the
mid-1990s, Bogots Secretariat of Health responsible for administering subsidies for
low-income subscribers began to audit the lists of members submitted by insurers for
reimbursement. They found that benefts were being received by 114,000 new affliates, far
beyond the increase that could be expected through the extension of universal coverage.
Instead, the Secretariat found that insurers kept individuals on their books, so they could
continue to receive government subsidies, even after the same individuals had signed
on to a new insurer.
4
GC2006 01 part1 14 8/11/05 17:54:50
medical professional or procurement offcer should not be second-guessed by someone
who is less informed of the circumstances of a case. As a result, opportunities to divert
funds, sell favours, solicit bribes or otherwise corrupt the application of resources may
be widespread.
These problems emerge in all kinds of health systems around the world. The particular
institutional structures of the health system may make particular forms of corruption
more or less attractive, but no system is immune to abuses and fraud. Understanding how
a countrys health system functions, reviewing the underlying incentives for provision
of care and analysing its particular vulnerabilities are the frst steps toward designing
holistic strategies to tackle corruption from a systemic point of view, and implementing
measures that will be effective in reducing the extent of abuse and fraud.
hoIas
1. William D. Savedoff is a senior partner at Social Insight and formerly senior economist at
the World Health Organization (WHO) and the Inter-American Development Bank. Karen
Hussmann is a public policy consultant specialising in health economics and governance,
and formerly programme offcer at Transparency International.
2. These fgures are the authors estimates for 2001 from a variety of sources, including WHO,
the Pan American Health Organization (PAHO), the World Bank and the US Department of
Health and Human Services.
3. Kenneth J. Arrow, Uncertainty and the Welfare Economics of Medical Care, American Economic
Review 53 (1963). For a discussion of Arrows article and its impact on health economics, see
William D. Savedoff, 40th Anniversary: Kenneth Arrow and the Birth of Health Economics,
Bulletin of the World Health Organization 82(2), February 2004.
4. The detailed economic explanations for these problems involve adverse selection and moral
hazard and are explained in most health economics textbooks. See, for example, T. Getzen,
Health Economics: Fundamentals and Flow of Funds (New York: Wiley, 1997).
5. Public choice models and government failure literature includes Dennis C. Mueller (ed.),
Perspectives on Public Choice (Cambridge: Cambridge University Press, 1997), and Torsten
Persson and Guido Tabellini, Political Economy: Explaining Economic Policy (Cambridge, MA:
MIT Press, 2002).
The practice was facilitated by the fact that individuals were often unfamiliar with the
insurance system and did not understand the implications of signing a new application.
Some insurers failed to issue their members with the required documentation, undermining
their ability to access the services to which they were entitled. Finally, some insurance
agents simply submitted false applications. As a result, Bogot was defrauded of millions
of dollars until it established a unifed database, and began to scrutinise and investigate
claims more intensely. Similar practices, however, were likely to have continued in the
rest of the country where claims were less actively scrutinised.
William D. Savedoff
Note
1. Rafael Di Tella and William D. Savedoff, Diagnosis Corruption: Fraud in Latin Americas Public Hospitals
(Washington, DC: Inter-American Development Bank, 2001).
GC2006 01 part1 15 8/11/05 17:54:50
6. For principalagent model literature, see D. E. Sappington, Incentives in PrincipalAgent
Relationships, Journal of Economic Perspectives 5(2), 1991, and William D. Savedoff, Social
Services Viewed Through New Lenses, in William D. Savedoff (ed.), Organization Matters:
Agency Problems in Health and Education in Latin America (Washington, DC: Inter-American
Development Bank, 1998).
7. Alberto Ades and Rafael Di Tella, Rents, Competition and Corruption, American Economic
Review 89(4), 1999.
8. For a discussion of different payment mechanisms and their impact on provider behaviour,
see H. Barnum, J. Kutzin and H. Saxenian, Incentives and Provider Payment Methods,
International Journal of Health Planning and Management 10, 1995, and J. C. Robinson, Theory
and Practice in the Design of Physician Payment Incentives, Milbank Quarterly, November
2001.
9. See Chapter 3, Corruption in hospitals, page 54.
10. N. Inkster, A Case Study in Health Care Fraud in Ontario, Canada, Corruption in Health
Services. Papers presented at the 10th International Anti-Corruption Conference Workshop
Corruption and Health, Prague, Czech Republic, October 2001 (Washington, DC: Inter-
American Development Bank, 2002).
11. British Medical Journal 312, 13 January 1996.
12. William D. Savedoffs interview with Leslie Aronovitz, US Department of Health and Human
Services, 17 December 2000.
13. L. Aronovitz, Allegations of Inaccurate Billing in the Medicare System in the United States,
Corruption in Health Services. Papers presented at the 10th International Anti-Corruption
Conference Workshop Corruption and Health, Prague, Czech Republic, October 2001
(Washington, DC: Inter-American Development Bank, 2002).
14. World Development Report 2004: Making Services Work for Poor People (Washington, DC: World
Bank, 2004), and The World Health Report 2000. Health Systems: Improving Performance (Geneva:
WHO, 2000).
15. Gerald Bloom, Primary Health Care meets the Market: Lessons from China and Vietnam,
IDS Working Paper 53 (Brighton, UK: Institute of Development Studies, 1997), and Tim
Ensor, What Role for State Health Care in Asian Transition Economies? Health Economics 6
(5), 1997.
16. Rafael Di Tella and William D. Savedoff, Diagnosis Corruption: Fraud in Latin Americas Public
Hospitals (Washington, DC: Inter-American Development Bank, 2001).
6orrupIIon In haaIIh oara sysIams. Iha 8 axparIanoa
Malcolm K. Sparrow
1
The United States spends more on health care than any other industrialised country,
with national health expenditures in 2003 exceeding US $1.6 trillion.
2
This represents
15.3 per cent of the countrys GDP, up from 5.7 per cent in 1965, and 8.8 per cent
in 1980.
3
Despite the extraordinary level of spending, health care economists have
traditionally paid very little attention to corruption, fraud, waste and abuse in the
US health care delivery system. They do not factor it into their cost models, they say,
because there is no data on that. There is certainly a paucity of reliable data on the
extent of corruption in the system, and few reliable estimates of how much of each
health care dollar is actually lost to criminal enterprise.
As a risk to be controlled, fraud and corruption in the health care system exhibits
all the standard challenges of white-collar crime: well orchestrated criminal schemes
are invisible by design and often go undetected. Investments in control are based on
GC2006 01 part1 16 8/11/05 17:54:51
the visible (that is, detected) sliver of the problem, rather than on its underlying scale
or any valid statistical or scientifc estimates of its magnitude.
Despite the essentially invisible nature of the problem, health care fraud in the
United States was deemed suffciently serious by the Clinton administration (based
on cases revealed) that in 1993, Attorney General Janet Reno declared it Americas
number two crime problem, second only to violent crime. This signalled a level of
concern over health industry integrity without precedent in the United States, and
perhaps around the world.
6haraoIarIsIIos oI Iha 8 sysIam
Despite high levels of public sector spending on health care,
4
the health system involves
comparatively few public sector offcials or employees in frontline service delivery
roles. Therefore, if one adopts a defnition of corruption restricted to abuse of public
authority, most health care fraud issues do not quite ft. But the broader defnition,
abuse of entrusted authority, does cover dishonest actions of physicians, hospitals and
other health care professionals, who are generally afforded high social and professional
status and are expected to exercise professional medical judgement unbiased by private
fnancial interests. The majority of fraud within the system, perpetrated by medical
providers, can therefore be understood as corruption under this defnition. For example,
when physicians accept payment to hand out unnecessary prescriptions as part of
pharmaceutical recycling scams, con patients into treatments they dont need, or
submit bills to public programmes for services that were never provided, they would
surely be seen by most members of the public as having abused the trust placed in
them as medical professionals.
The US health system has a number of distinct features that make it vulnerable to
corruption:
Health care delivery is largely contracted out. Health care is mostly delivered
by the private sector, or independent, not-for-proft entities. But the services are
paid for by government programmes such as Medicare (federal programme for
the elderly) or Medicaid (state-run programmes for the poor), or by commercial
insurers who offer health insurance to individuals, to groups or to employers
(who buy coverage for their employees as an employment beneft). This means
that payers have no reliable information about which services were performed,
or were necessary, other than the word of the providers.
Fee-for-service structure and payment on trust. The majority of services are
reimbursed on a fee-for-service basis, despite the recent development of alternative
structures such as capitation (where the entity contracts to deliver necessary care in
exchange for a fxed revenue stream per patient per month), and other managed
care systems. Under the fee-for-service structure, health care providers (doctors,
hospitals, specialists, and so on) are trusted to determine the appropriate levels
of care, and then trusted to bill the insurer for the services they perform.
GC2006 01 part1 17 8/11/05 17:54:51
6orrupIIon and haaIIh 1B
Medical suppliers and providers constitute main loci of corruption. The
principal opportunity for theft lies with providers rather than patients. Patients
can only cheat on their own accounts, and to a limited extent if they are to avoid
tripping various fags or alarms. So the prevalence of patient-orchestrated fraud is
constrained to some degree by the proportion of dishonest patients. By contrast,
providers and their billing agents are in a position to submit false or infated bills
in high volumes, spreading the activity across hundreds or thousands of patient
accounts. Providers thus have a business opportunity in dishonest conduct, and
relatively few dishonest actors can do disproportionate amounts of economic
damage to the system. Most significant cases of corruption have involved
medical professionals, providers and corporations in the health care delivery
supply chain.
Highly automated payment systems. Fee-for-service payment systems are
now consolidated into massive, highly automated payment systems. Electronic
submissions transmitted into the system (in the form of claims for services
rendered) result in computerised dispatch of electronic payments. The bulk of such
claims are paid through auto-adjudication, which means the claim was received,
subjected to a rules-based examination, approved and paid, all electronically,
with no human scrutiny. Such payment systems make very attractive targets for
fraud. An extraordinary range of actors have been found lining up to defraud these
systems, ranging from blue-collar individuals (who can sign on as suppliers of
medical equipment for a small fee, without any training, and proceed to submit
bills without ever seeing a patient); to major corporations, such as hospital chains
and pharmaceutical companies; to drug traffckers (reported by the FBI as switching
to health care fraud because it was safer and more lucrative than traffcking, and
with lower chances of detection); to organised crime groups and gangs.
5
Absence of verifcation and focus on processing accuracy. The bulk of claims
are therefore paid electronically, and on trust. The whole system is designed
with honest physicians in mind, incorporating the values of speed, effciency,
accuracy, predictability and transparency. The edits and audits (automated sets
of rules) built into computerised claims-processing systems serve the purpose of
checking pricing, policy coverage and medical orthodoxy (based on the diagnosis
reported in the claim). But the control systems generally assume the claim itself
to be true, and do little or nothing to verify that the patient actually received the
services claimed, or even that the diagnosis was real. To exploit these systems,
those intent on stealing need only to ensure that they bill correctly. If they do that,
they can fabricate or alter diagnoses, or invent entire medical episodes. If, by some
mischance their claims are selected for audit, they need only create and submit
medical records that support the fctitious billing, and provided perpetrators are
capable of lying twice, and consistently they will survive such audit scrutiny
without much fear of detection. The controls in place within the industry therefore
deal better with billing errors and with honestly reported medical unorthodoxy
than they do with outright criminal deception in the form of falsifed claims.
They deal better with poorly documented services than with well documented
GC2006 01 part1 18 8/11/05 17:54:51
lies. Investigators in the industry are starting to use a broader range of controls
to address this problem (see below).
Multiple methods of cheating, and centrality of the false claims problem. The
incentives produced by the fee-for-service payment structure lead to submission
of false or infated bills. Other more sophisticated scams involve illegal kickbacks
for referral of patients, physicians acceptance of bribes for prescribing particular
pharmaceuticals, infating cost reports in systems where reimbursement rates
for services depend on the reported costs and self-referral (referring business to
other entities in which the referrer has an ownership or other fnancial interest),
among others. Nevertheless, submission of false claims (claims that contain some
material deception) represents perhaps the central and most persistent form of
cheating in the US system.
Poor measurement of overpayment rates. The Medicare programme and several
Medicaid programmes have conducted measurement studies recently,
6
producing
loss rates varying from 3 per cent to 15 per cent of overall costs, and with most
results in the 510 per cent range. The studies draw random samples of claims paid,
but then tend to apply somewhat weaker audit protocols than those necessary
to produce true estimates of overpayment rates. The audit protocols used often
replicate document-based or desk audits, which check that the claims were
processed correctly, and that they are supported by medical records requested
and received by mail. But these audit methods generally include minimal or
no attempts to track down the patients and verify that the services were both
necessary and actually delivered. Hence the overpayment rates obtained by these
measurement programmes generally miss many of the more sophisticated types of
fraud, and often miss the ordinary phenomenon of billing for services not provided in
cases where perpetrators take the precaution of submitting a false medical record
to match the claim. These estimates therefore signifcantly understate the overall
loss rates. This defciency has been recognised by the Government Accountability
Offce, which acknowledges that use of more rigorous audit protocols designed
to detect fraud would have made the derived estimates for overpayment rates
greater how much greater nobody knows.
7
Investments in control do not match the scale of the problem. Despite loss
rates that could easily exceed 10 per cent of programme costs, investments in
controls for fraud and corruption remain pitifully low as is typical of white-
collar crime control. In the health industry, levels of investments in programme
integrity and fraud control average roughly 0.1 per cent of programme costs.
This ratio holds true remarkably consistently across the industry, irrespective of
whether the insurer is public, commercial or not-for-proft. Investments in control
are therefore woefully lacking, when viewed against potential losses.
Lassons Iaarnad Irom Iha 8 axparIanoa
The US health system remains vulnerable to attack, and programme integrity and fraud
control systems are not yet suffciently equipped to deal with the problem. Scandalous
GC2006 01 part1 19 8/11/05 17:54:51
6orrupIIon and haaIIh Z0
revelations of medical professionals or companies stealing millions of dollars from the
system make almost daily appearances in the media. As a result, important lessons have
been learned about controlling fraud and corruption, some of which include:
Attractiveness of automated systems as targets for fraud. Large, highly
automated payment systems make dream targets for fraud perpetrators. Their
payment behaviour can be studied and their utter predictability exploited. Quality
control and process improvement techniques can only guarantee the correct
operation of the payment system, but do nothing to validate the information fed
into it. In this environment, fraud works best when processing systems work perfectly.
This vulnerability extends beyond health care programmes to many other major
public assistance or payment programmes that share similar characteristics.
Importance of measurement. Failure to measure losses in a scientifcally valid and
rigorous fashion creates uncertainty about the scale of the problem. This leaves
policy-makers unable to justify greater investments in control or enforcement
and keeps resources for control at minimal levels.
Importance of whistleblower statutes. Most of the big cases brought against
major corporations for defrauding government health care programmes in the
past decade arose from, or relied heavily upon, qui tam suits (allowing private
citizens to fle lawsuits charging fraud in government programmes) brought under
the federal False Claims Act.
8
Most often the whistleblower was an employee or
ex-employee of the offending corporation. Although the False Claims Act was
originally designed to reduce corruption in defence contracting, health care fraud
cases now routinely account for more than half of the annual volume of qui tam
cases taken up by the Department of Justice. Whistleblowers receive a share of
any eventual settlement. Providing fnancial incentives and compensation to
whistleblowers has turned out to be one of the most powerful weapons available to
the US government in tackling health care fraud and corruption. One prominent
example involves the Columbia/HCA hospital chain, Americas single largest
health care provider. A series of whistleblower lawsuits launched against Columbia
in the 1990s resulted in aggregate settlements with the Department of Justice
exceeding US $1 billion dollars.
9
The practices whistleblowers reported included
paying physicians for patient referrals to the hospitals, funnelling of patients to
affliated home-health services even when the patients preferred another provider,
setting performance targets in terms of complication rates (which justify higher
levels of reimbursement from Medicare), hiding paperwork and accounts from
government auditors, and false billing.
Dynamic nature of the game. Investigators and auditors have learned how
quickly fraud perpetrators can adapt to changes in the control system. Control
strategies that rely on any static set of controls (such as reliance on a particular set
of rule-based edits and audits in the processing system) fail utterly. Fraud control
is a game of intelligence and counter-intelligence played against conscious, and
highly adaptive, opponents.
GC2006 01 part1 20 8/11/05 17:54:51
Tha oausas oI oorrupIIon In Iha haaIIh saoIor Z1
Limitations of transaction-based analysis and detection methods. Investigators
are discovering the importance of moving beyond transaction-level control systems,
which are easily circumnavigated by perpetrators who design their scams so that
each claim, viewed in isolation, looks perfect. The more successful detection units
within the industry are beginning to use a broader range of structural analysis and
pattern-recognition methodologies that can search for patterns of coincidence or
clustering (across thousands of claims) refective of computerised billing scams and
organised conspiracies very few of which would ever be detected by examination
of individual claims or individual patient histories.
The dangers of rushing to structural solutions. Normally one would applaud
policy-makers for seeking long-term structural solutions to integrity problems.
Anti-corruption literature emphasises structural changes in incentives as a method
of eliminating known forms of corruption and embezzlement. Many offcials,
concerned about fraud in the fee-for-service health structure, mistakenly assumed
the advent of capitated managed care systems would eliminate the fraud problem
by removing the fnancial incentives for overutilisation and overbilling. What
they realise now is that changing the structure without removing the bad actors
leads to criminal adaptation, and a whole new class of scams.
With capitated systems, the incentives for overutilisation have been replaced by
incentives for underutilisation. Dishonest providers take the monthly capitation
payments and fnd a multitude of creative mechanisms to divert resources into
their own pockets and away from frontline service delivery. The new forms of fraud
that emerge turn out to be harder to detect, harder to control, more diffcult to
prosecute (because there is no false claim per se around which to build a case), and
more dangerous to human health. Examples of abuses include: embezzlement of
capitation funds paid by the state; the use of fraudulent subcontracts as a method
of diverting funds to friends or family; improper enrolment or disenrolment
practices (such as seriously ill patients being driven out or refused admission to
a health care plan, or bribes being paid to secure younger and healthier patients);
denial of treatment without proper evaluation; failure to inform patients of their
rights and entitlements; failure to provide suffcient medical professionals to meet
the needs of the enrolled population; and requiring patients to fght their way
through extensive appeals processes in order to obtain necessary treatment. Under
the fee-for-service structure, crimes were largely fnancial, with patients often
oblivious to what was being billed in their names. With managed care, diversion
of capitation payments results in inaccessible or inadequate patient care.
LookIng ahaad
The battle against health care fraud and corruption in the United States is not over.
The Clinton administration paid more attention to the problem than any previous
administration, and made some important fnancial and legislative investments to
enhance control. Despite those investments, levels of resources available for monitoring,
validation and enforcement remain completely inadequate when compared with the
GC2006 01 part1 21 8/11/05 17:54:52
6orrupIIon and haaIIh ZZ
scope of the problem. The introduction of a new prescription drug beneft for seniors
under the Medicare programme,
10
almost guarantees that the federal government will
have to pay renewed attention to this issue in years to come, since drug-related fraud
remains one of the most prominent fraud threats within other programmes. The recent
deceleration of the transition to capitated managed care (and in some regions and
segments of the industry, the reversal of this transition), means that US health insurers
will still have to develop more effective controls within a fee-for-service environment,
as there is no prospect of structural change within the industry being able to solve the
problem in the near future.
hoIas
1. Malcolm K. Sparrow is professor of the practice of public management at Harvards John F.
Kennedy School of Government, and author of License to Steal: How Fraud Bleeds Americas
Health Care System (Denver: Westview Press, 2000), which contains a detailed analysis of the
vulnerabilities of the US health system to fraud, waste and abuse.
2. Historical National Health Expenditures Aggregate, per Capita, Percent Distribution, and
Average Annual Percent Change by Source of Funds: Calendar Years 19602003, www.cms.
hhs.gov/statistics/nhe
3. Ibid.
4. Public sector spending runs at roughly 45 per cent of national costs. The two largest public
programmes are Medicare (federal programme for the elderly) and Medicaid (programme for
the poor, administered by the states and jointly funded by federal and state governments).
See also national health expenditures in note 2 above.
5. The introduction to License to Steal (see note 1) catalogues the extraordinary range of apparent
perpetrators and fraud methods seen in the industry over the last decade.
6. Measurement of Medicare overpayment rates was required by the Government Management
Reform Act of 1994, instituted by the Offce of Inspector General (DHHS) in 1996, and repeated
every year until 2002. Derived overpayment rate estimates ranged from a high of 14.1 per
cent to a low of 6.3 per cent. For a synopsis of recent measurement studies within Medicaid,
see Payment Accuracy Measurement Project: Year 2 Final Report, Center for Medicaid and
State Operations, Center for Medicare and Medicaid Services, DHHS, April 2004.
7. Efforts to Measure Medicare Fraud, Letter to Rep. John R. Kasich (Chair, House Budget
Committee), GAO/AIMD-00-69R, 4 February 2000.
8. The 1986 Federal False Claims Act updated Civil War-era laws originally designed to prevent
procurement fraud against the Union Army. It became available for use against health care
fraud upon its revision in 1986. Penalties for false claims against government programmes
were further stiffened by the Health Insurance Portability and Accountability Act of 1996.
9. www.cbsnews.com/stories/2002/12/18/national/main533453.shtml
10.
The prescription drug beneft, known as Medicare Part D, comes into full effect in January
2006 under the Medicare Prescription Drug Improvement and Modernization Act of 2003.
8ox 1.Z 6orrupIIon In 6ambodIas haaIIh saoIor
1
Cambodias health record is amongst the worst in Asia. The maternal mortality rate is the
highest in the region, with 437 deaths per 100,000 live births. Skilled personnel attend
less than a third of all births.
2
Almost one in every ten babies does not live to his/her frst
birthday and more than 60,000 babies die every year of malnutrition or diseases that
4
GC2006 01 part1 22 8/11/05 17:54:52
Tha oausas oI oorrupIIon In Iha haaIIh saoIor Z8
can be prevented or cured.
3
Malaria remains a serious problem, and known cases of
tuberculosis have increased from approximately 61,000 in 1999 to 108,000 in 2004.
4
Such a poor state of health exists despite money pouring into Cambodias health sector
over the past decade to reconstruct a health system that was systematically decimated
under the Khmer Rouge regime (197578) and underfunded in subsequent years.
Overseas development aid (ODA) funded a lot of the reconstruction and continues to be
an important source of fnance for the government. In 2002 the US $490 million ODA
Cambodia received accounted for just over 12 per cent of the GDP, some 20 per cent of
which was spent on health.
However, government and ODA spending on health are dwarfed by the sums spent
privately. Of the 177 countries assessed in the Human Development Report, Cambodia
has the highest private health expenditure as a percentage of the GDP. Out-of-pocket
spending on health care in Cambodias private clinics or as informal payments for public
health services accounts for 10 per cent of the countrys GDP.
5
Corruption is one reason why public investment in health, coupled with high rates
of private spending, has not translated into good health outcomes. Anecdotal evidence
suggests that corruption takes place at every level of the health system in Cambodia,
but there has typically been a reluctance to speak about it. Researchers, health workers
and administrators interviewed in July 2005 said it was widely assumed that between
5 and 10 per cent of the health budget disappears before it is paid out by the Ministry
of Finance to the Ministry of Health.
6
More money is then siphoned off as funds are
channelled down from the national government to the provincial governors and to the
directors of operational districts, and then to directors or managers of local hospitals
and clinics.
Reports commissioned by the World Bank and USAID indicate that corruption is common
in public procurement and contracting processes, public fund management activities at
central and district government levels and in health service delivery schemes. It is common
for companies to pay bribes for public contracts.
7
Several experts interviewed alleged that
health ministry offcials and hospital administrators infate the cost of medical equipment
in collusion with private suppliers and share the non-reported difference, which can be
as much as fve times the true cost.
Another source of concern is that public health services are underutilised due to their
poor quality and inaccessibility. With the increase in land prices in Phnom Penh and Siem
Reap, this problem threatens to escalate under the governments reported plans to remove
hospitals from city centres to outskirts where land is cheaper, but where the hospitals will
be less accessible. In Siem Reap, for example, a hospital is in danger of being destroyed
to free up prime real estate close to a popular tourist attraction. The government claims
that the land is valued at US $4 million. Health programme managers from the private
and public health system claim the land is worth many times more than the cost of
rebuilding the hospital.
The potential for proft-making through schemes such as this can be the very motivation
for entering the health sector. In Cambodia it is considered common practice to pay
large sums of money to secure positions as public offcials in government: the higher the
position, the higher the price.
8
Health workers interviewed reported a going rate of up
to US $100,000 for a post as director at the provincial or national offces of the health
ministry. A job as a low-level public servant in the health sector may go for US $3,000.
These sums represent a large investment considering that government employee salaries
are generally very low: on average US $40 per month.
4
GC2006 01 part1 23 8/11/05 17:54:52
Corruption also takes place at the point of health service delivery, where underpaid
health workers request informal payments above the normal cost service, or siphon off
public funds from available cash budgets. Informal payments to doctors or nurses in
order to receive better and more expedient treatment are common, and the low salary
paid to health workers is an important area to reform. In 2001, Mdecins Sans Frontires
worked with the Ministry of Health and UNICEF on a project in Sotnikum district, Siem
Reap province, that topped up salaries for health workers based on performance and
commitment to ethical practice.

It also tried to initiate an Equity Fund to assist the poor
in paying for medical costs and services. These two strategies have been successful and
continue in many donor-funded health care projects in Cambodia, though coverage is
patchy.
Other important reforms include increasing transparency in procurement, improving
links between health policies and budgets, and conducting research to help understand
the mechanisms of corruption in the sector. A planned public expenditure tracking survey,
initiated by the World Bank for the health sector to identify bottlenecks and leaks in public
fnances at national and local levels, is an important step towards plugging the information
gap surrounding Cambodias health sector.
Urgent attention also needs to be paid to law enforcement. An extremely weak judiciary,
coupled with inadequate laws that are very slowly being reformed, mean that impunity
is the norm for cases of corruption. There are 100 prosecutors, 250 private attorneys and
100 judges operating in the country most of the latter self-selected, having bought their
positions.
9
Some progress has been made in training judges and a number of NGOs are
developing basic legal services for the weak and poor, but to all intents and purposes
there is no redress for those who have suffered from the effects of corruption at the hand
of health authorities or staff.
Lisa Prevenslik-Takeda
10
Notes
1. The article is based on feldwork and author interviews conducted from May to July 2005.
2. Royal Government of Cambodia, Cambodia Millennium Development Goals Report 2003.
3. UNDP, Human Development Report 2003 (Geneva: UNDP, 2003); UNICEF, Childhood Under Threat:
The State of the Worlds Children 2005 (New York: UNICEF, 2005).
4. WHO Report, Global Tuberculosis Control (Geneva: WHO, 2005). The actual fgures are probably
much higher since normal tuberculosis testing in medical centres throughout the country is
done by sputum tests which detect only 75 per cent of pulmonary tuberculosis infections.
5. Although the constitution enshrines the right to free medical care to all Cambodian citizens, a
recent government policy requires all Cambodians to pay 2,0003,000 riel (US $0.75) to access
health care in public health facilities. This entitles the patient to be examined by a doctor, though
additional costs for medicine and other medical supplies must be borne by the patient.
6. Author interviews, Phnom Penh, Cambodia, July 2005.
7. Michael Calavan, Sergio Diaz Briqvets and Jerald OBrien, Cambodian Corruption Assessment,
report prepared for the World Bank, USA/Cambodia, August 2004; Jean-Franois Bayart,
Thermidor au Cambodge, Alternatives Economiques, March 2005; Peter Leuprecht, Special
Representative of the UN Secretary-General for Human Rights in Cambodia, Rethinking Poverty
Reduction to Protect and Promote the Rights of Indigenous Minorities in Cambodia, NGO Forum
on Cambodia, April 2005.
8. See, for example, Calavan et al., Cambodian Corruption Assessment.
9. Ibid.
10. Lisa Prevenslik-Takeda is a project coordinator in Transparency Internationals Asia-Pacifc
department.
GC2006 01 part1 24 8/11/05 17:54:52
Tha soaIa oI Iha probIam Z6
Z Tha soaIa oI Iha probIam
Women lie in bed at the Sisters Missionary of Charity Hospital in Port-au-Prince, Haiti, 22
March 2005. (Shaul Schwarz/Getty Images)
While it is impossible to determine the overall costs of corruption in the health sector
worldwide, it is evident that it amounts to tens of billions of dollars. Indeed one US
estimate of annual earnings from the sale of counterfeit drugs alone puts the annual
cost at more than US $30 billion, which is just the tip of the iceberg of health care
corruption.
In this chapter, the World Banks efforts to track expenditure in health give an
indication of costs by tracking how much money dispersed by higher levels of
government fails to reach its intended recipients. New data from Central and Eastern
Europe fnds a strong correlation between perceptions of corruption and an individuals
health. A study in the Philippines highlights how local-level corruption undermines
health service delivery. The case study on Costa Rica looks higher up in the chain of
responsibility for health budgets, and follows the money trail in one of the countrys
GC2006 01 part1 25 8/11/05 17:54:53
biggest ever corruption scandals. An example from Mexico shows that corruption can
affect not only the volume of resources for health care, but also health policy. The UKs
National Health Service claims high returns on its investment in anti-corruption and
counter-fraud mechanisms.
The real costs, however, cannot be measured in dollar terms alone. The impact of
corruption must also be measured in terms of those people who suffer because they cannot
afford brown envelope payments to health care workers (see Chapter 4) and those who
are forced to pay far more than they should for hospital services and pharmaceuticals
due to rampant corruption (see Chapters 3 and 5). Corruption has a direct negative
impact on access and quality of patient care and is one reason why, so often, increased
spending on health does not correlate with improved health outcomes.
6asa sIudy. rand oorrupIIon In 6osIa Ioa
Emilia Gonzlez (TI Costa Rica)
Costa Rica has one of the best funded health systems in Latin America. Established in
1941, the Caja Costarricense de Seguro Social (CCSS) has been responsible for providing
universal health care coverage since 1961. The health care network comprises fve health
regions, each with hospitals, clinics, health centres and mobile health units. Costa Ricas
health indicators are comparable to those of developed countries and better than any
Latin American country with the exception of Cuba. Workers pay 5.5 per cent of their
salary in health insurance and employers contribute a further 9.25 per cent.
Given the high cost and the high regard in which the CCSS is held, its fall from
grace was therefore steep when reports of maladministration and corruption started
to seep into the public domain in 2001. Two congressional party commissions were
tasked with looking into the matter. Allegations involved corruption at many different
levels, most commonly in the purchase of medical services, often at infated prices; the
procurement of medicines and equipment; the provision of private training courses
and medical research; the construction of hospitals; and the management of the CCSS
pensions system.
The climax of the scandals came in October 2004 when the public prosecutor accused
CCSS head Eliseo Vargas, members of the board of directors, several CCSS managers
and former president Rafael Angel Caldern of corruption in the running of the agency.
They had allegedly skimmed millions off a US $39 million Finnish government loan
(see Finland country report, page 156).
The loan to modernise hospitals was conditional on Costa Rica using at least half of it
to buy Finnish products. The contract was won by Finnish consortium Instrumentarium
Corporation Medko Medical and a commission of US $8.8 million (20 per cent of
the value of the loan) was paid to Corporacin Fischel, the consortiums Costa Rican
representative. It was this commission that found its way into the bank accounts of
CCSS directors and senior government offcials. The CCSS spent the loan plus an extra
US $7.5 million of its own funds on equipment that was not needed.
GC2006 01 part1 26 8/11/05 17:54:54
The money trail was uncovered in October 2003 by journalists who found that the
head of CCSS, Eliseo Vargas, was living in a house worth US $750,000, which had been
paid for by Corporacin Fischel (see Global Corruption Report 2005).
1
Suspecting that
the house was payment for a favour, the reporters looked for a possible motive. They
found that two years earlier, as head of the ruling party faction in congress, Vargas had
pushed through approval of the tied loan from Finland. Vargas now argues that he was
assisted and encouraged to do so by then president Caldern. The journalists later
uncovered a series of bank accounts in Panama, Costa Rica, the United States and the
Bahamas through which commissions had been paid to politicians and CCSS offcials.
Vargas and the fnancial director of Fischel resigned when the news hit the headlines
in April 2004.
The Finnish loan was not the frst to be called into question. In 1997, a US $40
million loan by the Spanish government and Banco Bilbao Vizcaya, also to modernise
hospitals, was spent on equipment, much of which has never been used. A group
of notable experts named by the government to look into the functioning of CCSS
requested that the authorities responsible for executing the loan be investigated for
paying above-market rates for the equipment and for failing to prepare the hospitals
for the equipment to be installed.
Incidents of opaque procurement processes at CCSS are unfortunately not restricted
to the use of the two loans. Complaints of systematic corruption have been made in a
series of reports and statements by a special legislative commission, the ombudsman,
a group of notable experts and users of the health system. CCSS internal audit reports
also point to irregularities.
A majority party congressional investigation report published in April 2001 provided
evidence of disorganised purchasing the results of a decentralisation strategy that
was supposed to make procurement processes more effcient.
2
The result was a chaotic
network of channels through which millions of colones fowed, swelling the accounts of
private pharmaceutical companies at the cost of the CCSS, and ultimately the taxpayer.
In addition to the monetary costs involved, there were also the associated health costs
resulting from delays in getting medicine to the sick and the use of poorer-quality
medicines
The various reports into the CCSS note that a common practice at some hospitals
was to purchase excessive quantities of medicines not included on the offcial list of
medicines (defned by the WHO as those necessary to counter the principal causes of
morbidity). These were purchased under a budget line reserved for medicines needed
for uncommon illnesses or exceptional cases, which are not subject to the usual CCSS
controls. Another concern is the readiness with which some CCSS doctors accepted
trips paid for by pharmaceutical companies. This was the subject of a Supreme Court
ruling in January 2004 stating that acceptance of gifts from providers could lead to
a loss of confdence in the doctor and therefore could be cited as grounds for lawful
dismissal.
3
Many examples of overpayment for medical services contracted out to private service
providers emerged from the investigations. It is diffcult, however, to distinguish between
poor management and corruption, where doctors often with one foot in the public
GC2006 01 part1 27 8/11/05 17:54:54
6orrupIIon and haaIIh ZB
system and the other in private practice might have unnecessarily contracted out
expensive treatments. For example, the CCSS paid a private foundation close to US $1
million in 2000 for 9,600 minor surgical procedures, 37,000 eye and nose consultations
and 322 vitrectomies at a cost per intervention of between 40 per cent and 140 per
cent above the cost of CCSS providing the treatment at one of its own clinics. A special
congressional commission published a report in May 2001 into the procurement of
private medical services and the misuse of CCSS resources through offering excessively
cheap teaching facilities to private university students.
4
The CCSS response to these multiple accusations of maladministration and corruption
has been to hire consultants and researchers to come up with new strategic plans and
new mission and values statements. Complaints mechanisms have been introduced,
and the client has been placed at the forefront of the institutions plans.
But the correctives do not go to the root of the problem. With the exception of the
investigation into misuse of the Finnish loan, senior CCSS staff have not been asked
to take responsibility for wrongdoing. Few are named in the numerous reports and
documents written on the cases, and no administrative, criminal or civil action has
been taken to sanction those responsible.
Close ties between the board and directors of the CCSS many party members hold
board-level positions at the CCSS may have stood in the way of judicial and audit
bodies, contributing to a situation where the CCSS functions with virtual impunity,
unaccountable to users. There are indications that the close relationship between
political parties and the CCSS may have led to conficts of interest that infuenced
decision-making. The 1999 budget shows, for example, that more than US $160 million
of CCSS funds was invested in state bonds at a time of dire need for investment to
improve health care facilities.
Scandals have erupted before without responsibility being assigned to the offcials
involved, while civil society watched on impassively. This time, public pressure and
media attention is not abating. There is hope that high- and middle-ranking CCSS
staff will be held to account and deep reforms will be made to the management,
organisation and structure of CCSS, including the introduction of greater accountability
and transparency mechanisms to reduce future opportunities for corruption.
hoIas
1. The team of investigative journalists from La Nacin (Costa Rica) were awarded Transparency
Internationals Journalism for Transparency prize in 2005.
2. Costa Rican Legislative Assembly, Informe de Mayora: Comisin Especial que proceda a
analizar la calidad de los servicios, compra de servicios privados, utilizacin de los recursos de
la CCSS para la enseanza universitaria privada, medicamentos y pensiones (Majority Report:
Special Commission to proceed to analyse the services, purchase of private services, use of
CCSS resources for private university teaching, medicines and pensions), File number 13-980,
San Jos, Costa Rica, 26 April 2001.
3. Ruling by the second tribunal of the Supreme Court, Exp: 95-000493-02-LA Res: 2004-
00212.
4. A second congressional report co-sponsored by current president Abel Pacheco, a congressman
at the time, presented a contrasting view of the CCSS, concluding that: There is no legal,
GC2006 01 part1 28 8/11/05 17:54:54
technical, scientifc nor strategic reason whatsoever for us to have reservations about the
contracting modalities used by CCSS since the end of the 1990s. See Costa Rican Legislative
Assembly, Informe de Mayora: Comisin Especial que proceda a analizar la calidad de los
servicios, compra de servicios privados, utilizacin de los recursos de la CCSS para la enseanza
universitaria privada, medicamentos y pensiones.
MaasurIng oorrupIIon In Iha haaIIh saoIor. WhaI Wa oan Iaarn
Irom pubIIo axpandIIura IraokIng and sarvIoa daIIvary survays
In davaIopIng oounIrIas
Magnus Lindelow, Inna Kushnarova and Kai Kaiser
1
Most government offcials and development practitioners acknowledge that high
levels of health spending do not necessarily translate into improved health status. This
observation is also borne out by empirical evidence studies have found that once other
factors are controlled for, increased government spending on health is not associated
with a reduction in child mortality in cross-country data, at least not in contexts with
weak governance.
2
In part, the challenge in transforming resources into improved
health outcomes is technical in nature; it concerns the allocation of resources across
interventions and programmes, as well as the technical skills of providers responsible for
delivering the interventions. The focus of this chapter, however, is on how corruption
defned here as the abuse of public offce for private gain can drive a wedge
between what is put into the health system, on the one hand, and what it delivers,
on the other.
Some of the evidence on the nature and consequences of corruption in the sector
comes from perception-based surveys.
3
While these surveys have generated useful
insights, the data suffer from many of the same weaknesses that plague perception-
based measures of corruption in general. An alternative approach is to try to develop
more direct measures of fscal leakages, including corruption. This has been the aim of a
number of recent Public Expenditure Tracking Surveys (PETS), which aim to answer the
question: Does public money spent on health and education actually reach frontline
health facilities and schools? They seek to achieve this by tracking the fow of public
resources through various layers of the administrative hierarchy to individual service
providers, and by developing quantitative estimates of fscal leakage that is, the failure
of resources intended for frontline service provider (clinics and hospitals) facilities to
reach their intended destination.
The World Bank and other organisations have conducted PETS, almost exclusively
in the social sectors, in over two dozen countries, beginning with Ugandas education
sector in 1995 where it was found that 77 per cent of non-wage funds failed to reach
schools. This chapter reviews what has been learnt from tracking surveys in the
health sector so far. It shows that while many PETS have generated valuable insights,
practical and methodological challenges have often made it diffcult to develop frm
and comprehensive estimates of leakage.
GC2006 01 part1 29 8/11/05 17:54:54
Moreover, once an estimate of leakage has been arrived at, there are challenges
interpreting the data, specifcally in how to establish the relationship between leakage
and corruption. There are two main reasons for this diffculty. First, it is possible that
resources were legitimately diverted from their intended purpose towards other ends.
All budget systems allow for some fexibility in the resource allocation process: budgets
can be changed, allocation rules can be modifed or ignored, and so on. This provides
government with the fexibility to adjust plans in response to unexpected events and
needs, and means that discrepancies between expenditure outcomes and original
allocations (leakage) may be both legitimate and desirable.
Second, facilities or lower levels of government may receive less than intended due
to problems in the budget execution or resource distribution process. For example,
capacity weaknesses and red tape can result in low levels of budget execution, and
a broken down vehicle can disrupt the distribution of drugs. A discrepancy between
expenditure allocation and outturn may hence be the consequence of delays in the
disbursement or distribution of funds rather than evidence of corrupt acts.
With these caveats in mind, what have tracking surveys revealed about leakage in the
health sector? As can be seen from the summary in Table 2.1, the focus of the surveys
has varied across countries. Some surveys such as those in Ghana, Tanzania and Rwanda
have generated leakage estimates for overall expenditures. For example, the Ghana
PETS found that 80 per cent of non-salary funds did not reach health facilities, with
most of the leakage arising between central government and the district. Considering
that approximately 65 per cent of total health spending (total spending estimated to be
about US $2.24 per capita in 1998) is non-salary recurrent, and assuming that the total
of the 35 per cent salary expenditures reached the health facilities, approximately half
of the overall amount allocated to clinics and hospitals did not actually reach them.
Similar problems were found in Tanzania and Rwanda.
Tracking overall expenditures is often diffcult, however. Health facilities typically
do not receive a single monthly budget allocation that they proceed to spend and
account for. Rather, they receive resources through multiple channels and sources.
4

The upshot of these institutional arrangements is a myriad of complex resource fows,
each governed by separate administrative and recording procedures. In each case,
there are risks of leakage. Expenditures on drugs and other supplies can leak through
the procurement process, or through supplies being stolen, lost or disposed of (such
as expired drugs or vaccines) as part of the distribution process. Administrative and
logistical procedures tend to be different for other non-salary expenditures, but similar
issues arise. Salary budgets can be siphoned off at different levels of government either
by simply withholding salary payments, by creating fctitious health workers (ghosts)
and collecting the salaries on their behalf, or by paid staff simply not showing up
for work.
Given this complexity, tracking surveys have often been forced to be selective about
what resources to track. For example, the survey in Honduras collected individual-level
data on 14,454 health professionals, and found that 9.3 per cent did not actually work
in the location where they were offcially assigned. About a quarter of these individuals
GC2006 01 part1 30 8/11/05 17:54:54
Tha soaIa oI Iha probIam 81
Table 2.1: Overview of fndings from Public Expenditure Tracking Surveys in the health
sector
Country Year Sample Leakage Other fndings
Ghana
a
2000 200 facilities;
40 districts
Leakage of non-salary
recurrent expenditures
is estimated at 80%.
Found greater leakage between
centre and district than
between district and facility.
Service users bear much
higher cost than intended
primarily due to the non-salary
expenditure leakage.
Honduras
b
2000 805 staff;
35 facilities
2.4% of all workers on
the payroll at health
facilities considered
ghosts.
Absenteeism estimated at
27%. In addition, study found
that 5.2% of workers were not
actually in the assigned post but
had moved to other locations.
Mozambique
c
2002 90 facilities;
167 staff;
679 users
Some evidence of
leakage of drugs in
transfer from provinces
to districts, within the
primary health care
system, but no frm
estimate.
Documented delays and
bottlenecks in budget execution
and supply management;
inequalities in allocation of
resources across districts and
facilities; incomplete registering
of user-fee revenues by facilities
(reported revenue as per cent
of expected revenue was 67.6%
for consultations and 79.6%
for medicines); absenteeism
estimated at 19%.
Nigeria
d
30 loc. gov.;
700 staff
No frm estimate of
leakage (focus was
on governance issues
in health sector, in
particular on fow of
resources, provider
behaviour and
incentives, and the role
of local governments
and community
participation).
42% of staff experience salary
delays despite suffcient
budget; detailed description of
governance and service delivery
arrangements, including facility
characteristics; evidence of
delays in salary payments.
Papua New
Guinea
e
2002 117 facilities No frm estimate of
leakage (main focus on
the education sector,
but some data on
health facilities were
collected).
Evidence of poor access to
care and limited availability of
drugs; absenteeism estimated
at 19%.
GC2006 01 part1 31 8/11/05 17:54:54
Country Year Sample Leakage Other fndings
Peru
f
2001 120 munici-
palities
Leakage in Glass of
Milk food supplemen-
tation programme esti-
mated at 71% (includes
leakage of benefts at
household level).
Quantifed leakage at different
levels of government (greater at
the higher levels); evidence that
poorer municipalities affected
the most; diversion of funds to
cover operational costs.
Rwanda
g
40 districts
Some evidence of
leakage between
regions and districts,
but no frm estimate.
Evidence of delays in budget ex-
ecution and low execution rates
(80% of non-wage funds released
at year end); user-fee revenues
and drug sales shown to be prin-
cipal sources of funding.
Senegal
h
10 districts;
37 loc. gov.
Some evidence of
leakage at regional and
communal level in
allocation of non-salary
resources from the
central level to service
providers through the
decentralisation fund
but no frm estimate.
Delays in the decentralisation
fund transfers; evidence on
extent of discretion by local
governments in allocation of
resources.
Tanzania
i
1999 36 facilities;
3 districts
Leakage of non-salary
funds estimated at 41%
(budget and accounting
mechanisms were
studied for health and
education at district
and facility level).
Donor contributions shown
to favour better-off districts;
leakage attributed to poor
record-keeping and lack of
audits.
Tanzania
j
2001 20 facilities;
5 districts
No frm estimate of
leakage in primary
education and health
facilities studied.
Substantial delays at all levels,
especially non-wage
expenditures; lack of supplies in
facilities; some evidence of
underreporting of facility
revenues.
Uganda
k
19 districts
No frm evidence of
leakage in fow of
resources to primary
health care providers
but heavy reliance
on in-kind fows and
poor record-keeping
hampered data
collection. Qualitative
evidence suggests that
leakage is limited.
Qualitative evidence suggested
that main leakage takes place
at facility level, rather than in
transfer of resources to facilities.
Table 2.1: continued
GC2006 01 part1 32 8/11/05 17:54:55
were ghost employees, while the remainder were retired or had been transferred
without records being updated. The survey also found evidence of dual job-holdings,
absenteeism and other human resource management problems.
While most health PETS have managed to generate leakage estimates for overall or
specifc resource fows to health care providers, the reliability of fndings has often
been undermined by the quality of administrative records (budgets, expenditure
accounts, receipts, drug records, payrolls, and so on). These records are often poorly
kept, refecting a lack of capacity, weak procedures and possibly efforts by staff to play
the system. As a result, survey enumerators have to contend with records that are both
incomplete and riddled with errors. In Mozambique, provincial health departments
Uganda
l
2000 155 facilities Leakage of specifc
drugs and supplies
estimated at 70% in
government, private
non-proft facilities
studies.
Detailed descriptive data on
facility characteristics and
performance; overview of
accountability arrangements;
comparison of government and
non-government providers.
hoIas
a Xiao Ye and Sudharshan Canagarajah, Effciency of Public Expenditure Distribution and Beyond:
A Report on Ghanas 2000 PETS in the Sectors of Primary Health and Education, World Bank
Africa Region Working Paper Series No. 31, 2002.
b World Bank, Honduras: Public Expenditure Management for Poverty Reduction and Fiscal
Sustainability, Report No. 22070, World Bank Poverty Reduction and Economic Sector Management
Unit, Latin America and the Caribbean Region, 2001.
c Magnus Lindelow, Patrick Ward et al., Primary Health Care in Mozambique: Service Delivery in
a Complex Hierarchy, World Bank Africa Region Human Development Working Paper Series No.
69, 2003.
d Monica Das Gupta, Varun Gauri et al., Decentralized Delivery of Primary Health Services in
Nigeria: Survey Evidence from the States of Lagos and Kogi, World Bank Africa Region Human
Development Working Paper 70, 2004.
e World Bank, Papua New Guinea: Public Expenditure and Service Delivery, unpublished manuscript,
2004.
f World Bank and Inter-American Development Bank, Peru: Restoring Fiscal Discipline for Poverty
Reduction: Public Expenditure Review, Report No. 24286-PE, 2002.
g Hippolyte Fofack, Robert Ngong et al., Public Expenditure Performance in Rwanda: Evidence from
a Public Expenditure Tracking Study in the Health and Education Sectors, Africa Region Working
Paper Series No. 45, 2003.
h World Bank, Expenditure Tracking Survey in Senegal: The Health Sector, unpublished manuscript,
2003.
i PricewaterhouseCoopers, Tanzania Public Expenditure Review: Health and Educational Financial
Tracking Study, Final Report, vols III (Dar es Salaam, 1999).
j Research on Poverty Alleviation and Economic and Social Research Foundation, Pro-poor
Expenditure Tracking, unpublished manuscript, 2001.
k Emmanuel Ablo and Ritva Reinikka, Do Budgets Really Matter? Evidence from Public Spending
on Education and Health in Uganda, Policy Research Working Paper 1926, World Bank, 1998.
l Magnus Lindelow, Ritva Reinikka et al., Health Care on the Frontline: Survey Evidence on Public
and Private Providers in Uganda, World Bank Africa Region Human Development Working Paper
38, 2003.
GC2006 01 part1 33 8/11/05 17:54:55
could provide complete district-level data for only 40 per cent of their districts. Similarly,
complete records were found in less than half of the district health offces surveyed in
Ghana, and although the data collected in Rwanda were consistent with high levels of
leakage there were substantial discrepancies between funds recorded as dispersed by
higher levels of government and the funds recorded as received by lower levels these
discrepancies may in part be due to poor book-keeping, and no frm leakage estimate
could be developed.
8ayond Iaakaga. InsIghIs InIo pubIIo axpandIIura managamanI
Where, due to the paucity of administrative records or the absence of clear allocation
rules, it has not been possible to reach frm conclusions concerning leakage, valuable
insights may still be gleaned from PETS. An important contribution has been to provide
hard evidence on the extent and source of delays and bottlenecks in budget execution
and supply management systems. For example, the Nigeria study found that although
funds had been released to local government, 42 per cent of the facility workers had
not received their salaries for more than six months in the year prior to the survey.
Similarly, in the Mozambique survey, 30 per cent of staff said that salaries are always
or almost always late, and 15 per cent of staff reported that salaries are sometimes not
paid in full. Whatever the source of the problem, delays in payments are likely to have
adverse consequences for staff morale, and may contribute to problems of absenteeism,
informal charging and other problems.
Problems of the same nature have been documented in the case of non-salary budgets,
and in the distribution of drugs and other essential supplies. The Senegal PETS found
that it takes an average of 10 months for the resources from the Decentralisation Fund
the main source of government fnancing for health facilities to actually reach the
providers. In Mozambique, nearly 30 per cent of district health offces received their frst
budget transfer of the year more than three and a half months late. Delays in budget
transfers often conspire with other factors to result in low levels of budget execution.
For example, in Mozambique, districts executed an average of only 80 per cent of their
budgets, and in some districts execution rates were as low as 35 per cent.
More generally, tracking surveys have contributed to a better understanding of the
public expenditure management process, allocation rules, fnancial management and
accounting practices, and accountability arrangements; in particular, at lower levels
of government where routine monitoring and reporting systems tend to be weak. For
example, the Ghana, Mozambique and Rwanda PETS found evidence that existing
user fee rules and regulations are not followed: patients are charged more than they
should be, exemptions are not granted, revenues are not used as intended, and so on.
In part, these problems probably refect the problems in the budget and supply systems,
that is, user fees become a lifeline for facilities that do not receive adequate funds and
resources from government but opportunistic overcharging by health workers may
also be a factor.
GC2006 01 part1 34 8/11/05 17:54:55
Tha oonsaquanoas oI Iaakaga and oIhar pubIIo axpandIIura managamanI
probIams
Do problems of leakage, delays and reallocation of resources matter? Many surveys
have focused on primary health care services, which often account for a relatively small
share of health spending. However, even though dollar values may be small, leakage
of resources or delays in budget transfers or drug supplies may seriously undermine
the capacity of facilities to deliver services. The costs in terms of poor health, suffering
and loss of life may be considerable.
In Ghana, most clinics received fewer resources than intended some received no
cash at all and had to rely on internally generated funds for their operations. As
a result, users were forced to bear higher costs than intended, in part through high
charges for drugs. The Nigeria survey found that most facilities were missing essential
equipment, medications, vaccines and supplies: 95 per cent did not have microscopes,
59 per cent did not have sterile gloves, 98 per cent did not have a malaria smear, and 95
per cent did not have urine test strips. In Mozambique, over 60 per cent of facilities had
been out of stock of one or more essential medicines during the six months preceding
the survey, with an average stock-out time of six weeks. The Uganda survey (2000)
also found evidence of stock-outs of vaccines and drugs, combined with overuse of
antibiotics and other drugs. These problems may have multiple causes, but are clearly
a cause for concern.
Tracking surveys thus can help diagnose leakages, delays and other budget execution
problems that can seriously undermine service delivery and contribute to an improved
understanding of how resources are allocated and used at lower levels of government
issues that often fall outside the purview of routine reporting systems. But PETS also
have important limitations. For one thing, most tracking surveys have mainly been
implemented in integrated health systems, where public resources are channelled to
public providers, and have proven most effective in contexts with clearly identifable
service providers and explicit resource allocation rules. Tracking surveys may be less
useful in other contexts, such as where third-party payers (insurers) play an important
role, or where private provision and contracting is more widespread. Even within public
integrated systems, different tools are needed to diagnose some forms of corruption. This
raises questions about how PETS relate to other integrity and accountability tools.
5
It
is clear that effective efforts to diagnose and combat corruption will depend on a wide
range of internal mechanisms (such as clear rules and procedures, effective accounting
and record keeping, internal and external audits) and external ones (transparency,
mechanisms for client voice, and so on). PETS may have an important role to play,
but this role needs to be determined with an eye on their cost, and with a view to
complement rather than replace other parts of the public fnancial management
system.
Ultimately, however, successfully channelling resources to providers is only half
the battle. Once there, resources must be used effciently and as intended in order to
have an impact. Tracking surveys have increasingly sought to provide evidence on
facility performance, but detailed studies including facility surveys, case studies and
GC2006 01 part1 35 8/11/05 17:54:55
qualitative work of absenteeism, informal charging and pilfering of drugs and other
supplies also have an important role to play.
For example, a recent multi-country study based on multiple, unannounced facility
visits reports absenteeism rates ranging from 23 per cent to 40 per cent in the health
sector, and fnds absenteeism to be related to both the location and the characteristic
of the health facility.
6
Evidence from provider and household surveys have shown
that informal or unoffcial charges add an unintended fnancial burden on patients
in many countries.
7
Finally, there have been attempts to collect facility-level data on
theft of drugs and other supplies by health workers through small-scale surveys or
case studies.
8
Such studies have revealed serious service delivery problems in many
countries, and highlighted the importance not only of getting resources to facilities,
but also of ensuring that health workers are provided with incentives and opportunities
to perform. But the studies have also helped counter the image of health workers and
government administrators as inherently corrupt agents an unfortunate by-product
of single-minded efforts to diagnose corruption in service delivery. Detailed case studies
and qualitative work has shown that the majority of health workers are dedicated
professionals trying to cope in diffcult and frustrating environments with low pay,
poor management and support systems, and weak accountability mechanisms.
9
This
is an important perspective to keep in mind in any efforts to strengthen the tools for
diagnosing corruption in the health sector.
hoIas
1. Magnus Lindelow is an economist at the World Bank in East Asia Pacifc Human Development,
Inna Kushnarova is a consultant with the World Bank, and Kai Kaiser is an economist with
the World Banks Public Sector Group in Poverty Reduction and Economic Management.
2. Deon Filmer and Lant Pritchett, Child Mortality and Public Spending on Health: How Much
Does Money Matter?, Policy Research Working Papers, World Bank, 1997; Vinaya Swaroop
and Andrew Sunil Rajkumar Swaroop, Public Spending and Outcomes: Does Governance
Matter?, World Bank, Policy Research Working Paper Series, 2002. For a general discussion of
the weak links in the chain between public expenditure and outcomes in health and other
public services, see World Development Report 2004: Making Service Work for Poor People (Oxford:
Oxford University Press and World Bank, 2003).
3. See, for example, Anne Cockcroft, Lorenzo Monasta et al., Bangladesh Baseline Service Delivery
Survey: Final Report, CIET International, 1999, and Filipino Report Card on Pro-Poor Services,
World Bank Environment and Social Development Sector Unit East Asia and Pacifc Region,
May 2001. Evidence of corruption from perception-based service delivery surveys has been
linked to child and infant mortality by Sanjeev Gupta, Hamid R. Davoodi and Erwin R.
Tiongson, Corruption and the Provision of Health Care and Education Services in George
T. Abed and Sanjeev Gupta, Governance, Corruption, and Economic Performance (Washington,
DC: IMF, 2002).
4. For example, facilities in Ghana, Rwanda and Mozambique receive practically no cash through
the budget process. Salaries are paid directly to staff and other resources are procured at higher
level and distributed in kind.
5. Increasingly, both bilateral and multilateral development agencies are channelling aid as
general budget or sector support. Shifts in aid modalities, combined with debt reduction
initiatives, have led to a growing concern with the transparency and integrity of public
fnancial management in developing countries. In this context, PETS have emerged as an
important diagnostic tool. Recently, PETS have also been proposed as a tool for promoting
GC2006 01 part1 36 8/11/05 17:54:55
accountability in public spending. For a discussion of PETS as a tool for tracking poverty-
reducing public spending under the Enhanced HIPC Initiative, see Tracking of Poverty-Reducing
Public Spending in Heavily Indebted Poor Countries (Washington, DC: IMF, 2001). A general
discussion is provided in the World Banks Public Financial Management: Performance Measurement
Framework (Washington, DC: World Bank, 2005). The jury is still out on whether PETS are a
useful and cost-effective tool for preventing corruption.
6. Nazmul Chaudhury, Jeffrey Hammer et al., Provider Absence in Schools and Health Centers,
Journal of Economic Perspectives, (forthcoming).
7. James Killingsworth, Najmul Hossain et al., Unoffcial Fees in Bangladesh: Price, Equity and
Institutional Issues, Health Policy Plan 14(2): 15263, 1999; Maureen Lewis, Who is Paying
for Health Care in Eastern Europe and Central Asia? (Washington, DC: World Bank, 2000); Tim
Ensor and Sophie Witter, Health Economics in Low Income Countries: Adapting to the Reality
of the Unoffcial Economy, Health Policy 57(1): 113, 2001; Paolo Belli, George Gotsadze,
and Helen Shahriari, Out-of-Pocket and Informal Payments in Health Sector: Evidence from
Georgia, Health Policy 70(1): 10923, 2004; Tim Ensor, Informal Payments for Health Care
in Transition Economies, Social Science and Medicine 58(2): 23746, 2004.
8. Barbara McPake, Delius Asiimwe et al., Informal Economic Activities of Public Health Workers
in Uganda: Implications for Quality and Accessibility of Care, Social Science and Medicine 49(4):
84965, 1999; Rafael Di Tella and William D. Savedoff, Diagnosis Corruption: Fraud in Latin
Americas Public Hospitals (Washington, DC: Inter-American Development Bank, 2001).
9. Paulo Ferrinho, Wim Van Lerberghe and Aurlio da Cruz Gomes Ferrinho, Public and Private
Practice: A Balancing Act for Health Staff, Bulletin of the World Health Organization 77(3): 209,
1999; Wim Van Lerberghe, Claudia Conceio, Wim Van Damme and Paulo Ferrinho, When
Staff is Underpaid: Dealing with the Individual Coping Strategies of Health Personnel, Bulletin
of the World Health Organization 80(7): 5814, 2002.
LooaIIavaI oorrupIIon hIIs haaIIh sarvIoa daIIvary In Iha
FhIIIppInas
Omar Azfar and Tugrul Gurgur
1
In the past two decades there has been a widespread devolution of authority to local
governments around the world. As local governments increase their share of authority
and responsibility vis--vis central government, their effectiveness in terms of quality,
quantity and the accessibility of public services has become critical. Consequently, the
effect of local-level corruption on service delivery has critical relevance for development
economists and policy-makers.
The Philippines is an ideal place to study the impact of corruption on service delivery.
Five years after the democratic revolution in the Philippines, the Local Governments
Act of 1991 devolved both political authority and administrative control of many
health and education services to the provincial and municipal level. According to
some public survey results and anecdotal evidence, much of the corruption in the
Philippines does appear to be at the local level. The large number of municipalities, the
signifcant devolution of authority, and the high and varying levels of corruption make
the Philippines an ideal place to study the impact of corruption on service delivery.
Data collected in 2000 from 80 municipalities in the Philippines was used to assess
the impact of corruption in local governments on health and education outcomes. The
results showed clearly that corruption undermines the delivery of health services. We
GC2006 01 part1 37 8/11/05 17:54:56
found a signifcant partial correlation between 13 dependent variables that measure
various aspects of health and education services and corruption perceptions, after
controlling for capacity (based on measures of human and physical capital), adult
education levels, urban residence, living standards (as proxied by assets), inequality,
existence of private sector competition, voting and media exposure, accountability
measures and local autonomy.
Corruption levels were measured using corruption perceptions of households and
public offcials (administrators, health and education services, school principals and
health workers). The respondents were asked questions about specifc acts of corruption
(such as bribery, the sale of jobs and theft of supplies) as well as their general perceptions
about the corruption level at each municipal government, public school and public
health clinic. Most kinds of corruption were found to be more prevalent in the municipal
administrators offce than in other offces, perhaps due to the administrators offce
exerting more authority and thus having more opportunity to extract rents. A total of
19 per cent of municipal administrators said there were cases of bribery in their offces
in the year preceding the survey (1999), while 32 per cent said there were instances of
theft of funds. By contrast, the fgures for municipal health offcers were 2.5 per cent
and 16.5 per cent, respectively.
To measure the quality, quantity, and accessibility of health services, we used seven
variables: six of them from a household survey (immunisation of children, delay
in vaccination of children, patient waiting times, accessibility of health clinics for
treatment, choosing public health clinics for immunisation, and satisfaction with public
health clinics) and one from the Ministry of Health (municipal average of immunisation
rate of children).
The results showed clearly that corruption undermines the delivery of health services
in the Philippines. In each case regression results indicated a signifcant and negative
effect of corruption on the quality of health services. For example, a standard deviation
(about 10 per cent) increase in corruption reduces the immunisation rate by around
1020 per cent, increases waiting time in public health clinics as much as 30 per
cent, decreases user satisfaction by 30 per cent, and reduces the odds of completing
vaccination by four times and choosing public health facilities by a factor of three.
The results also suggest that corruption does not affect the rural areas the same way
it affects the urban areas. In the urban areas demand for public health care is more
corruption-elastic (that is, households use of public health facilities declines more
rapidly in response to higher corruption incidence). Households in rural areas, on the
other hand, suffer with more waiting at public health clinics, late immunisation of
infants, and less satisfaction with public health services as compared to households
in urban areas facing the same level of corruption. The presence of alternative health
facilities in urban areas, either in the form of private health care providers or other
public health facilities, may be the reason for such differences.
We also ran regressions to understand the effect of corruption in rich, middle-income
and poor municipalities. Even after controlling for other factors we found that when
corruption is endemic, poor and middle-income municipalities report more waiting at
public clinics and a higher frequency of being denied vaccines than rich municipalities.
GC2006 01 part1 38 8/11/05 17:54:56
Corruption in public clinics is also more likely to deter households living in poor
municipalities and forces them to opt for self-medication.
Robustness checks that control for outliers, sample selection problems and reverse
causality concerns (for instance, that some common variable is affecting both corruption
and service delivery, or that poor service delivery is causing corruption) confrmed our
fndings.
Taken together our results suggest that corruption undermines the delivery of services
in the Philippines. This complements cross-country fndings on the subject, and adds
to the expanding list of ways corruption undermines welfare.
hoIa
1. Omar Azfar ([email protected]) is a research associate at the IRIS Center of the University
of Maryland College Park, and Tugrul Gurgur ([email protected]) is a graduate student at the
Economics department of the University of Maryland College Park. The article summarises
research conducted by the IRIS Center of the University of Maryland on behalf of the World
Bank and the Netherlands Trust Fund. The full report was published as: Omar Azfar and Tugrul
Gurgur, Does Corruption Affect Health and Education Outcomes in the Philippines?, Working
Paper (College Park: IRIS Center, University of Maryland College Park, 2004), available at www.
iris.umd.edu. The authors thank Satu Kahkonen, Anthony Lanyi, Patrick Meagher and Diana
Rutherford for their contributions to this report.
6orrupIIon Is bad Ior your haaIIh. IIndIngs Irom 6anIraI and
LasIarn Luropa
Richard Rose
1
Modern medicine offers many treatments that can alleviate pain or restore people to
good health. Moreover, in prosperous OECD countries there is the assurance that, if
you do get ill, you will be treated by a state-funded health service or through a private
health insurance programme. But health care costs money, and in many developing
countries the most the state can fnance are the rudiments of public health facilities,
such as clean water and sewers. In the developing world, individuals needing health
care must sometimes turn to traditional remedies or borrow money to pay for private
health care. Where corruption is rife, people have the worst of both worlds: paying
twice for treatment, once through taxes and once in a brown envelope.
Communist governments in Central and Eastern Europe once promised health care to
everyone in need. However, the result was favouritism and corruption in the allocation
of medical and hospital treatment. Those who were in the party nomenklatura had access
to good treatment; those who could pull strings through informal networks (blat) also
benefted; and people who could offer payments on the side were more likely to get
good treatment than those who could not. The corruption that was an integral part
of the shadow economies of communist countries has left a legacy of corruption
throughout the region, particularly in the health sector.
GC2006 01 part1 39 8/11/05 17:54:56
As part of this legacy, the imposition of a corruption tax for treatment that ought
to be free is likely to have negative consequences for the health of citizens. At worst,
it may lead to the denial of treatment or even people not seeking treatment because
they do not have the money to make payments under the table. Corruption in health
inevitably punishes the elderly, who are most likely to need health care, and the
poor.
The seventh New Europe Barometer (NEB) of the Centre for the Study of Public
Policy has tested the extent to which corruption is bad for a societys health.
2
Between
1 October 2004 and 23 January 2005, it organised nationwide random sample surveys
of the adult populations in eight new EU member states (the Czech Republic, Estonia,
Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia); two applicant countries
(Bulgaria and Romania); plus Belarus and Russia. National research institutes interviewed
13,499 people face to face, asking questions about their perception of corruption,
health care and such infuences on health as age, education and social class.
When people assess their physical health, the largest group of 39 per cent, not
surprisingly, says it is average; 34 per cent say their health is good; and 10 per cent
describe it as excellent. By contrast, only 14 per cent say their health is bad and 3 per
cent report it is very bad.
3
In Romania, Slovenia and Slovakia, more than half say their
health is good or excellent. Even in Belarus, where one-quarter says their health is bad,
the largest group has average health.
However, almost three-quarters of those surveyed have a negative view of their
countrys health services (Table 2.2). Altogether, 24 per cent describe the system as very
bad, and almost half characterise it as not so good, as against 27 per cent who consider
it fairly good, or very good. The evaluation of health care varies greatly within the
region. In the Czech Republic, an absolute majority gives the health system a positive
endorsement and the same is true in Belarus. By contrast, in Russia and Bulgaria fewer
than one in twelve is positive. Bulgarians and Russians differ only as to whether their
health service is not so good or very bad.
At the same time, there is a widespread perception that the body politic is infected
with corruption. When asked how many offcials are corrupt, 29 per cent say that
practically all offcials are corrupt and an additional 44 per cent see a majority of offcials
as corrupt (Table 2.3). Again, there are big differences between countries. In Romania,
a majority perceive practically all offcials as corrupt, and in Russia 43 per cent do. By
contrast, nearly half of all Estonians and Slovenes polled think corruption affects less
than half of public offcials.
Where corruption appears widespread, people also see major defciencies in health
care (Figure 2.1). Five out of six people who see nearly all offcials as corrupt think their
health system is either very bad or not so good; and almost four-ffths who think a
majority of offcials are corrupt see the health service in negative terms. Among those
who think that less than half the public offcials are corrupt, three in fve still have a
negative view of the health service. Even among the small percentage of citizens in
the region who see very few offcials as corrupt, just under half have a positive view
of their health system.
GC2006 01 part1 40 8/11/05 17:54:56
Table 2.2: Health service seen as not very good
Q. How would you evaluate the current system for health care in this country?
Very Fairly Not so Very
good good good bad
Czech Republic 3 51 39 7
Slovenia 4 42 42 11
Belarus 2 49 38 11
Romania 2 14 66 18
Hungary 1 38 46 15
All NEB countries 1 26 49 24
Estonia 1 24 49 26
Lithuania 1 22 56 21
Slovakia 1 21 52 26
Latvia 1 20 47 32
Poland 1 16 48 35
Bulgaria 1 7 55 38
Russia 1 7 53 40
Source: Centre for the Study of Public Policy, New Europe Barometer VII. Total number of respondents:
13,499. Fieldwork conducted between 1 October 2004 and 23 January 2005.
Table 2.3: Corruption perceived as widespread
Q. How widespread do you think that bribe-taking and corruption are in this country?
Very few public offcials are corrupt; less than half are corrupt; most public offcials are engaged in
corruption; almost all public offcials are engaged in corruption.
Almost all Majority Less than Very few
half
(% replying)
Romania 51 34 14 1
Bulgaria 43 45 10 2
Russia 43 46 8 3
All NEB countries 29 44 22 5
Lithuania 32 50 15 3
Slovakia 30 50 18 2
Hungary 27 36 35 1
Belarus 26 44 21 8
Latvia 24 49 22 6
Poland 22 52 24 2
Czech Republic 21 49 26 5
Slovenia 17 36 33 14
Estonia 12 39 36 13
Source: Centre for the Study of Public Policy, New Europe Barometer VII. Total number of respondents:
13,499. Fieldwork conducted between 1 October 2004 and 23 January 2005.
GC2006 01 part1 41 8/11/05 17:54:56
Figure 2.1: As corruption rises, health service gets worse
Source: Answers to questions in Tables 2.2 and 2.3 gamma correlation: 0.36. Centre for the Study of
Public Policy, New Europe Barometer VII. Total number of respondents: 13,499. Fieldwork conducted
between 1 October 2004 and 23 January 2005.
People with below-average health are most likely to be dissatisfed with their countrys
health system; 78 per cent describe it as not so good or very bad. But being in bad
health is not the chief reason why a health service is viewed negatively. More than
three-quarters of those who rate their health as average also think that health care is
not very good or very bad; and even among those in good or excellent health, two-
thirds view the health care available in negative terms.
An individuals health not only refects the state of the country but also the characteristics
specifc to that person, such as age and education. The extent to which bad government
has a negative effect on individual health, in addition to individual characteristics,
can be determined by multiple regression analysis. It identifes conditions that have a
statistically signifcant infuence on health, net of the effects of other infuences.
Both individual characteristics (age, social status and education) and perceptions of
public services signifcantly and independently infuence the health of individuals
in Central and Eastern Europe and the former Soviet Union. Together, they can account
for 26.8 per cent of the variance in self-assessed health. As expected, age is by far the
single most important infuence: being 60 or over has an even more negative effect on
health than the positive effect of being under 30.
Three other socio-economic characteristics give a signifcant boost to individual
health. The higher a persons social status and education, the better his or her health,
however old they are. The more durable consumer goods there are in the house a
50
40
30
20
10
0
Few
corrupt
Less than
half corrupt
Most
corrupt
Nearly all
corrupt
%
(percentage rating health service very good or fairly good)
GC2006 01 part1 42 8/11/05 17:54:57
proxy for income in countries where subsidies and shadow earnings complicate the
evaluation of conventional wages the better a persons health. The statistic that shows
men are more likely to be healthy than women is a by-product of the higher rate of
male mortality at younger ages, which results in men who do survive into old age on
average being healthier.
The perception of corruption has both a direct and an indirect infuence on health.
After controlling for social characteristics, people who perceive government as more
corrupt are more likely to be in worse health. Corruption also has an indirect effect
because it correlates with a negative assessment of the health service, and a bad health
service is bad for individual health. For individual health, at least, the individual
perception of corruption is more signifcant than the overall national rating.
4
Notwithstanding the widespread perception of inadequate and even corrupt public
services, the welfare values of Central and East Europeans continue to support paying
taxes for better services. However, the more corrupt a system actually is, the less beneft
that individuals will gain from paying higher taxes. In order to improve health in the
region, national governments not only have to spend more money on health care, but
also have to spend that money honestly.
hoIas
1. Richard Rose is professor at the Centre for the Study of Public Policy, University of Aberdeen,
Scotland.
2. The New Europe Barometer survey is fnanced by a grant from the British Economic & Social
Research Council for the analysis of diverging paths of post-communist countries. The health
data was collected with the support of a MacArthur Foundation grant to Professor Sir Michael
Marmot, Department of Epidemiology and Public Health, University College, London.
3. All percentages are based on pooling the 12 NEB national surveys and weighting each equally,
so that each contributes one-twelfth of the total answers reported.
4. The TI Corruption Perceptions Index (CPI) does not register statistical signifcance due to the
fact that the CPI rates the country as a whole; thus the regression analysis assigns the same
CPI score to each individual respondent in a country. However, there is never 100 per cent
agreement within a country as to the degree to which offcials are corrupt. The NEB collects
data from individuals and thus can take into account differences in individual perception
within a country.
6IIItans audII In MaxIoo ravaaIs papar IraII oI oorrupIIon
Helena Hofbauer
1
At the end of 2002, as it was discussing the 2003 budget, Mexicos Congress announced
it would provide 600 million pesos (US$ 56.5 million) of additional funding for
programmes that promoted womens health. The president of the Budget Committee
sent instructions to that effect to the Ministry of Health. Included was a statement
that 30 million pesos (US$ 2.8 million) were to be reallocated to a private organisation,
Provida, as part of the womens health initiative. Originally, the amount had been
allocated to HIV/AIDS public health campaigns.
GC2006 01 part1 43 8/11/05 17:54:57
Six Mexican civil society organisations (CSOs) Consorcio para el Dilogo Parlamen-
tario y la Equidad; Equidad de Gnero, Ciudadana, Trabajo y Familia; Fundar, Centro
de Anlisis e Investigacin; Grupo de Informacin en Reproduccin Elegida; Letra S,
Sida, Cultura y Vida Cotidiana; and Salud Integral para la Mujer launched an investi-
gation into why the budget had been altered. The six embarked on a time-consuming
piece of detective work lasting 18 months during which they documented evident
irregularities. Much of the CSOs efforts were possible because Mexico implemented a
new Transparency and Access to Public Information Law in June 2002.
The organisations uncovered a funding request that Provida presented to the Ministry
of Health on 3 December 2002 for 30 million pesos, as well as confrmation from both
the ministries of fnance and of health that 30 million pesos were given to Providas
national committee. They also uncovered the signed agreement between the grants
administrator and Provida, a fnancial and social impact report presented by Provida
on the expenditure of the resources and a 6,525-page fnancial fle containing invoices
detailing how the 30 million pesos were spent.
With this knowledge, the CSOs began their own audit trail of how Provida spent
30 million pesos of taxpayers money in 2003. They found evidence of misuse and
corruption. More than 80 per cent of the funds were used to hire the services of a public
relations frm for work such as a campaign against provision of emergency contraception
for women. Money was also spent on an agency importing overpriced medical equipment,
as well as to pay for the rent of a ballroom. The two companies and the owner of the
ballroom shared Providas address, telephone numbers and its administrative director.
The CSOs also found that Provida had purchased luxury pens, clothing and groceries
with some of the funds. Documents showed serious fscal inconsistencies. Receipts dated
October 2003 related to products acquired in July 2003.
In addition the CSOs made a number of observations about procedural violations
that had taken place. First, the president of the Budget Committee is not allowed to
speak for the plenary, or to issue instructions to a minister; second, Congress cannot
allocate money to private organisations, particularly if it is taken away from public
programmes; third, the Ministry of Health can only disburse resources to NGOs through
an open, public process, after soliciting proposals; and fourth, Providas radical stance
contradicts signifcant parts of Mexicos public health policy in that it actively opposes
the prevention of HIV/AIDS via the use of condoms, and systematically rejects the right
to abortion that was granted to raped women.
Armed with this damning evidence, the CSOs unveiled their citizens audit at
a press conference in June 2004 at which they launched a campaign demanding
transparency and accountability, supported by 700 NGOs across Mexico. The campaign
demanded that the Ministry of Health publicly explain its reasons for fnancing a private
organisation that advocated health policies contradicting those of the government;
that the government carry out an offcial audit of the 30 million pesos and clarify the
responsibilities of the government offcials involved and Providas legal representative;
that the 30 million pesos be returned to the state budget; and that legislation be drafted
and implemented to prevent similar transgressions with government money.
The campaign became the focus of national attention, occupying the headlines of
Mexicos news media for a month. As a result of the mounting public pressure, Congress
GC2006 01 part1 44 8/11/05 17:54:57
unanimously voted in July 2004 to call on the Minister of Health to explain the use of
the 30 million pesos and speed up an ongoing offcial audit. Shortly after, the ministry
demanded the return of the 30 million pesos and cancelled its contract with Provida,
suspending the distribution of additional funds to the organisation for 2004.
In September 2004, the Internal Comptroller, who is responsible for initiating audits
within the executive branch of government, issued the results of the offcial audit, which
corroborated the irregularities the CSOs had identifed. At the end of March 2005, the
earliest permissible date, the Auditor General (of the legislative branch) also issued its
results on the case. But the Auditor Generals report went further, noting that 90 per
cent of the money Provida received from the government had been inappropriately
used. As a result, the Senate asked for a judicial process to be started against Provida
and its legal representatives.
2
In April 2005 the Internal Comptroller removed the three offcials at the head of
the health ministry unit who had handed out the resources without a public process;
and banned Providas legal representative, Jorge Serrano Limn, from occupying public
offce and fned him 13 million pesos. The 30 million pesos have not been returned,
the fne has not been paid and the judicial process is still under way.
Nonetheless, the CSOs have effectively promoted the cause for greater transparency
in important ways.
They demonstrated the important role CSOs can play in making government more
accountable by using a countrys legal framework. In particular, they showed the value
of the Transparency and Access to Information Law to enable processes that would not
have been possible three years ago.
This was the frst time CSOs followed a misallocation of resources and its corrupt
expenditure throughout the entire budget process. It was possible to identify what had
happened, to audit the exercise of resources and to reach into the oversight stage of the
process in order to seek redress. The misuse of resources and the corruption highlighted
by CSOs was confrmed by offcial institutions, and action followed.
A legal precedent was established, since the Law of Responsibilities of Public Offcials
(in operation since 1982, with several reforms) was applied for the frst time to an
individual (Serrano Limn), who had made unlawful use of public resources.
Inconsistencies between public health policies and Providas activities were highlighted,
and the care centres that should have been built and run with the 30 million pesos
have since been carefully supervised in order to ensure lawful practices.
The administrative unit in the Ministry of Health responsible for distributing resources
among CSOs reviewed its policies and for the frst time published its procedures in the
public domain.
hoIas
1. Helena Hofbauer is Executive Director of Fundar, Mexico City.
2. www.senado.gob.mx/sgsp/gaceta/?sesion=2005/04/26/1&documento=60
GC2006 01 part1 45 8/11/05 17:54:57
FIghIIng Iraud and oorrupIIon In 8rIIaIns haIIonaI haaIIh 8arvIoa
Jim Gee
1
Fraud and corruption represent a pincer movement on organisations affected by them.
They deny them the resources they need while undermining the confdence of the
public. For too long, the defence against such attacks has been poorly organised and
unprofessional. In recent years in the United Kingdom, and especially in its National
Health Service (NHS) the third largest organisation in the world, with 1.2 million
staff and an annual budget of 70 billion (US $125 billion) this picture has changed
considerably.
The Counter Fraud Service (CFS) was created in 1998 with overall responsibility to
protect the NHS and its resources from fraud and corruption. Our starting point is to
accurately measure and track losses to fraud and corruption in each area of the NHS
budget to an accuracy of within 1 per cent and to have that independently audited. This
helps to identify the nature and extent of the problem, which is essential to fnding
the appropriate solution. Thus we know that losses to patient fraud have been reduced
from 171 million (US $305 million) in 1999 to 78 million (US $139 million) in 2004
(a reduction of 54 per cent), and losses to fraud by medical professionals have fallen
by about 4354 per cent over the same period. We are currently measuring losses to
payroll fraud involving ghost employees, or where people obtain employment by
using bogus qualifcations and false employment histories. These fgures should be
available in late 2005.
The CFS has the responsibility not only for operational work to counter corruption
(detection, investigation and the seeking of sanctions and redress). It also works to
develop a real anti-fraud and corruption culture, to create a strong deterrent effect, and
to revise policy and systems to prevent the problem recurring. By integrating these two
aspects, we have ensured that we generate not only activity, but also tangible outcomes
in terms of reduced losses to fraud and corruption. As a legal requirement, the CFS is
staffed by professionally trained and accredited counter-fraud specialists, members of
a new profession numbering around 8,500 across the public and private sectors since
its formation by the government in 2001.
The CFS has encountered and dealt with many different aspects of corruption.
Examples in recent years include:
We are suing a number of generic drug companies for 152 million (US $271
million) because we believe they formed a cartel to raise prices for the drugs
warfarin, penicillin and ranitidine.
A chief executive of an NHS Trust who falsifed his qualifcations to obtain the
post resigned to avoid dismissal; a criminal prosecution is under way.
Medical professionals who claimed and pocketed payments for treatments they
did not provide are usually prosecuted criminally, with civil legal action to recover
losses. Finally, they are suspended or removed from professional bodies.
GC2006 01 part1 46 8/11/05 17:54:58
These and other examples where we have detected and stopped corruption total more
than 170 million (US $303 million) since 1999, but this is only part of total fnancial
benefts to the NHS of 675 million (US $1.2 billion), which also includes recovery of
monies lost to fraud and reductions in measured losses due to CFS intervention. This
amounts to a 13:1 return on its budgetary investment, and the equivalent of what it
would cost to build 10 new hospitals.
To achieve this, the CFS has worked to mobilise the honest majority, undertaking more
than 1,400 presentations and awareness sessions reaching hundreds of thousands of
staff and millions of patients. It also seeks to deter the dishonest minority by publicising
the actions taken, with around 400 media articles each year. Detection rates have risen
by several hundred per cent, with a 96 per cent success rate in prosecution, alongside
extensive use of civil law to freeze and recover assets.
There have been four keys to this success. These are:
accurate identifcation of the nature and scale of the problem
comprehensive action to tackle the problem (not limited to traditional
policing)
professional agency staff with the right skills to reduce losses to corruption
permanently
successful mobilisation of the honest majority and the deterrent effect this has
had on the dishonest minority.
The CFS approach is widely recognised as best practice in the UK public sector and
increasingly across Europe, with information being shared via the new European
Healthcare Fraud and Corruption Network.
It is time that work to counter fraud and corruption moves from its pre-professional
period and becomes fully professionalised. No one expects an untrained lawyer to
provide good legal advice or an unqualifed surgeon to operate on a relative. It is equally
unacceptable to take a non-professional approach to the protection of public bodies
against fraud and corruption.
hoIa
1. Jim Gee is chief executive of the National Health Service Counter Fraud Service and director
of Counter Fraud Services in the UK Department of Health.
GC2006 01 part1 47 8/11/05 17:54:58
8 6orrupIIon In hospIIaIs
A run-down hospital ward in Tamale, Ghana, March 2004. (Che Chapman)
As the loci of a large proportion of health spending and given their size and complexity
hospitals provide many opportunities for corruption, as Taryn Vian describes. Money
leaks from hospitals through opaque procurement of equipment and supplies, ghost
employees, exaggerated construction costs and infated hospital price tags. In developing
countries the result is a depleted budget for other necessary health care services such
as primary health care programmes.
Ultimately it is patients that suffer, either because they are asked to pay bribes for
treatment that should be free, or because treatment decisions are based on fnancial
motivation rather than medical need. Effects are felt in both the developed and the
developing world. Case studies from around the world provide a glimmer of hope by
GC2006 01 part1 48 8/11/05 17:54:58
6orrupIIon In hospIIaIs 49
showing how low-cost efforts to increase transparency of hospital procurement in
Kenya and waiting lists in Croatia can help reduce corruption.
6orrupIIon In hospIIaI admInIsIraIIon
Taryn Vian
1
The hospital sector represents a signifcant risk for corruption, in both developing and
developed countries alike. In the United States alone, fraud and abuse in health care
has been estimated to cost US $11.9 to 23.2 billion per year; much of this expense is
attributable to hospital-based care.
2
The size and complexity of hospitals allows the possibility for many kinds of
corruption. As many economists have pointed out, corruption is a crime of calculation
and is more likely to occur where budgets are large and rents or possibilities for
people to gain from decisions made by offcials are high. Hospitals meet these criteria
for vulnerability. Globally, hospitals account for 3050 per cent of total health sector
spending (public and private); in some regions, such as Eastern Europe, the percentage
may be as high as 70 per cent.
3
Hospital spending may also include large investments
in building construction and purchase of expensive technologies, areas of procurement
that are particularly vulnerable to corruption. The need to manage multiple stakeholders
with different interests and asymmetries in information at many levels (between medical
personnel and patients, doctors and administrators, and procurement specialists and
clinicians, to name just a few) also creates an environment that is susceptible to
corruption (see Chapter 1).
Corruption in hospital administration has a direct negative effect on access and
quality of patient care. Employee theft of supplies can leave patients without medicines,
and extorted, under-the-table payments create anxiety and reduce access to care. As
resources are drained from hospital budgets through embezzlement and procurement
fraud, less funding is available to pay salaries and fund operations. This in turn leads
to demotivated staff and greater absenteeism as medical personnel seek private income
from outside jobs, again lowering access and decreasing quality of services. Financial
arrangements between hospitals and doctors intended to increase hospitals and doctors
profts can lead to waste of public money, or medical decisions that are not in the
patients best interests. Persistent corruption in the hospital sector makes it harder
to reduce hospital spending as a proportion of overall health expenditures, a goal in
many developing countries where needs can be met more cost-effectively in primary
care settings, such as health centres and maternal and child health clinics. If offcials
in power are gaining personally from the current patterns of spending in the hospital
sector, why would they favour changes to expand primary care, an area where there is
less opportunity for private enrichment?
Table 3.1 provides a typology of corruption in hospital administration. Key areas
of concern include the procurement function; embezzlement and theft; payment
system fraud; and personnel issues such as absenteeism, informal payments and sale
of positions.
GC2006 01 part1 49 8/11/05 17:54:59
Table 3.1: Major types of corruption in hospital administration
Category Type Description
Procurement Overpayment for goods
and services
Engaging in collusion, bribes and kickbacks
in procurement processes, resulting in
overpayment for goods and contracted services;
not enforcing contractual standards for quality.
Embezzlement
and theft
Embezzlement Diverting budget or user-fee revenue for
personal advantage.
Theft Stealing medicines and medical supplies or
equipment for personal use, use in private
practice or re-sale.
Personnel Absenteeism Not showing up for work or working fewer
hours than required, while being paid as if full
time.
Informal payments Extorting or accepting under-the-table
payments for services that are supposed to be
provided free of charge; soliciting payments in
exchange for special privileges or treatment.
Abuse of hospital
resources
Using hospital equipment, space, vehicles or
budget for private business, friends or personal
advantage.
Favouritism in billing,
spending
Waiving fees or falsifying insurance documents
for particular people; using hospital budget to
beneft particular favoured individuals.
Sale of positions and
accreditation
Extorting or accepting bribes to infuence
hiring decisions and decisions on licensing,
accreditation or certifcation of facilities.
Payment
systems
Insurance fraud and
unauthorised patient
billing
Illegally billing insurance companies,
government or patients for uncovered services
or services that were not actually provided,
in order to maximise revenue. May involve
falsifcation of invoice records, receipt books or
utilisation records, and/or creation of ghost
patients.
Illegal referral
arrangements
Buying business from physicians by creating
fnancial incentives or offering kickbacks
for referrals; physicians improperly referring
public hospital patients to their private
practice.
Inducement of
unnecessary medical
procedures
Performing unnecessary medical interventions
in order to maximise fee revenue.
GC2006 01 part1 50 8/11/05 17:54:59
hospIIaI proouramanI. a hoIbad oI oorrupIIon
Procurement fraud is a large risk in hospitals, as virtually all capital spending involves
procurement, and medicines and supplies are often the next largest recurrent
expenditure item after salaries. Procurement agents may seek bribes or kickbacks from
supply companies, or contractors may engage in collusion or offer bribes to hospital
offcials in order to win contracts.
Evidence from Argentina, Bolivia, Venezuela and Colombia suggests that these
practices drive up the price of supplies purchased. For example, estimated overpayments
in 1998 for seven specifc medications in 32 public hospitals in Colombia were valued
at more than US $2 million per year, an amount that would have paid for health
insurance coverage for 24,000 people.
4
Small hospitals face special challenges in reducing vulnerability to procurement
abuse. Where there are only a few doctors in a specialty, they have more power over
the decisions made by administrators. The doctors may demand that the hospital
purchase certain equipment or supplies for them, or they will move their practice
elsewhere. Some may not consider this corruption but merely an economic driver of
medical infation.
In addition, hospitals may be pressured by consultants to buy more technology than
the hospital can afford to maintain, because the additional equipment enables the
specialist doctors to demand higher fees. This is particularly true in private hospitals,
but may also take place in public hospitals where doctors use public facilities for
private practice (offcially or not), or are able to demand under-the-table payments
from patients.
While essential drug lists and hospital formularies can help by restricting procurement
to pre-approved drugs meeting effcacy, cost and quality standards, private drug
manufacturers or their agents may still try to bribe offcials to see that their medicine
or formulation appears on the list. For example, in Albania, a Ministry of Health offcial
claimed in 2003 that offers had been made to purchase the not-yet-approved list of
new members appointed to the national committees for drug nomenclature and drug
reimbursement. Presumably the bribers wanted the list so that they could individually
approach the new members to try to infuence their selection decisions, perhaps by
offering fnancial incentives for decisions favourable to the bribers. In a similar bid to
infuence medicines purchasing and use decisions, TAP Pharmaceutical Products was
charged with giving inducements directly to Lahey Clinic, a 259-bed US medical centre
and primary care practice, allegedly agreeing to pay some US $100,000 for a Christmas
party, golf tournaments and seminars if the clinic agreed to continue prescribing its
cancer drug Lupron instead of a less expensive rival drug.
5
TAP had already paid a
record US $885 million fne in 2001 to settle similar charges.
Procurement agents may also turn a blind eye when vendors substitute lower-quality
building materials or deliver goods that do not meet contractual expectations for quality,
as in Malaysia, where the Anti-Corruption Agency recently launched a probe into
irregular construction of the Sultan Ismail Hospital.
6
Risk of corruption is higher if
a hospital lacks systems for documenting and controlling contractor performance.
Kenyatta National Hospital in Kenya reportedly lost over US $12 million to procurement
GC2006 01 part1 51 8/11/05 17:54:59
fraud between 1999 and 2002.
7
Problems cited by the press included failure to control
quality of purchases (obsolete items substituted for the modern equipment described in
the bid, or fewer supplies delivered than contracted) and hidden charges or construction
overruns not included in the original procurement contract, as well as non-competitive
bidding processes resulting in higher prices. Hospitals may not have adequate systems
for recording receipt and use of drug orders, leading to situations where they pay for
orders that are never received.
Better administrative systems for procurement and inventory control can help to
prevent corruption by reducing discretion; however, anti-corruption efforts that rely
heavily on administrative controls can be stymied by the problem of collusion. In
Venezuela, researchers suspected that collusion between hospital administrators and
purchasing offcers was feeding the corruption by reducing the probability of detection
and punishment.
8
Transparency and accountability measures must be used to hold hospital administrators
accountable. In Argentina, the government adopted a strategy of monitoring how much
hospitals were paying for medical supplies and disseminated this information among
them. Purchase prices for the monitored items immediately fell by an average of 12 per
cent. Prices eventually began to rise again, but stayed below the baseline purchase prices
for the entire time the policy was in place.
9
The WHO and Health Action International
have also developed a drug-price monitoring tool that could be used for transparency
initiatives.
10
In Bolivia, researchers found that increased citizen health board activism and
supervision of personnel played a role in deterring overpayment for drugs by
procurement agents,
11
while in Uganda, health unit management committees with
community representation began to enforce accountability, particularly in the area of
hospital drug management.
12
Of course, if community board members accept kickbacks
or collude with hospital offcials, the committees will not be effective.
To increase transparency in procurement of medicines, hospitals can channel
decision-making through expert pharmacy and therapeutic committees, or procure-
ment committees. The committee structure helps to balance the infuence of clinicians
with strong personal interests. Pooled procurement decisions for groups of hospitals
may help to increase competition and dissipate power of individual physicians. Some
countries, like Albania, have moved to centralise hospital procurement as a way to
reduce opportunities for corruption. Chiles centralised health procurement agency,
CENABAST, has prevented collusion and lowered prices by introducing computerised,
auction-style bidding (see Corruption in the pharmaceutical sector, Chapter 5, page 76).
Centralised procurement may bring other problems, however, if it is poorly designed and
controlled. And even with effective centralised procurement systems, the risks of bribery
and collusion remain, and must be dealt with through transparency and review.
LmbattIamanI and IhaII
Embezzlement involves the theft of cash payments or other revenue from a hospital
by employees charged with revenue collection. Hospitals with weak fnancial systems
GC2006 01 part1 52 8/11/05 17:54:59
that are not computerised, or are cash rather than accrual-based, are more vulnerable
(see Box 3.1). In developing countries, embezzlement often involves user-fee revenues
collected from sale of drugs or diagnostic tests, and registration fees paid by patients.
One study found that workers pocketed an estimated 6877 per cent of revenues from
formal user-charges in Ugandas sub-hospital clinics.
13
Researchers compared expected
user-fee revenue based on recorded utilisation in 12 facilities, to actual recorded revenue.
Although Ministry of Health guidelines allowed some fee exemptions for the poor,
the study found that in practice those unable to pay were actually turned away, and
estimated that most of the gap in revenue was taken by collectors.
Theft of supplies is another common problem in public hospitals. Although not
all theft can be categorised as corruption, the line is crossed when those entrusted
with power systematically abuse their position to deplete a hospitals resources. There
are indications that the problem is signifcant. In a study in Venezuela, two-thirds of
surveyed medical staff knew of cases where medical supplies had been stolen, while
in Costa Rica over 80 per cent of nurses reported a lot or some theft.
14
Uganda has
huge problems with drug leakage from hospitals and sub-hospital health facilities,
where researchers estimated losses of two-thirds of the purchased drug supply.
15
In
interviews with 53 health workers in Mozambique and Cape Verde, about half of whom
8ox 8.1 6ash ragIsIars In|aoI Iransparanoy and ravanua InIo kanyas
6oasI FrovInoIaI anaraI hospIIaI
In Coast Provincial General Hospital in Kenya, government staff used information from
patient satisfaction surveys to detect fraud in the user-fee collection system.
1
Employees
were allegedly pocketing user fees, draining funds from the hospital. Because systems for
reporting revenue collection were not computerised, it was hard to determine what the
user-fee revenue should have been, and to compare this with actual receipts. Managers
lacked the information they needed to take action.
To combat the problem, management installed a network of electronic cash registers.
Programme implementers had to replace the fee collectors, who were resistant to the
change.
The reform took three months and cost US $42,000. User-fee revenues jumped by
almost 50 per cent in three months with no change in utilisation rates. The new system
revealed other gaps in hospital systems and accountability, which were also addressed.
Within three years, annual user-fee revenues were up 400 per cent. Accountability for
spending the windfall in revenue was addressed by introducing more transparency in the
planning and budgeting process.
Taryn Vian (Boston University School of Public Health)
Note
1. C. Stover, Health Financing and Reform in Kenya: Lessons from the Field. Background document
for end-of-project conference for the APHIA Financing and Sustainability Project (Nairobi: May
2001).
GC2006 01 part1 53 8/11/05 17:55:00
worked in hospitals, researchers reported frequent misuse of pharmaceutical supply
for personal gain.
16
Misappropriation of drug supply and embezzlement of user-fee revenue in poor
countries are seen by some as a personal coping strategy for deteriorating work
conditions, including falling salaries and irregular pay. Approaches to prevention and
control therefore need to include not only monitoring and control systems for detection
and punishment, but also reforms to payment systems and reforms to strengthen
professionalism. One suggestion, based on feldwork in Mozambique and Cape Verde,
is to introduce legislation that makes the head of an organisation or department
legally responsible for the actions of that body as a way of increasing peer pressure and
accountability.
17
Performance contracting is another way to increase accountability
and provide incentives for performance.
18
nhaaIIhy parsonnaI praoIIoas
Stealing time is another common abuse. A total of 32 per cent of health professionals
interviewed in Peru thought absenteeism was common or very common among hospital
staff,
19
while in Venezuela respondents reported that doctors and head nurses were
absent during 3037 per cent of contracted hours (see A tale of two health systems,
Chapter 1, page 14). Absenteeism has been linked to low salaries and dual-job holding,
20

which some consider a coping mechanism rather than corruption. Many doctors
are also active in the private sector, driven in part by the inadequate compensation
available in the public sector.
21
To reduce absenteeism, institutional controls must be introduced to increase detection,
including personnel supervision, performance measurement systems, and community
participation in hospital management. Researchers noted that while control mechanisms
can help, one size doesnt ft all. The success of strategies to reduce absenteeism in
public facilities will also depend on pay differentials between the public and private
sectors, and whether there are barriers to entry into the private sector. Larger reforms to
civil service policies and public human resource management systems may be needed,
such as shifting from civil service appointments to contractual payment for time and
services rendered. If an employee does not perform, the contract would not be renewed.
This also permits one to pay a higher hourly rate for hours actually worked.
Informal payments defned as payments made by patients for services that are
supposed to be provided free of charge are a serious problem in many middle- and
low-income countries (see Chapter 4, page 62). Under-the-table remuneration has also
been documented in some higher income countries including France and Greece.
22

In addition to causing anxiety and uncertainty among patients, informal payments
can cause poor people to forgo or delay seeking care, and can have negative effects
on the quality of clinical services. Some patients go into debt or sell assets in order to
make informal payments, thus impoverishing themselves. Others seek to keep informal
payments low by skipping levels of care going straight to specialists or the hospital,
for example, instead of using primary care services or general practitioners.
GC2006 01 part1 54 8/11/05 17:55:00
Patients report making informal payments to all kinds of health workers, from guards
and cleaners, to mortuary attendants and lab technicians, to the doctors and nurses
involved in diagnosis and treatment. Some studies have found that patients who are
hospitalised are more likely to make informal payments, and to pay higher amounts,
than patients seeking ambulatory care.
23
In the foreboding words of one Albanian
informant: The most important thing is that you should pay the doctor, because he
will never forget the face of someone who has not paid him for the rest of his life.
24
The fact that it is hard to distinguish informal payments from tips, or gifts given
by patients to express gratitude, makes the problem more diffcult to address. While
informal payments may be seen as a coping mechanism for survival when the salaries of
doctors and nurses fall below a living wage, other payments are clearly bribes extorted
by workers, a practice detected in a Kenyan mortuary and decried by offcials. Mortuary
attendants have also been implicated in bribery and other corruption schemes in South
Africa and Zimbabwe.
25
Involving ordinary citizens in oversight or transparency initiatives may be a useful
complement to regulatory and bureaucratic reforms to address informal payments. One
hospital in Cambodia has had success in reducing informal payments by formalising
user fees and promoting professionalism among staff. The hospital created individual
contracts with personnel and increased pay scales while enforcing accountability and
sanctioning poor performance.
26
8ox 8.Z hospIIaI WaIIIng IIsIs opan Ior soruIIny In 6roaIIa
The Croatian health sector is perceived to be among the most corrupt sectors in the
country.
1
It is not surprising then that instances of patients paying bribes to reduce time
spent on waiting lists are thought to be commonplace. To curb this problem, the health
ministry launched a pilot initiative to publish open waiting lists a measure obliging
hospital executives to disclose lists to patients showing them their position in the line-up
to receive medical treatment. Lists are made accessible at hospital and clinic reception
desks, and patients that do not want to have their names made public can ask to be
listed by number instead. Complaints about irregularities can be made to the head of
the hospital or to the Health Ministry.
With the help of TI Croatia, waiting lists at two major hospitals in Zagreb, Dubrava
and Sveti Duh were published in hard copy and on the Internet in late 2004 and 2005.
A hotline run by TI Croatia to monitor the effectiveness of the initiative received 90 calls
about the Dubrava Hospital waiting list within the frst few months starting in October
2004. In one case, a patient had waited two years for heart surgery but, after lodging a
complaint with TI Croatia, was operated on within two weeks. The pilot initiative is set
to become a precedent in curbing corruption in health care delivery by making it more
open and transparent.
Ana First (TI Croatia)
Note
1. Transparency Internationals Global Corruption Barometer 2004, a public opinion survey, ranked
the health services as the second most corrupt institution in Croatia, second only to the legal
system/judiciary and equal to political parties and parliament.
GC2006 01 part1 55 8/11/05 17:55:00
As in other sectors, private interests may also affect the selection and promotion of
staff to fll hospital positions, with posts going to the highest bidder or most connected
individuals, rather than to candidates with the best qualifcations. One study found that
auxiliary nurse-midwives pay bribes of six or seven times the monthly salary to obtain
positions in Uttar Pradesh state, India.
27
Also in India, the Delhi High Court found
that the president of the Indian medical council had accepted bribes to allow medical
colleges to sell seats to local students.
28
The cost of this type of corruption can be
very serious, affecting both the clinical practice of medicine, and the management of
hospital systems and performance. To reduce vulnerability, hospitals can try to open up
the hiring and promotion decision-making process, making criteria more transparent.
Performance monitoring is also essential to provide accountability.
1usI WhaI Iha dooIor ordarad. oorrupIIon In paymanI sysIams
Other forms of corruption including insurance reimbursement fraud, treatment
decisions based on fnancial motivation rather than the medical need and improper
referral relationships between doctors and hospitals (sometimes involving kickbacks)
can be traced to various forms of payment systems.
Reimbursement-system fraud may occur in countries with social insurance funds or a
sizeable private health care insurance market (see Chapter 1). Losses can be substantial:
the US government has estimated that improper Medicare fee-for-service payments,
including non-hospital services, may be in the range of US $11.923.2 billion per year,
or 6.814 per cent of total payments.
29
This sum must be interpreted with caution as it
may include unintentional mistakes or controversial decisions about what is labelled
necessary care, but it gives a sense of the magnitude of the problem. Health care fraud
includes false billing of insurance funds or governments for medical services that are not
supposed to be covered, services that were not actually delivered (sometimes because
the person is dead or does not exist, so-called ghost patients) or services that were not
medically indicated. It also includes the practice of upcoding diagnosis related groups
(DRGs), that is, classifying a case as more complicated or as having co-morbidities in
order to obtain reimbursement at higher rates.
Whether insurance systems are involved or not, hospitals and doctors may have
fnancial incentives to use increased resources in providing patient care. This is referred
to as provider-induced demand. Where services are needed, increased demand can be
good; however, fnancial incentives sometimes cause doctors to provide unnecessary
treatments, or marginally useful diagnostic tests. Fee-for-service payment systems
have been associated with increased utilisation of resources, sometimes to the point
of inappropriate use, as providers try to maximise their revenue by providing more
care. For example, researchers in Peru documented excessive caesarean section rates
in the Social Security Institute and private hospitals where doctors were paid on a fee-
for-service basis.
30
It is important to note that while demand may rise due to fnancial
incentives, it may still fall within the range of normal medical judgement. Where
provider-induced demand becomes abuse is when it is excessive and outside the range
normally considered medically indicated, yet this is far from simple to determine.
GC2006 01 part1 56 8/11/05 17:55:00
Less recognised but equally harmful from the viewpoint of patients may be the risks
introduced by managed care capitation payments, where hospitals and doctors may
engage in fraud resulting in underutilisation of care in order to maximise proft (see
Corruption in health care systems, Chapter 1, page 19). Again, it is hard to determine
where underutilisation falls outside the normal range and becomes abuse.
Another area of concern is when hospitals enter into fnancial relationships with
physicians to increase hospital referrals. Where hospitals are reimbursed by the state or
private insurers based on patient admissions or days of care delivered, it can be advan-
tageous for them to increase the number of patients admitted and to maintain high
occupancy (see the Columbia/HCA case, Corruption in health care systems, Chapter
1, page 20). One way to do this is to offer advantages to physicians who refer patients
to the hospital. Yet introducing fnancial incentives for referrals can present a danger:
even if the hospital is not best suited to meet a particular patients medical needs, the
physician may still refer the patient there in order to gain the fnancial advantage.
Financial incentives are sometimes used to promote medically needed care offered
at the most appropriate level, so it is not the use of fnancial incentives per se that
creates the danger for corruption. But the situation must be monitored and controlled
to prevent abuse. US federal law prohibits physician self-referrals, and a federal statute
proscribes kickbacks. Applying these laws in Nebraska, one hospital was charged
with underwriting a loan, paying consultants and providing free drugs and medical
equipment to a doctor in exchange for referrals.
31
The defnition of corruption in other situations is not so clear, as when a private 231-
bed hospital in the United States owned by Tenet, a large for-proft hospital corporation,
was charged with using relocation agreements to bribe doctors. Over a period of several
years, the hospital paid US $10 million to doctors who agreed to relocate their practices
to the area.
32
Although federal law specifcally prohibits hospitals from paying or
otherwise compensating doctors for referrals, the question was whether the relocation
agreements were devised to get around this law. The court case ended in a mistrial as
the jury could not agree on whether this was a violation of the law.
Payment system reforms are important to reduce vulnerability to this type of
corruption. In northern European countries, such as Finland, Sweden and the United
Kingdom, health reforms have shifted health care provision from fixed-budget
bureaucratic institutions to contract payments based on performance.
33
While this
increased operating effciency, it also required the state to play a more sophisticated
role in regulating services. Because it is diffcult to detect and control where utilisation
falls outside the range of normal practice, regulators may have more success with
approaches that reward providers for quality improvement.
34
k prasorIpIIon Ior raIorm
Strategies to prevent corruption in hospitals must be tailored to the particular ownership
structure, policy environment and health-fnancing situation in the country. The types
of corruption one will fnd, and the resources available for preventing corruption, are
likely to be different in low-income countries, compared with high-income countries.
GC2006 01 part1 57 8/11/05 17:55:00
Yet the range of interventions for reducing vulnerability to corruption does include
some standard components. Once the types of corruption have been identifed and
prioritised, reform strategies such as those below should be considered and adapted.
These include strengthening management systems and tools, creating incentives,
increasing the likelihood of detecting corruption as well as the consequences of getting
caught, and developing better information and transparency initiatives to hold hospital
offcials and medical personnel to account.
8ox 8.8 ho brIbas Ior haaIIhy busInass. IndIas TransasIa 8IomadIoaIs
1
Indias leading manufacturer of high-tech diagnostic machines to check for life-threatening
blood diseases is Transasia Biomedicals, based in Mumbai. The brainchild of Suresh Vazirani,
Transasia began marketing imported diagnostic equipment in 1985, only branching into
manufacturing eight years later with the help of international manufacturers, such as
Sysmex, Wako and Nittec in Japan, Finlands Biohit and Trace in Australia.
What marks out Transasia is the dogged stance it takes against corruption. Vazirani
says he has never paid a paisa in bribes, but that avoiding corruption takes up more of
his time than any other issue. When he wanted to install a fountain in the lunch area,
two offcials demanded a US $100 bribe for a licence. It took four years in court, and
US $4,000, to deal with the case.
Vaziranis interest in fghting corruption stems from his nine years as a volunteer with
Moral Re-Armament (now Initiatives of Change), running industrial leadership training
courses. There he would urge businessmen not to be corrupt, he recalls. Thats all
very well, they would reply, but youve never run a business. You dont know what
its like.
He and a friend decided to go into business in 1979 and as the company grew from a
modest importer to a global player exporting to over 30 countries, so did the opportunities
for corruption. Vazirani risked losing a DM 20 million (US $12.6 million) sales contract
to Germany because a customs offcer wanted a bribe to release imported components.
Rather than pay, Vazirani left the components in the warehouse for three months. He
went to the top customs offcials and appealed to their sense of national pride. The
components were released just in time.
Recently, a politician suggested to Vazirani that it would be an opportunity if they each
pocketed part of the World Bank aid the politician had received to improve health care.
Yes, and is it an opportunity if we land up in hospital needing urgent care ourselves?
replied Vazirani. At this, the politician changed his tune, realising that Vazirani was not
to be bought.
In September 2003, Vazirani was a keynote speaker at the launch in Mumbai of
Transparency Internationals new Business Principles for Countering Bribery. Corruption
is a big road block to progress, he says. Because of it everything goes wrong. The
intimidation leads to wrong decision-making. Transasia can be an example. But many
more companies need to be.
Michael Smith (For A Change Magazine)
Note
1. Excerpt from For A Change Magazine, December 2003/January 2004.
GC2006 01 part1 58 8/11/05 17:55:00
Managerial systems and tools
Important managerial systems and tools for preventing corruption in hospitals
include hospital drug formularies, review committees to certify need for new drugs or
equipment, competitive bidding and other best-practice procurement procedures, and
inventory systems to safeguard supplies. Each management system should have clearly
defned levels of responsibility and approval of decision-making, with appropriate
checks and balances. In addition to procurement, other management systems include
budgeting and planning systems to prevent spending that favours pet projects or people
and is not needs-based, and internal fnancial control systems to prevent theft and
embezzlement.
Anti-corruption strategies in the hospital sector need to be one step ahead of different
actors trying to abuse entrusted resources, and to penalise corrupt practices. Fraud
control programmes have proven effective in reducing corruption; for example, the
US federal government gets a return of US $8 on every US $1 spent on fraud control.
35

It recovered US $8 billion over 15 years through enforcement of the False Claims Act,
about half of which was health-related.
36
In addition to fnancial benefts, fraud control
efforts can also have health benefts and change patterns of care in desirable ways.
37
Incentives and consequences
There are conficts of interest inherent in most hospital payment systems, and the
infuence of payment systems on health care utilisation is a well-studied topic in health
policy literature. It is an area where careful monitoring and continuous analysis is
needed to ensure that patient safety and well-being are not being compromised by
actions taken to maximise providers income. A promising new area of research is in
performance-based contracting, especially payment systems that reward quality. At
the same time, it is important to promote laws and codes of conduct that explicitly
regulate hospitals and hospital administrators engagement in practices where confict
of interest is likely to be a problem (for example, owning supply companies), and that
encourage and reward professionalism.
Transparency and information
Since collusion among hospital personnel can subvert management control reforms,
transparency is an essential anti-corruption strategy. In the hospital sector, transparency
initiatives that should be considered include public access to procurement bidding
results, monitoring of procurement prices paid (as in the Argentinian example discussed
above), analysis of procurement bids for evidence of collusion, and setting performance
standards for hospitals and suppliers. This type of information, when shared with other
hospitals and citizen health boards or oversight committees, can both detect corruption
and serve as a deterrent.
Anti-corruption strategies should not target only agents or offcials working in
hospitals: many forms of hospital corruption are promoted by the producers or dealers
of medical equipment and drugs. Laws and codes of conduct for businesses supplying
hospitals should also be revised and enforced to prevent offers of bribes. Transparency
GC2006 01 part1 59 8/11/05 17:55:01
can also be effective here, through the publication of report cards monitoring the
compliance of private companies with these laws and codes of conduct. In addition,
in centralised, public health systems the government can create a blacklist of suppliers
caught bribing. Alternatively, the government can also share whitelists of suppliers
who consistently meet or exceed standards of performance.
Anti-corruption programmes should support health-sector fnancing and structural
reforms to assure that public systems are not over-promising and under-delivering.
Hospital systems and the medical personnel who staff them should be organised to
provide incentives for improved performance. This is especially important in resource-
constrained countries, where pressures to engage in corruption as a survival strategy
may be strong. To prevent corruption and promote health, hospitals need management
systems that are transparent, accountable and fair to both patients and providers.
hoIas
1. Taryn Vian is assistant professor at the Boston University School of Public Health, where
she conducts research and teaches courses on health care management and prevention of
corruption in the health sector. Carol Karutu assisted in researching this paper and Rich
Feeley provided feedback on an earlier draft.
2. D. Becker, D. Kessler and M. McClellan, Detecting Medicare Abuse, Journal of Health Economics
24(1), January 2005.
3. R. Taylor and S. Blair, Public Hospitals: Options for Reform through Public Private Partnerships,
(Public Policy for the Private Sector Note Number 241) (Washington, DC: World Bank, 2002);
J. Healy and M. McKee, Reforming Hospital Systems in Turbulent Times, Eurohealth 7(3),
2001.
4. R. Di Tella and W. D. Savedoff, Shining Light in Dark Corners in R. Di Tella and W. D.
Savedoff (eds) Diagnosis Corruption: Fraud in Latin Americas Public Hospitals (Washington,
DC: Inter-American Development Bank, 2001).
5. Boston Globe (US), 7 April 2004.
6. Bernama (Malaysia), 27 September 2004.
7. The East African (Kenya), 10 March 2003.
8. M. H. Jaen and D. Paravisini, Wages, Capture and Penalties in Venezuelas Public Hospitals,
in Di Tella and Savedoff, Diagnosis Corruption.
9. E. Schargrodsky, J. Mera and F. Weinschelbaum, Transparency and Accountability in
Argentinas Hospitals, in Di Tella and Savedoff, Diagnosis Corruption.
10. See www.haiweb.org/medicineprices/
11. G. Gray-Molina, E. Perez de Rada and E. Yez, Does Voice Matter? Participation and Controlling
Corruption in Bolivian Hospitals, in Di Tella and Savedoff, Diagnosis Corruption.
12. D. Kyaddondo and S. R. Whyte, Working in a Decentralised System: A Threat to Health
Workers Respect and Survival in Uganda, International Journal of Health Planning and
Management 18(4), OctoberDecember 2003.
13. B. McPake, D. Asiimwe, F. Mwesigye et al., Informal Economic Activities of Public Health
Workers in Uganda: Implications for Quality and Accessibility of Care, Social Science and
Medicine 49(7), 1999.
14. Di Tella and Savedoff, Diagnosis Corruption.
15. McPake et al., Informal Economic Activities.
16. P. Ferrinho, C. M. Omar, M. D. Fernandes, P. Blaise, A. M. Bugalho and W. Van Lerberghe,
Pilfering for Survival: How Health Workers Use Access to Drugs as a Coping Strategy, Human
Resources for Health 2(1), 2004.
17. Ibid.
GC2006 01 part1 60 8/11/05 17:55:01
18. Management Sciences for Health, Using Performance-Based Payments to Improve Health
Programmes, The Manager 10, 2001.
19. L. Alcazar and R. Andrade, Induced Demand and Absenteeism in Peruvian Hospitals, in Di
Tella and Savedoff, Diagnosis Corruption.
20. Schargrodsky et al., Transparency and Accountability, and P. Ferrinho, W. Van Lerberghe, I.
Fronteira, F. Hipolito and A. Biscaia, Dual Practice in the Health Sector: Review of Evidence,
Human Resources for Health 2(14), 2004.
21. R. Gruen, R. Anwar, T. Begum, J. R. Killingsworth and C. Normand, Dual Job Holding
Practitioners in Bangladesh: An Exploration, Social Science and Medicine 54(2), 2002.
22. Ferrinho et al., Pilfering for Survival.
23. P. Belli, G. Gotsadze and H. Shahriari, Out-of-pocket and Informal Payments in Health Sector:
Evidence from Georgia, Health Policy 70(1), October 2004; T. Vian, K. Gryboski, Z. Sinoimeri
and R. Hall, Informal Payments in the Public Health Sector in Albania: A Qualitative Study.
Final Report. Partners for Health Reform Plus Project (Bethesda, US: Abt Associates, Inc.,
2004); D. R. Hotchkiss, P. L. Hutchinson, M. Altin and A. A. Berruti, Out-of-pocket Payments
and Utilization of Health Care Services in Albania: Evidence from Three Districts (Bethesda,
US: Partners for Health Reformplus, 2004).
24. T. Vian, T. Gryboski, Z. Sinoimeri and R. Hall, Informal Payments in Government Health
Facilities in Albania: Results of a Qualitative Study, forthcoming in Social Science and Medicine,
2005.
25. The Nation (Kenya), 8 February 2001; Panafrican News Agency, 19 July 2003; African Business
(UK), January 2004.
26. S. Barber, F. Bonnet and H. Bekedam, Formalising Under-the-table Payments to Control
Out-of-pocket Hospital Expenditures in Cambodia, Health Policy and Planning, July 2004.
27. R. Balakrishnan, cited in B. Lee, M. Poutanen, L. Breuning and K. Bradbury, Siphoning off:
Corruption and Waste in Family Planning and Reproductive Health Resources in Developing Countries
(Berkeley: University of California Press, 1999).
28. The Lancet (UK), 358, 2001.
29. Becker et al., Detecting Medicare Abuse.
30. Alcazar and Andrade, Induced Demand and Absenteeism.
31. See note 27.
32. Modern Healthcare 33, 2003.
33. R. B. Saltman, Regulating Incentives: the Past and Present Role of the State in Health Care
Systems, Social Science and Medicine 54, 2002.
34. New York Times (US), 13 March 2005.
35. J. A. Meyer and S. E. Anthony, Reducing Health Care Fraud: An Assessment of the Impact
of the False Claims Act. Report prepared by New Directions for Policy (Washington, DC:
Taxpayers Against Fraud, 2001).
36. Pharmaceutical Executive 21(11), 2001.
37. Becker et al., Detecting Medicare Abuse.
GC2006 01 part1 61 8/11/05 17:55:01
4 InIormaI paymanIs Ior haaIIh oara
Television spot, autumn 2004, highlighting the problem of informal payments for health care
in Lithuania. (TI Lithuania)
Informal payments charges for services or supplies that are supposed to be free are
common in many parts of the world, especially in developing and transition countries.
While it is diffcult to draw a line between voluntary gift and mandatory payment,
and between payments that should be considered bribes or extortion, and those that
are better understood as a coping mechanism for underpaid caregivers, there is less
disagreement about the damaging effects these payments have on health systems
worldwide.
Sara Allin, Konstantina Davaki and Elias Mossialos look at the causes and consequences
of informal payments in Central and Eastern Europe and the Commonwealth of
Independent States, where informal fnancing is a legacy of communist health care
systems. They argue that raising the wages of health professionals alone is unlikely
to eliminate the problem and point to a number of essential policy measures, such as
developing appropriate incentives and suitable information systems to support the
accounting and auditing of payments. A case study from Hungary shows that, despite
GC2006 01 part1 62 8/11/05 17:55:01
InIormaI paymanIs Ior haaIIh oara 68
the relatively small sums involved, informal payments can lead to a massive distortion
of the health system. The example from Morocco demonstrates that small, under-the-
table payments can be a serious obstacle to poor patients accessing medical care.
FayIng Ior Iraa haaIIh oara. Iha oonundrum oI InIormaI
paymanIs In posIoommunIsI Luropa
Sara Allin, Konstantina Davaki and Elias Mossialos
1
Informal payments for health care in the countries of Central and Eastern Europe (CEE)
and the Commonwealth of Independent States (CIS the former Soviet Union excluding
the Baltic states) are widespread. Informal, under-the-table or envelope payments
are typically defned as direct payments by patients for services they are entitled to
for free, usually in a public health system. Informal payments range from the ex ante
cash payment to the ex post gift-in-kind. While the common practice of gift giving as
an expression of gratitude is, in principle, benign, informal payments that resemble
fee-for-service have potentially serious implications.
They can undermine offcial payment systems, distort the priorities of the health
system, reduce access to health services and impede health reforms. They can also
provide undesirable incentives and encourage unprofessional behaviour, including
rent-seeking behaviour by health workers. It is diffcult to disentangle the specifc
form of informal payment and decipher what constitutes corruption; the different
manifestations of informal payment can be placed on a continuum of gravity ranging
from nuisance to obstacle to barrier and, ultimately, to self-exclusion.
2
Reducing the
extent of informal charging is far from straightforward and represents an enormous
task for policy-makers.
Informal payments exist for several reasons, including economic ones such as a
general scarcity of fnancial resources in the public system; and socio-cultural ones,
such as the lack of trust in government and a culture of tipping. Most of the CEE
and CIS countries health systems were modelled on the Soviet Semashko system of
universal health care coverage, with a virtually exclusive role for the state in fnancing
and delivery. Informal payments became a common feature of these health systems,
since the state could not deliver what it promised. Following the economic and social
crisis with the fall of communism and the break-up of the Soviet Union, health care
suffered even further in terms of resource availability and service quality. Health system
characteristics that may help explain the prevalence of informal payments include an
excess supply of capital and human resources, low salaries, lack of accountability and
government oversight, and an overall lack of transparency. Human resource shortages
may also drive informal payments as it may lead to providers giving priority to those
patients that can afford to pay. A paucity of private services may also drive informal
payments, as wealthier patients have fewer options outside of the public system. Also,
the population may not be adequately informed of the health services they are entitled
to free of charge.
GC2006 01 part1 63 8/11/05 17:55:01
Some scholars argue that informal payments arose as a reaction by dissatisfed patients
and providers to shortcomings within the health system during the communist era.
3

Given the defciencies regarding quality and availability, there were no opportunities for
dissatisfed patients to opt out, as there was no private sector alternative, nor to voice
their complaints, as these were regarded as direct criticism of the government. Providers
were faced with low salaries and no explicit state-organised rationing mechanisms.
Thus informal payments became an established practice and served as an alternative
method of enabling patients to pay for better quality.
Throughout the 1990s, staff salaries in CEE countries were, and many continue to
be, very low and payments were often delayed. In Lithuania and Ukraine, health care
workers are reported to have waited up to three months to be paid, with even longer
waiting times in Russia.
4
Money was instead sought directly from patients and provided
to staff. While these informal payments allowed health care staff to continue providing
services during periods of economic diffculty, the demand for payments also resulted
in the exclusion of those unable to pay. Those most severely affected were the poorest
and the chronically ill.
Tha soaIa oI InIormaI paymanIs
The clandestine nature of informal payments makes accurate accounting diffcult. By
defnition, informal payments are made without any record of the transaction and are
often illegal, making both patients and providers reluctant to discuss them.
5
Furthermore,
interpretation of what constitutes an informal payment differs across regions and
countries, making generalisations and cross-country comparisons inappropriate. For
example, discrepancies in the perceived nature of informal payments have been shown
between providers and the public in Albania, with providers perceiving payments as gifts
and the public viewing fees as necessary to receive services.
6
Despite these diffculties,
recent surveys and qualitative studies indicate that informal payments have come to
represent a large proportion of total health expenditure in CEE and CIS countries.
Informal payments constitute 84 per cent of total health expenditure in Azerbaijan
7

and out-of-pocket payments contribute around 7080 per cent of total health spending
in Georgia, half of which is estimated to be informal.
8
They are also an important
form of health care fnancing in other countries, representing 56 per cent of total
health expenditure in the Russian Federation, and 30 per cent in Poland.
9
In Tajikistan,
household spending on health averages US $8.58 per person per annum compared
to government expenditure of US $3.75.
10
Similarly, the Albanian Living Standards
Measurement Survey of 2002 estimated out-of-pocket (both formal and informal)
expenditures constituted more than 70 per cent of total health expenditure.
11

Survey data of the prevalence of informal payments among service users highlight
the severity of the problem and identify substantial diversity across countries. Informal
payments are mainly associated with in-patient care settings, particularly surgery, and
several surveys have found that they tend to be more common in large towns and
cities. A 1999 World Bank/USAID survey observed that 71 per cent of GP visits and 59
per cent of specialist visits involved payments in Slovakia.
12
In Latvia, the TI Annual
GC2006 01 part1 64 8/11/05 17:55:02
Report 2000 estimated that approximately 25 per cent of patients made informal
payments sometimes, while 5.7 per cent made payments on almost every visit. A
regional breakdown showed that Riga had the highest proportion of under-the-table
payments, with 46.1 per cent of Riga respondents having made such payments.
13
In
Bulgaria, informal payments are more common in the capital city, Sofa, with 51 per
cent of survey respondents reporting paying without a receipt for a doctor or dentist.
14

In Romania, informal payments are prevalent and account for 41 per cent of total
out-of-pocket expenditure.
15
A recent survey of public perceptions conducted by the
Centre for Policies and Health Services revealed that 39 per cent of people with high
incomes paid unoffcial fees or gifts for medical services in 2001, while 33 per cent of
people with below-average income paid unoffcial fees or gifts.
16

There is evidence in some countries of an increasing trend in the proportion of health
service visits incurring charges throughout the 1990s. Between 1993 and 1998, the
number of patients in Slovakia who paid for hospital admissions grew by approximately
10 per cent.
17
In Bulgaria, out-of-pocket payments (including both formal and informal
payments) increased from 9 per cent of total expenditure in 1992 to 21 per cent in
1997.
18
In Kyrgyzstan, while 11 per cent of patients who visited a physician reported
paying informally in 1993, 50 per cent did so in 1996.
19
In Kazakhstan, while out-
of-pocket payments were, at least offcially, virtually non-existent prior to 1991, by
1996, 30 per cent of visits were charged either formally or informally.
20
It is not clear
whether these changes refect a real increase in informal payments or an increase in the
willingness of individuals to report them, and surveys have not dealt with this issue.
Tha roIa oI physIoIans
The role of physicians in shaping expectations regarding informal payments is crucial.
The status of the profession can also shape physicians attitudes toward accepting
payments directly from patients. Evidence on private expenditures in Poland reveals
that informal payments nearly double physicians formal salaries, suggesting overall
that managing existing resources poses a more diffcult challenge than fnding new
resources. There is also a direct beneft for hospital physicians, where informal payments
constitute 46 per cent of all patient expenditure in hospitals, thereby leading to an
increase in physician salaries by 15 per cent.
21
In Bulgaria, doctors allegedly receive informal payments of up to US $1,100,
signifcantly augmenting the average monthly salary of US $100.
22
Evidence from
Bulgaria also suggests that the unoffcial cost of an operation accounted for more than
80 per cent of the average monthly wage.
23
With health workers in Tajikistan among
the lowest paid in the country, informal payments and gifts-in-kind represent the main
source of income for many providers.
24
By contrast, informal payments are not high
in the Czech Republic where doctors salaries have risen above the rate of infation of
average wages. A 2000 survey of health care staff and public offcials revealed that 5 per
cent of Czech doctors confessed to accepting something more than a small gift.
25
However, poor pay alone does not seem to explain physicians readiness to accept
informal payments. Doctors in Bulgaria, Slovakia and the Czech Republic were more
GC2006 01 part1 65 8/11/05 17:55:02
likely than the average government offcial to have reported a second income, and were
also well above average in their reporting of having a family income that was enough
for a fair or good standard of living. More signifcantly, while poor pay increased the
willingness to accept gifts, it was those with the highest salaries and the highest family
income who received such payments more frequently, a likely result of the positions of
power held by these individuals.
26
It is not enough, therefore, to increase the salaries
of doctors in line with or even above general wages or general public sector incomes.
For example, in Greece, substantial increases to hospital physician salaries after the
introduction of a national health service in the early 1980s had no impact on the
prevalence of informal payments.
27
Tha ImpaoI oI InIormaI paymanIs
The impact of informal payments on the health system is diffcult to measure. Payments
that solely express gratitude in the form of a donation and are given willingly after a
service is delivered may not have any adverse impact on effciency, quality or equity.
However, in countries where this gratitude form of payment is common, the fee-for-
service type of informal payment that physicians may demand and may determine access
to and/or quality of services has serious adverse effects on effciency and equity.
Informal payments can be viewed either as contributing to the cost of services, or as
an abuse of power by the physician since the patient is placed in a situation with little
choice of provider and immediate need of service. The two types of informal payment
require different policy responses: the former calls for increasing health resources, in
part by formalising payments, while the latter necessitates regulating and monitoring
providers.
28
However, in either case, it is likely that the practice of informal payments
contributes to resource allocation that is distorted away from the social optimum:
rather than being allocated to those in most need, health services will instead favour
those who are able to pay, or are easily coerced into paying.
The impact of informal payments on quality is uncertain. Some argue that the quality
of services is better for those who pay informally, while others contend that payments
lead to unnecessary additional services. Using data from a survey of hospital patients
in Kazakhstan in 1999, Thompson and Xavier found that informal payment and the
amount paid are generally associated with better-quality services. This is evidenced
by decreased waiting time, longer length of hospital stay and patients subjective
ratings of quality.
29
But if service quality is improved when payment is made, the
benefts are restricted to that individual. Moreover, physicians are likely to keep the
payment for their own personal gain rather than improve services by investing it in
the facility. As a result, improved medical equipment, more effcient heating systems
and infrastructure, raised nursing standards and other necessary elements of a health
system are neglected.
There is little evidence on how informal payments affect utilisation, but patients
who cannot afford the extra cost are either unable to obtain treatment or they cannot
access the same quality of services or have to wait longer for care. Poorer patients have
to make signifcant sacrifces in order to pay for essential health care services, as seen
GC2006 01 part1 66 8/11/05 17:55:02
in Romania.
30
In Kyrgyzstan, one in three patients reported borrowing money for in-
patient care, and in rural areas, 45 per cent of in-patients sold produce or livestock to
cover hospital costs.
31
In Georgia, qualitative evidence highlights several examples of
sacrifces people have to make for health services, such as paying 12 lari for treatment
for poisoning (compared to the average monthly salary of 15 lari), while others are
forced to borrow money or sell household valuables to pay for health services.
32

Evidence suggests that informal payments are regressive: although poor individuals
pay less in absolute terms than the rich, they pay more as a proportion of their income.
This is the case in Albania, Bulgaria, Georgia, Kyrgyzstan, Kazakhstan and Moldova. In
Kazakhstan, the poor spent 252 per cent of their monthly income on in-patient care,
compared to only 54 per cent among the better off for the same type of services.
33
The
percentage of household income spent on informal payments in the late 1990s ranges
from 4.1 per cent in Romania, 4.4 per cent in Bulgaria, 9.1 per cent in Albania, to
20.6 per cent in Georgia.
34
In Georgia, 94 per cent of survey respondents were unable
to seek health care in 1997 due to its high cost, similar to fndings from Albania and
Tajikistan.
35
Likewise, surveys conducted in 2001 found that in Armenia and Georgia,
over 70 per cent of people reporting illness but not seeking care reported not seeking
care because they could not afford it.
36
In addition to the fnancial barriers imposed
by fees, patients in some countries are further deterred by the uncertainty about prices
caused by informal payments. Nonetheless, there is no evidence as to whether offcial
fees affect equity more strongly than informal payments do.
In some countries, providers may make exemptions for low-income households and
engage in price discrimination. Results from a recent study in Georgia suggest that
informal payments depend to some extent on the providers assessment of a patients
ability to pay which, though vague and likely inaccurate, may minimise the fnancial
barrier to access.
37
Nevertheless, the reverse has also been seen, with evidence from
Armenia suggesting a refusal to care for people unable to pay informal fees.
38

One of the most important implications of informal payments is that they undermine
governments efforts to improve accountability and contribute to the growth in
corruption endemic in many CEE and CIS countries. The relationship between
corruption and informal payments is complex and bidirectional. To simplify, a lack
of resources generates the need for additional income, hence informal payments are
made and over time become established practice. This, coupled with a lack of regulatory
capacity and a lack of monitoring and payment systems that are not linked to output,
exacerbates existing corruption in public policy. The existence of informal payments
is at odds with transparent public policy and erodes trust in government.
FoIIoy opIIons
In order to reduce informal payments, serious efforts are needed to rebuild lost trust in
health care, raise salaries, ensure good quality of care and improve accountability and
transparency. Governments should be explicit and reasonable in defning a benefts
package of services provided at a suffciently high standard for everyone within the
GC2006 01 part1 67 8/11/05 17:55:02
funding that is available. Efforts should be made to adequately inform the population
of the benefts package provided by the state and any services that do incur charges.
One possible policy option is to formalise informal payments and develop appropriate
exemption schemes. However, formalising informal payments will not solve the
problem since informal payments may continue to exist alongside the formal charges,
which has been the case in Georgia and Bulgaria.
39
One diffculty that governments
face in converting informal payments into formalised cost-sharing arrangements is
securing compliance from providers, many of whom may lose income. Experience
from low-income countries suggests that a successful conversion to formal cost-sharing
depends on the ability of government to regulate providers and set priorities or limit the
services on offer.
40
For example, in Bulgaria, payments were formalised in 1997 with no
signifcant increase in revenue (less than 1 per cent of municipal health expenditure)
and there is no evidence that exemptions are being used.
41
While the formalisation
of informal payments is one possible option, it is essential that these payments be
transparent and monitored in order to ensure they actually replace informal payments.
Moreover, funds should remain in the health sector, with decentralised retention of
revenue to allow local improvements in quality of care. If payments translate into staff
bonuses, these should refect performance in order to provide incentives to improve
quality and productivity.
In addition to formalising informal payments, private sector involvement can take two
forms: private provision and private health insurance. Some argue that allowing private
sector involvement in health care delivery may help curb the rise in informal payments
by allowing wealthier patients an alternative to the public system, and offering providers
an alternative or supplementary salary. Private health care organisations have developed
signifcantly in Lithuania, for example, and the number of physicians working in the
private sector has increased in recent years. Surveys in that country reveal a decline in
informal payments corresponding with the growth of private providers.
42
This trend
seems to follow the Czech experience regarding the role and compensation of providers,
where there is a clear division in earnings between physicians in private practice and
those employed by the state, although average earnings of public physicians have stayed
above the average national earnings and informal payments are rare.
43

However, perverse incentives associated with permitting private practice among
public physicians may arise, which may compromise the quality of care and increase
waiting times of individuals who cannot afford to pay for private care. It is possible
that allowing private practice may boost incomes and lead to a reduction in informal
payments but, if public time and facilities are used for private practice, resources are
directed to the wealthier individuals and away from those who cannot afford to pay.
Also, physicians may make cross-referrals from their public to their private practices,
in order to generate more income.
Private insurance may also be an option to formalise informal payments while also
pooling risks. However, informal payments and cultural tendencies regarding the
fnancing of medical care may restrict the growth of private insurance. Patients may
be more comfortable paying physicians and other providers directly, while paying
third-party entities may be viewed as needlessly meddling with the doctorpatient
GC2006 01 part1 68 8/11/05 17:55:02
relationship and reducing assurances of quality care.
44
In Slovakia, informal payments
are signifcant and the market for private medical insurance is not substantial. This is
despite the fact that a 2001 Agency Markant survey found that one-third of respondents
were distrustful of the General Health Insurance Company while almost two-thirds did
not trust the Ministry of Health.
45

At the same time, indiscriminate support of private sector expansion and encouraging
individuals to opt out of the public system may not be such a good idea since there
is a risk that the majority of quality-conscious patients would leave the public sector,
and it is likely to lead to a two-tier system: a poorly performing public and a well
performing private one. Enough fnancial resources should rather be made available
to provide the services of a realistic beneft package at a reasonably good standard to
everybody, and new innovative methods of accountability should be made available
for the transparent handling of local performance problems. The key issue is to ensure
a high quality of care.
Although one possible policy approach is to shift toward more decentralised social
insurance models of health system organisation, this may not necessarily reduce
the extent of informal payments. While surveys conducted before and after the
implementation of a national insurance scheme in Lithuania reveal a decline in the
extent of informal payments,
46
no decrease was observed after the implementation
of a national health insurance system in Romania, despite the fact that monthly
contributions under the Romanian system are compulsory regardless of whether any
services are actually received.
47
The ability to improve effciency and quality without jeopardising equity critically
depends on a number of policy measures, including the skills and capacity of staff,
the development of appropriate provider incentives, and the existence of suitable
information systems to support the accounting and auditing of payments. Health
reforms should also target excess capacity, since incentives created by informal
payments can lead to overuse of available staff. Reducing the number of physicians,
where appropriate, can also help increase wages and the professional status of medical
staff, although wages alone are unlikely to have long-term effects. Evidence supporting
the view that increased wages reduce informal payments may be found in the Czech
Republic, where a reduction in number of Czech physicians was accompanied by salary
increases, and in Poland, capitated primary care physicians, who were the highest paid,
were the only ones not making additional charges.
48

The challenges facing CEE and CIS countries regarding informal payments are great.
They represent an important source of revenue in countries in which pre-payment
systems have collapsed, so phasing them out without developing suitable alternatives
may be damaging. It is clear that multiple, concurrent strategies are needed to eliminate
informal payments and to convince the population that good-quality health services
can be available without paying under the table. The frst step is for governments to
acknowledge the existence and full impact of informal payments and to develop more
appropriate and affordable benefts packages, and information and monitoring systems
with genuine penalties for infringement. This is also contingent upon the existence of
political will to address corruption and lack of transparency in broader public policy.
GC2006 01 part1 69 8/11/05 17:55:03
hoIas
1. Sara Allin is a research offcer in health policy at LSE Health and Social Care, London School
of Economics and Political Science, and at the European Observatory on Health Systems and
Policies. Konstantina Davaki is a research offcer in health and social policy at LSE Health and
Social Care. Elias Mossialos is a professor of health policy in the Department of Social Policy,
London School of Economics and Political Science, co-director of LSE Health and Social Care
and research director of the European Observatory on Health Systems and Policies.
2. J. Killingsworth, Formal and Informal Fees for Health Care (Manila: WHO Regional Offce for
the Western Pacifc, 2003).
3. P. Gal and M. McKee, Informal Payment for Health Care and the Theory of INXIT,
International Journal of Health Planning and Management 19, 2004.
4. J. Healy and M. McKee, Health Sector Reform in Central and Eastern Europe, Health Policy
and Planning 12(4), 1997.
5. To our knowledge, no country explicitly accepts informal payments in their legislation, though
countries vary in the degree to which restrictions are enforced. In Bulgaria, for example,
offcial attitudes to informal payments are ambiguous; between 1989 and 1997 there was
no formal ban and a 1997 decree outlining services for which a fee applied left provisions
vague and subject to local discretion (D. Balabanova and M. McKee, Understanding Informal
Payments for Health Care: The Example of Bulgaria, Health Policy 62, 2002).
6. T. Vian, K. Gryboski, Z. Sinoimeri and R. H. Clifford, Informal Payments in the Public Health
Sector in Albania: A Qualitative Study (Bethesda, US: Partners for Health Reformplus Project,
Abt Associates, Inc., 2004).
7. M. Lewis, Who is Paying for Health Care in Eastern Europe and Central Asia? (Washington,
DC: World Bank, 2000).
8. P. Belli, G. Gotsadze and H. Shahriari, Out-of-pocket and Informal Payments in the Health
Sector: Evidence from Georgia, Health Policy 70, 2004.
9. Lewis, Who is Paying for Health Care?
10. J. Falkingham, Poverty, Out-of-pocket Payments and Access to Health Care: Evidence from
Tajikistan, Social Science and Medicine 58, 2004.
11. M. E. Bonilla-Chacin, Health and Poverty in Albania: Background Paper for the Albania Poverty
Assessment, Europe and Central Asia Sector for Human Development (Washington, DC: World
Bank, 2003).
12. L. Vagac and L. Haulikova, Study on the Social Protection Systems in the 13 Applicant Countries:
Slovak Republic Country Report (Brussels: Commission of European Communities, 2003).
13. Ibid.
14. D. Balabanova and M. McKee, Understanding Informal Payments for Health Care: The
Example of Bulgaria, Health Policy 62, 2002.
15. P. Belli, Formal and Informal Household Spending on Health: A Multi-country Study in Central and
Eastern Europe (Cambridge, MA: Harvard School of Public Health, 2003).
16. V. Mihai, Study on the Social Protection Systems in the 13 Applicant Countries: Romania Country
Report (Brussels: Commission of the European Communities, 2003).
17. Vagac and Haulikova, Study on the Social Protection Systems: Slovak Republic.
18. Balabanova and McKee, Understanding Informal Payments for Health Care.
19. J. Falkingham, Barriers to Access? The Growth of Private Payments for Health Care in
Kyrgyzstan, EuroHealth 4, 1998/99.
20. T. Ensor and L. Savelyeva, Informal Payments for Health Care in the Former Soviet Union:
Some Evidence from Kazakhstan, Health Policy and Planning 13(1), 1998.
21. M. Chawla, P. Berman and D. Kawiorska, Financing Health Services in Poland: New Evidence
on Private Expenditures, Health Economics 7, 1998.
22. T. Ensor, Informal Payments for Health Care in Transition Economies, Social Science and
Medicine 58, 2004.
23. E. Delcheva, D. Balabanova and M. McKee, Under-the-counter Payments for Health Care:
Evidence from Bulgaria, Health Policy 42, 1997.
GC2006 01 part1 70 8/11/05 17:55:03
24. Falkingham, Barriers to Access?
25. W. L. Miller, A. B. Grodeland and T. Y. Koshechkina, If You Pay, Well Operate Immediately,
Journal of Medical Ethics 26, 2000.
26. Ibid.
27. E. Mossialos, S. Allin and K. Davaki, Analyzing the Greek Health System: A Story of
Fragmentation and Inertia, Health Economics 14(51), 2005.
28. Ensor, Informal Payments for Health Care in Transition Economies.
29. R. Thompson and A. Xavier, Unoffcial Payments for Acute State Hospital Care In Kazakhstan.
A Model of Physician Behaviour with Price Discrimination and Vertical Service Differentiation.
Discussion Paper 124/2002 (Brussels: LICOS Centre for Transition Economics, 2002).
30. Belli et al., Out-of-pocket and Informal Payments.
32. G. Gotsadze, S. Bennett, K. Ranson and D. Gzirishvili Health Care-seeking Behaviour and
Out-of-pocket Payments in Tbilisi, Georgia, Health Policy and Planning 20(4), 2005; Belli et
al., Out-of-pocket and Informal Payments.
33. A. Sari, J. Langenbrunner and M. Lewis, Affording Out-of-pocket Payments for Health Care
Services: Evidence from Kazakhstan, Eurohealth 6(2), 2000.
35. Ibid.
36. D. Balabanova, M. McKee, J. Pomerleau, R. Rose and C. Haerpfer, Health Service Utilisation
in the Former Soviet Union: Evidence from Eight Countries, Health Services Research 39,
2004.
37. Belli et al., Out-of-pocket and Informal Payments.
39. Belli et al., Out-of-pocket and Informal Payments; Balabanova and McKee, Understanding
Informal Payments for Health Care.
40. A. Mills and S. Bennett, Lessons on Sustainability from Middle to Lower Income Countries
in E. Mossialos, A. Dixon, J. Figueras and J. Kutzin (eds) Funding Health Care: Options for Europe
(Buckingham: Open University Press, 2002).
41. Balabanova and McKee, Understanding Informal Payments for Health Care.
42. A. Dobravolskas and R. Huivydas, Study on the Social Protection Systems of the 13 Applicant
Countries: Lithuania (Brussels: Commission of the European Communities, 2003).
43. M. Rokosov, P. Hva, J. Schreygg and R. Busse, Health Care Systems in Transition: Czech Republic
(Copenhagen, WHO Regional Offce for Europe on behalf of the European Observatory on
Health Systems and Policies, 2005).
44. E. Mossialos and S. Thomson, Voluntary Health Insurance in the European Union: A Critical
Assessment, International Journal of Health Services 32(1), 2002.
45. Vagac and Haulikova, Study on the Social Protection Systems: Slovak Republic.
46. Dobravolskas and Huivydas, Study on the Social Protection Systems: Lithuania.
47. Mihai, Study on the Social Protection Systems: Romania.
III, Iaa or brIba? InIormaI paymanIs In hungary
Pter Gal
1
After 15 years of reform, informal payments for health care, a legacy of the socialist
health care system, still generate heated debates in Hungary. In 2004, a young father
set up a website, halapenz.hu,
2
where parents of newborn babies were invited to share
their experiences about the obstetrician that delivered the baby, including how much
they paid for the service. What makes this story remarkable is that Hungary has a social
GC2006 01 part1 71 8/11/05 17:55:03
insurance system in which virtually everybody is entitled to receive almost all health
services, free of charge. The doctors who appeared on the list were quick to react,
demanding the website be shut down which was unsurprising since such payments
are subject to income tax and should have been declared. The case attracted strong
media attention, especially when the website was shut down after the ombudsman
said it violated the doctors right to privacy. The incident sparked an intense debate
about the legality of informal payments, the motivation of the patients and whether
or not the practice should be banned. But after a couple of months, interest faded and
it was back to business as usual.
hoW WIdaspraad ara InIormaI paymanIs?
Research has shown consistently that informal payments are widespread in the health
sector in Hungary, but the fndings vary widely as to the magnitude. An analysis of
available data shows that the share of informal payments was 1.54.5 per cent of
total health care expenditure in Hungary in 2001.
3
This amounts to 13.5 per cent of
yearly net income for the average household, even if we take into account that only
one-third of households reported expenditures on informal payments in 2001.
4
This
does not seem much in comparison with other former communist countries, where
the majority of health expenditures are informal payments (see Paying for free health
care, page 64).
To understand the impact of informal payments, however, the aggregate total of
money is less important than its distribution. Surveys in Hungary have shown that 90
per cent of payments go to medical doctors and to particular specialities and services,
with deliveries and surgical procedures being the best paid.
5
Using the low estimate and
distributing the amount equally among doctors in specialities where informal payments
exist, income from informal payments contributes about 6075 per cent of physicians
offcial net salary. This suggests that the signifcance of informal payments stems not
from their overall magnitude but from the consequences of their unequal distribution.
The case of Hungary shows that policy-makers should not ignore the phenomenon of
informal payments, even though the total sums involved are small.
Tha prassura Io pay
Determining whether informal payments are fees, gifts or bribes is important in
determining what can be done to curb them but, more importantly, whether they
should be eliminated at all.
6
It is not easy to dismiss the donation explanation of
informal payments. In Hungary, many surveys found that the majority of patients
paid the doctor out of gratitude, or at least the majority said they were motivated by
gratitude when they made the payment.
7
On the other hand, a more thorough analysis
reveals subtle contradictions, which indicate that surveys are not always the best tool
to capture patients true motivation.
Indeed, in our survey, follow-up interviews with respondents reveal that the motivation
behind informal payments is multifaceted and that even in apparently straightforward
GC2006 01 part1 72 8/11/05 17:55:03
cases of gratitude payment there is always pressure to pay.
8
For instance, patients take
it for granted that a chosen doctor must be paid extra or, in certain cases, patients
feel that they must give something, if the doctor pays more than usual attention.
These fndings suggest that informal payment is rarely motivated by gratitude alone.
Yet despite the arguments against it, the gratitude motive has deeply infltrated the
explanation of the phenomenon in Hungary and is stubbornly adhered to by patients,
doctors and policy-makers alike.
At the systemic level, informal payments can rather be explained as the response
of patients and doctors to the shortages generated by the states socialist health care
system. Though several systemic features contributed to this shortage, the most notable
was the low salaries of health care professionals. Low salaries alone created shortage,
either because doctors lowered their performance (No one can expect me to work hard
for such a low remuneration!) or because they had to take part-time jobs and made
patients suspicious about the quality of the provided service (Can I be certain that this
overworked doctor will provide me with the service I need?). Taking into account the
information asymmetry between patients and doctors, low salaries could also erode
trust (Is it realistic to expect this underpaid doctor to do everything to cure me?).
Hence shortage does not need to be real to generate informal payments.
Lassons Irom Iha hungarIan axparIanoa
Informal payments in Hungary seem to stem from a reaction by dissatisfed patients
and doctors to the shortage generated by the socialist health care system, which was
long on promise and short on delivery. Patients and doctors adapted to the situation by
reinterpreting the declared but unfulflled offcial entitlement to comprehensive high-
quality care and a decent salary for honest work. Where the reassessment of patients
and doctors coincided, a new, unwritten set of entitlements emerged.
The health sector reforms of the past 15 years have not fundamentally changed this
set-up. Informal payments continue to be a challenging problem for health policy since
they have the embedded incentives of a fee-for-service policy, without the transparency
and control of formal out-of-pocket payments. Neither taxing informal payments nor
legally enforcing non-payment are viable policy options since both patients and doctors
have seen unrealistic rules fouted. Successful policies have to tackle shortage in the
health sector, either by curtailing the generous benefts package and/or incorporating
additional funds by formalising informal payments as co-payments.
9
Mapping informal payments could help in the design of a co-payment system that
would be accepted by the population, but it cannot be assumed that the existence of
a formal out-of-pocket payment system will necessarily prevent patients from paying
extra. Indeed, payment is likely to continue until patients are wholly convinced the
system will deliver effective care without additional incentives. Hence attempts to
eliminate informal payments require concerted action to rebuild the lost trust in health
care. Local initiatives such as the Hungarian care coordination pilot,
10
which builds
on partnership and participation, can help to re-establish the trust-based relationship
between the public and physicians, and thus provide a different set of expectations for
GC2006 01 part1 73 8/11/05 17:55:03
their future encounters.
11
Under this programme, local health care providers (doctors,
clinics or hospitals) assume responsibility for the whole spectrum of care for residents
in their area, and they are provided with data on their patients by the national health
insurance fund to monitor actual service utilisation.
Nevertheless, any reforms have to take into account the political complexities of
the current system, as well as the resistance that will inevitably ensue if attempts to
eliminate informal payments are made. Though important, recognising that the concept
of gratitude payment is no more than a convenient myth that has been used to make
an unacceptable phenomenon acceptable is only the frst step towards the formulation
of more effective policies in this area.
hoIas
1. Pter Gal is assistant professor at the Health Services Management Training Centre, at
Semmelweiss University, Hungary.
2. Hlapnz is the Hungarian term for informal payment. It literally translates to gratitude
payment.
3. Pter Gal, Informal Payments for Health Care in Hungary (London: London School of Hygiene
and Tropical Medicine, University of London, 2004).
4. Hungarian Central Statistical Offce, Yearbook of Household Statistics 2001 (Budapest: Hungarian
Central Statistical Offce, 2002).
5. For a summary of these surveys, see Pter Gal, Tamas Evetovits and Martin McKee, Informal
Payment for Health Care: Evidence from Hungary, Health Policy (forthcoming).
6. Pter Gal and Martin McKee, Fee-for-service or Donation? Hungarian Perspectives on
Informal Payment for Health Care, Social Science and Medicine 60, 2005.
7. For a summary of the fndings of surveys see Gal, Informal Payments for Health Care in
Hungary.
8. Ibid.
9. Pter Gal and Martin McKee, Informal Payments for Health Care and the Theory of Inxit,
International Journal of Health Planning and Management 19, 2004.
10. Pter Gal, Health Care Systems in Transition: Hungary (Copenhagen: WHO Regional Offce
for Europe on behalf of the European Observatory on Health Systems and Policies, 2004).
11. Gal and McKee, Fee-for-service or Donation?
8ox 4.1 InIormaI paymanIs Iaka a IoII on Moroooan paIIanIs
My husband injured his hand at work and was taken to a public hospital. He had to
pay 300 dirhams (US $33) to get an X-ray and 200 to have the injury stitched. He then
had to pay another 500 dirhams just to be allowed to stay in the hospital.
(Woman interviewed in Casablanca)
When my wife went to the hospital they examined her and prescribed some pills. They
said that none were available there, but if we paid 20 or 30 dirhams (US $23), someone
could provide the free medication. The problem is, we cant afford the drugs.
(Man interviewed in Casablanca)
4
GC2006 01 part1 74 8/11/05 17:55:04
Four out of fve people interviewed in a Transparency International (TI) Morocco survey
in 2002 described corruption in the public health system as common to very common.
1

Morocco has a system of poverty certifcates, designed to guarantee the poor access to
basic care, but this system has been prone to corruption and a market for obtaining the
certifcates has developed. The health minister summed up the problem by admitting that
56 per cent of those that have the means to pay are benefting from public hospitals,
while 15 per cent of the countrys poorest are paying out of their pockets.
2
According to TI Moroccos study, which surveyed 1,000 households,
3
of those who
had been in contact with members of the public health service, 40 per cent admitted to
making an illicit payment for a service or supply that was supposed to be free. Of those
who required hospital treatment, 59 per cent admitted to paying to be examined or
admitted into hospital, while 26 per cent paid for treatment. When asked whether the
payments had achieved results, 81 per cent said that the expected result had been reached,
compared to 3 per cent who claimed that the bribe was ineffectual. This success rate
has to be qualifed by the fact that 85 per cent of citizens who paid bribes to public health
offcials were entitled by law to receive the service for free. The average size of the bribe
was 140 dirhams (US $15).
While informal payments can be seen as a coping mechanism for poorly paid health
workers, everyone pays for corruption in this sector. Citizens who do not consent to making
informal payments do not receive access to care. Public hospitals pay because potential
revenue is lost, goes unrecorded or is diverted into the hands of medical staff who abuse
their position to extort from patients, and equipment and medicines are wasted or are
sub-standard. The credibility and perceived integrity of health personnel suffers. The cost
for the state is a failed public health policy.
To remedy this situation, hospital staff must be made aware of the duties they have
to their patients, and both health system workers and users must be made aware of
patients rights. Pay structures and working conditions in hospitals must be re-evaluated
and whistleblowers who denounce corrupt practices need protection.
Azeddine Akesbi, Siham Benchekroun and Kamal El Mesbahi (TI Morocco)
Notes
1. TI Morocco, La Corruption au Maroc, Synthse des rsultats des enqutes dintgrit (Corruption in
Morocco, a summary of the National Integrity System survey) (Rabat: TI Morocco, 2002). The
interviews cited here are from a focus group discussion.
2. La Vie Economique (Morocco), 4 February 2005.
3. Of the 1,000 interviewed, 80 per cent came from big cities and 20 per cent from rural municipalities.
Of those surveyed 79 per cent were men and 21 per cent were women.
GC2006 01 part1 75 8/11/05 17:55:04
6 6orrupIIon In Iha pharmaoauIIoaI saoIor
A young medicine vendor from a so-called ground pharmacy offers black market drugs to
clients in a street in Libreville, Gabon, 29 August 2003. (Desirey Minkoh/AFP/Getty Images)
The pharmaceutical sector faces many challenges that are not addressed in this volume,
including patterns of research and patent systems that do not seem to be meeting all
public health needs, particularly in eradicating devastating tropical diseases. Corruption
adds a potentially deadly element when patients cannot afford extortion payments for
the drugs they need, or they are sold counterfeit medicines.
In this chapter, Jillian Clare Cohen argues that heavy government regulation in the
pharmaceutical chain while essential to safeguard the population against sub-standard
drugs and unfairly priced goods makes this sector particularly prone to corruption.
In recent years, much discussion has centred on the close ties between physicians
and the pharmaceutical, biotechnology and medical device industries which, when
unchecked, can lead to corrupt practices. Jerome Kassirer highlights the conficts of
interest that may arise when doctors feel indebted to drugs representatives, or when
scientists are on the payroll of companies whose drugs they are hired to evaluate.
GC2006 01 part1 76 8/11/05 17:55:04
6orrupIIon In Iha pharmaoauIIoaI saoIor 77
Efforts are being made to improve the situation. Representatives of the pharmaceutical
industry and of physicians describe the voluntary codes set up to reduce potential
conficts of interest. Civil society and concerted efforts by courageous regulators can
help curb corruption in the pharmaceutical industries both legal and counterfeit as
the experiences from India, Thailand and Nigeria show.
FharmaoauIIoaIs and oorrupIIon. a rIsk assassmanI
Jillian Clare Cohen
1
Pharmaceuticals are indispensable to health systems. They can complement other types
of health care services to reduce morbidity and mortality rates and enhance quality of
life for many patients. Because pharmaceuticals have curative and therapeutic qualities,
they cannot be regarded simply as ordinary commodities. Access to medicines is often
about life and death. This is illustrated most dramatically in sub-Saharan Africa where
almost 30 million people are infected with HIV/AIDS and the majority lack access to
anti-retroviral therapies.
In a broader context, access to essential medicines has become a central topic at the
international policy-making level where it is increasingly viewed as a fundamental right,
with human rights law placing obligations on states to ensure access.
2
This includes
duties on governments to ensure that pharmaceutical systems are institutionally sound
and transparent and that there are appropriate mechanisms to reduce the likelihood
of corruption, which can deny medicines to those in greatest need.
A major conundrum in international drug policy is the fact that, despite international
aid and a plethora of programmes devoted to improving pharmaceutical access, there
is a morally worrying drug gap. The WHO continues to estimate that one-third of the
global population lacks regular access to essential medicines.
3
A number of determinants
contribute to this drug gap, including market failures, government ineffciencies,
poverty and corruption.
For example, OECD countries generally devote US $239 in annual spending on
drugs per head, compared to less than US $20 in developing countries and US $6 in
sub-Saharan Africa.
4
Pharmaceuticals are the largest public health expenditure after
personnel costs in most low-income states, and often the largest household health
expenditure of all.
5
One of the most important differences between industrialised and
developing countries is that in the latter pharmaceutical expenditures are anywhere
from 5090 per cent of total individual out-of-pocket expenditures.
6
In such countries,
illness is a major cause of household poverty. Corruption exacerbates this drug gap:
when offcials accept kickbacks for purchasing medicines, pharmaceutical expenditure
is reduced and fewer of the right drugs get to the right people when they need them.
Many determinants are responsible for disparities in access to medicines, but
little research has been devoted to just how corruption impacts on drug availability.
Fortunately, this area is gaining interest and a number of studies have begun to address
this issue.
7
The pharmaceutical system is susceptible to corruption for a variety of
GC2006 01 part1 77 8/11/05 17:55:04
reasons. One of the most signifcant is the degree of government involvement in its
regulation: studies from other sectors have found that the incidence of corruption is
noticeably higher when the state retains a major involvement in the economy and its
bureaucracy is pervasive.
8
Without robust institutional checks, government regulators
can make discretionary decisions rather than decisions based on uniform criteria. In
addition, wide information asymmetries exist between patient and physician (see
Chapter 1). Patients trust their doctor to prescribe the most effective drug for their
condition, but the doctors decision as to which drugs to prescribe may be infuenced by
pressure from pharmaceutical companies. There are often poorly documented processes
in the quality control system that can lead to the manufacture of sub-standard drugs.
This occurred in Brazil when a well known pharmaceutical manufacturer was found to
8ox 6.1 8 pharmaoauIIoaI oompany IInad Ior paymanIs Io oharIIy haadad
by FoIIsh haaIIh oIIIoIaI
1
In June 2004, the pharmaceutical company Schering-Plough agreed with the Securities and
Exchange Commission (SEC) to pay a fne of US $500,000 for violations of the books and
records and internal controls provisions of the Foreign Corrupt Practices Act (FCPA).
According to the SECs fndings, the Polish subsidiary of the New Jersey-based company,
Schering-Plough Poland (S-P Poland), made payments amounting to approximately US
$76,000 between February 1999 and March 2002 to a foundation for the restoration of
Silesian castles, the Chudow Castle Foundation. The foundation was run by the director
of the Silesian Health Fund,
2
one of 16 regional state-run Polish health authorities which
provides funding for the purchase of pharmaceutical products by hospitals and other
medical centres.
The SEC alleged that these payments were made to induce the director to buy S-P
Polands products for his health fund. It alleged that, in order to conceal the nature of the
payments, the S-P Poland manager deliberately set them at or below his approval limit
and provided false medical justifcations for them in documents submitted to the parent
companys fnance department.
Although the SEC conceded that the foundation was a bona fde charity and that the
donations were made without the knowledge or approval of the US parent company, it
charged that the parents internal controls were inadequate to detect and prevent the
fnancial irregularities committed by its Polish subsidiary. Although the SEC did not go so
far as to state that the payments were bribes, it did fnd that the manager viewed them
as necessary, in order to infuence the action of the government offcial.
This case highlights that companies should not only have clear policies covering
charitable donations, their permitted amount and approval procedures, but should
conduct due diligence across their organisation. The case also underscores the aggressive
stance of the SEC in holding suppliers accountable for the actions of their subsidiaries.
Notes
1. This text is based on Wilmer Cutler Pickering Hale and Dorr LLP, Foreign Corrupt Practices Update,
30 June 2004, www.wilmerhale.com
2. Rzeczpospolita (Poland), 11 June 2004.
GC2006 01 part1 78 8/11/05 17:55:04
have manufactured sub-standard contraceptives.
9
Finally, the pharmaceutical market is
so lucrative that it attracts entrepreneurs who are both honest and, more perplexingly,
dishonest. All of these factors expose the pharmaceutical system to the possibility of
corruption.
This essay focuses primarily on the role of government, since state intervention,
particularly through regulation, is vital to the pharmaceutical sector. There are two
central reasons why governments regulate the pharmaceutical market: frst, to ensure
that health policy and other governmental interventions, such as quality assurance of
drugs and fair drug pricing, enhance the health of the population; and second, to ensure
that industrial policies strengthen economic competitiveness of the pharmaceutical
sector and improve innovation and effciency. These two objectives can sometimes lie
at cross-purposes. If regulators are subject to pressure from commercial groups, health
objectives can be compromised.
kay daoIsIon poInIs
The pharmaceutical system is technically complex and replete with a number of core
decision points.
10
Each decision point needs to function optimally so that the system
as a whole offers good-quality, cost-effective, safe and effcacious medicines. Figure
5.1 shows key processes in the selection and delivery of pharmaceutical products and
illustrates the potential for corruption that exists at any one of its decision points
(post-manufacturing) unless there are solid institutional checks and balances in place.
For example, procurement is particularly susceptible to corruption unless there are
open bidding processes, good technical specifcations, and consistent and transparent
Efficacy
Labelling
Marketing
Use
Warnings
Full registration
Re-evaluation
of older drugs
Determine budget
Assess morbidity
profile
Determine drug
needs to fit
morbidity profile
Cost-benefit
analysis of drugs
Consistency with
WHO criteria
Determine model
of supply/distribution
Reconcile needs
and resources
Develop criteria
for tender
Issue tender
Evaluate bids
Award supplier
Determine
contract terms
Monitor order
Make payment
Quality assurance
Receive and
check drugs
with order
Ensure
appropriate
transportation
and delivery to
health facilities
Appropriate
storage
Good
inventory
control of
drugs
Demand monitoring
Consultation with
health
professional
In-patient care
Dispensing of
pharmaceuticals
Adverse drug
reaction
monitoring
Patient
compliance with
prescription
Service
delivery
Distribution Selection Procurement Registration
Figure 5.1: Key processes in the selection and delivery of pharmaceutical products
GC2006 01 part1 79 8/11/05 17:55:05
6orrupIIon and haaIIh B0
procedures for redress if needed. While the design of good institutions with oversight
is crucial for the reduction of corruption, there is also a signifcant role for civil society.
If community groups closely monitor pharmaceutical companies and regulators, there
is a greater likelihood that corruption can be caught or even prevented out of fear of
disclosure (see Boxes 5.2 and 5.3).
Registration
The frst decision point in the pharmaceutical chain is registration, which was originally
introduced to protect patients from catastrophes like the thalidomide cases in the
1950s, and evaluates a drugs effcacy against a specifc disease and its possible side-
effects. The process regulates the labelling, marketing, usage, warning and prescription
requirements for a drug. Registration procedures need to be transparent and applied
uniformly, and should leave no room for individual discretion. The registration process
should guarantee drug safety and effcacy, but these guarantees risk being eroded by
the pharmaceutical industry lobby. A high-profle inquiry into risks posed by the pain
pills Vioxx, Bextra and Celbrex in 2004 highlighted already existing concerns regarding
the US Food and Drug Administrations (FDAs) capacity as an unbiased regulatory
body (see The corrupting infuence of money in medicine, page 88). Critics point
to the fact that between 1997 and 2004, 12 major prescription drugs, with a market
value of billions of dollars, were recalled by the FDA or withdrawn by companies.
According to Sheldon Krimsky of Tufts University, the rise in for-proft clinical trials,
fast-tracking of drug approvals, governmentindustry partnerships, direct consumer
advertising and industry-funded salaries for FDA regulators has contributed to degrading
the institutional integrity of the FDA, suggests regulatory capture of the FDA by the
pharmaceutical industry to some degree and also illuminates the need for the insti-
tution to demonstrate more independence from its stakeholders.
11
Meanwhile, in
low-income countries, regulatory agencies are often weak or non-existent due to lack
of resources.
Selection
Drug selection processes should ensure that the most cost-effective and appropriate
drugs for a populations health needs are chosen fairly. The WHO Model List of Essential
Medicines is a helpful framework in this regard for most developing countries because
it establishes priority areas of treatment and covers the most common diseases.
12
But
this can open a new avenue for corruption since manufacturers have a strong interest
in getting their products selected as essential medicines. If institutions are weak and
individuals have incentives to engage in corrupt activities, the selection process can
be replete with kickbacks and payoffs so that drugs on a national drug list may not
necessarily refect appropriate and cost-effective drugs (see Corruption in hospital
administration, Chapter 3, page 51).
However, there are methods that can reduce the likelihood of corruption in the
selection process and promote sound, evidence-based decision-making. The pharmaco-
economic techniques used by Australia and the Canadian province of British Columbia
GC2006 01 part1 80 8/11/05 17:55:05
6orrupIIon In Iha pharmaoauIIoaI saoIor B1
have proved helpful in ensuring that objective decision-making takes place if the
correct models and techniques are employed. Pharmaco-economics, or outcomes
research, uses cost-beneft, cost-effectiveness and cost-utility analyses to compare the
economics of different pharmaceutical products, or to compare drug therapies with
other medical treatments.
Drug selection committees must be composed of impartial persons with the
appropriate technical skills. Their members must be obliged to declare any conficts
of interest, and meetings should be regular and well publicised so that the public
can observe proceedings. Minutes of meetings should be posted on the Internet and
decisions clearly justifed. In the event of a potential breach, an appeal process must
be in place that ensures due process.
Final selection criteria should be based on discussions and acceptance by key
prescribers, and the WHO criteria for selection should be used as a basis for decision-
making. These are: relevance to the pattern of prevalent diseases; proven effcacy and
safety; evidence of performance in a variety of settings; adequate quality, including
bio-availability and stability; favourable cost-beneft ratio in terms of total treatment
cost; and preferences for drugs that are well known to have good pharmaco-kinetic
properties. Lastly, all drugs listed on a government essential medicines list should be
identifed by generic name.
Procurement
Procurement is the principal interface between the public system and drug suppliers,
and its goal is to acquire the right quantity of drugs in the most cost-effective manner.
This involves inventory management, aggregate purchasing, public bidding contests,
technical analysis of offers, proper allocation of resources, payments, receipts of drugs
purchased and quality control checks.
Procurement is often poorly documented and processed, which makes it an easy
target for corruption. Drug procurement is even more vulnerable to corruption than
contracting in other sectors. This is due to several factors, including: the method to
determine the volume of drugs needed is often subjective; there are diffculties in
monitoring quality standards in drug provision; suppliers use different prices for the
same pharmaceutical products and can artifcially infate prices; some marketing practices
by pharmaceutical companies induce demand for products; and an additional challenge
is posed by emergency situations, which call for speedy and adequate intervention.
The best protection against corruption is open, competitive procurement that
prevents personal discretion in the selection of suppliers, and requires clear criteria for
the selection and process of winning bids. However, procurement procedures require
ongoing monitoring, including reviews from the inspector generals offce.
13
Strong oversight mechanisms can drastically reduce corruption. A World Bank
study from 2001 examined the use of an electronic bidding system for pharmaceutical
purchases in Chile.
14
Contrasting the innovative Chilean system to other procurement
practices, the authors argued that outcomes are greatly improved by the adoption
of good incentive structures for public offcials and the reduction of informational
asymmetries through the posting of drug prices on the Internet.
GC2006 01 part1 81 8/11/05 17:55:05
6orrupIIon and haaIIh BZ
A comprehensive study of corruption in the pharmaceutical system in Costa Rica found
that in many cases competition was reduced, or procedures were followed incorrectly.
15

Some health care professionals and pharmaceutical company executives alleged that
participants in public tenders had on occasion colluded to extend the purchasing cycle
as long as possible. This was done by submitting frivolous appeals, which were then
extensively contested by both sides, or by delaying the delivery of drugs for unfounded
reasons. The effect of these long delays was the eventual depletion of the social security
systems inventory resulting in direct purchases from private suppliers. These purchases
were then made at much higher unit prices than would be obtained through formal
bidding processes. Studies from Argentina and Bolivia show that increased transparency
and citizen participation in the procurement process can reduce corruption and cut
costs considerably (see Corruption in hospital administration, page 52).
Distribution
Distribution in the pharmaceutical system ensures drugs are allocated, transported
and stored appropriately at all points where they are to be dispensed. This involves
central and regional warehouses, pharmacies and service foors. Information must
fow easily through every level of the system to control inventory movements and
deliveries. In addition, the system requires storage facilities, including refrigeration
units, to guarantee the integrity of the drugs and good security to minimise the risk of
theft. The electronic monitoring of transport vehicles and careful checking of delivery
orders against inventories of products delivered are some of the methods that can
reduce this likelihood.
In one Central American country, inventory records showed that stocks of oral
antibiotic eye treatment and other products were intentionally oversupplied because
government purchasers received commissions for their orders.
16
This demonstrates
one way that corruption can drain public expenditure on pharmaceuticals and have
the greatest impact on the poor.
Service delivery
Service delivery involves the participation of physicians, pharmacists, nurses and other
health care providers who diagnose patients and identify what drugs a patient should
consume to treat a particular disease. This is the decision point at which patients should
experience the benefts of the entire system. Here physicians prescribe, pharmacists
dispense and nurses administer drugs to treat patients. Health providers ideally utilise
evidence-based practice to provide effective therapy to their patients.
The interface between the pharmaceutical industry and physicians is an area that
is particularly susceptible to corruption, as service delivery can be infuenced by the
marketing practices of the pharmaceutical industry (see The corrupting infuence of
money in medicine, page 86).
Some physicianindustry interaction is necessary to educate doctors about the
therapeutic qualities of new drugs. However, there is compelling evidence that suggests
that the motivation is often not health education, but proft maximisation. A 2000
GC2006 01 part1 82 8/11/05 17:55:05
study by Wazana found that physician interaction with the pharmaceutical industry
was associated with increased requests for additional drugs on hospital formularies
and changes in prescribing practice.
17
The infuence of industry on physicians is an
issue of concern in both developed and developing countries. But it can be particularly
dangerous in developing and transition countries where doctors make paltry salaries
and may rely heavily on gifts (both monetary and material) from the pharmaceutical
industry to supplement their livelihood.
The US authorities have recently demonstrated concerted efforts to address
inappropriate marketing practices by some pharmaceutical companies. In 2001, TAP
Pharmaceutical Products was required to pay one of the largest fnes in the industrys
history, with the government demanding US $875 million for civil liabilities and criminal
charges.
18
Other governments are introducing stricter laws and regulations. For example,
in April 2005 a report by the UKs House of Commons Health Select Committee on
The Infuence of the Pharmaceutical Industry recommended greater transparency in
drug regulation processes, reduction in the excessive promotion of medicines, tougher
restrictions on physicians to avoid inappropriate prescribing and an end to Department
of Health relationships with the drugs industry in favour of the Department of Trade
and Industry.
19
Following press accounts of the free trips pharmaceutical companies
offer medical doctors and the lavish parties thrown for them,

the Deputy Mayor of
Social Affairs and Public Health of Helsinki, Paula Kokkonen, banned all trips funded
by the pharmaceutical industry for the capitals medical doctors.
20

In view of the potential for undue infuence on prescribing behaviour, global standards
have been developed and a number of professional bodies, including pharmaceutical
industry associations, have enacted codes of conduct that detail best practice in
minimising corruption (see Promoting trust and transparency in pharmaceutical
companies, page 92, and Fighting corruption: the role of the medical profession, page
94). Whether such guidelines have made an impact is questionable. The WHO issued
its Ethical Criteria for Medicinal Drug Promotion in 1988, but a 1997 WHO roundtable
discussion concluded that inappropriate drug promotion is still a problem in developing
and industrialised countries.
21
Even though the criteria have been disseminated widely,
their effective implementation is a major problem, as governments need to revise
legislation and regulation, and to promote them forcefully in medical schools and
associations.
While self-regulatory codes of conduct may be benefcial, they should not delay
meaningful reform in terms of external, enforceable regulations. Current voluntary codes
are not audited or enforced with meaningful penalties, or overseen by independent and
objective observers.
22
More robust policies are needed to address the serious conficts
of interest that arise in the service delivery segment of the pharmaceutical system.
6ounIarIaII madIoInas. Iha bad and Iha ugIy
When institutions are weak and unable to regulate the pharmaceutical sector accurately,
they increase the opportunities for corruption, including the manufacture of counterfeit
drugs, a problem that precedes the frst decision point in the pharmaceutical chain
GC2006 01 part1 83 8/11/05 17:55:05
in Figure 5.1. For example, regulators may receive kickbacks to ignore makers of
counterfeit products, or customs agents may be paid to turn a blind eye to their import
or export.
In 2001, China had roughly 500 illegal medicine manufacturers and Laos around
2,100 illegal medicine sellers. In Thailand, sub-standard medicines account for 8.5
per cent of those on the market.
23
India plans to introduce the death penalty for the
manufacture or sale of counterfeit medicines that cause grievous harm. Profting from
spurious drugs that might harm or kill innocent people is equivalent to mass murder,
said Health Minister Sushma Swaraj recently.
24
Meanwhile, an estimated 192,000 people
died last year in China because of fake drugs.
25
Regulatory bodies in the South need
resources to root out corruption and stem the fow of counterfeit drugs. The success
of Nigerias National Agency for Food and Drug Administration and Control is one
example of what can be achieved through strong leadership (see page 96).
MovIng IorWard. hoW Io do baIIar?
Corruption in any one of the critical decision points in the pharmaceutical system can
be harmful to a countrys ability to improve the health of its population by limiting
access to high-quality medicines and reducing the gains associated with their proper
usage. While corruption affects the entire population, it is typically the poor who are
most susceptible when offcials hoard drugs, or waste resources on the wrong kind of
medicines. Good governance is therefore a sine qua non for ensuring better access to
essential medicines.
Greater transparency in the pharmaceutical system will help to improve drug access.
Honest assessment of the institutional robustness at all core decision points in the
pharmaceutical system is the frst necessity. Governments need to know what areas of
the system are less than optimal and vulnerable to corruption. There is a need for more
monitoring of how pharmacies, hospitals and health care providers are reimbursed for
drugs. Further research is needed to determine what systems offer the best incentives
for providers to behave honestly and control fraud. Second, consumer groups and
other third parties need to be vigilant about monitoring both the public and private
pharmaceutical systems to ensure they are directed towards the public interest.
While international statements and professional guidelines on best practice are
well intentioned, they are meaningless unless they are properly enforced. Individual
governments must have the courage to enact and, most importantly, to implement
policies and processes which encourage ethical behaviour and punish frms and
individuals for corrupt actions. If this happens, hopefully we will see a change for the
better in terms of ensuring that people in need get the right drugs at the right time.
hoIas
1. Jillian Clare Cohen is assistant professor in the Leslie Dan Faculty of Pharmacy at the University
of Toronto and Director of the Comparative Program on Health and Society at the University
of Torontos Munk Centre for International Studies.
GC2006 01 part1 84 8/11/05 17:55:06
2. Philippe Cullet, Patents and Medicines: the Relationship between TRIPS and the Human
Right to Health, International Affairs 79(1), 2003.
3. Michael R. Reich, The Global Drug Gap, Science 287(5460), 197981, 17 March 2000.
4. WHO Medicines Strategy: Framework for Action in Essential Drugs and Medicines Policy 20022003.
(Geneva: WHO, 2000), www.who.int/medicines/strategy/strategy.pdf
5. Ramesh Govindaraj, Michael Reich and Jillian Clare Cohen, World Bank Pharmaceuticals
Discussion Paper (Washington DC: World Bank, 2000).
6. Ibid.
7. For example, the World Bank, the WHO and USAID have all commissioned studies in recent
years on the issue of corruption in the pharmaceutical system.
8. Ian E. Marshall, A Survey of Corruption Issues in the Mining and Mineral Sector, Mining,
Minerals and Sustainable Development Project (London: International Institute for
Environment and Development, 2001).
9. Jillian Clare Cohen, Public Policies in the Pharmaceutical System: The Case of Brazil,
(Washington DC: World Bank, 2000).
10. This section borrows heavily from Jillian Clare Cohen, James Cercone and Roman Mayaca,
Improving Transparency in the Pharmaceutical System: The Case of Costa Rica, internal
study, World Bank, October 2002.
11. Sheldon Krimsky, A Dose of Reform: But Do the FDAs Actions Go Far Enough? The Star
Ledger, 20 February 2005.
12. See www.who.int/medicines/publications/essentialmedicines/en/
13. USAID, A Handbook on Fighting Corruption, Center for Democracy and Governance
(Washington, DC: USAID, 1999).
14. Jillian Clare Cohen and Jorge Carikeo Montoya, Using Technology to Fight Corruption in
Pharmaceutical Purchasing: Lessons Learned from the Chilean Experience (Washington, DC:
World Bank Institute, 2001).
15. Cohen et al., Improving Transparency in the Pharmaceutical System.
16. Management Sciences for Health, with the WHO, Managing Drug Supply (West Hartford, US:
Kumarian Press, 1997).
17. Ashley Wazana, Physicians and the Pharmaceutical Industry: Is a Gift Ever Just a Gift?,
Journal of the American Medical Association 283(3), 19 January 2000.
18. US Department of Justice, press release, 1 October 2001. Available at: www.usdoj.gov/opa/
pr/2001/October/513civ.htm See also Corruption in hospital administration, Chapter 3,
page 51.
19. The UK parliamentary report is available at www.parliament.the-stationery-offce.co.uk/pa/
cm200405/cmselect/cmhealth/42/42.pdf
20. Kauppalehti Presso (Finland), 11 December 2004.
21. See the Drug Promotion Database website at www.drugpromo.info/about.asp#1
22. The Code of Marketing Practices of Canadas Research-Based Pharmaceutical Companies from
January 2005 is a case in point. See www.canadapharma.org/Industry_Publications/Code/
code_e05Jan.html (accessed 15 March 2005).
23. British Medical Journal 327(1126), November 2003.
24. British Medical Journal 327(414), August 2003.
25. PharmaBiz.com, 18 March 2005.
Tha oorrupIIng InIIuanoa oI monay In madIoIna
Jerome P. Kassirer
1
Pharmaceutical, device and biotechnology companies have created new drugs and
devices that have prolonged the lives and improved the health of millions of people.
Many interactions between academic scientists and industry have been responsible for
such advances, and these collaborative research projects should be encouraged. Yet the
GC2006 01 part1 85 8/11/05 17:55:06
collaborations sometimes go beyond research and merge into marketing by physicians
who become paid company consultants or speakers. The fnancial relationships between
the pharmaceutical industry and physicians yield a subtle form of corruption, one that
escapes legal supervision and challenges.
My comments apply principally to the United States, but the manifestations are
similar in countries all over the world. In recent years, the pharmaceutical, device and
biotechnology industries have spent some US $16 billion annually in the United States
on marketing to physicians.
2
Of this, more than US $2 billion was spent on meals,
meetings and events alone.
3
Companies seek to infuence doctors with US $ 1,0005,000
honoraria (or more) to participate in their speakers bureaus and hire them as well
paid consultants and members of their advisory boards. They also bombard doctors
with journal ads, and almost 90,000 friendly drug salesmen.
4
They pay academic
physicians to help them develop educational materials and befriend medical students
and doctors with gifts of textbooks, stethoscopes, and free lunches and dinners. Such
payments can lead some physicians to act in their own best interests rather than in the
interests of their patients. There can be a fne line between legitimate marketing outlays
by a pharmaceutical company and an unethical practice. But when compensation
to salespeople and medical professionals translates into higher sales revenues, the
temptation to cross the line becomes especially great.
Tha anIIoamanIs on oIIar by pharmaoauIIoaI oompanIas
The attempt to seduce young people is particularly worrisome. Some years ago, I
witnessed a typical drug company-sponsored lunch at an academic medical centre.
Two well dressed pharmaceutical representatives had brought food for a regular teaching
conference for the house staff. One by one, house offcers and medical students arrived
to join a buffet line and were greeted warmly by the male drug rep with How was
your weekend? or Howre you doing? These reps were obviously a familiar presence.
The line moved slowly because it took some time to scoop up the food, and the two
drug reps used the opportunity to make a sales pitch. One was stationed strategically
at the beginning of the line, and the other at the end. The reps were describing two of
the companys popular new (and expensive) products, as well as recommendations for
dosages.
5
The seduction moves on to the dinner hour as well. One evening in a pizza
parlour, I observed a resident with his team of interns and students enjoying pizza and
beer with a drug representative. There were two costs for the free food and drinks. The
resident had to listen to the drug reps sales pitch during the meal, and at the end of
the party he was given a pile of reprints to take back to the rest of his team.
These trinkets and meals are simply marketing ploys, intended at minimum to
ingratiate the drug rep to the doctor, perhaps to raise awareness of certain products
and, at the other extreme, to create a sense of indebtedness. Such indebtedness is
problematic, however, because the physicians obligation to the drug salesman or his
company often conficts with his obligation to his patients. The prescribing practices
of physicians have been examined in a few studies in relation to some kind of exposure
to a drug company promotion.
GC2006 01 part1 86 8/11/05 17:55:06
In one, 40 physicians who requested additions to their hospitals drug formularies
were compared to 80 who had not requested any new drugs.
6
Statistically, doctors
who requested the additions were 9 to 21 times more likely to have eaten free meals
provided by the companies, to have accepted drug company money to attend or
speak at a company-sponsored symposium, or to have received research support from
the companies. An independent review (in the same study) indicated that the newly
requested drugs had little or no advantage over the drugs already available.
Another study of the prescribing practices of 10 physicians who had attended
company-supported symposia in resort locations showed a two- to threefold increase in
the physicians use of the drugs in the months after their trip.
7
Interestingly, a majority
of physicians attending the symposia claimed that they would not be infuenced by
the enticements; most dismissed the possibility defying common sense that all of
these efforts by industry could affect them.
FInanoIaI oonIIIoIs oI InIarasI In madIoaI rasaaroh
Fundamentally, big business and physicians alike are involved in a charade. The drug
companies say that marketing helps to educate doctors so they can prescribe drugs more
appropriately. At the same time, the companies press their drug salesmen to push the
newest products, and they allow their surrogate intermediaries, the medical education
companies, to advertise their services as persuasive education. And the physician-
recipients of drug company largesse act as if they were immune to its infuence.
Physicianindustry involvement is widespread. A 1996 survey showed that half of full
professors and lesser fractions of more junior faculty who conduct life science research
have substantial fnancial arrangements with industry, and disclosures at medical
meetings and in published journal articles confrm the widespread involvement.
8
During
my tenure as editor-in-chief of the New England Journal of Medicine, we only allowed
physicians to write review articles and editorials if they had no fnancial conficts with
a company whose products (or their competitors) were featured in the article. Finding
authors without such conficts became progressively more diffcult during the 1990s
and, by the end of the decade, we often had to reject several prominent potential
authors before we found one who had no conficts. Finally, an industry-connected
legal group admitted the extent of involvement. It wrote: It is widely acknowledged
that most of the top medical authorities in this country, and virtually all of the top
speakers on medical topics, are employed in some capacity by one or more of the
countrys pharmaceutical companies.
9
Several specifc examples will illustrate the problem: one involving practice guidelines;
the second, a human research study; a third involving radiological diagnosis; and the
fourth, a decision by the Food and Drug Administration (FDA).
Four oasa sIudIas Irom Iha nIIad 8IaIas
The National Cholesterol Education Program at the National Institutes of Health
regularly updates its practice guidelines when new data become available. The latest,
GC2006 01 part1 87 8/11/05 17:55:06
6orrupIIon and haaIIh BB
reported in July 2004, was a combined effort of the American Heart Association, the
American College of Cardiology and the National Institutes of Health. These three
organisations selected nine individuals to analyse all the clinical trials that had been
published since the previous guidelines and come up with new recommendations. The
group was impressive. It consisted of a nutritionist, the chief of the molecular disease
branch at the National Institutes of Health, a well known pharmacologist, a former
president of the American Heart Association and other well regarded cardiologists. Their
recommendations included greater lowering of low-density lipoprotein (LDL) with
diet, exercise and treatment with statins. Later, it was revealed that seven of the nine
participants had fnancial arrangements as paid speakers or consultants for companies
that make statins. They had these arrangements not with just one company, but three
to fve of them. These connections made it diffcult to know whether the relations of
these high-level physicians with the statin manufacturers may have infuenced their
recommendations.
10
In 1999, a 17-year-old boy died at the University of Pennsylvania four days after
receiving genes imbedded in a common cold virus. The boy had only a mild defciency of
a particular enzyme, but was participating in the research because he thought the results
might help others. Neither he nor his parents had been told that the experiment had
previously shown some toxicity; nor were they told that both the principal investigator
and the university had fnancial stakes in a company that might have benefted from
the outcome of the work. The principal investigator denied that money had anything to
do with his decision or the institutions decision to move ahead with these studies.
11
An interesting study was reported in the journal Academic Radiology in 2004. It was
a re-analysis of 492 chest X-rays read by 30 radiologists employed by law frms who
were suing companies for people exposed to agents that damage the lungs. To explain
the fndings, I will call these 30 the hired hands. The authors of the study had the
same chest X-rays re-read by six radiologists who were not paid by lawyers. I will call
these radiologists the independents. All 36, the hired hands and the independents,
were certifed B readers by a federal agency, meaning that they all had undergone the
same training to interpret chest X-rays. The results are interesting: the hired hands
diagnosed 9697 per cent of flms as abnormal, whereas the independents said only
46 per cent were abnormal. The hired hands said none of the flms were completely
normal, whereas the independents said 38 per cent were normal. One does not need a
chi square test to appreciate the gross discrepancy in these interpretations.
12
In mid-February 2005, an advisory panel of the FDA met to assess whether the
risk-beneft profle of various Cox-2 inhibitors made by Merck and Pfzer warranted
removing the drugs from the market. This was a highly visible decision because of the
increased risk of cardiovascular complications of some of the drugs, especially Vioxx,
and because of Mercks decision only weeks before to take Vioxx off the market. The
32-person panel voted 31:1 to keep Celebrex on the market; there seemed to be little
controversy about this decision. However, the votes on Bextra and Vioxx were much
closer. The panel voted 17:13 to keep Bextra on the market, and 17:15 to allow Vioxx
to return to the market. But there was a hitch: it was later learned that 10 of the panel
members had fnancial ties to both companies that made these two drugs, and that
GC2006 01 part1 88 8/11/05 17:55:06
these company-paid physicians had voted 9:1 in favour of keeping both drugs on the
market. If none of these conficted panel members had voted, the recommendation
would have been not to allow either on the market. The votes would have been 12:8
opposed for Bextra and 14:8 opposed for Vioxx. Bextra has since been removed from
the market, but both Vioxx and Bextra could return if the FDA follows the advisory
boards recommendations.
13
The FDA decision will affect millions of people as well as
the enormous profts of two major pharmaceutical companies.
14
Though these examples are worrisome with respect to their effect on patient care,
and cannot be condoned from an ethical construct, none constitutes either fraud or
overt corruption. None is punishable by legal means and any sanction would have to
come from state or professional organisations, but these bodies rarely impose any (see
below). Each example strongly suggests a pattern of overt bias, but the problem with
each is trying to assess an individuals motivation. One possibility is that none of the
tilt towards company products was intentional, yet the close ties between physicians
and companies yielded biased recommendations in some subconscious way. It is even
possible that the recommendations these physicians made were completely objective,
and that anyone else with the same expertise would have come up with exactly the
same conclusions. Finally, it is possible that some doctors on industry payrolls are
knowingly greedy and that they are intentionally profting at the expense of the validity
of information that doctors use in their daily practices. In the latter case, we must
assume that they perceive the consequences of their actions on patient care to be
negligible. These examples illustrate the essential problem with fnancial conficts of
interest: we dont know what to believe.
15
k IhraaI Io Iha pubIIos IrusI
Extensive analyses of the effects of fnancial conficts of interest have documented
its corrosive infuences on patient care, medical information and the publics trust
in the profession.
16
These huge fnancial subsidies can infuence the validity of the
information that doctors use every day in their practices. It tends to distract faculty
into emphasising proftable research and to neglect their teaching duties. It replaces
openness with secrecy, privatises knowledge and replaces part of the social commons
by commercialising discovery. It has also created a culture in which the design of
studies is sometimes jiggered to create positive results; in which unfavourable results
are sometimes buried; in which communication of results is sometimes hindered for
commercial reasons; and in which bias in publications and educational materials has
sometimes gone unchecked.
17
All of this amounts to a serious threat to public trust in
medicine. These fnancial conficts can undermine the faith of the public in medical
research, threaten government funding, reduce enrolment in clinical trials and damage
the trust between patients and their doctors.
In the United States, some progress has been achieved in dealing with fnancial
conficts. The Association of American Medical Colleges has issued new guidelines for
individuals and institutions,
18
while many medical schools are now in the process of
revising their confict-of-interest policies. The National Institutes of Health, in response
GC2006 01 part1 89 8/11/05 17:55:07
to a public outcry about important fnancial connections of several of its senior scientists,
issued strict guidelines in 2005 that effectively limit investigators from having these
associations.
19
The United States Congress has also expressed an interest in the concerns
raised here.
20
The pharmaceutical companies and the American Medical Association
have both issued guidelines about physician engagement in company programmes, but
neither has precluded marketing of products by physician-consultants or speakers.
Far more work on this is needed. All gifts from the industry should be prohibited, even
items that might be considered useful in a doctors practice or education. Consultations
with industry for anything except scientifc matters should also be prohibited, while
marketing by physicians of drugs or devices in which they have a fnancial interest
should be outlawed. Physician participation in company-sponsored speakers bureaus
should be excluded. Clinical practice guideline committees and FDA advisory panels
must contain a minority of individuals with fnancial conficts of interest. Positions
of journal editors, offcers of major professional organisations and leaders of medical
centres and academic institutions should be preserved only for individuals without
conficts. Given that complete elimination of all fnancial conficts of interest is unlikely,
the full disclosure of relevant fnancial conficts on an easily searchable website should
be introduced.
It is diffcult to understand why the standards on conficts of interest in medicine
should be lower than those of other professions, such as the media. Reporters for
the most ethical media outlets such as the New York Times and CNN are not allowed
to accept any gifts, meals, honoraria or paid consulting arrangements.
21
This is an
exceptionally high standard, but one medicine must adopt. The bar must be raised if
we are to maintain the publics trust in medicine.
hoIas
1. Jerome P. Kassirer is distinguished professor at Tufts University School of Medicine and adjunct
professor of medicine and bioethics at Case Western Reserve University. He was editor-in-chief
of the New England Journal of Medicine from 1991 to 1999.
2. Boston Globe (US), 10 March 2004.
3. Jerome P. Kassirer, On The Take: How Medicines Complicity With Big Business Can Endanger Your
Health (New York: Oxford University Press, 2004).
4. B. Darves, Too Close for Comfort? How Some Physicians are Re-examining their Dealings
with Drug Retailers, ACP Observer, July/August 2003.
5. Journal of the American Medical Association (US), 284(21567), 2000.
6. Journal of the American Medical Association (US), 271(6849), 1994.
7. Chest (US), 102(27073), 1992.
8. New England Journal of Medicine (US), 335(17349), 1996.
9. D. J. Popeo and R. A. Samp, comments of the Washington Legal Foundation to the Accreditation
Council for Continuing Medical Education concerning request for comments on the 14
January 2003 draft: Standards to Ensure the Separation of Promotion From Education Within
the CME Activities of ACCME Accredited Providers, Washington Legal Foundation, 2003.
10. Washington Post (US), 1 August 2004.
11. Washington Post (US), 30 December 2001.
12. J. N. Gitlin, L. L. Cook, O. W. Linton and E. Garrett-Mayer, Comparison of B Readers
Interpretations of Chest Radiographs for Asbestos-related Changes, Academic Radiology
11(84356), 2004.
GC2006 01 part1 90 8/11/05 17:55:07
13. Despite the FDA ruling in February 2005 in favour of allowing Vioxx back on the market, at
this writing Merck had decided against its return.
14. New York Times (US), 25 February 2005.
15. Kassirer, On The Take.
16. Ibid., and Sheldon Krimsky, Science in the Private Interest: Has the Lure of Profts Corrupted
Medical Research? (Lantham: Rowman and Littlefeld, 2003).
17. Ibid.
18. Association of American Medical Colleges (AAMC), Protecting Subjects, Preserving Trust,
Promoting Progress I: Policy and Guidelines for the Oversight of Individual Financial Interests
in Human Subjects Research, AAMC Task Force on Financial Conficts of Interest in Clinical
Research, December 2001; Protecting Subjects, Preserving Trust, Promoting Progress II:
Principles and Recommendations for Oversight of an Institutions Financial Interests in
Human Subjects Research, AAMC Task Force on Financial Conficts of Interest in Clinical
Research, October 2002.
19. www.nih.gov/about/ethics_COI.htm
20. waysandmeans.house.gov/hearings.asp?formmode=view&id=2933
21. Ethical Journalism: Code of Conduct for the News and Editorial Departments, New York
Times (US), January 2003.
FromoIIng IrusI and Iransparanoy In pharmaoauIIoaI oompanIas.
an IndusIry parspaoIIva
Harvey Bale
1
The twentieth century saw enormous improvements in overall health care standards in
the developed world. Yet in both the developed and developing worlds, patients are still
in need and are waiting for treatments, cures and vaccines for AIDS, cancer, diabetes,
heart disease, Alzheimers disease and many hundreds of other debilitating and life-
threatening conditions. Even older diseases, once thought conquered or controlled,
such as tuberculosis, malaria and polio, are re-emerging as clear and present dangers
because of resistance to existing treatments or failings in immunisation programmes.
Biological resistance to current treatments for HIV/AIDS infections is on the rise, making
it imperative that industry and governments continue to fund heavily research into
this as well as other diseases.
According to surveys by member associations of the International Federation of
Pharmaceutical Manufacturers Associations (IFPMA), industry currently spends more
than US $50 billion in research and development into fnding drugs and vaccines
annually worldwide. The industry is subject to a high degree of government regulation
at every nearly stage of its activity. The large interface between industry and government
throughout the life cycle of medicinal products poses continuous risks of corruption.
Before clinical trial tests can begin, government must approve them. Before a drug is
approved after such trials, another formal approval is needed in every country where
the drug or vaccine is to be used by patients, physicians and nurses. Many countries
set prices another government decision. Before companies invest they need to have
their ideas and innovation protected against copiers another government function.
Furthermore, where poor countries are concerned about certain epidemic threats, like
GC2006 01 part1 91 8/11/05 17:55:07
HIV/AIDS or malaria, companies work with governments and NGOs to fnd ways to
get medicines to those who cannot afford them. Governments must be involved,
from customs authorities to regulators to health ministry and local offcials, to ensure
the medicines get to intended patient groups. All of these points of governmental
intervention raise the possibility of corrupt practices entering to distort and damage
the development and delivery of new drugs and vaccines to patients.
Corruption in the pharmaceutical supply chain can take many forms: products can
be diverted or stolen at various points in the distribution system; offcials may demand
fees for approving products or facilities, for clearing customs procedures, or for setting
prices; violations of industry marketing code practices may distort medical professionals
prescribing practices; demands for favours may be placed on suppliers as a condition
for prescribing medicines; and counterfeit or other forms of sub-standard medicines
may be allowed to circulate. While corruption carries economic costs, corruption adds
further costs to the end goal of patient well-being.
Given the impact of corruption, the IFPMA and other industry bodies have taken
signifcant steps to address the dangers of corruption. But the industry and other
stakeholders must intensify efforts to prevent and avoid abuses.
The need to minimise the chances of corruption in the distribution chain is well
illustrated by the diversion of heavily discounted GlaxoSmithKline (GSK) anti-retroviral
(ARV) HIV/AIDS drugs from Africa to Europe unearthed in the summer of 2002. GSK
had committed to providing its full range of ARVs at not-for-proft prices to the worlds
poorest countries. These prices were, on average, 70 per cent less than developed world
prices. Registration of special access packs in target countries would have taken between
6 and 18 months. With the HIV/AIDS epidemic spreading quickly, GSK was anxious
to respond to the global crisis as quickly as possible. GSKs initial consignments to
Africa were therefore dispatched in European packaging. The medicines had originally
been sold by GSK at not-for-proft prices to an NGO and the procurement arm of a
ministry of health, for distribution to African HIV patients. In the beginning of the sales
programme, the company had not received approval for box designs to differentiate the
countries to which they were destined as such approvals take time; and some of the
ARVs were diverted by West African public offcials, almost undetected, back into the
European market, with traders making substantial profts and patients in Africa being
denied access to the medicines they desperately needed. Prosecution is under way for
those involved in this scheme, which should help send the signal that this behaviour
cannot be tolerated. In the meantime, GSK has developed access packages for its main
ARVs that are differentiated from developed country packs.
Another area where the industry has been active in recent years is in strengthening
its product-promotion practices. The prescribing behaviour of medical professionals,
who are frequently paid poorly under national health care systems, may be affected
by the compensation offered by suppliers for administering their products or services,
rather than by the interests of their patients. Though the direct evidence is thin that
prescribing behaviour is directly and signifcantly affected by trips and gifts from the
industry, there are cases that involve travel including coverage for spouses, despite
GC2006 01 part1 92 8/11/05 17:55:07
the fact that the IFPMA Code and various national codes forbid spousal travel to
be sponsored by companies to educational symposia. Companies belonging to the
IFPMA adhere to a marketing and promotion code that requires that companies
refrain from offering inappropriate hospitality or gifts to medical professionals that
would tend to infuence them in the prescription of pharmaceutical products. The
IFPMA Code is supplemented by its national member associations, by individual
company ethical marketing codes and by a variety of measures that seek to redress the
situation when violations of the codes occur. The code is based on self-regulation, but
its application is obligatory. These codes are activated by complaints that are made
to IFPMA or its member associations by physicians, other medical professionals or
other interested parties, and violations are accompanied by publicity or fnes paid in
some countries.
Transparency is important in many other areas. Signifcant new initiatives have been
introduced over the past two years regarding the pharmaceutical industrys approach to
clinical trials. In a few cases, companies have been accused of disclosing and publishing
only favourable clinical results. To increase the transparency of companies clinical
trials undertaken to develop new drugs and vaccines and recognising that there are
important public health benefts associated with making clinical trial information more
widely available to health care practitioners, patients and others easily accessible
web-based clinical trial registers have been set up by companies to publicly record
relevant details of the trials they are conducting. Beginning in summer 2005, the
industry is making public the results of all clinical trials that have taken place and also
information on those just being initiated, from the frst stage of patient registration
and enrolment through to fnal outcomes. At the same time, to make trial information
easily accessible to those seeking information, the IFPMA is establishing a web-based
search portal, linking the various clinical trial registries for information on ongoing
clinical trials and databases for the summary results of completed clinical trials. This
one-stop location will simplify and ease access for patients and medical professionals
to the company registries and data.
Health care expenditures, and spending on innovative pharmaceuticals, will inevitably
increase throughout the world. Whereas the past 20 years have seen an informatics
revolution, the next quarter-century will witness major advances in the biosciences.
Public confdence in the pharmaceutical industry is crucial and companies are taking
signifcant steps through their member associations to maintain and improve public
trust. To ensure that patients are able to beneft from medical advances, it is also
important to ensure that access be addressed, and one way will be to help prevent the
selective allocation of health care by those in the public or private sector on the
basis of bribery and corruption.
hoIa
1. Harvey Bale is director-general of the International Federation of Pharmaceutical Manufacturers
and Associations.
GC2006 01 part1 93 8/11/05 17:55:07
FIghIIng oorrupIIon. Iha roIa oI Iha madIoaI proIassIon
John R. Williams
1
Physicians are human beings and, like everyone else, are subject to the temptation
to put their own interests above those of others. As self-regulating professionals, they
have less oversight than many other individuals and consequently more opportunity
to conceal unethical behaviour. On the other hand, they belong to a profession that
has high ethical standards and that encourages and expects its members to uphold
these standards.
Physicians encounter corruption in health care at all levels: in government, hospitals
and other health care institutions, and in their own practice. For the most part, they
are among the victims of corruption, seeing resources that should go to patient care
or professional development siphoned off for other purposes. In some cases, however,
they may be benefciaries of corruption, insofar as they personally receive part or all
of the resources that have been designated for other legitimate purposes.
The extensive guidance for physician behaviour provided by their professional
associations seldom includes a responsibility for dealing with corrupt practices by non-
physicians. It is quite a different matter when it comes to themselves and their colleagues.
The World Medical Association (WMA) International Code of Medical Ethics exhorts
physicians to always maintain the highest standards of professional conduct ...; not
permit motives of proft to infuence the free and independent exercise of professional
judgement on behalf of patients ; deal honestly with patients and colleagues, and
strive to expose those physicians defcient in character or competence, or who engage
in fraud or deception.
2
These general principles have been elaborated in detail in policy
statements from the WMA and its national medical association members.
It should be noted that the word corruption seldom appears in medical association
policy statements. These deal with unethical or unprofessional behaviour and
practices that cover a wide spectrum from impoliteness to various degrees of confict of
interest to euthanasia. Corruption would be considered an extreme form of confict of
interest whereby physicians receive substantial personal beneft at the expense of others,
whether individuals, institutions or society in general. Most professional guidance
deals with softer forms of confict of interest where it is not immediately obvious
that wrongdoing is involved.
In what follows, I describe activities designed to prevent or deal with such conficts
of interest between physicians and the pharmaceutical industry.
The conficts of interest inherent in the relationships of physicians and industry
are described elsewhere in this volume (see The corrupting infuence of money in
medicine, page 87). Beginning in the late 1980s, the World Health Organization (WHO),
industry groups and national medical associations began to produce guidelines for
such relationships. In 1988, the WHO Assembly adopted a resolution endorsing a
set of ethical criteria for medicinal drug promotion.
3
In 1991 the Canadian Medical
Association adopted guidelines for physicianpharmaceutical industry relationships,
4

followed by many other professional organisations, including the American Medical
GC2006 01 part1 94 8/11/05 17:55:08
Association in 1992,
5
the Finnish Medical Association in 1993,
6
the Australian Medical
Association in 1994,
7
the Israeli Medical Association in 2004
8
and the World Medical
Association in 2004.
9
These guidelines deal with gifts to physicians, continuing medical
education/professional development, industry-sponsored research and drug samples.
Though their primary concern is to avoid conficts of interest between physicians and
patients, they are equally applicable to conficts between the interests of physicians
and those of society in general, for example regarding cost-effectiveness in prescribing
drugs that are paid from public sources.
The principal reason why the WMA took so long to produce its guidelines is the
great variation in access of physicians to continuing professional development activities
throughout the world. In less developed countries, the pharmaceutical industry is often
the only source of funding for physicians to attend conferences, whereas in wealthier
countries such a relationship would be considered an unacceptable confict of interest
for physicians.
These guidance documents are directed to individual physicians, organisers of
educational events and medical associations. Though they are ethical rather than
legal in nature and therefore not generally binding, various mechanisms exist for
turning them into enforceable rules, whether for those who offer confict-of-interest
incentives (for example, the pharmaceutical industry) or for those to whom they are
offered (physicians and other health professionals). The pharmaceutical industry is
increasingly subject to laws and regulations regarding its educational and promotional
activities with physicians.
10
In some countries medical conferences are not eligible
for continuing professional development credits unless they follow strict rules for
industry sponsorship.
11
Some physician licensing bodies are beginning to defne
acceptable limits for industryphysician relationships and warning physicians that
overstepping these limits will result in disciplinary action. Progress in this area has
been slow for several reasons; for example, the diffculty of monitoring physician
relationships with industry and the need to address more serious instances of physician
misconduct, such as murder and the sexual abuse of patients. Unless the medical
licensing authorities defne more precisely the rules for physician behaviour regarding
conficts of interest and can obtain extra resources to enforce them, the individual
consciences of physicians will have to be the principal resource for identifying and
dealing with conficts of interest.
Several educational programmes are available to inform physicians how to avoid
confict-of-interest situations with industry. The American Medical Association has
developed an on-line resource for self-study by physicians,
12
and a group of health care
providers has developed the No Free Lunch website
13
to encourage their colleagues
to maintain complete independence from industry in their clinical and educational
activities. In the feld of medical research, where there have been many reports of
unethical conduct in recent years, educational resources for the responsible conduct
of research are plentiful and many institutions now require researchers to demonstrate
familiarity with the basic principles of responsible conduct of research.
The effectiveness of educational measures in this area is difficult to measure.
Enforcement mechanisms may be somewhat more effective but are expensive to
GC2006 01 part1 95 8/11/05 17:55:08
implement. The best hope for improving physician behaviour is a combination of
reasonable and well publicised standards; continuing education about the standards
and their foundations (beginning in medical school and continuing at all other levels);
peer pressure from colleagues and medical associations; stricter government regulation
of industry involvement in medical research and practice; and the threat of disciplinary
action for egregious breaches of the standards. However, unless all interested parties
cooperate to address conficts of interest in health care, it is unlikely that progress will
ever be achieved.
hoIas
1. John R. Williams is director of ethics at the World Medical Association. The views expressed
in this article are his own, not those of the World Medical Association.
2. www.wma.net/e/policy/c8.htm
3. World Health Organization, Ethical Criteria for Medicinal Drug Promotion (Geneva: WHO,
1988).
4. www.cma.ca//multimedia/staticContent/HTML/N0/l2/where_we_stand/physicians_and_the_
pharmaceutical_industry.pdf
5. www.ama-assn.org/ama/pub/category/4001.html
6. www.laakariliitto.f/e/ethics/industry.html
7. www.ama.com.au/web.nsf/doc/WEEN-5GJ7MH
8. www.pharma-israel.org.il/eng/htmls/article.aspx?C1004=578&BSP=4
9. www.wma.net/e/policy/r2.htm
10. See Susan Chimonas and David J. Rothman, New Federal Guidelines For Physician
Pharmaceutical Industry Relations: The Politics Of Policy Formation, Health Affairs 24(4),
2005 and House of Commons Health Committee, The Infuence of the Pharmaceutical
Industry, 22 March 2005, www.parliament.the-stationery-office.co.uk/pa/cm200405/
cmselect/cmhealth/42/42.pdf
11. For example, the Standards for Commercial Support of the US Accreditation Council for
Continuing Medical Education, available at www.accme.org/dir_docs/doc_upload/68b2902a-
fb73-44d1-8725-80a1504e520c_uploaddocument.pdf
12. www.ama-assn.org/ama/pub/category/8405.html
13. www.nofreelunch.org/
Tha IIghI agaInsI oounIarIaII drugs In hIgarIa
Dora Akunyili
1
The presence of sub-standard and counterfeit drugs on Nigerias streets escalated after
the distribution of pharmaceuticals was denationalised in 1968. The lack of proper
regulation and monitoring meant that import licences were readily issued to non-
professional companies and drug regulations were fouted with impunity. Companies
producing quality drugs found it diffcult to compete with those who skimped on active
ingredients, or relabelled expired drugs for resale. The result for the user of the fake
pharmaceuticals was often prolonged illness, organ damage or death.
Though counterfeit drugs remain a serious problem in Nigeria, the situation has
changed since 2001 thanks to a combination of mass education campaigns targeted
as potential users of counterfeit drugs, and a more rigorous testing and enforcement
GC2006 01 part1 96 8/11/05 17:55:08
regime. Nigerias National Agency for Food and Drug Administration and Control
(NAFDAC) has been at the centre of these efforts. A baseline study conducted in April
2001, as the current NAFDAC directors took offce, showed that 68 per cent of the drugs
available in Nigeria were not registered with NAFDAC, which is taken as an indication
of counterfeiting.
2
A repeat of the study in 2004 revealed an 80 per cent reduction in
the level of counterfeit drugs in the country.
The manufacture of counterfeit drugs is a global problem, but opinions as to what
constitutes counterfeiting vary from country to country, making it diffcult to control.
The WHO describes counterfeit medicine as one that is deliberately and fraudulently
mislabelled with respect to identity and/or source. Counterfeiting can apply to both
branded and generic products, and counterfeit products may include products with
the correct ingredients or with the wrong ingredients, without active ingredients, with
insuffcient active ingredients or with fake packaging.
3
In Nigeria NAFDAC has identifed each form of counterfeit drug. These include drugs
that contain no active ingredient but are made up merely of lactose, chalk or olive
oil; herbal preparations that are toxic, ineffective or mixed with orthodox medicine;
expired drugs that have been relabelled; drugs that are issued without publishing the
full name and address of manufacturer; and drugs that have not been certifed and
registered by NAFDAC.
6orrupI oIIIoIaIs proIaoI oounIarIaIIars
The counterfeiting of medicine is fnancially lucrative, as several organised crime
syndicates have discovered. Moreover, it entails relatively low risks compared to narcotics
or gun traffcking. The low risk may be deliberate: according to the WHO, corruption
and confict of interests are the driving forces behind poor regulation which, in turn,
encourages drug counterfeiting. Corruption and conficts of interests result in laws not
being enforced and criminals not being arrested, prosecuted and convicted.
4
An example of how authorities collude with organisations that fake or sell counterfeit
drugs is the falsifcation of shipping manifests. In 2002, a 20-foot container of Napfen
(ibuprofen tablets) imported through Apapa Port was falsely declared as containing
motorcycle spare parts in order to evade NAFDAC regulations. The consignment was
released by custom offcials but later intercepted by NAFDAC offcials. Similar-sized
containers intercepted later that year contained hidden Gentamycin injections and
Seven Seas Cod Liver Oil in one case, and Tramal capsules imported from Pakistan in
a second. The drugs were discovered by the Port Inspection Directorate, which was
established by the present NAFDAC administration.
Early on in the current administration, NAFDAC agents were themselves discovered
to have engaged in corrupt practices in a series of high-profle cases. Two NAFDAC
offcials at Port Harcourt were dismissed and publicly reproached for releasing imported
products without inspection in 2002. In Akwa Ibom state, two NAFDAC staff members
were caught extorting money from the Nigerian Association of Patent Medicine Dealers
and were dismissed in 2003.
GC2006 01 part1 97 8/11/05 17:55:08
Until recently, NAFDAC staff were allowed to collect cartons of expensive products
as samples, which they could then sell off. This led to the practice of deliberate
oversampling and sparked industry complaints. NAFDAC subsequently adopted clear
sampling guidelines and disseminated information about correct sampling sizes to
employees and the industry. New guidelines also prohibit NAFDAC staff from accepting
free transportation, lunch or gifts from the companies they are inspecting. Instead,
inspectors are provided with all the necessary resources to carry out their tasks.
The registration process produces another opportunity for corruption by NAFDAC
staff. It is still common for it to take two years or more to register a product, although
recent streamlining and automation of the process have shortened the process to two or
three months in most cases. The lengthy exceptions are partly due to ineffciency, but
corruption also plays a role, with NAFDAC staff dragging their heels and extorting bribes
from applicants to speed up the process. Staff guidelines have been disseminated among
industry members so that manufacturers might be less vulnerable to extortion. NAFDAC
offcers face suspension, demotion or dismissal if they are found to be corrupt.
InadaquaIa IagIsIaIIon oonIrIbuIas Io Iha probIam
Nigeria has a multiplicity of drug control laws that have become unwieldy, overlapping
and sometimes conficting. The result is a legal framework that fails to deter counterfeiters
or that moves so slowly once allegations of wrongdoing have been identifed that the
suspect is rarely brought to trial.
Penalties for some offences related to counterfeiting are not commensurate with
the severity of the crime. For example, the maximum punishment for contravening
the decree on counterfeit or fake drugs and unwholesome processed food is less than
N500,000 (US $3,600), or a prison sentence of between 5 and 15 years. NAFDAC does
not believe that this level of punishment deters offenders and is calling for amendments
to the law.
Judicial authorities have on occasion failed to act against counterfeiters or importers
of fake drugs, even when NAFDAC has provided evidence of wrongdoing. For example,
a well known importer of fake drugs, Marcel Nnakwe, was arrested three times in 1997
for importing more than N19 million worth (around US $137,700), but was protected
by a judge who issued an interlocutory injunction restraining NAFDAC from taking
any further action without court clearance.
One month after the present NAFDAC administration took office, a team of
regulatory consultants and legal experts were invited to review existing obsolete laws
and recommended detailed amendments. These have been reviewed and at the time
of writing were before the National Assembly.
IsorImInaIory raguIaIIon by axporIIng oounIrIas
In many countries more lenient control of drugs for export has compromised the quality
of drugs on the international market. A case that came to light in Nigeria recently
involved the importation of poorly packaged, fake paracetamol tablets labelled not for
use in Southeast Asia. The poor regulation of exports from manufacturing countries
GC2006 01 part1 98 8/11/05 17:55:08
exposes those countries with non-existent or weak regulations to the dumping of
counterfeit pharmaceuticals.
There are 84 pharmaceutical manufacturing companies in Nigeria, which together
produce less than 30 per cent of the countrys drug requirements: the rest is imported.
Most counterfeit drugs are imported from Asia, more than 98 per cent from China
and India. Nineteen pharmaceutical companies, mainly Indian and Chinese, were
blacklisted and banned from exporting drugs to Nigeria in 2001, and a further 12 were
debarred in 2004. NAFDAC recently prohibited the importation of products marked
for export only.
Other factors that militate against effective regulation and encourage counterfeiting
include: ignorance and poor public awareness of the problem; the chaotic drug
distribution system; misleading advertising; the demand for drugs exceeding supply;
inadequate funding of regulatory authorities; lack of cooperation between government
agencies; false declarations by importers; the sophistication of clandestine drug
manufacturing; and the irrational use of drugs, making demand diffcult to control.
hkFk6s roIa and IuIura
NAFDACs dual strategy of creating a strong regulatory environment, while encouraging
intolerance of counterfeit drugs through public enlightenment campaigns, seems to
be working. Jingles, media interviews, public alerts and notices in the national press
publicising drugs identifed as fakes are helping to lift the shroud of secrecy from the
problem.
5
Efforts have been made to stop fake drug imports at source; surveillance at all
ports of entry has been beefed up; many counterfeit drugs already in circulation have
been mopped up by the agency; good manufacturing practices of local manufacturers
are being monitored; and registration guidelines have been streamlined and are being
strictly enforced.
But success comes at a cost. Testament to NAFDACs achievements over the past few
years is the vehemence with which corrupt manufacturers have sought to block our work.
During my time as head of NAFDAC, my family and I have been the victims of numerous
death threats and in December 2003 we narrowly escaped an assassination attempt.
Efforts to tackle counterfeit medicines must be redoubled. While national measures
are working, the international community must realise that poor nations lack the funds,
manpower and technology to fully address the problem. NAFDAC strongly advocates
for harmonised regulation of pharmaceutical products on the international market and
the establishment of an international convention for the control of counterfeit drugs
similar to the one on psychotropic substances. The international community should
recognise the control of counterfeit drugs as an international health emergency.
hoIas
1. Dora Akunyili is director general of the National Agency for Food and Drug Administration
and Control (NAFDAC), Nigeria. Her fve-year mandate expires in April 2006. She was the
winner of TIs Integrity Award in 2003.
2. Ijeoma Nnani et al., Baseline Study to Ascertain the Level and Quality of Unregistered Drugs
on the Market (NAFDAC, 2001).
GC2006 01 part1 99 8/11/05 17:55:08
3. WHO Drug Information 6(2), 1992.
4. WHO (1999) Counterfeit Drugs. Guidelines for the Development of Measures to Combat Counterfeit
Drugs (Geneva: WHO, 1999).
5. Ibid., and D. N. Akunyili, Understanding the Problem: The African Perspective with Special
Emphasis on Nigeria, Global Forum on Pharmaceutical Anti-Counterfeiting (2225 September
2002), Geneva Switzerland.
8ox 6.Z 6orrupIIon In Iha MInIsIry oI FubIIo haaIIh, ThaIIand
1
The Rural Doctors Forum (RDF)
2
of Thailand traces its origins to the student demonstrations
of 1973 and an ideological commitment to serving the rural public. This political
commitment initially placed it in a diffcult position in relation to the government. Towards
the end of the 1970s, however, the head of the RDF was given a position in the Ministry
of Health, which increasingly came to accept the Forum as a means of resolving the
problems involved in decentralising health services to the rural areas.
3
In 1998, the RDF departed from its role of supporting the ministrys work to expose
corruption in the procurement of medicines and medical supplies. It claimed that its
members had been ordered by the central authorities to procure supplies from some
companies, rather than others, at prices two to three times higher than normal. It also
alleged that senior administrators had put in place a regime that fostered corruption
by cancelling medicine price ceilings and changing budgeting arrangements so as to
make provincial-level offcials, rather than offcials in individual hospitals, responsible for
procurement. The latter move made it easier for administrators in central government to
interfere with the procurement process for personal gain.
The RDFs chairman wrote an open letter to the prime minister asking for an investigation.
The RDF and another professional association, the Rural Pharmacists Forum (RPF), began
to collect evidence on corruption and encouraged their members to step forward as
witnesses. They also approached existing networks of NGOs, including the Drug Study
Group and Consumers Protection Group, to form a coalition of 30 organisations against
medical supplies corruption. The coalition provided information to the media and the
public, and petitioned the court to force the countrys National Counter Corruption
Commission to release information on the case. The court decided in its favour and the
information was released.
The committee set up to investigate the case confrmed that there was indeed corruption
among politicians and civil servants in the ministry.
4
It recommended that the procurement
system be reformed to promote transparency and accountability, and that those guilty of
corruption be punished through a free and neutral committee. Two ministers resigned
as a result,
5
and several senior and mid-level offcials were dismissed or reprimanded.
Rakkiat Sukthana, Public Health Minister at the time of the scandal, was later found guilty
of accepting bribes from drug companies, and began serving a 15-year prison sentence
in November 2004.
6
Despite this victory, there continue to be calls for other politicians and high-level
offcials to face legal sanctions.
7
It was widely felt that the committees recommendations
for reforming the procurement system to prevent corruption were ignored.
8
But the
improved coordination among civic organisations, which previously knew little about
each others work, is likely to help them to promote transparency and exert pressure on
government in future.
9
4
GC2006 01 part1 100 8/11/05 17:55:09
The role of the RDF and RPF in the case was particularly important because of the
position of members of the associations in the Ministry of Public Health. Most were
medical professionals and had privileged access to information, such as changes in budget
allocations, yet were able to maintain their independence, rather than being drawn into
the corruption.
10
This degree of independence can be attributed both to the fact that
many rural doctors were involved in public health NGOs, and to the RDFs history as a
force for public health reform.
11
Stuart Cameron (Institute of Development Studies, UK)
Notes
1. This essay draws from N. Trirat, Two Case Studies of Corruption in Medicine and Medicine
Supplies Procurement in the Ministry of Public Health: Civil Society and Movement Against
Corruption, Institute of Development Studies, UK: Civil Society and Governance Programme
Working Paper, 2000; S. Wongchanglaw, Case Study: Citizen Mobilisation in the Fight
Against Corruption: The Case of Health-Care Funding in Thailand, paper written for the Open
Government Forum held in Seoul, February 2003, see www.thinkcentreasia.org/documents/
healthcarecorruptionthailand.html; U. Tumkosit, Two Case Studies of Corruption in Medicine and
Medicine Supplies Procurement in the Ministry of Public Health: A Framework of Relationships
between Civil Society and Good Governance, Institute of Development Studies, UK: Civil Society
and Governance Programme Working Paper, 2000.
2. Sometimes referred to as the Rural Doctors Society.
3. Trirat, Two Case Studies of Corruption.
4. Wongchanglaw, Case Study.
5. Dr Rakkiat (alternative spelling, Rakkied) Sukthana resigned on 15 September 1998 and Deputy
Public Health Minister Teerawat Siriwanasarn resigned on 20 September 1998.
6. The Nation (Thailand), 2 November 2004.
7. Pasuk Phongpaichit, Corruption, Governance and Globalisation: Lessons from the New Thailand,
Corner House Briefng 29, 2003, www.thecornerhouse.org.uk/item.shtml?x=51987
8. Trirat, Two Cases of Corruption.
9. Wongchanglaw, Case Study, and Tumkosit, Two Case Studies.
10. In one sense, it [the RDF] is inside the ministry it is attacking ... But in another sense, the Rural
Doctors Society is not an offcial part of the ministry structure. It is just a chomrom (club). See
C. Noi, Six Rules for Fighting Corruption, The Nation (Thailand), 15 November 1998. Available
at www.geocities.com/changnoi2/ruraldoc.htm
11. Trirat, Two Cases of Corruption.
8ox 6.8 MaIpraoIIoa In Iha IIIoa oI Iha rug 6onIroIIar In karnaIaka, IndIa
1
The Karnataka Lokayukta (KLA) is a statutory judicial body charged with improving standards
of public administration in the state of Karnataka, India. Although other Indian states also
have lokayuktas, the KLA is exceptional in that it is better funded its annual budget for
200203 was around Rs72 million (around US $1.7 million) and is proactively led by
a high-profle retired judge, Justice Venkatachala. It is able to investigate grievances and
complaints against public bodies through the police, and direct the relevant authorities
to take corrective action when a grievance is justifed. Its actions in the health sector
have included paying unannounced visits to hospitals to check for bribes being paid, and
requesting hospitals to display citizens charters detailing which drugs are available, the
fees for services, and what kind of facilities and services are offered.
NGOs occasionally make vital contributions to the KLAs investigations. A medical doctor
and activist from Drug Action Forum (DAF), a group aiming to raise awareness about
4
GC2006 01 part1 101 8/11/05 17:55:09
drugs promotion and policy, made a complaint to the KLA in 2003, alleging malpractice
in the Offce of the Drug Controller (ODC). A preliminary investigation revealed a number
of irregularities. The offces mandate is to ensure that only authorised drugs of specifc
quality are sold. Many drugs were found to be sub-standard, but the test results were
only available after several months and no action had been taken to withdraw them. Nor
had any action been taken against the companies manufacturing the drugs. In this way,
suffcient time had passed for all of the sub-standard drugs to be sold to the public.
It was discovered that companies that paid bribes were allowed to circumvent drugs
standards, and those that refused to pay were harassed. Other irregularities included non-
enforcement of price controls and accepting kickbacks. The ODCs remit also included
granting licences to blood banks, but it did this with little regard for enforcement of
standards or monitoring. The investigation found that a complaint had been fled about
a blood bank in the district of Gulbarga that had provided HIV-positive blood; no action
was taken in response.
The KLA responded to these fndings by calling a meeting of over 50 offcers from
the ODC. It was claimed at the meeting that each drugs inspector was required to give
Rs20,000 (around US $460) every six months to the Drugs Controller, who then passed it
on to the Minister of Health.
2
Hearings were open to the media, with politically damaging
consequences for former ministers who had also been implicated. In a bid to limit the
damage, the ODC suspended the three offcers who were cooperating with the inquiry,
but the KLA threatened to hold the government in contempt of court for obstruction of
justice if it did not reinstate the men and protect them from further harassment.
The KLAs fnal report of the investigation called on the government to suspend the
ODCs top three offcials, but did not implicate the Minister of Health.
3
The three offcials
were duly suspended on grounds of misconduct and dereliction of duty in October 2004.
4

The Lokayuktas powers have limitations: it is not able to remove someone from offce
without the permission of central or state government, or of a senior offcial in the same
department as the accused. It therefore depended on pressure from the public, via media
exposure, to push the government into acting on its recommendations. It is not yet clear
whether this pressure has been suffcient to bring about sustainable reform in the ODC.
DAFs involvement in the case was instrumental. There are obvious diffculties for
ordinary individuals who make a complaint to a judicial body like the KLA. The judicial
process is slow and cumbersome, and can seem daunting. Patients may lack information
about their entitlements or health standards, and may fear losing access to services if
they fle a formal complaint. Moreover, expert pressure groups like DAF can provide the
detailed information that may be necessary in order to proceed with an investigation.
Stuart Cameron (Institute of Development Studies, UK)
Notes
1. This essay draws from two articles by Asha George, We Need to Fix This Leaky Vessel and Small
Steps Ahead published in Humanscape Magazine 10(9) 2003, and 10(10) 2003, respectively.
See www.humanscape.org/Humanscape/new/sept03/weneedto.htm and www.humanscape.
org/Humanscape/new/october03/smallsteps.htm The issues were uncovered by Anuradha Rao,
in Karnataka Lokayukta: Initiatives in the Public Health Sector: A review, Mimeo, Bangalore:
Public Affairs Centre, 2003.
2. Humanscape Magazine 10(10), 2003.
3. Deccan Herald (India), 1 October 2003; The Hindu (India), 1 October 2003.
4. Deccan Herald (India), 3 October 2004. The offcials were the Drugs Controller, Anand Rajashekar, the
Additional Drugs Controller, H. Jayaram, and the Deputy Drugs Controller, B. G. Prabhakumar.
GC2006 01 part1 102 8/11/05 17:55:09
6orrupIIon and hIVlkI8 108
6 6orrupIIon and hIVlkI8
Some 5,000 demonstrators take part in a protest march to the Constitutional Court in
Johannesburg on 2 May 2002 to protest the governments appeal of a court ruling forcing it
to provide a key AIDS drug to HIV-positive pregnant women. (Themba Hadebe/AP)
While the corruption that affects HIV/AIDS prevention and treatment does not look
very different from corruption found in other areas of the health sector, the scale of
the pandemic, the stigma attached to the disease and the high costs of drugs to treat
it magnify the problem. The response to HIV/AIDS must involve an increase in funds
available to purchase drugs. But scaling up budgets without paying due regard to
the anti-corruption mechanisms needed to ensure their proper use provides further
opportunity for corruption. A case study from Kenya shows a worst-case scenario, of
corruption and profigacy at the national AIDS body set up to coordinate prevention
programmes. An examination of the Global Fund fnds that including all stakeholders
in the design of programmes, from governments and NGOs to the sufferers themselves,
could help provide a safeguard against corruption.
GC2006 01 part1 103 8/11/05 17:55:09
Tha IInk baIWaan oorrupIIon and hIVlkI8
Liz Tayler and Clare Dickinson
1
While it is diffcult to draw a causal link between corruption and the spread of HIV,
there is ample evidence that corruption impedes efforts to prevent infection and treat
people living with AIDS in many parts of the world. The mechanics of corruption
affecting the prevention and treatment of HIV/AIDS are not substantively different from
those affecting the health sector more generally: opaque procurement processes, the
misappropriation of funds earmarked for health expenditure and informal payments
demanded for services that are supposed to be delivered free. What are different are
the scale of the problem and the nature of the disease a chronic, usually fatal and
often-stigmatised disease that can be contained only with expensive drugs. Moreover,
the individuals responsible for tackling corruption may themselves be severely affected
by AIDS. These factors create particular vulnerabilities to corruption.
There are multiple opportunities for corruption in the prevention and treatment of
AIDS. In prevention programmes, corruption occurs when false claims are presented
for awareness-raising activities that never took place, or for materials that were never
purchased. Corruption occurs in programmes aimed at alleviating the socio-economic
effects of the disease on victims and their families, such as feeding programmes or
support for school fees. Corruption can also contribute directly to infection when
relatively low-cost measures, such as the use of sterile needles and the screening of
blood donations, are ignored because a corrupt procurement or distribution process
holds up supplies. Alternatively, health workers may use non-sterile equipment as an
additional source of income by extorting illicit payments from patients who demand
clean equipment.
But it is treatment programmes that are most vulnerable. Money for high-value drugs
can be embezzled at any number of points in the procurement and distribution chain.
At the grand end of the scale is theft by ministries and national AIDS councils of funds
allocated for treatment, and the misappropriation or counterfeiting of medicine. At the
petty end are doctors who extort tips for medicines and patients who sell their own
medication because it is the only valuable commodity they have.
The international response to the epidemic has increased in recent years and there
is pressure to spend large sums of money in countries with limited capacity to oversee
their proper usage. The IMF reports that HIV/AIDS resources fows were US $5 billion
in 2003 and US $8 billion in 2004. With this much money in play, and with donors
insisting that disbursement be the standard metric for judging programme success,
recipient nations will fnd ways to absorb the funds, whether legally or illegally. The
prime requirement for recipient nations seems to be spend it or lose it.
The numbers of people infected with HIV are high and rising. In sub-Saharan Africa
overall, 7 per cent of women and 2 per cent of men aged 1524 are infected.
2
In
Botswana, Swaziland and Zimbabwe, over 25 per cent of the adult population is now
HIV infected. In Asian countries the rates are generally lower, but they are rising fast.
The impact of a large proportion of a community becoming sick and dying is unclear.
GC2006 01 part1 104 8/11/05 17:55:10
Some have suggested that more widespread corruption might be a result of increased
short-termism as those infected seek fnancial security by any means possible for the
families they will leave behind, and informal structures emerge to meet the vast needs
that formal health systems are failing to meet.
3
6orrupIIon In Iha IraaImanI oI hIVlkI8
Relatively effective drug treatment has changed the nature of HIV/AIDS in the West.
Increasingly, it is seen as a condition people can live with. Hospitalisation and death rates
have fallen, and anti-retroviral drugs (ARVs), when properly administered, offer people
with HIV many extra years of productive life, depending on when treatment begins.
In Africa, it is estimated that people live an average six and a half years after infection.
If ARV treatment is started at the appropriate time, life expectancy is doubled or tripled.
Over the past decade, ARV treatment has gone from being something that even people
in developed countries could not afford to a treatment that over 700,000 people in
developing countries now receive. The WHO is attempting to get 3 million people onto
treatment by 2005 under its 3 by 5 initiative.
Even with this massive and rapid scaling-up, treatment is not available to all who
need it. This is no different from other health services in Africa and the rest of the
developing world where many are excluded through fnancial or cultural constraints,
or because of the distance to health facilities. Access to ARV sharpens these issues,
however. Demand frequently exceeds supply even when there is an offcial policy to
determine who gets treatment, such as a cut-off point based on blood test results (the
CD4 count). Those whose result is not quite bad enough may try to use fnancial,
political or other inducements to get onto treatment programmes. A 29-year-old
Nigerian father of three spoke for many across the continent in the 2005 civil society
organisation statement to the African Union Summit of Heads of States: The ARVs
that come to the centre are not given to those of us who have come out to declare our
status, but to those big men who bribe their way through, and we are left to suffer
and scout round for the drug.
4
Where ARVs are provided for free or at heavily subsidised rates through donor-funded
programmes, requests for top-up payments are common. The Malawi Network of People
Living with HIV/AIDS (PLWHA) reported instances of abuse from hospital workers
demanding sexual, monetary or material favours in return for proper medication and
care. Those who refuse are either neglected or receive sub-standard care. In cases where
PLWHA do report receiving high-quality care, it is followed by suspicion by other care
providers and patients that those who furnish it are receiving bribes.
5
Those that get onto programmes offering free or highly subsidised drugs receive a
valuable commodity. They and their family will have other needs as well, and many
elect to share or trade their drugs to meet these needs. There is a ready market for
ARVs. In Tsavo Road, Nairobi, huge quantities are traded every day.
6
Some come from
patients, others leak out of the health system, and a large proportion is counterfeit.
The drugs are often cheap and there are fewer stigmas, no hassle and no waiting. Some
vendors sell their own treatment drugs; some are registered on multiple programmes
GC2006 01 part1 105 8/11/05 17:55:10
and have ARVs to spare; and others have access to the supply chain through central
and hospital pharmacies.
People buy drugs from informal sources like Tsavo Road because it is convenient and
anonymous. The problem with doing so is that ARVs are effective only when there is
rigid adherence to the treatment protocol. Buying treatment from those who know
little about the appropriate combinations, side-effects or dosage, and substituting one
drug for another depending upon availability, means treatment is likely to become
ineffective and result in the development of resistance to ARVs. Moreover, the product
may be expired or fake.
The WHO estimates that the global market in fake and sub-standard drugs is worth
US $32 billion or around a quarter of all drugs used in developing countries.
7
Well
substantiated reports from Ethiopia,
8
DRC
9
and Cote dIvoire
10
indicate that the
problem may be even greater and is increasing. Given the demand for, and value of
the drugs, faking ARVs is potentially much more proftable than faking other drugs.
Corruption contributes to the extent of the problem when regulatory authorities turn
a blind eye to counterfeiting or public offcials receive inducements to procure from
less reputable suppliers, as Dora Akunyili describes (see The fght against counterfeit
drugs in Nigeria, Chapter 5, page 97).
Concerted advocacy by civil society groups and governments, and competition from
generic and research-based companies have been extremely effective in lowering the price
of ARVs in the developing world, resulting in a system of differential pricing between
OECD countries and developing countries. A months supply of GlaxoSmithKlines
Combivir, for example, costs around US $610 in Britain and US $20 in Uganda, Tanzania
and Kenya. The potential proft from re-importation or smuggling is large for vendors
in developing countries and drugs brokers in developed countries. How much of a
problem this is in reality is controversial, however, and there have been allegations
that the pharmaceutical countries are exaggerating the scale of the problem in order
to dampen pressure for differential pricing.
11
Competition in the supply of ARVs has not stopped corruption in national
procurement processes. For example, the Romanian government has launched an
investigation following allegations by US Ambassador Michael Guest that ARVs
were being sold at prices 50 per cent higher than in the United States and that the
health ministry had engaged in corrupt dealings with drug suppliers. A government
watchdog agency reported in April 2003 that the ministry had ignored an agreement
with GlaxoSmithKline to reduce the price of its ARVs by up to 87 per cent
12
and
denied drug importation contracts to foreign companies, granting them instead to
four local ones. These levied taxes and commissions were worth up to 55 per cent of
the drugs value.
haIIonaI programmas. naW approaohas and roIas
Where systems are weak and corruption endemic, it is diffcult to disentangle corruption
from mismanagement and system failure as the root cause of poor HIV/AIDS responses.
Nigerias ARV programme attracted much criticism in 2003 when treatment centres
GC2006 01 part1 106 8/11/05 17:55:10
began handing out expired drugs and rejecting patients.
13
But it is not yet clear whether
the prime cause was corruption or a weak drug procurement, supply and distribution
service that was unable to respond to the demands that the rapid scaling-up of the
programme had placed upon them.
Fresh approaches have developed involving new actors and sectors not traditionally
involved in health programmes, such as education, security, agriculture and social
services. National AIDS commissions have been established to coordinate the response
in many countries. They are often seen as a donor construct, however, and the extent to
which they have been assimilated into domestic governance systems is variable. Kenya
provides an example of the worst-case scenario: its agency was discredited when it was
discovered that senior staff had paid themselves infated salaries and allowances (see
Corruption in Kenyas National AIDS Control Council, page 112).
In Zimbabwe the government has imposed an AIDS levy since 2000 whereby
employees contribute 3 per cent of their gross salaries towards a fund administered by
the National AIDS Council (NAC). It is estimated that the government collects about
US $20 million per year through this mechanism, but no information about how the
fund is used and who benefts from it has ever been made public. In March 2005, the
health ministry ordered an audit of the NAC, but at the time of writing it had not yet
been published.
Civil society organisations (CSOs) are increasingly seen as important providers of
services and receive substantial grants to do so, but the transaction costs of processing
and monitoring CSO applications are very high. An attendant risk is that CSO directors
will siphon off their funding. For example, the director and senior staff at the Zimbabwe
National Network for People Living with HIV/AIDS were suspended after allegations of
corruption.
14
The network received more than US $1.8 million from the NAC between
2003 and 2004.
Tha InIarnaIIonaI rasponsa. mora monay
The sums now being disbursed to tackle HIV/AIDS are huge compared to the existing
budgets of many countries.
15
In Ethiopia, Liberia and Malawi, the money allocated
by global health partnerships such as the Global Fund to Fight AIDS, Tuberculosis
and Malaria represents more than a doubling of the health budget. Funds from the
World Bank and the US Presidents Emergency Project for AIDS Relief (PEPFAR) are
also massive.
While the need for money is undisputable, the systems to use these funds appropriately
are poorly developed. The fact that the performance of a grant or loan is assessed by
how rapidly it is disbursed gives incentives to donor and recipient to allocate the money
carelessly. For corrupt offcials, rapidly expanding budgets offer greater scope to siphon
off signifcant volumes without anyone noticing. This is especially true where health
systems are fragile, where there is a lack of monitoring and oversight, and where the
capacity to channel the money effectively is limited.
Beyond the immediate risk of money being squandered by corruption, commentators
such as Stephen Knack
16
suggest that development assistance may actually reduce
GC2006 01 part1 107 8/11/05 17:55:10
8ox 6.1 kooounIabIIIIy In a IIma oI orIsIs. oorrupIIon and Iha IobaI Fund
The Global Fund to Fight AIDS, Tuberculosis and Malaria was established in January
2002. At the time, international efforts were failing to dent a death toll of 6 million
people each year who die of illnesses that in rich countries are controlled or cured. Its
foundation coincided with growing concern that corruption was lessening the impact
of development aid.
The Global Funds mandate was simple: to provide a massive infusion of fnancing for
efforts to combat these three diseases in developing countries. Its role would be limited to
supplying funding rather than, as has classically been the case in development assistance,
bundling fnancing with technical support to prepare and implement programmes. This
model was developed out of a recognition that adequate capacity existed at local level
to scale up disease control interventions, should suffcient fnancing be made available.
No country offces would be established, and instead the Global Fund would be created
with a small board supported by a small Secretariat in Geneva.
1
To date, the Global Fund has approved proposals totalling almost US $3.5 billion for
combating the three diseases in nearly 130 countries. More than US $1.41 billion was
disbursed as grants in the organisations frst three years, and the fgures are growing
rapidly. The countries being fnanced are among the most corrupt in the world: 23 of the
25 lowest-ranked countries in Transparency Internationals 2004 Corruption Perceptions
Index have received money from the Global Fund.
2
Working in countries where corruption is endemic, and under pressure to work fast,
the Global Funds approach has been to include parties from government, civil society,
the private sector, UN and donor agencies, and people affected by the diseases in
Country Coordinating Mechanisms that have responsibility for submitting proposals
and overseeing the use of funds. The idea is that the different stakeholders will exert
peer pressure to promote more effective implementation and reduce the likelihood of
money disappearing.
But the experience to date with this approach to ensuring accountability has been
mixed.
3
In Armenia, Cambodia, Ghana and Rwanda, the country bodies have taken on
active roles in overseeing implementation, including developing monitoring tools and
operating procedures. In other countries, however, they have been appropriated by a
single constituency typically the government particularly in Eastern Europe and central
Asia; have fallen prey to competing political agendas; or simply have not met regularly
enough to ensure any adequate oversight role.
A second aspect of the Global Funds accountability system is that ongoing funding
is performance-based. Global Fund resources are provided as advances and the fnancial
reporting requirements are generally quite streamlined. But expenditure reporting is
required to be linked with programme monitoring and evaluation, shifting the focus
from inputs (whether or not a computer was bought or a shipment of drugs arrived
at the port, for example) to outputs (such as whether the fnancing was used to scale
up interventions against AIDS, tuberculosis or malaria). If expenditures occur without
demonstrable results, it is an immediate red fag that corruption may be diverting resources
away from their intended purposes. This enables the Global Funds Local Fund Agent
(LFA)
4
to pay increased attention to the recipients fnancial records.
However, LFAs are more familiar with fnancial data than health outcomes and have not
always adequately addressed this weakness by bringing in outside expertise. Adding to
4
GC2006 01 part1 108 8/11/05 17:55:10
the quality of governance in recipient countries. Donors may set up parallel systems
to avoid the risk of corruption, but this means taking talent and capacity away from
the offcial government system, with the concomitant that governments and offcials
become more accountable to the donor than to their own constituents. PEPFAR is an
example of an approach that combines a political imperative to spend money rapidly
within narrow political constraints.
the problem, the contracting system does not systematically ensure that an LFA working
in a very corrupt country has more resources at its disposal than one working in a country
with robust accountability systems. The Global Fund has terminated grant agreements
because of corruption concerns in two cases, Ukraine and Uganda. In both cases, the
corruption was detected as a result of a combination of the work of the LFA and that of
partners in the country.
A third innovation of the Global Fund is its transparency. The Global Fund makes
information about the dates and amounts of every disbursement available on its website
and in its publications. The ideal is that the government and non-government partners
with a stake in the programme will use this information to ensure that resources are not
diverted.
There are concerns that this vision is losing some of its clarity, however, as the Global
Fund Secretariat grows in size and slowly takes on more responsibility for doing the work
that its partners were originally expected to be able to assume. This has arisen both because
of pressure on the new organisation to prove itself and because partners have tended to
view the Global Fund as yet another external body coming in to fnance its own projects,
rather than one that simply provides additional resources to a national response that all
parties would support.
Given the Global Funds short history, it is diffcult to assess fairly how well these
various accountability and transparency mechanisms are working. What speaks in the
organisations favour is that it has been willing to amend its processes as corruption
concerns emerged; for example, in deciding in mid-2005 to set up an Offce of the
Inspector General to tackle suspected fraud and abuse. It has also begun to introduce risk
management principles into its operations, both to allocate staff resources appropriately
and to tailor procedures and responses to varying contexts.
Toby Kasper
5
Notes
1. Of the 19 board members, 14 are from national governments or regional groups, generally
represented by health ministries, HIV/AIDS committees, and development cooperation ministries.
Three are from non-governmental organisations and two are from the private sector. Two of the
NGO members were from developing country NGOs, while the 14 governmental representatives
were evenly divided between developing and developed countries.
2. Transparency International, Global Corruption Report 2004, available at www.transparency.org/
cpi/2004/cpi2004.en.html#cpi2004
3. See www.theglobalfund.org/en/apply/mechanisms/casestudies/default.asp
4. The Global Fund Secretariat does not have any offces outside Geneva, so it contracts independent
frms to assess the capacity of the principal recipients of the funds to handle the large volume of
resources and to monitor implementation. The LFAs are generally accountancy frms (particularly
PricewaterhouseCoopers and KPMG), selected through a competitive tendering process.
5. The author worked at the Global Fund to Fight AIDS, Tuberculosis and Malaria from August 2002
until March 2004, initially responsible for the management of a portfolio of countries and later
as policy manager.
GC2006 01 part1 109 8/11/05 17:55:11
In an attempt to prevent this, some donors mainly European, but also the Global
Fund (see page 108) are moving towards budget support, essentially putting their
money through government channels. While recognising the fduciary risk, they believe
that the benefts improved effciency, legitimacy in focusing on public fnancial
management and support to domestic accountability outweigh the disadvantages
in many countries.
6ouId mora ba dona Io mInImIsa oorrupIIon?
As with attempts to tackle corruption in the health sector generally, the terms and
conditions of health workers should be improved in parallel with the introduction of
mechanisms to increase their accountability to the communities they serve. However,
though paying health workers and civil servants more is necessary, it is not enough
to limit corruption, as the Nigerian experience in 2000 illustrated. And minimising
the opportunities for corruption without providing alternative sources of income may
induce health workers to give up, resulting in an escalation of the human resource
crisis in the health sector.
Increasing transparency is vitally important in health services. The public needs to
be more aware of the eligibility criteria for ARV programmes, which should ideally
become more consistent within and across countries. They need to be aware of what
they have to pay and what they will receive. The quantities and values of drugs supplied
at each level of the system should be well publicised, and health workers should have to
account for them. There also needs to be a mechanism whereby people can complain
without fear of victimisation.
Pharmaceutical companies also need to take action. To minimise the risk of drugs
for developing countries being reimported, GlaxoSmithKline is rebranding and
changing the colour of ARVs sold in developing countries. An alternative approach is
to develop different branding and packaging for products designed for use in developing
countries.
The EU employs a system of registration whereby products are given a number
and bar code, and can be identifed by customs or drug brokers if reimported. Tight
monitoring of pharmaceutical sales within the United States and Europe is an important
disincentive to reimportation, and needs to be maintained. However, implementation
of the recent WTO agreement regarding compulsory licences, and the export and import
of generic varieties of drugs may restrict the availability of cheap generic varieties of
drugs, providing additional scope for bureaucratic corruption.
Donors have an important role to play in minimising corruption, one that is not
specifc to HIV/AIDS treatment or prevention programmes. With vast resources fowing
in for HIV/AIDS, however, a new paradigm has been created that distorts the donor
recipient relationship. What rich nations view as the provision of funds to purchase
AIDS medicines, many in poor nations have monetised upwards as a currency of street
trade.
Donors need to fnd a choke point to reduce corruption. One step towards making
recipient governments more transparent would be for donors to be open and explicit
GC2006 01 part1 110 8/11/05 17:55:11
about what they are giving, when and to whom. This requirement is included in
international recommendations, but the reality is far from ideal. Donors should ensure
that aid is used in line with good procurement guidelines, and work with pharmaceutical
companies to encourage and ensure responsible behaviour.
Ultimately, it is the responsibility of national governments to deal with corruption.
Given the associated sensitivities about international action, regional pressure may be
more appropriate; in Africa, the New Partnership for African Development (NEPAD)
peer review system could become an important tool. Finance and health ministers
control the foreign exchange that is used to purchase medicines and need to be aware
of the long-term effects of their misuse. When medicines are sub-standard or distributed
inadequately, the onset of drugs resistance is accelerated, leading to a growing burden
of chronically ill people. The cost of medical care to treat them will be far greater than
the price of the legitimate medicines in the frst instance.
HIV/AIDS is going to be a major problem for the next two decades at least. Experience
gained in other areas of development, and the need for transparency and strong domestic
accountability, should not be ignored if sustainable and effective approaches to tackling
the disease are developed.
hoIas
1. Liz Tayler is a UK public health physician, who worked for several years as the DFID health
adviser in Nigeria before joining the HLSP institute as an adviser. Clare Dickinson is an
HIV/AIDS specialist with HLSP and formerly worked in Indonesia on a health policy project
based in the Ministry of Health.
2. UNAIDS, 2004 situation report, www.unaids.org/wad2004/EPI_1204_pdf_en/Chapter3_
subsaharan_africa_en.pdf
3. Alex de Waal, HIV and the Security Threat to Africa. Evidence submitted to the high-level
forum panel on security threats and challenges, Justice Africa, May 2004.
4. Statement by CSO at the fourth ordinary African Union Summit of Heads of States, January
2005 Nigeria.
5. Malawi Network of People Living with HIV/AIDS (Manet), Voices for Equality and Dignity:
Qualitative Research on Stigma and Discrimination Issues as they Affect PLWHA in Malawi,
July 2003, www.synergyaids.com/documents/Malawi-MANET.pdf
6. The Nation (Kenya), 22 January 2004.
7. Fake and Counterfeit Drugs, WHO Fact Sheet 275, November 2003.
8. www.addistribune.com/Archives/2003/10/10-10-03/Black.htm
9. www.essentialdrugs.org/edrug/archive/200402/msg00028.php
10. www.essentialdrugs.org/edrug/archive/200401/msg00004.php
11. Financial Times (Britain), 23 May 2005.
12. Agence France-Presse (France), 22 April 2003.
13. Associated Press, 4 February 2004.
14. The Chronicle (Zimbabwe), 3 February 2004, 23 April 2004 and 19 July 2004.
15. In 2001, US $2.1 billion was spent on HIV and AIDS; within three years this almost tripled to
US $6.1 billion, with an expectation that needs will triple again by 2008. See Resource Needs
for an Expanded Response to HIV/AIDS in Lower and Middle Income Countries (UNAIDS,
2005).
16. Stephen Knack, Aid Dependence and the Quality of Governance: A Cross-Country Analysis
(Washington DC: World Bank, 2001).
GC2006 01 part1 111 8/11/05 17:55:11
6orrupIIon In kanyas haIIonaI kI8 6onIroI 6ounoII
Kipkoech Tanui and Nixon Nganga
1
HIV/AIDS is one of the biggest challenges facing the health sector in Kenya, and was
declared a national disaster in 1999. The National AIDS Control Council (NACC) was
set up later that year to coordinate the prevention and control of HIV/AIDS. Its role
became even more critical when the current government placed at the centre of its
200307 development plan the goal of achieving 90 per cent awareness of the disease
and its effects across society.
The NACC was given control over funds pooled under the Kenya HIV/AIDS Disaster
Response Project (KHADREP), fnanced by the World Bank, the UNDP, and the UK
and US development agencies. In the 200405 fnancial year, the NACC was allocated
just under KSh4 billion (US $41 million). The most signifcant portion of its budget is
channelled into community-based organisations. It claims to have channelled KSh1.8
billion (US $24 million) to community-based organisations during 200003.
The NACC was set up under the Offce of the President (OP). However, a more natural
home for it is the health ministry, which is also a recipient of large amounts of bilateral
funding and runs the National AIDS and STD Control Programme (NASCOP). The
choice of the OP as home for the NACC was made ostensibly out of the governments
desire to control the sizeable budget it manages. The OPs record belies the wisdom of
this decision, however. It has been the focus of some of Kenyas most egregious acts
of corruption, often perpetrated by well-connected offcials who have proved almost
impossible for prosecutors to touch.
In April 2003, the OP was enveloped in scandal when it was revealed that the head of
the NACC, Margaret Gachara, had been receiving a salary seven times what she should
have been entitled to as a senior civil servant. She had negotiated the salary based on a
fraudulent letter from her previous employer that exaggerated her earnings there. Once
in offce, she raised her salary even higher than the already infated amount she had
been offered. In August 2003 she was ordered to refund US $340,000 to the NACC.
Fears that the corruption did not end with her high salary were confrmed in April
2005 when a report by the Effciency Monitoring Unit (EMU), also based in the OP,
revealed that for years high-level public servants had used the NACC as their personal
cash cow. There had been a number of early warning signals. An internal audit in June
2002 found irregularities in procurement procedures and in June 2003 the Global Fund
to Fight HIV/AIDS, Tuberculosis and Malaria withheld a US $15 million AIDS grant
until the government addressed corruption in the NACC.
The 300-page EMU report revealed that Kenya could not account for KSh3.64 billion
(US $48 million) donated by the United Kingdom over fve years since 2001. It put a fgure
of more than KSh37.3 million (US $490,000) on the amount used by NACC employees
to pay themselves infated salaries and fraudulent allowances, such as the payment of
private water, electricity, telephone and home security bills. The largest sum was the
money embezzled by Gachara, but others were also involved, including eight permanent
secretaries or their representatives, and NACC Chairman Mohammed Abdallah, who
was charged with embezzlement but later acquitted due to lack of evidence.
GC2006 01 part1 112 8/11/05 17:55:11
Even where money did fnd its way out of NACC to the community organisations it
was intended to support, the report into its use was damning. The EMU found that on
a sample examination of the community-based organisations funded by the NACC, at
least half of the money allocated has been squandered.
Investigators probed three of the 10 national NGOs funded by NACC and several
provincial, district and constituency-level organisations. They found wanton theft of the
NACC money granted to noble-sounding projects that turned out to be sham. The worst
cases involved shell organisations purposely formed to cash in on the NACC windfall.
The NACC itself had cracked down on some of the so-called briefcase NGOs cited
in the report, including the Neema Childrens Centre in Nairobi. The NACC awarded
Neema US $14,000 out of a World Bank grant to fnance grassroots work on HIV/AIDS.
It was closed down in mid-2003 after inspectors could not fnd a single Neema worker
or a single orphan who had benefted from the childrens centre.
Money was squandered by almost all the AIDS Control Units (ACUs) formed in each
ministry to sensitise staff to the disease. Grants were spent on needless seminars, usually
involving the same participants. Of the US $205,000 given to the Ministry of Agriculture,
for example, more than 75 per cent was spent on staff accommodation, allowances and
participation fees at various awareness-raising shows, the EMU report noted. Almost
one-third of the amount spent was not accounted for and was presumed wasted.
Investigations into the three national NGOs revealed similar misdeeds. Par Aid, a
well-connected organisation based in Eldoret, received US $100,000 for a proposal to
study the effcacy of Par Aid herbal medicine in the treatment of HIV/AIDS infection.
The chairman of the Institutional Research and Ethics Committee at Moi Teaching
Referral Hospital, which is part of Moi University, withdrew a letter approving the
project because he was concerned that Par Aid was not serious about the study, but his
decision was quickly overturned with no explanation given by the hospitals director.
The study went ahead, and the EMU report found that most of the money was spent
on trips to collect the medicine, or on fuel. The medicine that should have been used
in free trials was sold to desperate patients, leading the EMU to conclude that Par Aid
was conducting a proftable business with NACC funds.
Corruption in the case of the AIDS Prevention Forum of Kenya (APFK) is even more
blatant. Also given US $100,000 in NACC funds, its directors appear to have gone on
a spending binge under the guise of organising seminars and workshops.
EMU noted a claim by the organisation that it spent US $16,000 hosting school pupils
at a seminar in the Chania Tourist Hotel. The schools said to have been involved denied
any knowledge of the activity and said some of the pupils alleged to have participated
did not even exist. Similarly, hotels refuted several account entries, saying they were
either paid considerably less, or did not host the seminars at all. For example, the Hotel
Big Five in Homa Bay, which was said to have hosted 150 students at a cost of US $6,200,
consists of just 12 rooms and denied ever accommodating the group.
A number of APFK directors were simultaneously directors of the third NGO
investigated, Technologies and Action for Integrated Development (Techno Aid), where
similar practices were uncovered. Techno Aid claimed to have organised seminars and
workshops for the same people as APFK, consulted academic experts who denied ever
GC2006 01 part1 113 8/11/05 17:55:11
working for the NGO, and paid large bills to non-existent hotels. Both Techno Aid and
APFK presented receipts for stationery from the University of Nairobi bookshop, which
has disowned them as frauds.
The report points the fnger of blame at the lax implementation of the NACCs own
funding rules and, in the worst cases, outright collusion between crooked NGOs and
NACC staff. In some cases the NACC continued to fnance organisations even when its
own offcers had expressed concerns over the accounting for previous allocations.
As isolated cases, the funds may seem petty especially when juxtaposed with the
huge sums that HIV/AIDS attracts. But in their consolidated amounts, and if spent
on effective prevention programmes, life-prolonging anti-retroviral drugs (ARVs) or
income-generating activities for the affected and infected, the sums are signifcant.
The fght against HIV/AIDS in Kenya attracts massive funding. The Global Fund
has promised US $129 million over fve years while the United States has pledged US
$115 million. Other donors who have responded to Kenyas appeal for more funds
include UNAIDS (US $15 million) for disease mitigation initiatives and the World
Bank (around US $658,000 on top of a 2004 grant of US $4 million). The bulk of these
funds go to NASCOP, which has also fallen under suspicion for failing to deliver results
commensurate with its budget. If there were no leakage or ineffciencies in the use of
NASCOP funds, they should be enough to provide ARVs to 200,000 of the 1.4 million
Kenyans who are estimated to be infected with HIV. The real fgures are scandalously
small. By November 2004 only 24,000 people were reported to be on ARVs.
The EMU is based in the OP, and was created in response to donor pressure to
contain corruption in the institutions they support. Every state institution is liable to
be investigated by the unit, but given its scant resources staffed by just 50 people it
opts to probe those with sizeable budgets, often guided to them by rumours of sleaze.
The EMU is reputed to conduct thorough and impartial investigations. Its report,
Financial Management Audit of the National AIDS Control Council (NACC) in the
Offce of the President is the culmination of a two-year investigation.
The EMU has called on the Anti-Corruption Commission to investigate all the cases
of fraud and abuse of offce listed in the report. Gachara, the former NACC director,
was sentenced in August 2004 to one year in prison on three counts of fraud and
misuse of offce. She was granted a presidential pardon in December 2004, along with
7,000 petty offenders who had stolen from various government offces. Her release
was publicly decried.
In response to the report, the NACC claims to have hired auditors to probe the
accounts of the NGOs it funds. It says it will release funds in tranches, conditional on
proof that the previous allocation was properly utilised. It ordered 20 NGOs to refund
money that was misappropriated, or face prosecution. At the time of writing none had
refunded the money and none had been taken to court.
The role of constituency-based AIDS councils has also been bolstered in response
to the scandals. These had already been given a larger role in resolving the Global
Funds concerns and now have responsibility to scrutinise the expenditure of NACC
money. Many MPs who are the patrons of their respective constituency councils
have welcomed moves in this direction and some have called for the NACC to be
GC2006 01 part1 114 8/11/05 17:55:12
disbanded in favour of constituency-based AIDS management committees, citing bias
in NACC decisions over which NGOs to fund. Whether this will help curb corruption
is questionable, however. Civil society groups and the media have levelled accusations
of favouritism in appointments to the constituency councils and in their decisions over
the disbursements of funds.
hoIa
1. Kipkoech Tanui is deputy managing editor and Nixon Nganga is a journalist with The Standard,
Kenya.
GC2006 01 part1 115 8/11/05 17:55:12
GC2006 01 part1 116 8/11/05 17:55:12
Part two
Country reports
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GC2006 02 part2 118 8/11/05 17:53:45
Lessons learned from anti-corruption campaigns 119
7 Lessons learned from anti-corruption campaigns
around the world
CobusdeSwardt
1
The past year saw the unfolding of several dramatic corruption scandals, including the
removal of the vice-president in South Africa after corruption allegations; investigations
of heads of state or former political leaders in Israel and Costa Rica; and major corruption
trials in France, Nepal and Venezuela. No country is immune to graft. As New Zealand
and Finland demonstrate in the Global CorruptionReport2006, even countries that
are consistently ranked in the top 10 in Transparency Internationals Corruption
Perceptions Index experience lapses in accountability. Corruption affects all sectors of
society, from construction (France and Malaysia in this book), education (Uganda) and
police (Malaysia, Nepal, Papua New Guinea), to parliament (Japan), the judiciary (Brazil,
Burkina Faso, Ecuador, Israel and Nepal) and even the church (Greece). As highlighted
by the Algeria report, corruption continues to be an obstacle to investment. It impedes
effective management of natural resource revenues (Cameroon and Venezuela) and can
lead to misappropriation of disaster relief funds (Sri Lanka).
But the news is not all bad. These scandals highlight the increasing role played by
civil society and the media in monitoring public funds and holding public offcials to
account. Corruption is no longer taboo in some countries, including Kuwait, and in
Morocco and Uganda the media has played a key role in exposing it. Civil society is
developing new ways to collaborate with reform-minded governments. South Korea
witnessed the signing of a nationwide, anti-corruption compact involving the private
sector, civil society and government.
Corruption and new governments
We have witnessed a dramatic turnaround in many countries, sparked by concerns
over corruption. After Georgias rose revolution in 2003, Ukraine followed suit with
the electoral victory of opposition leader Viktor Yushchenko in January 2005, and
then Kyrgyzstan with its tulip revolution in March 2005. The new governments were
quick to commit themselves to fghting corruption. A principal driving force behind
these changes was public outrage at the extreme methods used by previous regimes to
stay in power, and the realisation of the potential of civil society involvement. Across
the globe in Latin America, two presidents were forced to step down because of events
that were perceived to be related to corruption: the independence of the judiciary in
Ecuador and confict of interest in Bolivias oil and gas sector.
GC2006 02 part2 119 8/11/05 17:53:45
Country reports 120
New leaders face huge challenges in meeting the expectations of their electorates. The
example of Kenya shows how diffcult it can be for a leader to maintain the mantle of
an anti-corruption reformist. Prosecuting past and new cases of corruption has proved
daunting for governments in Kenya, Kyrgyzstan, Morocco and elsewhere.
International pressure is often a motor for change: efforts by Romania and Croatia
to pass anti-corruption measures are driven less by domestic demand than the pull of
becoming members of the EU. Peer pressure is also evident in Asia-Pacifc where the ADB-
OECD Anti-Corruption Initiative has brought 25 countries together to tackle corruption.
In Latin America, the OAS Anti-Corruption review mechanism is providing a valuable
opportunity for independent groups to assess corruption-related developments.
Reforms at country level
Reform of the judiciary is one of the most powerful anti-corruption measures. Georgia
passed a law to increase the independence of the courts in February 2005, strengthening
the governments capacity to prosecute corrupt judges. A series of high-profle corruption
scandals involving judges forced change in Greece and Kenya, while in Brazil, recent
reforms have focused on increasing transparency in what is already a very independent
institution. Other countries, including Burkina Faso, Ecuador and Venezuela, have
seen a reversal of this trend: the judiciarys capacity to tackle corruption cases has been
seriously called into question in these states.
Notable progress has been made in adopting reforms in other areas, including the
drafting, passing and implementation of laws that are at the heart of efforts to curb
corruption. Examples from the GlobalCorruptionReport2006include:
increasing transparency in public procurement (Cameroon, Finland, France, Guatemala,
Malaysia, South Korea and the United States)
reducing corruption in politics (Croatia and Slovakia)
increasing access to information (Slovakia, Switzerland and Panama)
ensuring the independence and transparency of the judiciary (Brazil, Georgia, Greece,
Poland and Romania)
enhancing public sector integrity through codes of conduct and confict of interest
rules (Croatia, New Zealand and Panama)
protecting whistleblowers (Japan, Papua New Guinea and Romania)
improving transparency in fnancial services (Ireland, Malaysia and South Africa)
Signing up to international conventions
Another positive trend is the increased attention governments give to ratifying anti-
corruption conventions. Every country report indicates which conventions a country
has signed and ratifed.
GC2006 02 part2 120 8/11/05 17:53:45
Lessons learned from anti-corruption campaigns 121
The UN Convention against Corruption, signed in Mexico in December 2003, has
now attained the minimum 30 ratifcations required and is expected to enter into
force in early 2006. All OECD countries have ratifed the 1997 OECD Anti-Bribery
Convention, which makes overseas bribery a criminal offence for companies in their
home countries, but its enforcement has been weak in many countries (including Japan
and the United Kingdom). A further problem, highlighted in the New Zealand report,
is the astonishingly low level of awareness of the Convention among the business
community.
Reducing poverty by tackling corruption
There is a growing consensus that progress on reaching the Millennium Development
Goal (MDG) of halving the number of people living in extreme poverty by 2015 is
dependent on tackling corruption. Poverty and corruption are clearly linked: corruption
leads to poverty when money to cover basic needs such as health and education ends up
in the pockets of corrupt offcials; when the private sector is harmed, leading to lower
investment; and when the environment is damaged through corrupt infrastructure
projects. Poverty can also exacerbate corruption because funds are not available to
properly fnance the institutions that keep corruption in check. The G8 summit of
leaders in July 2005 confrmed that anti-corruption measures in the poorest countries
of Africa must be a priority to reduce poverty. But it is not enough to combat corruption
at country level. Foreign companies are often the source of big-ticket bribes in the
developing world. It is just as important that wealthy governments publicise and enforce
their anti-corruption laws to ensure that companies no longer view bribery as an
acceptable way to win business. The multifaceted nature of corruption makes it diffcult
to tackle, and for this reason it is crucial that anti-corruption initiatives are initiated,
monitored and enforced at government, civil society and private sector levels.
About the country reports
As in previous editions of the GlobalCorruptionReport, the country reports refect
the unique combination of historical context, political, socio-economic, legal and
cultural climates that present a country with particular challenges in its efforts to
combat corruption. Mostly written by TIs national chapters, the reports are intended
to provide an overview of key developments in fghting corruption across the world.
The number of countries covered has expanded steadily over the years: from 34 in
2004, to 40 in 2005, and 45 this year. Special attention has been given to ensure a
balance of information from developed and developing countries of various sizes. The
absence of a particular country in this section does not refect a high or low level of
corruption in that country.
The country reports do not cover the same issues; topics of particular importance
to individual countries are presented instead. Nevertheless, the structure is consistent
across reports. Each begins with a list of which anti-corruption conventions the country
has signed or ratifed, followed by a list of key legal and institutional changes of July
GC2006 02 part2 121 8/11/05 17:53:45
Country reports 122
2004April 2005. The reports then delve into an analysis of the main corruption-related
issues that arose during the period under review.
Note
1. Cobus de Swardt is director of global programmes at the Transparency International
Secretariat.
GC2006 02 part2 122 8/11/05 17:53:45
Country reports ALGERIA 123
8 Country reports
Conventions:
AU Convention on Preventing and Combating Corruption (signed December 2003; not
yet ratifed)
UN Convention against Corruption (ratifed August 2004)
UN Convention against Transnational Organized Crime (ratifed October 2002)
Legal and institutional changes
A unit to process fnancial information, appointed by presidential decree in April
2004, became operational in the Ministry of Finance in December 2004. The unit is an
independent body with responsibility for receiving, analysing and dealing with suspicions
relating to banking or fnancial operations that may constitute money laundering or the
fnancing of terrorism.
A draft anti-corruption law that brings legislation into line with the UN Convention
against Corruption had its frst reading in January 2005 and was adopted by the Council
of Ministers in April 2005, pending presentation in parliament. The draft provides for
the creation of a national body vested with the widest powers in terms of preventing
and combating corruption. More particularly it will have responsibility for the drafting
and implementation of a national anti-corruption strategy. This body will have the
status of an independent administrative authority. Critics question the seriousness of
the governments will, given the recent crackdown on the media (see below). Similar
initiatives have been scuppered in the past: in 1996, the government set up a National
Anti-Corruption Observatory that was dissolved by President Abdelaziz Boutefika
in 2000.
Algeria
Crackdown on corruption or on
the press?
The state of emergency that has existed in
Algeria from 1992 to the present has had
many consequences, notably restrictions on
civil liberties, opposition parties and civil
society organisations. Public demonstrations
are frequently banned and the right to strike
has effectively disappeared. Journalists
often fnd themselves at the sharp end of
these restrictions. In June 2004, Mohamed
Benchicou, managing editor of the daily Le
Matin, was sentenced to two years in prison
for writing a book critical of the president. The
newspaper was forced to cease publication
in July 2004 when the state-owned printing
company suddenly demanded payment of
debts; its website suffered the same fate;
and its offces were sold at auction by the
tax authorities. Le Matin was noted for
GC2006 02 part2 123 8/11/05 17:53:46
Country reports 124
publishing investigations into allegations
of corruption involving senior offcials.
1
In the past year the authorities issued
a stream of statements reiterating their
commitment to uprooting corruption in
response to increasing pressure for action
from international fnancial institutions,
foreign trading partners and the public.
While the government claims to be working
overtime on the problem, no concrete
actions have actually resulted. The rhetoric
strikes the right note, as did the ratifcation
of the UN Convention against Corruption
in August 2004, but there are fears they will
both be used as excuses for doing nothing.
To take one example, the auditor
generals department (Cour des comptes)
was created in 1980 and is required under
the constitution to publish annual reports,
but only two have been submitted in the
entire quarter century of its existence. In
spite of an order in July 1995 that set out its
mandate, the status of its investigators has
still not been clearly defned. Its association
of offcers has repeatedly protested against
the departments marginalisation, most
recently at a public meeting attended by
the press in August 2005, but the authorities
have never deigned to give an explanation
of their behaviour towards it.
Though s anct i oned under t he
constitution, access to information held
by the government is more likely to be
denied than granted. Despite the pledge
to eliminate corruption, no law facilitating
access to information has been promulgated
or included in any legislative programme.
On the contrary, departments are more
likely to restrict access to information,
whether for use by the public or by the
press. The latter fnds it diffcult to conduct
investigations, particularly into corruption,
when the authorities systematically refuse to
collaborate with information or sources. This
seriously inhibits media activity, as do the
numerous libel actions taken against them.
Public procurement is also tainted by
irregularities, including the excessive use
of private agreements. President Boutefika
referred to this in a televised speech in April
2005 when he said such agreements would
henceforth be prohibited in the public
procurement process. Algeria is set to invest
US $55 billion in infrastructure and other
public works over the next fve years, but the
IMF expressed reservations on how public
money is utilised in a report on Algerias
budgetary policy published in March. It
concluded that Algeria only partially observes
the norms on fscal transparency. It went on
to say that the distribution of data on the
execution of the budget is severely restricted
and sporadic and the transparency measures
laid down by law are not fully respected.
2

Capital fight is also a serious problem with
an estimated 500 million (around US $612
million) leaving the country annually,
according to government fgures.
3

Despite government efforts to the contrary,
the limited amount of foreign investment
Algeria receives can be principally explained
by the corruption prevailing among public
departments and officials. According to
the World Bank, which surveyed more
than 1,400 investors and companies in
2003, corruption is a major constraint for
investment in Algeria with 75 per cent of
frms reporting bribes are paid.
4
The World
Bank estimated that companies in Algeria
spend an average 6 per cent of their turnover
on corruption, while the OECD and the
African Development Bank called corruption
endemic in a recent joint report.
5
The state is the main shareholder in
Algerias wealthy oil and gas sector through
the company Sonatrach, which rarely
publishes details about its activities or the
payments it receives from foreign investment
partners. The only information it does
make available relates to export revenues.
It is a diffcult company for journalists to
investigate and any attempt to do so is
quickly halted. The procurement process is
also obscure. In April 2005, following the lead
of the president, energy and mines minister
Chakib Khelil expressed his own concerns
at the growing number of public contracts
being replaced by private agreement. He
observed that more and more procurement
contracts are being placed privately. This is a
GC2006 02 part2 124 8/11/05 17:53:46
Country reports ALGERIA 125
source of many abuses. The top priority is, in
consequence, to exclude private agreements
from public procurement processes.
6
This
same minister, however, filed a writ for
libel against four journalists at LeMatinfor
an article published in August 2003 that
questioned the legality of a sale of Sonatrach
buildings and denounced the business
interests of a number of politicians. Editor
Youcef Rezzoug and journalists Yasmine
Ferroukhi, Abla Cherif and Hassan Zerrouky
were sentenced to two- and three-month jail
terms, while Mohamed Benchicou, who had
already spent 10 months in jail, saw his two-
year sentence increased by five months.
The International Federation of Journalists
complained of a campaign of systematic
judicial harassment against reporters in
Algeria.
7
Since 2004, the government has
announced a number of initiatives to
combat corruption, particularly in the
wake of the Khalifa affair (see below). It
has also launched criminal proceedings
against elected representatives and senior
civil servants implicated in cases involving
the misappropriation of funds. One case
involved the former prefect of Oran, who
was sentenced to a prison term, and in May
2005 the spotlight fell on the prefect of Blida,
who was forced to resign. The latters son
was also charged with corruption in which
his father may have been involved.
8
The case
led to the arrest of, or charges against, several
magistrates and senior officials from the
justice ministry and the presidents offce. In
May, the minister for religious affairs sent a
note to imams asking them to stress the need
to fght corruption in their Friday sermons
through references to sharia law.
These gestures leave Algerians perplexed
as to whether, behind all the apparent
activity, there is any true commitment to
combating corruption. Past anti-corruption
campaigns rarely produced effective action
and were widely viewed as power struggles
in the higher reaches of government. It is
now up to the authorities to demonstrate
that their latest effort is more than another
empty exercise.
The Khalifa affair
Revelations continue to tumble out about
this enormous corruption case, reported in
detail in the GlobalCorruptionReport2004.
According to documents submitted to the
French courts in July 2004 by the liquidators
of El Khalifa Bank, the group owned
by Algerian businessman Rafik Khalifa
improperly transferred 689 million (US
$843 million) to other countries between
1998 and 2002.
9
Khalifa, who has refused
to comment on the collapse of his group,
was sentenced in absentia to five years
imprisonment and a fne of 6 billion dinars
(US $85 million) for banking violations in
March 2004.
Financed by local investors, El Khalifa
Bank provided cash for the groups subsidi-
aries in air transport and the media, which
subsequently failed. The bank received sums
from numerous companies because it offered
an interest rate of 17 per cent and a high
commission to new business providers. The
French courts are particularly interested in
Khalifa Airways purchase of real estate in
Paris for persons close to President Boutefika.
The police have drafted an investigative
memorandum referring to the acquisition
of two apartments. The frst was acquired
for someone close to the president and
the second was transferred to Abdelghani
Boutefika, the presidents brother, who also
worked as the Khalifa groups lawyer. The
authorities do not deny these allegations.
Candidates showed little interest in
the Khalifa affair during the presidential
campaign in April 2004 which returned
Boutefika for a second fve-year term, but
this hardly surprised analysts. Resolving
the affair risks opening a Pandoras box so
explosive that nobody could expect to derive
beneft. None of the subsequent inquiries
has reported on the generous facilities that
Algerias political, economic and fnancial
elites extended to Khalifa, nor examined the
factors that led the authorities to ignore the
warning signs until it was too late. Algerias
courts routinely say they are continuing their
investigations into this matter, but a trial
GC2006 02 part2 125 8/11/05 17:53:46
Country reports 126
DjilaliHadjadj(Associationalgriennedeluttecontrelacorruption)
Further reading
Lounis Aggoun and Jean-Baptiste Rivoire, Franalgrie:crimesetmensongesdEtats (French Algeria,
Crimes and Lies of States) (Paris: La Dcouverte, 2004)
Djilali Hadjadj, CorruptionetdmocratieenAlgrie (Corruption and Democracy in Algeria) (Paris:
La Dispute, 2001)
Reporters Sans Frontires, Algrie, livre noir (Algeria: The Black Book) (Paris: La Dcouverte,
2003)
Soir Corruption,a page devoted to news about corruption, has appeared in the evening newspaper
LeSoirdAlgrie every Monday since 2000. See www.lesoirdalgerie.com
Association algrienne de lutte contre la corruption (Algerian Anti-Corruption Association)
(AACC): www.chafafa.new.fr
Notes
1. Reporters Sans Frontires, press release, 2 February 2005, available at www.rsf.org/article.
php3?id_article=12443
2. Libert (Algeria), 3 March 2005.
3. ElWatan (Algeria), 12 March 2005.
4. World Bank, WorldDevelopmentReport2005 (Washington, DC: World Bank, 2004).
5. OECD and African Development Bank, AfricanEconomicOutlook, May 2005.
6. Libert (Algeria), 17 April 2005.
7. Agence France-Presse (France), 19 April 2005.
8. JeuneAfriqueLIntelligent (France), 5 June 2005, and ElWatan (Algeria), 22 May 2005.
9. LeMonde (France), 8 February 2005.
10. Libert (Algeria), 24 March 2005.
11. ElWatan (Algeria), 31 October 2004.
Conventions:
UN Convention against Corruption (not yet signed)
UN Convention against Transnational Organized Crime (not yet signed)
ADB-OECD Action Plan for Asia-Pacifc (endorsed November 2001)
originally set for March 2005 was postponed
without any new date being set. They have
issued an international arrest warrant for
Rafk Khalifa, who remains at large. French
investigations have focused on Khalifas
business dealings in France, including some
fnancial transactions and his generous gifts
to celebrities in the cinema and media.
According to the chief prosecutor in Blida,
the court dealing with the Khalifa affair, the
investigation is well under way. It is a case
which has caused considerable damage to the
national economy, he said. All those who
contributed to this fraud, from near or far,
will be severely punished.
10
His predecessor,
who died in December 2004, had expected
the trial to be held in March 2005, but judicial
sources said in late October the investigation
would only conclude in June 2005.
11
The
same source said more than 800 people were
involved in the Khalifa affair, of whom 600
had been interrogated and 20 charged.
Bangladesh
GC2006 02 part2 126 8/11/05 17:53:46
127
The long-awaited Anti-Corruption Commission was set up in November 2004, allowing
the government to claim credit for meeting its electoral commitments, as well as
responding to the demands of civil society and international donors (see GlobalCorruption
Report2005). But a troublesome takeoff, questionable staff policies and curbed fnancial
independence led TI Bangladesh and other NGOs to question the commissions potential
to curb graft (see below).
A cabinet meeting in December 2004 approved the appointment of a Tax Ombudsman
(passed into law in July 2005), whose main tasks will be to receive taxpayers complaints,
to call the National Board of Revenue (NBR) to account and to suggest measures to redress
injustices or malpractices. Widespread corruption in the NBR is partly responsible for the
extremely low level of internal revenue collection,
1
while many tax offcials are believed
to aid tax evaders upon receipt of a bribe. At the time of writing, the appointment of
the Tax Ombudsman was still awaiting approval from the Ministry of Law, Justice and
Parliamentary Affairs. Civil society and the business community have long called for
the foundation of such a post. In the absence of information about its independence,
investigative powers and resources, however, it is still questionable whether it will prove
an adequate response to corruption in the NBR (see below).
New anti-corruption commission
disappoints expectations
When the Anti-Corruption Commission
(ACC) was set up in November 2004, it was
viewed as a timely institutional reform, and
a strong signal that the government was
committed to fghting corruption. Hardly
a day has passed since then without the
publication of media reports highlighting
the scepticism that surrounds the ACCs
lofty goals.
2
Indeed, since the key stimulus
to set up the commission came from a
combination of civil society demands and
pressure from international donors, it could
be argued that the government made the
concession reluctantly, rather than out of
genuine political will.
3

The lack of impartiality in the procedures
used to select the ACCs three commissioners,
one of whom was appointed chairman,
drew fre from the outset. Under the Anti-
Corruption Commission Act of February
2004, commissioners were supposed to
be approved by the president following
recommendations by a selection panel of
judges. As soon as the appointments were
announced, however, critics cried foul saying
that political considerations had prevailed
over the panels recommendations. The
eligibility of the chairman was also queried
since he had formerly served as Chief Election
Commissioner (CEC) and Supreme Court
judge. Constitutional experts and some
former election commissioners claimed that
the new appointment was in violation of the
constitution, which does not allow former
CECs or judges to take up other public posts.
4

Public interest litigation challenging the
legal validity of the appointment was fled in
the High Court in March 2005. Irrespective
of the cases outcome and the constitutional
debate surrounding it, such events do not
bode well for the ACCs future.
Disputes over staffng ensued, with the
ACC following no clear rules of appointment.
More controversially, it decided to rehire the
former staff of the defunct Bureau of Anti-
Corruption, which was dissolved due to its
ineffectiveness and lack of independence.
5

The commission subsequently annulled
the hiring decision, but the damage to its
credibility had been done. Furthermore,
contrary to the provisions of the Anti-
Corruption Commission Act, decisions on
personnel appointments and transfers were
Country reports BANGLADESH
GC2006 02 part2 127 8/11/05 17:53:47
Country reports 128
taken without consultation between the three
commission members, leading to serious
doubts as to their capacity to provide the
leadership needed for the challenging tasks
ahead. Most problematic of all, however,
is the issue of the ACCs independence
since the government retains authority
over key policy issues, such as budget, staff
recruitment and organisational structure.
Indeed, the commission currently requires
cabinet approval before implementing any
of its decisions.
6
Despite the powers bestowed on it, the
commission has failed to take specific
policy measures in the past fve months,
or to convey to the public any sense of
its strategy for fghting corruption. Instead,
it has limited its mandate to a number of
ad hoc decisions that demonstrate lack of
vision and poor performance. For instance,
the ACC framed charges against a number
of transfer orders for government offcials,
but failed to follow them up.
7
Similarly,
it announced it was going to investigate
the unauthorised use of government
vehicles, the misappropriation of public
land (belonging to the railways) and the
importation of rotten rice.
8
No concrete
measures were taken apart from issuing
letters to the relevant departments.
Corruption in the customs
department
According to a study published by TI
Bangladesh in September 2004, corruption
is rife in the customs department, which
comes under the jurisdiction of the National
Board of Revenue. The study was conducted
in Chittagong port, which handles about
75 per cent of the countrys imports and
exports. Shipping companies have to submit
descriptions of their goods, either in an
Import General Manifesto (IGM) or Export
General Manifesto (EGM), in accordance
with regulations. The study found that
tipping for permissions went without
objection for so long that it had become
institutionalised, with bribes paid in 100 per
cent of cases for both the IGMs and EGMs.
Bribes were also demanded in 100 per cent
of cases to amend IGMs or EGMs for various
reasons.
9

Under the regulations, if a container with
imported goods has not been released within
45 days, it must be auctioned. Research-
ers found that importers bribed customs
offcials to delay the auctions in order to
take advantage of price fuctuations in the
market. To obtain release orders from the
customs authority for imported goods,
moreover, clearing and forwarding agents
have to pay bribes at a minimum of 16 and
up to 37 different customs personnel levels.
The study estimates the amount of bribes
paid by importers and exporters to offcials
at Chittagong port at around 8 billion takas
(US $130 million) annually.
10

In the wake of the TI Bangladesh report,
the Parliamentary Standing Committee
on the Ministry of Finance demanded in
October 2004 that customs reduce the
number of steps importers and exporters
have to pass through to release their goods.
The Chittagong Port Authority (CPA) formed
a fve-member inquiry team to investigate
the cases of corruption revealed in the
report. In January 2005, it launched a one-
stop service for importers and exporters in
a bid to minimise corruption. It is too soon
to evaluate the impact these initiatives may
have on curbing corruption, but the business
community has embraced them.
Other recommendations emerged,
including the privatisation of port
management, the restructuring of the CPA,
the introduction of more fexible clearance
procedures and the privatisation of goods
handling and labour management, to
facilitate a system of incentives to reduce
the undue influence of vested interests.
Steps could be taken, for example, to include
representatives of port users on the CPAs
board of directors, so beginning the process
of transforming it into a fully autonomous
organisation.
GC2006 02 part2 128 8/11/05 17:53:47
129
IftekharZaman,SydurRahmanandAbdulAlim(TIBangladesh)
Further reading
Asian Development Bank, ControllingCorruptioninAsiaandthePacifc(Manila: ADB, 2004)
Centre for Policy Dialogue, ReformingGovernanceinBangladesh (Dhaka: CPD, 2002)
Centre for Policy Dialogue, BusinessCompetitivenessEnvironmentReport (Dhaka: CPD, 2004)
Transparency International Bangladesh, CorruptionDatabase (Dhaka: TI Bangladesh, 2004)
Transparency International Bangladesh, ParliamentWatch (Dhaka: TI Bangladesh, 2005)
TI Bangladesh: www.ti-bangladesh.org
Notes
1. In a country of 140 million people, there are only around 1.5 million registered taxpayers,
of whom perhaps half actually pay any taxes. See DailyBanglabazar(Bangladesh), 17 January
2002.
2. NewNation(Bangladesh), 6 March 2005.
3. One sign of Bangladeshs lack of commitment to the anti-corruption drive was its failure to
send any representatives to the 6th Steering Group Meeting of the ADB-OECD Anti-Corruption
Initiative held in Hanoi, Vietnam, in April 2005, although it is one of 25 Asia-Pacifc countries
to have endorsed the initiative.
4. DailyStar (Bangladesh), 13 March 2005.
5. Independent (Bangladesh), 15 March 2005;DailyStar(Bangladesh), 18 February 2005; see also
GlobalCorruptionReport2005.
6. GlobalCorruptionReport 2005;DailyJugantor (Bangladesh),13 April 2005.
Professionalism in the police force
questioned
Concern has grown in recent years over the
role of the police force as a law enforcement
agency. Indeed, it has not only failed to
enforce the law, but violations have often
taken place with the passive connivance, if
not active participation of its members.
A survey by TI Bangladesh, conducted
in September/October 2004 and released
in April 2005, revealed that 92 per cent of
all respondents who fled complaints to the
police administration had to pay bribes,
while 80 per cent paid bribes to obtain police
clearance certifcates for various purposes.
The survey estimated the amount of bribes
paid by households to the police at 15.3
billion takas (US $260 million) a year.
11
Members of the police have been
implicated in cases of extortion, bribery,
arbitrary arrest and even custodial torture
and murder in some cases. In one case, an
offcer killed a man in Badda thana (police
station) after he refused to pay a bribe. A case
against the offcer has now been fled in the
magistrates court.
12
In July 2003, the government formed
the Rapid Action Battalion (RAB), a
mixed force of police, army, air force and
paramilitary personnel, with the special task
of curbing crime. Nine months later, the
government claimed the controversial unit
had succeeded in improving law and order.
Although it recovered a total of 718 arms,
over 200 people were killed in questionable
circumstances that were offcially described
as crossfire.
13
In May 2005 alone, police
killed 24 people and the RAB a further 21.
14

The deaths sparked a food of criticism from
civil society, human rights organisations,
opposition parties and donors. The RAB
was also reportedly engaged in extortion,
robbery and bribe-taking.
15
Given that professionalism in the police
force and in other law enforcement agencies
is crucial to the fght against corruption,
developments like these are scarcely
conducive to ensuring better governance in
Bangladesh.
Country reports BANGLADESH
GC2006 02 part2 129 8/11/05 17:53:47
Country reports 130
7. NewNation(Bangladesh), 7 April 2005.
8. NewNation(Bangladesh), 27 March 2005.
9. TI Bangladesh, ChittagongPort:ADiagnosticStudy (Dhaka: TI Bangladesh, 2004).
10. Ibid.
11. TI Bangladesh, HouseholdCorruptionSurvey (Dhaka: TI Bangladesh, 2005).
12. DailyProthomAlo(Bangladesh, in Bengali), 20 May 2005.
13. DailyStar (Bangladesh), 29 March 2005.
14. DailyJugantor (Bangladesh, in Bengali), 1 June 2005.
15. Asian Human Rights Commission, Urgent Appeals Programme, 25 July 2005, www.ahrchk.
net/ua/mainfle.php/2005/1182/
Conventions:
OAS Inter-American Convention against Corruption (ratifed February 1997)
UN Convention against Corruption (signed December 2003; not yet ratifed)
UN Convention against Transnational Organized Crime (signed December 2000; not yet
ratifed)
Members of the justice department and presidential anti-corruption delegation are
drafting a confict of interest law that is expected to be approved in 2005. The law is
aimed at bringing Bolivian legislation on the issue into line with the Inter-American
Anti-corruption Convention and is being drafted with the support of a US-funded anti-
corruption programme.
An amendment to the penal code is being drafted under the same process as above,
and is also expected to be approved in 2005 if the full congressional agenda allows for
the changes to be debated. The aim is to incorporate new corruption-related crimes into
the criminal code in order to make it easier to prosecute acts of corruption.
Bolivia
Conflicts of interest: relationships
between the public and private
sectors
The debate over the future role of multina-
tional companies in Bolivias large natural
resources sector has led to the uncovering
of a number of events that allowed foreign
natural resources companies to obtain very
favourable contracts, to the detriment of
the government. Questions have since
arisen about the need for confict of interest
mechanisms to safeguard decision-takers
against undue infuence from the private
sector or other interest groups.
A practice that has become commonplace
is for public offcials to cross over into private
sector positions or vice versa in the same
sphere of work. Employees in state-owned
companies, the energy minister or the state
regulator might cross the revolving door
to private sector companies, for example,
where they are required to negotiate with the
government on issues that were their direct
responsibility when public servants. This
means that they have an unfair advantage of
information and experience when it comes
to negotiating favourable contracts.
In April 2005, El Diario newspaper
reported that the civil society Committee
to Defend National Heritage (CODEPANAL)
had complained that Jaime Barrenechea, the
former president of the Bolivian state oil
company Yacimientos Petrolferos Fiscales
GC2006 02 part2 130 8/11/05 17:53:48
131
Bolivianos (YPFB), is now a manager for
Repsol-YPF Argentina, while former YPFB
executives Hugo Peredo and Arturo Castaos
have moved to Repsol-YPF and the Bolivian
branch of the Brazilian state-owned company
Petrobras, respectively.
1
Another recent
scandal involved Eduardo Baldivieso, a
former regulator of the industry, who moved
to GAS del Sur to become managing director.
He was able to negotiate a favourable
contract to export liquefed petroleum gas
for GAS del Sur.
2
Similar situations have arisen in the water
sector. Aguas del Illimani and Aguas del
Tunari, two companies with potable water
and sewage concessions, have profted from
staff that moved from public sector roles
directly connected to the contracts they
subsequently negotiated on behalf of their
private sector companies. The government,
in 2005 and 2000, respectively, rescinded
both contracts in response to protests.
These and other cases have highlighted
the need for a law regulating conficts of
interest. The use of privileged information
and contacts by people switching between
public and private sector posts in the same
area of work has undermined the credibility
of both sectors and led to protests.
President Gonzalo Snchez de Lozada
was forced to step down in October 2003
in response to protests demanding the
nationalisation of Bolivias natural gas
reserves, the second largest in Latin America.
His successor, Carlos Mesa, resigned in
June 2005. While protests centred on the
question of privatisation, the fact that
private companies were seen to be profting
unduly from contracts thanks to government
connections probably contributed to the
protest movements.
Unlawful enrichment at local
government level highlights need
for new law
Over the past few years, cases of unlawful
enrichment at municipal government level
have increased, highlighting the need for
greater powers to investigate acquisition of
wealth by public offce holders.
Cases of illicit enrichment by authori-
ties at national policy bodies and in central
government continue to arise, but offcial
records point to municipal authorities as the
perpetrators of corruption in a surprising
number of cases. Many cases against mayors
and local councillors are currently going
through the courts.
Examples are the mayor of Achocalla, a
small municipality near the cities of La Paz
and El Alto, who faces charges of misusing
public funds. Also implicated in cases of
abuse of public funds are representatives
of local authorities in Tiquina, Viacha,
Caranavi, Ayoayo, Yanacachi, Copacabana
and Uyuni.
3
Nepotism, infuence peddling and abuse
of authority all exist at local and central
government level, and there are laws
aimed at curbing some of these practices.
One missing piece of the legislative puzzle,
which makes it diffcult to tackle such forms
of corruption, is a law allowing authorities
to probe assets of public offcials. Draft laws
setting out the ways and means in which
authorities might be able to scrutinise the
assets and earnings of public offcials have
been presented to Congress, but have been
rejected.
There is, however, a Financial Investiga-
tions Unit within the bank regulator with
the capacity to probe transactions of people
within the banking system. This unit could
identify possible cases of illegal enrichment
for further investigation.
Reforms at the national highways
authority aimed at reducing corruption by
its staff proved successful in reducing cases
of unlawful enrichment by staff, and could
provide a useful model for possible reforms
at other government bodies. Among the
key pieces of reform were a move to more
competitive recruitment; decisive action
against employees accused of corruption;
and the introduction of transparent and
open contracting processes.
In the fnal analysis, the political will of
the authority is key to any successful reform
Country reports BoLIvIA
GC2006 02 part2 131 8/11/05 17:53:48
Country reports 132
GuillermoPouMuntSerrano
(CentrodeDesarrollodeticasAplicadasyPromocindeCapitalSocial)
Further reading
Andean Commission of Jurists, Informe anual sobre la regin Andina (Annual Report on the
Andean Region, January 2002)
Fundacin Etica y Democracia, Informe de evaluacin ciudadana de implementacin de la
Convencin Interamericana contra la corrupcin (Report of Citizen Evaluation of the
Implementation of the Inter-American Convention against Corruption, 2004)
Notes
1. ElDiario (Bolivia), 24 April 2005.
2. CA$H (Bolivia), 15 April 2005.
3. Presidential Anti-corruption Delegation, Registro de seguimiento de casos de corrupcin
(Register of follow-up of cases), 2005.
process, and pressure from civil society can
help keep the issue on their agenda. Over
the past few years a number of civil society
organisations have developed to monitor
public authorities, in particular local authori-
ties. The development is not positive a priori,
however, and needs to be monitored as well
to ensure that civil society organisations do
not participate in corrupt acts themselves, or
are not co-opted by private interest groups.
Public contracting processes still
provide opportunities for corruption
Public contracts are regulated by very
detailed legislation and mechanisms such
as Internet-based information systems
that allow contracts to be placed and bid
for on-line, in order to reduce the risk of
corruption. Nevertheless, while instances of
corruption in public procurement appear to
have decreased in the past few years, they
continue to arise.
In 2003 the government planned to
promote a law to regulate once and for
all problems associated with purchasing
processes. The draft law was rejected and
converted into a presidential decree, which
attempted to incorporate the main details of
the law, but lacked the weight and support
of a law. The decree also contained an ethics
code for public offcials responsible for pro-
curement.
There remains a need, therefore, for
a reform to streamline and simplify the
resulting morass of laws, norms and decrees.
There are several loopholes and areas of
corruption that fall between the gaps where
laws do not knit together well. It is still not
practice across the board, for example, for
contracting authorities to present transpar-
ent terms of reference to bidders.
While it is true that important steps still
have to be taken to increase the transparency
of contracts offered by government,
comparable steps by the private sector have
yet to be taken. There are too few good
examples of integrity mechanisms, such as
codes of conduct preventing attempts to exert
undue infuence over government decision-
makers, which could be disseminated across
private sector companies.
GC2006 02 part2 132 8/11/05 17:53:48
133
Conventions:
OAS Inter-American Convention against Corruption (ratifed July 2002)
OECD Anti-Bribery Convention (ratifed August 2000)
UN Convention against Corruption (ratifed June 2005)
UN Convention against Transnational Organized Crime (ratifed January 2004)
New legislation regulating publicprivate partnerships (PPPs) was approved in December
2004. The PPP is a relatively new method of fnancing and developing infrastructure in
Brazil. Mechanisms were introduced into the new law to curtail opportunities for private
sector companies to unduly infuence the terms of a PPP tender.
After 13 years of discussions and negotiations, congress passed a constitutional amendment
in December 2004 aimed at streamlining the judiciary and speeding up judicial process.
The amendment introduced the concept of binding precedent, conceived as a means of
guaranteeing uniformity of jurisprudence and restricting recurrent appeals, and established
a National Council of Justice as an external control mechanism over the judiciary (see
below).
A parliamentary front against corruption was created in the lower house of Congress
in July 2004 to address matters on corruption.
Brazil
The judiciary: who guards the
guardian?
In contrast to a number of other Latin
American countries, where strengthening
judicial independence against political
pressure is the main challenge to anti-
corruption campaigners, the calls for judicial
reform in Brazil paradoxically derive from
its excessive independence. Once defned
by President Lula da Silva as a black box,
1

the judiciary lacks transparency and is
often accused of being isolated, dedicated
to preserving corporate privileges and
unaccountable to society.
Understandably, there was concern
to strengthen the independence of the
judiciary when the current constitution
was drafted after two decades of military
rule, though it was granted extremely wide
latitude. The constitution gave the judiciary
broad functional and structural autonomy.
At the same time, in order to guarantee the
protection of a number of social rights, it
allowed for almost endless rights of appealat
different levels of the legal system besides
rejecting the binding nature of superior
court decisions on lower courts.
This constitutional architecture has
fatal results insofar as accountability and
performance are concerned. The judiciary
is slow and inaccessible to the poor. One
example of how these characteristics can
be abused was the decision by Jos Serra,
the new mayor of So Paulo, in early 2005
to suspend payments to suppliers even as
he acknowledged that R2 billion (US$ 851
million) was owing, since he knew a judicial
decision was likely to take 10 years or more
due to the sluggish pace of justice.
Inefficiencies in the judiciary lead to
impunity. According to a survey by Congresso
em Foco (Congress in Focus), an Internet site
specialising in legislative news, 102 out of
595 MPs currently face criminal, adminis-
trative or electoral accusations in protracted
Country reports BRAzIL
GC2006 02 part2 133 8/11/05 17:53:48
Country reports 134
lawsuits. Corruption, such as the Anaconda
scandal in 2003 that involved a judge selling
favourable sentences to criminals, completes
the picture of a dysfunctional judiciary.
2
These factors led to calls for change in
the judicial structure and procedures as a
way to broaden access to juridical services,
to make justice more expeditious, to simplify
the system of appeals, to allow for a faster
solution of conficts and to put an end to
self-interested practices by judges. Judicial
reform proved hard to push through, given
the resistance from judges themselves.
Finally, after 13 years of discussion, Congress
approved an amendment to the constitution
in December 2004.
A key measure is the provision of binding
precedent, conceived as a means of
guaranteeing uniformity of jurisprudence
and restricting the recurrent appeals in similar
cases. Another important development, the
National Council of Justice, was praised in
some quarters, including the government, as a
promising initiative to introduce an external
control mechanism over the judiciary.
Given that the council is part of the
judiciary and is composed largely of judges
(nine of its ffteen members are judges; two
are lawyers; two are public prosecutors; two
are citizens appointed by Congress), its
independence will be in question. Moreover,
it has been given only limited powers, since
its decisions can be contested and annulled
by the judiciary. Many see the council as a
cosmetic move, rather than one that will
make the institution more accountable and
effcient.
As approved, the reform does not tackle
the gravest problem afficting the Brazilian
judiciary: the absence of aggregated and
comparative information on its workings.
Although every judicial decision is public
(and is published on the Internet), the
judiciary does not collect or publish statistics
about its workings, making it impossible for
external observers to effectively monitor it.
The black box of the Brazilian judiciary
remains to be opened.
Lulas anti-graft platform is shaken
by corruption scandals
A series of corruption scandals in 2004 and
the frst half of 2005 has shaken the ruling
Workers Party (PT), and cast doubts over
its ability to make good on its campaign
pledge to tackle corruption. In its winning
campaign, the PT had championed fscal and
ethical probity.
The scandals date back to February 2004
when news broke that chief of staff Jose
Dirceus closest aide, Waldimiro Diniz, had
taken kickbacks from the operators of bingo
parlours (see GlobalCorruptionReport2005
for an analysis of corruption in Brazils
gambling industry). The government
blocked efforts to launch a congressional
inquiry into the case. Diniz was director of
the lottery sector of Rio de Janeiro at the
time and he had allegedly offered contract
privileges for on-line and over-the-phone
lotteries in exchange for campaign donations
to fund certain PT candidates campaigns
during the 2002 election. The report of a
congressional investigation into the fraud
was approved by the Rio de Janeiro State
Assembly in October 2004.
In June 2004, Operation Vampire was
launched into possible illegalities at the
Health Ministry and four other ministries
connecting officials to the illegal sale of
blood supplies worth more than US $660
million from 1990 to 2002.
3
Government
auditors launched an investigation into the
high prices paid for blood; the suspicion was
that public offcials were buying blood at
one price and invoicing the government at
a higher rate.
Later, in August 2004, the weekly magazine,
Isto, published that the Central Bank
president and a director hid overseas assets
from tax authorities. The article led to the
downfall of the director of monetary policy
at the Central Bank, Luiz Augusto de Oliveira
Candiota, and tarnished the reputation of the
Banks president, Henrique Meirelles. As soon
as the accusations were made public, a presi-
dential decree was issued giving Meirelles
(and all future central bank presidents) the
status of cabinet minister, so that he could
GC2006 02 part2 134 8/11/05 17:53:49
135
AnaLuizaFleckSaibro(TransparnciaBrasil)
Further reading
Rogrio Bastos Arantes, MinistriopblicoepolticanoBrasil (Public Prosecutions and Politics in
Brazil) (So Paulo: Sumar, 2002)
David V. Fleischer, CorruptioninBrazil:Defning,Measuring,andReducing (Washington DC: Center
for Strategic and International Studies, 2002)
Transparncia Brasil, Vote Buying in the 2004 Elections, www.transparencia.org.br
Transparncia Brasil: www.transparencia.org.br
Notes
1. www.brazzil.com/2004/html/articles/jul04/p135jul04.htm
2. www.congressoemfoco.com.br/arquivo_especiais/12fev2004_rochamattos/rocha_respostas.
aspx, and www.economist.com/world/la/displayStory.cfm?story_id=2542089
3. UPI (USA), 6 October 2004.
4. Veja (Brazil), 14 May 2005.
5. EstadodeSo Paulo (Brazil), 20 May 2005.
be better protected against accusations of
improbity. The Supreme Court is currently
investigating allegations that he evaded taxes
and foreign exchange regulations.
In May 2005, the weekly magazine Veja
uncovered a bribery scandal in the Brazilian
Postal Service.
4
Reporters revealed a secretly
flmed videotape showing the former chief
of the contracts and supplies department,
Maurcio Marinho, receiving a US $1,250
cash advance from private companies
seeking contracts. The opposition petitioned
for a parliamentary inquiry, which the
government consented to after initial
resistance. Roberto Jefferson, a member of
Congress and president of the Brazilian
Labour Party (PTB) which is allied with
the ruling party was allegedly implicated
in the scandal.
Jefferson was also involved in the next
scandal to break. In May 2005, the media
reported allegations by Ldio Duarte,
former president of the state-run Brazilian
Reinsurers Institute (IRB), that Jefferson had
tried to pressure him to hire a number of
his associates.
5
The scandal deepened after
Duarte accused Jefferson of also demanding
a monthly kickback to the PT of R400,000
(US $170,000) as a thank you for giving
him the IRB post.
In response, Jefferson accused the
governing PT of using undeclared funds to
pay campaign costs and bribe legislators.
Lacking a majority in Congress, the PT was
accused of paying a monthly allowance of
R30,000 (US $12,500) to congressmen from
two allied parties in return for their votes.
The two parties implicated are the Progres-
sive Party (PP), led by Severino Cavalcanti,
the low-profle ultra-conservative chairman
of the Chamber of Deputies; and the Liberal
Party (PL), whose president, Waldemar
Costa Neto, became the first lawmaker
to step down in the widening corruption
scandal.
Dirceu resigned as the presidents chief of
staff in June 2005 and returned to his seat in
the Chamber of Deputies where he is under
investigation by the Chamber of Deputies
Ethics Committee.
As the political crisis escalates and election
campaign fnancing irregularities are being
revealed, calls for political and campaign
financing reforms gain force. There is a
consensus that if anything positive can
result from Brazils worst political crisis in
a decade, it is the approval of comprehen-
sive political reforms that address problems
associated with private fnancing, inadequate
disclosure of campaign accounts and the
failure to impose proportionate sanctions
when breaches of political fnance rules are
found to have occurred.
Country reports BRAzIL
GC2006 02 part2 135 8/11/05 17:53:49
Country reports 136
Conventions:
AU Convention on Preventing and Combating Corruption (ratifed March 2005)
UN Convention against Transnational Organized Crime (ratifed May 2002)
In March 2005, the National Ethics Committee submitted its report for 2003 to the
prime minister after a delay of one year. It highlighted the lack of professionalism, weak
governance and corruption in public service, and recommended the adoption of public
sector codes of conduct for the departments of public administration, health, education,
security and fnance. The nine-member committee also conducted ethics training with
parties, ministries, parliamentarians and civil society organisations throughout 2004. With
the publication of its second report, the committee has now gained a degree of public
confdence, but it remains to be seen if its recommendations will be implemented.
In December 2004, the government issued a decree on the conduct of the national police
force that sets standards for behaviour and provides disciplinary sanctions for breaches
of conduct. It is expected to increase public awareness of police offcers duties and the
rights of citizens to fle complaints about illegal acts committed by offcers, including
corruption.
Burkina Faso
Challenges faced by anti-corruption
bodies
Despite government promises to facilitate
anti-corruption efforts by creating
new institutions and ratifying several
international conventions, the continued
failure to disclose reports into official
corruption and a culture of relative impunity
cast doubts on these efforts in 200405.
A case in point was the 2004 report by
the High Commission for the Coordination
of Anti-Corruption Activities (HACLC) in
March 2005, which remained as confdential
as its predecessor in January 2004 in spite of
an agreement that HACLC fndings should
be publicly available.
1
Also in March, a
document setting out the priorities of a
national campaign against corruption,
initiated by the HACLC and validated
during a seminar attended by 200 people
in December 2004, was presented to the
government. Its two main recommendations
were the creation of a national anti-
corruption assembly, bringing together
delegates from the public and private sectors
and civil society, and the creation of a higher
authority to refer corruption-related matters
to the courts when necessary.
2
At the time of
writing, the government had not responded
to its recommendations.
The HACLC, which offcially began work
in 2003, faces a series of challenges to its
effective functioning and is viewed by some
as weaker than other anti-corruption bodies,
such as the National Ethics Committee and
the Public Accounts Court (see below).
Several ministers and project managers
were implicated in the misappropriation of
public funds amounting to FCFA3 billion
(US $5.5 million) in its frst report.
3
The
offcial response has been limited, although
three corruption-related cases were referred
to the courts on the instructions of the
prime minister. Critics saw the gesture as a
political move to gain popularity before the
presidential elections in November 2005 and
to wrong-foot the oppositions campaign
against corruption.
GC2006 02 part2 136 8/11/05 17:53:49
137
On submission of its second report, the
HACLCs president, Honor Tougouri, was
quoted as saying that the commission has
not received any tangible response to the
recommendations in the 2003 report, taken
as a whole, that would have enabled it to
direct, correct, amend, reorganise, energise
or even slow down its activities. Speaking
of the HACLCs operational difficulties,
Tougouri stressed that the main problem
was the governments slow reaction to its
requests. With respect to its budget of nearly
FCFA1 billion (US $1.8 million), he said:
Even if the HACLC budget has risen slightly,
it does not cover its essential activities, i.e.,
those that justify its creation.
4

The HACLCs problems are not limited to
the lack of fnancial and human resources;
it also suffers from a lack of direction. It is
not clear, for instance, whether it should
coordinate the fght against corruption, as
stipulated in its governing provisions, or
act in all areas related to anti-corruption,
such as raising awareness, investigation,
lobbying and interagency cooperation. Its
work should be much better coordinated
with the activities of the National Ethics
Committee, the Public Accounts Court (PAC)
and other courts, the General State Inspector-
ate (GSI) and the committee responsible for
monitoring the GSIs recommendations.
Despite these difficulties, the HACLC
deserves credit for producing activity reports
on a regular basis and for the professional-
ism of its nine members. Moreover, there
has been a significant increase in public
awareness of the importance of the fght
against corruption, and citizens now expect
greater integrity in public affairs.
The PAC, established in 2002, has played
a key role in the oversight of public fnance
management in the past few years. It has tried
to compensate for the failings of the former
Accounts Chamber by producing three draft
laws governing the state budgets for 1999
2001, 2002 and 2003. Although the
preparatory reports for these laws are
supposed to be public, when the court is
asked to produce them offcials reply that
they are not authorised to do so. Nevertheless,
every MP receives a copy and substantial
extracts can be found in the press.
The PACs investigations have led to the
discovery of irregularities that cost the public
purse dearly. According to an October 2004
report by the fnance and budget committee
of the National Assembly, routine checks
revealed that 151 retired civil servants in
various ministries were still receiving their
salaries.
5
Apparently unaware that the staff
concerned had retired, the fnance ministry
continued to pay the salaries, a blunder
that cost more than FCFA450 million (US
$860,000).
The PAC has planned to submit its frst
report to President Blaise Compaor in
the frst half of 2005. Preparations for its
publication have involved the inspection
of the budgets of a number of public
institutions, local authorities and public
companies, including many where the press
had already reported poor management,
embezzlement and fraud.
The judiciary comes under fire
A string of corruption scandals in 200405
raised expectations that prosecutions of
senior offcials would follow, but the courts
handed down only a limited number of
verdicts. From January 2004 to April 2005,
the Council of Ministers imposed sanctions
on offcials accused of corruption, dismissing
some and moving others to different posts.
Judicial proceedings were undertaken in
the most serious cases, involving nearly
20 state accountants, fnancial controllers,
collection agents and court registry offcials.
The steepest penalties were imposed on
the mayors of Ouahigouya and Zorgho,
both members of the ruling Congress for
Democracy and Progress (CDP). They were
removed from office and charged with
corruption in February 2005. This could be
interpreted as a settling of scores within the
CDP, given that other mayors suspected of
corruption were not charged. In February,
several cases of embezzlement of public
funds were also heard before the criminal
Country reports BURKINA FASo
GC2006 02 part2 137 8/11/05 17:53:49
Country reports 138
LucDamiba(REN-LAC)
Further reading
REN-LAC, Rapport2004surltatdelacorruptionauBurkinaFaso (2004 Report on the State of
Corruption in Burkina Faso) (Ouagadougou: Editions REN-LAC, 2005)
Mdiateur du Faso, Rapport fnal des confrences du mdiateur du Faso sur la gestion du patrimoine
public (Final Report on the Conferences of the Faso Mediator on the Management of Public
Assets) (Ouagadougou, 2004)
HACLC, Documentcadredelapolitiquenationaledelaluttecontrelacorruption (Framework Document
for the National Policy on Ways to Combat Corruption) (Ouagadougou: HACLC, 2004)
Conseil Suprieur de la Magistrature, Rapport de la commission dtude sur la corruption dans le
secteur de la justice, mars 2005 (Report of the Commission Charged with Studying Corruption
in the Judiciary, March 2005)
REN-LAC: www.renlac.org
courts. One involved the misappropriation
of some FCFA11 million (US $21,000) from
a public fund for health and nutrition by
state accountant, Jean Paul Balbogo. He
admitted the charges and was sentenced to
fve years in prison.
6

Nevertheless, the judiciary was widely
criticised for delaying alleged corruption
investigations involving senior offcials, such
as director generals, high commissioners,
MPs and ministers, even when there was
overwhelming evidence against them. The
sacrosanct rule of separation of powers
is not sufficiently observed: judges face
diffculties in opening such investigations
and corruption cases are rarely tried
before the courts. This has led to a public
perception that high-ranking offcials enjoy
impunity, and the fnger of blame points at
the judiciary.
Allegations of corruption have recently
been made against the judiciary, whose per-
formance has never been lower in the annual
corruption perception rating of REN-LAC, a
nationwide anti-corruption network of 30
civil society organisations. In December
2004, the magazine Evnement published the
fndings of an investigation into corruption
that accused judges of attempted extortion
from litigants; lawyers of robbing their
clients; court offcials of embezzling funds;
and other auxiliaries of tampering with court
fles and other documents.
7
The expos led
to a massive outcry. Professional lawyers
associations denounced their colleagues,
while others supported the justice ministry,
denying that corruption existed in their
ranks.
In the face of mounting public pressure,
the Higher Council of the Judiciary,
chaired by the president, created an ad hoc
commission of inquiry into corruption in the
judiciary in June 2004. Chaired by Kadiatou
Dakoure, who also chairs Council of State
meetings, it fled its fndings in March 2005
which confrmed that graft was widespread.
Corruption was found to be prevalent in the
courts of Bobo-Dioulasso and Ouagadougou,
which deal with the more serious cases. The
commission found more than 30 cases of
questionable practices and suspicious
behaviour implicating judges, lawyers,
police offcers, intermediaries or touts, and
other users of the judicial system, including
accounting frms and liquidators. The report
concluded that no strategy to combat
corruption would be effective without
genuine political will.
8

In the meantime, the bar association
imposed sanctions on two of its members in
April 2005. One, Matre Djibril Lankoand,
was suspended for extorting FCFA1 million
(US $2,000) from a client on the grounds
that the sum was needed to motivate the
judge in charge of the case.
9
The judiciary
was shaken by this and other cases, but no
offcial steps have been taken to address the
fndings of the commission of inquiry.
GC2006 02 part2 138 8/11/05 17:53:50
139
Notes
1. GlobalCorruptionReport2005.
2. National Seminar on the Proposed National Policy to Combat Corruption, Summary Report,
1315 December 2004.
3. HACLC Press Conference, 10 January 2004, published in LObservateurPaalga (Burkina Faso),
11 January 2004.
4. SanFinna (Burkina Faso), 4 April 2005.
5. National Assembly, Report No. 2004/030/AN/COMFIB, File No. 16; see also Bendr (Burkina
Faso), 17 October 2004.
6. www.aib.bf/siteaib/revuearch2.htm
7. Evnement (Burkina Faso), 10 January 2005, www.cnpress-zongo.net/evenementbf/pages/
dossier_1_59.htm
8. Conseil Suprieur de la Magistrature, Rapport de la commission dtude sur la corruption
dans le secteur de la justice, mars 2005 (Report of the Commission Charged with Studying
Corruption in the Judiciary, March 2005).
9. www.lefaso.net/article.php3?id_article=8270
Conventions:
AU Convention on Preventing and Combating Corruption (not yet signed)
ratifed)
A law passed in September 2004 instituted a new procurement code (see below).
A decree in February 2005 laid down the rules for a new committee to coordinate the
fght against fraud, smuggling and forgery. Its remit is to review existing regulations
and propose changes; initiate administrative investigations; combat the import and sale
of products derived from fraud, smuggling or forgery; devise and monitor the imple-
mentation of prevention programmes; protect tax and customs receipts; and centralise
information about illegal commercial practices. The committee, chaired by the Minister of
Trade, includes representatives from other concerned ministries, the unions, the employers
federation, the security services and the department for external research. It will also have
inspectors at its disposal to carry out activities in the provinces.
A presidential decree in February 2005 established a special supervisory department
(Division spciale de contrle des services) in the national security service with
responsibility for investigating the confdentiality, state of mind, morale and loyalty of
members of the national and local police. If the new body were given real powers, it would
yield an immediate boost in public confdence since the police force is allegedly one the
most pernicious sources of everyday corruption.
1
It is doubtful the new department will
prove effective, however. A similar unit was created in the past but dismantled at short
notice, without proving its value.
In March 2005, the government promised to lift the secrecy surrounding its oil revenues
by signing up to the Extractive Industries Transparency Initiative and promising to
Cameroon
Country reports CAmERooN
GC2006 02 part2 139 8/11/05 17:53:50
Country reports 140
publish comprehensive, quarterly fgures about its production, sales prices and revenues
(see below).
Procurement: will independent
audits help?
Sixteen months after ratifying the UN
Convention against Corruption, the
government introduced a Procurement
Contracts Code in September 2004 to replace
the three decrees from 1995 and 2002 that
had regulated public tendering poorly. The
new code increases the responsibility of con-
tractors, establishes a mechanism to regulate
the system and strengthens supervision
before and after contracts are allocated by
submitting them to independent observers
and an independent auditor. Article 2
enshrines equality of access to public
orders, equality of treatment for bidders
and procedural transparency as the codes
guiding principles.
The code is intended to deal with a
multitude of procurement-related corrupt
practices, including: breaches of rules
regarding publication of offers, limiting
competition; failure to respect confdentiality
when bids are examined; lack of precise
criteria by which candidates and offers
are chosen; acquisition of interests by the
supervisory authorities through the creation
of fictitious companies; skewing of the
selection procedure; abuse of the purpose of
contracts; fctitious deliveries; payment for
contracts not performed; and the splitting
of orders to circumvent procedures by
remaining below the minimum required
threshold. Such practices make regular
appearances in the courts, most notably
in the Mounchipou case in 2003 when a
former minister of telecommunications was
found to have colluded in the fraudulent
award of a public works contract that
involved order splitting, fctitious delivery
of contracts and overpricing.
2

To combat these practices, the government
proposed two measures to improve the
performance of the Procurement Contracts
Commission (CPM), which is responsible
for providing contractors with technical
support and supervision in all departments,
including state-owned companies and
diplomatic missions. The frst is a new sub-
commission within the CPM to analyse and
classify bids in purely technical and fnancial
terms. It will be supported by four specialist
bodies with supervisory responsibility for
monitoring procurement procedures in roads
and infrastructure, buildings and collective
facilities, general supplies, and intellectual
services.
The codes other innovation is the
recruitment of an independent observer
through an international call for bids by the
Agency for the Regulation of Procurement
Contracts (ARMP), whose role is to ensure
that all regulations, transparency rules
and principles of fairness are respected in
procurement processes. The ARMP will
also recruit an independent auditor of
untarnished reputation to conduct annual
audits of all procurement contracts above
FCFA500 million (US $940,000) and a 25 per
cent sampling of contracts worth FCFA30
500 million. While the recruitment method
provides some assurance that the independent
observer will be truly independent, the weight
of administrative practice and pressure from
senior politicians (such as that exerted on the
NGO Global Witness when it was appointed
independent observer in the forestry sector)
could jeopardise the posts impartiality.
Cameroon should be congratulated on
the new procurement code, but it remains
to be seen how effective it will prove in the
absence of an independent judiciary, the
body ultimately responsible for enforcing
the law and sanctioning illegalities. Lack
of human and fnancial resources, and the
complexity of procedures invariably lead to
judicial delays while eroding the integrity
of staff. Successful implementation requires
that the commissions created by the new law
should be staffed by people of integrity, as
required by article 8 of the UN Convention
against Corruption.
GC2006 02 part2 140 8/11/05 17:53:50
141
Jean-BoscoTallaandMauriceNgufack(TICameroon)
Further reading
Cameroon National Governance Programme, Cameroun:leschantiersdelagouvernance (Cameroon:
The Workshops of Governance) (Yaound: PNG, 2004)
Lucien Ayissi, Corruptionetgouvernance(Corruption and Governance) (Yaound: PUA, 2003)
Arguably, the weakest link in the moni-
toring chain is the ARMP, which oversees its
application, recruits external observers and
auditors, and appoints chairmen to the four
supervisory bodies. As a state agency, it has
close ties with the political elite, and thus does
not have the independence necessary to carry
out the delicate tasks entrusted to it. There is
also the danger of operational drift by the
regulatory authority. At the time of writing,
a frst generation of observers appointed in
2001 to oversee procurement had not been
paid for nearly two years, a state of affairs that
clearly exposes them to temptation.
3
Finally, with respect to contracts,
departmental price lists cannot be used as a
reliable basis for assessing suppliers invoices.
State agents are well accustomed to corrupt
practices and the offcial list for offce supplies,
to take one small example, constitutes prima
facie evidence of overpricing, because it
contains prices four times higher than normal
market rates. External audits and reviews are
imperative if the hidden commissions that
litter price lists are to be weeded out before
the new code becomes operational.
Cameroon signs up to EITI
In a month that saw 500 civil servants
referred to a disciplinary council on charges
of fraud or misappropriation
4
and news that
3,000 fctitious offcials had been stripped
from the payroll,
5
the government gave
further evidence it was taking corruption
seriously by signing up to the Extractive
Industries Transparency Initiative (EITI) on
17 March 2005. In a letter to the IMF on
30 March, Prime Minister Ephram Inoni
reiterated that commitment and promised
to post quarterly data on oil production,
sales prices and revenue since 2000 on the
website of the state-owned Socit Nationale
des Hydrocarbures by the end of June 2005,
and to update it regularly.
In the light of these undertakings, civil
society organisations are in the process of
setting up a contact group to monitor the
publication of oil revenues. It comprises the
Centre for the Environment and Develop-
ment (CED), the Cameroonian Womens
Foundation for Rational Environmental
Action (FOCARFE), Transparency Interna-
tional Cameroon (TIC), the Catholic Relief
Service (CRS) and the Commission for Justice
and Peace of the Episcopal Conference of
Cameroon (CJPCEC). The EITI initiative
provides potential for civil society to play
the role of objective observer.
Breaking the secrecy surrounding oil
revenues will have a direct impact on
the recently completed ChadCameroon
pipeline, providing communities in the
regions that it crosses with vital information
against which to measure the governments
performance in developing the country.
The pipeline is expected to have a major
economic effect. By one account, the salaries
and income derived from the supply of
goods and equipment during the three-
year construction phase increased national
GDP by 2 per cent, and an annual 1 per cent
increase is anticipated during the 2530
years of its lifespan.
6
In 2004, the Cameroon
Oil Transportation Company (COTCO) paid
Cameroon some FCFA23 billion (US $43
million) in transit fees, a fgure included
in the budgetary framework as required by
international lenders, particularly the IMF
and the World Bank.
For many observers, while sustained
efforts are required to reduce the extent of
corruption, the EITI initiative forms part
of a raft of measures recently introduced
to clean up public sector management and
promote professional ethics. The test will be
in implementing them.
Country reports CAmERooN
GC2006 02 part2 141 8/11/05 17:53:51
Country reports 142
Charles Manga Fombad, The Dynamics of Record-Breaking Endemic Corruption and Political
Opportunism in Cameroon, in John Mbaku and Joseph Takougang (eds), TheLeadership
ChallengeinAfrica:CameroonunderPaulBiya (Trenton, NJ: Africa World Press, 2004)
Friedrich Ebert Stiftung, Luttecontrelacorruption:Impossiblenestpascamerounais (Combating
Corruption: Everything is Possible in Cameroon) (Yaound: PUA, 2002)
Pierre Titi Nwel (ed.), DelacorruptionauCameroun (Corruption in Cameroon) (Yaound: Gerddes-
Cameroun and Friedrich Ebert Stiftung, 2001)
Babikassana and Abissama Onana, LesdbatsconomiquesduCamerounetdAfrique (Economic
Debates about Cameroon and Africa) (Yaound: Prescriptor, 2003)
Notes
1. See GlobalCorruptionReport2005.
2. Ibid.
3. Mutations (Cameroon), 28 April 2005.
4. CameroonTribune (Cameroon), 1 March 2005.
5. LeMessager (Cameroon), 1 April 2005.
6. Roger Tsafack (ed.), LepipelineTchadCamerounetlemploi.Quellesleons? (The ChadCameroon
Pipeline and Employment. What Lessons Can Be Learned?) (Yaound: PUA/FES, 2003).
Conventions:
UN Convention against Transnational Organized Crime (ratifed September 2003)
ADB-OECD Action Plan for Asia-Pacifc (endorsed April 2005)
On 19 September 2004, the Fourth Plenary Session of the 16th Central Committee of the
Communist Party of China (CPC) adopted a resolution on governance capacity building
that called for more accountability of members through broader citizen participation,
greater separation of government from the management of businesses and the creation of
more democratic evaluation systems. The resolution included a call for whistleblowers
protection, a right offcially enshrined in an ordinance that came into effect on 24
October (see below).
In January 2005, the CPC Central Committee released guidelines for a national system
of corruption prevention that entails a three-pronged approach of ethics education,
institutional accountability and civil monitoring. The system is due to be in place by
2010. This is the frst time Chinese leaders have laid out a comprehensive blueprint for
a national anti-corruption campaign (see below).
Given that more and more corrupt offcials settle their families abroad before joining them
with their ill-gotten gains, the Central Commission of Disciplinary Inspection (CCDI) began
a scheme in July 2004 under which senior offcials must declare in advance any overseas
visits by spouses and children. A pilot project is currently operational in Xiangfan, Hubei
province, Suzhou in Shanxi and in a factory and power station belonging to the Shenhua
Group. Offcials who do not declare such visits will be denied promotion.
China
GC2006 02 part2 142 8/11/05 17:53:51
143
In April 2005 the standing committee of the 10th National Peoples Congress (NPC)
approved the countrys frst civil servant law to defne offcials rights and responsibilities.
The law covers such areas as duties, posts and ranks; recruitment, training, salaries and
assessments; and punishments and related issues. The law stipulates that all public servants
should be recruited through just, open and fair examinations. At present, some people
become civil servants by directly engaging or transferring from civilian organisations.
In addition, the law provides for a more stable rewards system by ensuring that salaries
are raised in line with economic growth.
Planned improvements to the
strategic system against corruption
Shenzen, the site of Chinas first special
economic zone, is to be the test-bed for
the CPCs blueprint for checking internal
corruption before it is rolled out to the rest of
the country by 2010. The implementation
guideline for the establishment of a national
system of punishing and preventing
corruption, unveiled in January 2005, calls
for further development of democracy and
legal institutions with the goal of bringing
power to closer public account. Among the
guidelines targets are more dynamic anti-
corruption tactics; broader channels for
public oversight and civil society monitoring;
protection of whistleblowers and citizens
rights to criticise; and increased transparency
of public policy. Five ordinances were
introduced in 2004 with the aim of increasing
the accountability of high-ranking offcials,
including two designed to promote greater
meritocracy in the selection and promotion
of party and government officials, and
another that specifes complaints procedures
for party members.
The guideline calls for improved
responsibility systems for the administrative
and judicial sectors, and a three-pronged
programme of ethics education, institutional
accountability and civil monitoring. Ethics
education will be incorporated into general
school curricula; the Central Commission
of Disciplinary Inspection (CCDI) will be
responsible for accountability capacity
building; and the Party Congress will
encourage whistleblowing by party members,
accountability in the public administration
and a code of conduct for the judicial
sector.
In particular, it prioritises enhanced
auditing in targeted sectors and ministries,
and introduces effciency auditing for high-
ranking offcials. All audits will be published,
building on an existing trend towards more
active and open auditing processes. Notably,
in June 2004, the state audit offce publicly
released a report on central government
spending that disclosed that 41 out of 55
central departments audited were suspected
of embezzlement and appropriation of
public funds, including funds earmarked for
the China Olympic Committee and disaster
relief fund. The report led to disciplinary
action against 545 people and more than
80 judicial hearings, including cases against
the former director of the Beijing Municipal
Power Supply bureau and against two vice-
presidents of the Agricultural Development
Bank. In July 2004, the state audit offce
announced plans to audit all CPC central
committee departments and all central
government ministries, commissions and
departments that receive funds from central
government.
The guideline foresees the creation of a
checks-and-balances institution to ensure
the accountability of investment decisions
by state companies and agencies, and to
monitor their projects. Those responsible for
investment policies will be held accountable.
In a similar vein, it proposes introducing a
real name bank accounts system to limit
cash transactions, a warning system for
high-volume cash movements and improved
information sharing to contain money
laundering.
Country reports CHINA
GC2006 02 part2 143 8/11/05 17:53:51
Country reports 144
Whether the guidelines grand designs will
translate into action is debatable. Beijing has
tended to advocate mostly administrative
measures to combat corruption. Moreover,
party investigators will fnd it diffcult to
investigate their own bosses.
Corruption amongst party cadres
Ever since the late 1990s, when the party
chief in Zhanjiang, Guangdong province
and two mayors in the autonomous
region of Anyang, Henan province were
convicted of corruption, the practice of
selling promotions for cash has been on the
rise. Despite passing a series of regulations
to streamline its system of selection and
appointments in 2000 and 2002, the CPC
has failed to stamp out power trading,
as it is known, though the detection rate
may have slightly improved. In 2000, Ding
Yangning was convicted of trading posts for
money during his three-year term as party
chief in Zhenghe, Fujian province, a case
that incriminated 246 offcials on charges
of bribery. This record was soon beaten
by Wang Hulin of Changzhi City, Shanxi
province, who allegedly sold 278 government
or party posts in a single month.
In 2004, five more ordinances aimed
at closing institutional loopholes in the
accountability of officials were issued,
among them interim regulations on open
selection of party and government offcials,
interim provisions on promotion via open
competition and another on party or
government offcials who take occasional
jobs in enterprises. At the same time, the
Central Committee sent out five teams
on inspection tours to monitor senior
leaders at provincial and ministerial level.
In a sign that power trading still thrives,
Ma De, former party chief in Suihua city,
Heilongjiang province, was charged in
March 2005 with taking bribes worth US
$726,000 from 260 officials over his six-
year tenure of offce. The conviction of Ma
known as the 10,000 yuan chief for his
daily income from bribes sent shock waves
through political circles and later ensnared
the provincial heads of the high court and
prosecutors offce, a deputy governor, the
chair of the provincial congress and the head
of the local party secretariat. Tian Fengshan,
a former minister of land and resources, was
also implicated.
The inspection teams exposed the extent
of corruption at all levels of administration.
Xinhua and ChinaDaily reported almost daily
on offcials scamming the system, ranging
from the Xintian education offcials who
owned luxury cars in an impoverished county
in Hunan province, or accusations that
offcials in Fuzhoudisplaced impoverished
land owners without compensation and sold
their plots to developers at prices lower than
market value. Examples of this are legion.
The NPC publicised the arrest of crooked
party cadres and offcials at banks and other
state-owned enterprises, claiming more
than 150,000 corrupt members had been
disciplined and the misuse of public funds
of over US $300 million had been uncovered
in 2004.
Further substantiation that lack of
accountability is endemic among offcials
is provided in a survey released in January
2005 by Wang Jianxin, an expert at the Law
School of the JiangxiUniversity of Finance
and Economics in eastern China.
1
Wangs
survey of village officials demonstrated
that there has been an increase in offcials
abuse of power and related economic crimes,
with cases of corruption by high-ranking
and grassroots officials cropping up in
quantity. Such cases involved bribes valued
at thousands, tens and even hundreds of
thousands of yuan (from US $240 to US
$1.2 million).
massive graft plagues some of
Chinas banks
Chinas banking system suffered a string of
graft allegations involving senior executives
at major state banks in 200405, and was
weakened by high levels of bad debt and
GC2006 02 part2 144 8/11/05 17:53:51
145
GuoYong(TsinghuaUniversity,China)andLiaoRan(TransparencyInternational)
Further reading
Wang Chaunli, FeelthePulseofCorruptionStudiesoftheCorrelationbetweenFrequencyofCorruption
andControlIntensity (Beijing: Qunzhong Publishing House, 2004)
Li Junjie, The Current Status, Development Perspectives and Monitoring of Chinas Banking
System, InternationalEconomicReview 34, 2004
Chi Lo, Bank Reform: How Much Time does China Have?, ChinaBusinessReview, MarchApril
2004
Xie Ping and Lu Lei, The Economics of Corruption in Chinas Financial Institutions: Behaviour
and Mechanism Design (Beijing: Peoples Bank of China, 2003)
Yan Sun, Corruption and Market in Contemporary China (New York: Cornell University Press,
2004)
low rates of capitalisation. In January,
investigators found 1 billion yuan (US $120
million), missing from deposits at a local
branch in Haerbin city after the branchs
director fled abroad. In March, a staff
member in the Dalian branch of the Bank
of China was found to have misappropriated
US $6 million and staff at the Baotou branch
of Chinas Industrial and Commercial Bank
were accused of a conspiring to loan illegally
300 million yuan (US $37 million). On 16
March, the chairman of China Construction
Bank, Zhang Enzhao, resigned amid reports
that he had allegedly received a US $1
million kickback and other monetary
favours from US companies in return for
granting loans. Zhang is under investigation.
His predecessor, Wang Xuebing, was jailed
for corruption in 2002. China Construction
Bank, the countrys top property lender, had
been the shop window of Chinas efforts
to reform its debt-ridden banking sector,
having received US $22.5 billion late in 2003
to recapitalise its balance sheet following
aggressive bad-loan write-downs. According
to a survey by the Research Bureau of the
Peoples Bank of China, 81.5 per cent of
people think corrupt dealing is a common
feature of Chinas banking system.
In April 2004, the media exposed another
fraudulent loan scandal. Two years earlier,
an internal investigator at the Beijing branch
of the Bank of China had found a loan case
in which Real Estate Ltd used its employees
names, forged purchase contracts and
proof of income declarations to apply for
199 separate loans from the bank worth
645 million yuan (US $78 million). The
fraud resulted in the abandonment of
273 unfinished luxury apartments. This
scandal highlighted the vulnerability of
Chinas banking system, which is groaning
under a mountain of bad loans. In 2004,
credit risk was increasing because bank
lending continues to tilt towards large real
estate and capital construction projects,
favouring medium- and long-term loans,
and monopolistic industries, such as
highways, railways, airports, power and
communications. The capital adequacy rate
of most banks in China is well below the 8
per cent Basel Standard. These two factors
are severe impediments to further reform of
the banking sector.
The Chi na Banki ng Regul at or y
Commission (CBRC) announced a new
crackdown on corruption following the
resignation of Zhang Enzhao. The CBRC says
it will enact a range of investigative checks,
including the monitoring of mortgage,
consumer and infrastructure project loans
to help address the problems. Meanwhile, it
warns banks to tighten their own checks to
prevent new cases of corruption emerging.
Between 2001 and 2005, courts sentenced
27,000 bank employees for fnance-related
crimes, over 4,000 of them to more than fve
years imprisonment, life imprisonment or
death. Attempts to solve the bad debt issue
by improving monitoring and internal
controls have failed because of political
leverage on credit decisions.
Country reports CHINA
GC2006 02 part2 145 8/11/05 17:53:52
Country reports 146
Zhong Wei, Ba Shusong, Gao Qinghui and Zhao Xiao, Evaluation Report of Chinas Financial
Risks, ChinaReform 3, 2004
Li Yifan, Strategic Shift of Chinas Fight against Corruption, ChinaOutlook 2, 2004
Guo Yong, Strengthening International Cooperation to Deal Heavy Blows against Trans-Border
Corruption, StudiesofInternationalIssues 5, 2004
Note
1. Unpan1.un.org/intradoc/groups/public/documents/apcity/unpan020124.htm
Conventions:
OAS Inter-American Convention against Corruption (ratifed June 1997)
UN Convention against Transnational Organized Crime (ratifed July 2003)
A law against corruption and illicit enrichment in the public services was approved
in October 2004. The law defnes and provides sanctions for crimes including infuence
peddling, international bribery and appropriation of gifts to the state, which formerly
were not defned and therefore rarely prosecuted. The new law also provides detailed
requirements for public offcials to declare their assets.
The Offce of the Special Attorney for Ethics and Public Services, established by
law in 2002, became operational when the post was flled in 2004. The budget for the
offce was increased following a series of high-profle scandals in 2004 (see below), and
its remit expanded to include supervising implementation of the OAS Convention
against Corruption, and helping the public prosecutor with ongoing investigations into
allegations of corruption against four former heads of state.
Costa Rica
Trust in political institutions wanes
as the cover is pulled off corruption
Costa Rica, hitherto the most stable
democracy in Latin America, had been able
to boast low levels of corruption until a
recent spate of scandals drew the publics
attention to decades of shady financing
of politicians and parties. It now faces the
challenge of rebuilding public trust in its
political institutions.
The first scandal erupted in October
2004 when former president Miguel Angel
Rodrguez was forced to resign as Secretary-
General of the Organization of American
States less than three weeks after he had taken
up offce. He stepped down after allegations
implicated him in a bribery scheme
involving the French telecommunications
company, Alcatel. In mid-2004, details
emerged that Alcatel had been awarded a
contract to improve the countrys cellular
phone system allegedly after its officials
successfully bribed Jos Antonio Lobo,
Rodrguezs protg and a former director
of the state electrical company, Instituto
Costarricense de Electricidad (ICE), with a US
$2.4 million prize. Lobo said he had been
advised to accept the sum by Rodrguez,
who is reported to have then demanded 60
per cent of it.
Digging deeper into Alcatels dealings,
allegations emerged that it had attempted to
GC2006 02 part2 146 8/11/05 17:53:52
147
infuence previous Costa Rican politicians as
well. Jos Mara Figueres, a former president,
was forced to step down from his senior
position at the World Economic Forum in
Geneva in October 2004 following allegations
that he had received a US $900,000 bribe
from Alcatel during his years of public service.
And current President Abel Pacheco has been
asked to explain an undeclared US $100,000
donation to his presidential campaign, also
by Alcatel. In total, the authorities believe
that Alcatel, which enjoys a near monopoly of
telecommunications services in the country,
has paid more than US $4.4 million to Costa
Rican politicians and offcials.
Money fowed to party coffers from foreign
governments as well. Rodrguezs Panama-
based investment company, Inversiones
Denisse, allegedly received two payments of
US $500,000 from the Friendship Company,
which has strong ties to the Taiwan
government. When he was president, he is
alleged to have received US $200,000 from
Taiwan on two separate occasions and his
party, the Social Christian Unity Party, has
been questioned over donations worth US
$500,000 from companies with connections
to Taiwan.
A separate scandal embarrassed another
former president, Rafael Angel Caldern, who
is accused of receiving nearly US $450,000
from a US $40 million loan from the Finnish
government to subsidise the state-run social
security system (see Grand corruption in
Costa Rica, Chapter 2, page 26).
These scandals along with evidence
produced through monitoring campaign
spending suggest that the sums of off the
record money fowing to campaign chests
dwarf the amounts legally declared and
scrutinised by the electoral authorities.
Current legislation requires parties to
report donations received and campaign
spending, sets limits on both and forbids
parties from accepting money from foreign
sources. Most of these regulations were
violated in the recent elections in April
2002, according to TI Costa Rica, but the
authorities failed to sanction the abuses.
Civil society groups found it difficult to
obtain information about party fnancing
that should be made public.
The legislature responded by setting
up special commissions to investigate
irregularities in the fnancing of the recent
campaign and to draft reform bills to
tighten up the legal framework. This is a
start, but more is needed if the public is to
regain confdence in the countrys political
institutions, especially given the gravity of
the allegations against former presidents.
Levels of abstention are expected to
increase in the next elections. A poll taken
in the first quarter of 2005 showed that
one in two people does not support any of
the potential candidates one year ahead of
elections, compared with one in three people
in 2001 and one in fve in 1997.
1
According
to a second poll in January 2005, corruption
is the biggest public concern (37 per cent
of people polled put it frst), while violence
and crime were the primary concern of just
5 per cent. In July 2004 the opposite was
the case, with 26 per cent placing violence
and crime at the top of their worries, and
only 5 per cent expressing concern about
corruption.
2
Two positive developments have been
increased public involvement a massive
march against corruption took place in
October 2004 and the increased credibility
of the judiciary. The public prosecutor has
shown a great deal of independence from
political pressure in his investigations, and
polls by the University of Costa Rica show
increased confdence in the judiciary.
3
Access to information: the citizens
tool against corruption
Access to information has been confrmed as
a critical tool in the fght against corruption,
thanks to a series of rulings by the Consti-
tutional Court rejecting attempts to limit
access to public information. Prior to the
rulings, access was limited to what offcials
permitted.
One major advance was lifting bank
secrecy provisions. This was effected through
Country reports CoSTA RICA
GC2006 02 part2 147 8/11/05 17:53:52
Country reports 148
RoxanaSalazar(TransparenciaCostaRica)
Further reading
Casals and Associates, ElfnanciamientodelospartidospolticosenArgentina,Chile,CostaRicay
Mxico:LeccionesparaAmricaLatina (Financing of Political Parties in Argentina, Chile, Costa
Rica and Mexico: Lessons for Latin America), 2004, www.respondanet.com/spanish/boletines/
pdf/issue41.pdf
Carlos Eduardo Serrano Rodrguez, LacorrupcincomofenmenosocialenCostaRica (Corruption as
a Social Phenomenon in Costa Rica) (San Jos: Escuela de Administracin Pblica, 2004)
Roxana Salazar (ed.), Corrupcin:unavisindesdelasociedadcivil (Corruption: A View from Civil
Society) (San Jos: Editorial Fundacin Ambio, 2004)
Roxana Salazar, Mapasderiesgodecorrupcinenelsectorforestal (Corruption Risk Maps in the
Forestry Sector) (San Jos: Editorial Fundacin Ambio, 2004)
Jorge Vargas and Luis Rosero-Bixby, LaculturapolticadelademocraciaenCostaRica(The Political
Culture of Democracy in Costa Rica) (Nashville: Vanderbilt University, 2004), www.dec.org/
pdf_docs/PNADB407.pdf
Transparencia Costa Rica (TI Costa Rica): www.transparenciacr.org
Notes
1. ElFinanciero(Costa Rica), 28 March 2005.
2. Ojo (Costa Rica), 12 and 30 January 2005.
3. University of Costa Rica, Sondeo sobre corrupcin de las lites polticas costarricenses: la
ciudadana valora positivamente las acciones contra la corrupcin (Survey on Corruption by
Costa Rican Political Elites: Citizens React Positively to Actions against Corruption), Instituto
Investigaciones Sociales, Proyecto Investigacin en Opinin Pblica, November 2004.
a writ against public and private banks that
appealed to bank secrecy rules to prevent
access to information. The Constitutional
Court ruled that where the funds of political
parties or candidates were concerned,
banking secrecy did not apply. The ruling
made reference to a constitutional reform
in 2000 stating that public institutions
must be accountable and held up to public
scrutiny.
The newspaper La Nacin requested
information about non-contributory
pensions to the board of directors of the
social service agency, Caja Costarricense
de Seguro Social. The reporters wanted an
electronic copy of the database, including
the names of benefciaries and details about
their pension entitlement. The request was
denied in September 2002 on the grounds
that it was information about third parties
whose confdentiality should be respected.
The reporters filed a writ of habeas
data requesting the information, which
they argued is public. The court agreed in
March 2003, asserting that transparency
is a constitutional requirement for public
administration, and only limited exceptions
apply. The journalists were granted the infor-
mation as a result.
Not only should information be made
publicly available when requested, the court
ruled, but the government should actively
disseminate information that is in the public
interest.
While the courts attitude is important
in prising open public records, obstacles
continue to be put in the way of accessing
information and a law clearly delineating
the right to access information is necessary.
Several access to information bills exist in
draft form but have yet to be adopted.
GC2006 02 part2 148 8/11/05 17:53:52
149
Conventions:
Council of Europe Civil Law Convention on Corruption (ratifed June 2003)
Council of Europe Criminal Law Convention on Corruption (ratifed November 2000;
Additional Protocol ratifed May 2005)
UN Convention against Corruption (ratifed April 2005)
In September 2004, parliament passed a law on the fnancing of the presidential
campaign that prohibits campaign donations from foreign powers, state-owned and
public companies, unions, employers associations, civic organisations, public institutions
and companies partly or entirely owned by local governments. A signifcant innovation is
article 6, which requires candidates to declare the amount and sources of their campaign
funding. Although the law represents some progress towards a more transparent election
process, it sets no upper limit on campaign costs (see below).
The Prevention of Conficts of Interest in the Exercise of Public Offce Act (PCIA), passed
in October 2003, underwent two alterations in July 2004 and April 2005. The frst reduces
the amount of base capital a serving public offcial may retain in a company from 25
per cent to 0.5 per cent. Fines for violating the law were raised, and the list of liable
offcials expanded to include the Croatian president, the secretaries of the supreme and
constitutional courts, the deputies of secretaries of parliament and the government. The
second amendment closed a loophole on the declaration of gifts by including presents
of less than 500 kunas (US $80), presents to relatives, and national and international
awards. Since April, offcials are also obliged to report in their personal declaration forms
on how they acquired their assets and the sources of the funds with which they purchased
properties (see below).
In August 2004, the Ministry of Justice and the State Geodetic Administration launched
a 62 million (US $74 million) project to digitalise the countrys land register with the
twin aims of resolving hundreds of thousands of disputes over ownership, and drawing
up an accurate and more accessible land registry database. Assisted by EU grants and
a credit from the World Bank, the Ministry established 107 land registry departments
to work with 105 land registry courts with a view to settling the 351,046 cases then in
progress. The old system of registering property was cumbersome and offered a platform
for corruption by public offcials in land offces and the judiciary. By February 2005, the
new system had successfully resolved 62,000 property registry claims. The frst electronic
land register was expected to be published in June 2005.
1
An amendment to the law on the Offce for Prevention of Corruption and Organised
Crime (USKOK) in February 2005 gives the agency complete jurisdiction in all felonies
involving corruption and organised crime. County attorney offces and police will
conduct preliminary investigations into cases bearing the hallmarks of these offences. If
they establish reasonable suspicion, they will pass the case up to USKOK. It is hoped that
the amendment, which was sponsored by an USKOK working party set up in March 2004,
will make the offce more effcient by eliminating cases that are not under its jurisdiction.
Croatia
Country reports CRoATIA
GC2006 02 part2 149 8/11/05 17:53:53
Country reports 150
In 2004, USKOK investigated 117 cases of corruption of which 65 went to court, but only
20 ended in prison sentences.
2
Progress in implementing the 2003 Right of Access to Information Act was ftful
with high numbers of requests on one hand, but slipped deadlines and non-existent
reporting on the other. While the Central Offce for State Administration (COSA) did
issue regulations concerning the organisation of offcial records, which was a prerequisite
for implementation of the law, the government published a list of the bodies to which
the act applies six months late. The report on implementation of the law, published by
COSA in May 2005, showed that ministries had received a combined 4,302 requests in
2004, of which 16 were refused; other government offces received 1,174; and COSA itself
redressed 13 requests it had previously rejected.
3
The opposition criticised the reports
brevity, saying it did not provide adequate information on why requests were being
refused. One opposition member claimed that 180 municipalities had not handed in
their reports on the act and some had not even appointed information offcers to deal
with requests.
Political financing: a free-for-all
The presidential elections of January 2005
threw a spotlight on Croatias less than
transparent system of fnancing political
parties and their electoral campaigns.
Financing of the election process is based
on two laws: the Law on Political Parties,
which came into force in 1993; and the Law
on Financing of the Presidential Campaign,
adopted in September 2004 in preparation
for the presidential election of January 2005.
Given the lack of will by politicians to disclose
details of their own fnancial arrangements,
neither provides very satisfactory regulation,
although the more recent of them was
undoubtedly an improvement.
The Law on Political Parties disposes of
the entire topic in a few curt clauses. Article
19 describes the methods of processing
fnancial transfers that parties receive from
the national budget and article 20 obliges
parties to declare their sources of funds,
and their designated uses, within one
year. But the law does not prohibit specifc
types of fnancing (foreign governments,
corporations, unions, and so on), nor
determine a fgure above which a party is
obliged to make the donors identity known.
Nor are there limits on expenditure during
electoral campaigns.
The new Law on Financing of the Presiden-
tial Campaign regulates some of these issues.
It makes donations from foreign sources,
state-owned companies, unions and public
institutions illegal, while article 6 requires
candidates to publicly declare the amount of
funds used in campaigns, and their sources.
The law is an undoubted improvement on
the 1993 political party law, but it still fails
to set a ceiling on electoral expenditure.
Another major faw and one with which
the public is very familiar is that there is no
independent offce responsible for verifying
whether a partys declaration of funding
and sources is true, and no provisions for
sanctions in the event it proves false.
Consider the presidential campaign
of January 2005 when there was much
speculation in the media about the
expenditure of Jadranka Kosor, the HDZ
(Croatian Democratic Union) candidate.
4

Civil society, led by local NGOs GONG
(an election monitoring watchdog) and TI
Croatia, applied in January and February
2005 to Croatian National Television
(HRT) to publish the cost of promotional
videos and electoral advertising purchased
by all candidates. HRT refused, claiming
the information was protected by rules
of commercial confdentiality. This was
implausible, given that HRT is a state-owned
institution with a duty to make information
of public interest available under the Right
of Access to Information Act. HRT refused
to provide the same information to its own
Council, creating the impression that its
executives were trying to shield a candidate
GC2006 02 part2 150 8/11/05 17:53:53
151
from public scrutiny. HDZ later claimed
that Kosor had spent 6 million kunas (US
$979,000) on her campaign, but a market
research agency reportedly estimated her
expenditures to be twice as high,
5
although
this fgure in turn has been contested. Due
to public pressure, information on the
costs of television advertisement of the
campaigns of Kosor and other candidates
was offcially issued by Croatian National
Television in May 2005. But there is still
no independent regulator with powers to
investigate and verify the fnancial reports
of electoral campaign expenditure, and
to apply sanctions on those who violate
regulations.
Other anomalies exist in the auditing of
the states contributions to party fnances.
Though required to deliver budget
reports to a parliamentary committee
(Standing Orders and Political System), the
information is not published in the offcial
gazette. A number of specialist observers
claim that several parties do not meet even
this minimal legal requirement, but were
not sanctioned. Parties who fle on time
do so in the knowledge that their reports
will not be subject to an independent audit.
There is a clear need for root-and-branch
reform of the legal framework of party
and election fnance. The Law on Political
Parties needs revision, with particular
focus on the source and size of donations,
public accounting of the use of state and
private contributions and the creation of
an independent oversight body. Only then
will transparency be improved in what is
currently a murky electoral process.
6
The Imostroj affair
Since it was passed into law in October
2003, not a single high ranking public
offcial has been brought to book under
the Prevention of Conficts of Interest Act
(PCIA), although the public has become
increasingly concerned about corruption
and abuse of power by those in high
offce. This is only partly explained by the
resignation of the commission responsible
for implementing the PCIA in late 2004
due to internal political disputes, with the
result that it did not start work properly
until February 2005.
The most controversial confict of interest
allegation in 200405 was the Imostroj
affair, whose chief protagonist was the then
minister of foreign affairs, Miomir uul. The
local media alleged that uul took a bribe
from a friend and businessman in return
for pushing the cabinet to cancel the debts
of Imostroj, a company the man planned
to buy.
7
Although the State Attorney and
Audit Offces did not identify any confict of
interest, the public remained sceptical.
In parliament, the opposition Social
Democrat Party (SDP) and Croatian Peoples
Party (HNS) demanded the ministers
resignation. The majority Croatian
Democratic Union (HDZ) turned the tables
by appointing a committee to inquire
into conficts of interest by senior offcials
during the 200003 coalition government,
naming Zlatko Tomci, leader of the
Croatian Peasant Party (HSS) and former
parliamentary speaker, and Radimir Caci,
a former minister of public works and
member of HNS, as ripe for investigation.
Miomir uul, considered Prime Minister
Ivo Sanaders right-hand man and head of
the team negotiating Croatias entry to the
EU, resisted calls to step down for two more
months, but fnally resigned in January
2005, several days before the presidential
election. In his letter of resignation, he
defended his innocence but recognised
that the allegations had inficted some
political damage on the government. His
resignation was a demonstration of the
power that public pressure can exert when
conficts of interest arise real or perceived.
Nevertheless, he remained in charge of
coordinating negotiations with the EU for
some time after.
While the allegations against uul fell in
the fallow period before the commission for
investigating conficts of interest resumed
work, the case demonstrated Croatias bare-
knuckle approach to allegations of political
impropriety: when accused of corruption,
Country reports CRoATIA
GC2006 02 part2 151 8/11/05 17:53:53
Country reports 152
AnaFirst(TICroatia)
Further reading
Davor Derencinovi, CommentsonUNConventionagainstCorruption(Zagreb: University of Zagreb
Law Faculty, 2005)
Viktor Gotovac and ord
e Gardaevi, RegulationofFreeAccesstoInformation(Zagreb: TI Croatia,

2004)
Josip Kregar, Financing of Political Parties and Election Campaigns, CollectedPapersofZagreb
LawFaculty No.5/2004(Zagreb: University of Zagreb Law Faculty, 2004)
Josip Kregar, IntroductiontotheNationalIntegritySystemCountryStudy:Croatia(Zagreb: TI Croatia,
2004)
TI Croatia: www.transparency.hr
Notes
1. www.pravosudje.hr
2. Transparency International Croatia, Analysis of National Integrity System: Croatia 2005
(Zagreb: TI Croatia, 2005).
3. www.sabor.hr/Download/2005/03/22/IZVJESCE.pdf
4. www.gong.hr/eng/Downloads/Predsj_05_izborniproces_en.pdf
5. www.index.hr
6. For further discussion of this, see Josip Kregar under Further reading.
7. InternationalHeraldTribune (France), 5 January 2005.
Conventions:
Secondary legislation implementing the Law on Transparency and Access to Public
Information has been drafted by a working group comprising the attorney general,
auditor general, prosecutor general, defence minister, secretary general for national
security, national archive, commission for women, tax and telecommunications offces
and civil society representatives. The law, which entered into force in May 2004, requires
all public entities, government contractors, trade unions, and public secondary and
higher education establishments to make information public. The guiding principle of
the law is that all public sector information is the property of the general public, with
a few exceptions that are specifed in the law. The law was drafted by the Ecuadorean
Association of Newspaper Publishers.
accuse back. In spite of the PCIA and recent
amendments to it, the technique appears
to work. Though he was forced to resign,
the allegations against uul have not
been investigated and therefore cannot be
proved either way.
Ecuador
GC2006 02 part2 152 8/11/05 17:53:53
153
The democratic crisis in Ecuador
A constitutional crisis that culminated
with the resignation of President Lucio
Gutirrez has forced the country to rethink
its institutions, particularly the way in which
the politicisation of the judiciary had left the
country vulnerable to corruption.
The crisis began a year after Gutirrez took
offce in January 2003. A former coup leader,
he had run for offce on a platform of anti-
corruption and social reform pledges. His
victory was all the more surprising since his
campaign, supported by indigenous groups,
had succeeded in dislodging the countrys
traditional parties of power.
However, with little political experience
and in a state with a recent history of presi-
dents failing to reach the end of their terms
of offce, Gutirrez soon began to barter with
his former electoral opponents to drum up
support for his policies.
In December 2004, the government
managed to gain the 52 legislative votes
needed to dismiss via a resolution of
unconstitutionality the 31 Supreme Court
judges, and to form a new court. Congress
also resolved that the National Judicial
Council, which is responsible for the
administration of the justice system, would
be restructured within 15 days, and a shortlist
of three candidates for the post of prosecutor
general would be drawn up. Congress also
re-established its powers to impeach and
censure members of the Supreme Court
and National Judicial Council. These powers
had been rescinded following a process of
popular consultation in 1997.
Gutirrezs response to these decisions was
to affrm that the existing court members
would stay in place for three months, during
which time the government would try to
push through a political reform supporting
the changes making manifest the attempts
by the executive branch to exert infuence
over the judiciary. The Constitutional Court
and Supreme Electoral Court were also
reconfigured in the governments favour
during this period.
These decisions by Congress violated
the constitution in a number of ways.
Article 202 grants tenure to Supreme Court
judges and was not respected; Supreme
Court vacancies cannot be flled through
negotiations between political parties; and
the independence of the judiciary must not
be violated by political parties seeking to
further their own interests.
The attempts to stack the judiciary along
partisan lines unleashed a crisis of democracy.
People took to the street in protest. Civil
society groups including Corporacin
Latinoamericana para el Desarrollo
(the national chapter of Transparency
International) and Participacin Ciudadana
called on car drivers to toot their horns as
they drove past the court. This generated
interest and awareness about themes that
are not usually a matter of popular interest,
such as the rule of law and the separation
of powers.
As the number of protesters swelled,
the governments popularity ratings
plummeted. The UN special reporter for the
independence of judges and lawyers visited
Ecuador and described the destitution
and replacement of Supreme Court,
Constitutional Court and Electoral Court
magistrates as unconstitutional. The reporter
called for respect for the UN standard on the
need for the judiciary to be independent of
political infuence, and for transparency in
the selection of magistrates.
By April, the political situation had
become unsustainable in Quito where
most of the protests occurred. Popular
discontent converted into outrage when the
de facto court annulled judicial processes
for embezzlement that were being launched
against former president Abdal Bucaram,
as well as corruption charges against
former president Gustavo Noboa and his
former vice-president, Alberto Dahik. At
this point, the focus of protest changed
from promoting respect for the rule of law
to demands for Gutirrezs resignation. By
April, demonstrators were demanding not
just the resignation of the president, but of
the entire political class.
Country reports ECUADoR
GC2006 02 part2 153 8/11/05 17:53:54
Country reports 154
AndrsTobar(CorporacinLatinoamericanaparaelDesarrollo,TIEcuador)
Further reading
Corporacin Latinoamericana para el Desarrollo (TI Ecuador): www.cld.org.ec
Conventions:
Council of Europe Civil Law Convention on Corruption (ratifed October 2001)
Council of Europe Criminal Law Convention on Corruption (ratifed October 2002)
OECD Anti-Bribery Convention (ratifed December 1998)
UN Convention against Transnational Organized Crime (ratifed February 2004)
In May 2005, parliament passed a law that criminalises accepting a bribe. A company
found guilty of accepting a bribe can be sanctioned, but only if the bribe has caused
damage to another company. The law was expected to come into effect in July 2005.
1
An amendment to the public procurement act came into effect in February 2005 ruling
that a public contract can be signed only 21 days after a decision has been made and
the bidders have been informed, allowing the latter time to appeal the decision. It also
requires that all public procurement contracts and any decisions made prior to awarding
the contracts be put in writing. Both changes open procurement-related decisions to
greater scrutiny. The government is preparing further amendments by January 2006 to
meet the requirements of the European Court of Justice.
In March 2005, the police formed a special unit for pre-trial investigation of economic
crimes, including cases of alleged corruption in Helsinki and its surrounding areas. Prior
to its formation, units investigating alleged economic crimes in Helsinki municipality were
severely overstretched. In 2004, 582 cases were pending in the municipality alone.
2

Protesters organised loosely and peace-
fully around Quito, setting up platforms
for people to express their discontent and
suggest ways forward. Though not organised
along party lines, these informal gatherings
were suffcient to convince Gutirrez to step
down. They also demanded that Congress
take stock of the ways it had overstepped the
boundary with the judiciary, provoking the
crisis in the frst place; and that the judiciary
seek a constitutional way to review the
independence of its members in response
to concerns by society.
Street protests disappeared soon after the
president stepped down, and political parties
have since regained their position at the
centre of public life, though it remains to
be seen how they will respond to public
demands for increased probity and
transparency in their functions. The new
government, headed by Gutirrezs former
vice-president, Alfredo Palacio, is expected
to introduce deep political reforms,
including changes to government structures
that are particularly vulnerable to corruption.
There are high expectations that civil
society, which was so active in bringing
about the change in government, will be
allowed to play a significant role in
proposing and debating the badly needed
reforms in the fields of corruption and
transparency.
Finland
GC2006 02 part2 154 8/11/05 17:53:54
155
Blowing the whistle on cartels
Finland is routinely ranked among the
least corrupt countries in the world in
Transparency Internationals Corruption
Perceptions Index, and a public debate began
last summer on whether graft was an issue
in the country at all. Classic examples of
corruption generally entail petty bribery of
offcials. For example, an employee of the
Directorate of Immigration was sentenced
in February 2005 for accepting payments
of 12,000 (US $15,500) over four years
from immigrants seeking to speed up
their residency applications.
3
Similarly, an
employee of the Defence Staff was prosecuted
for accepting free tickets worth more
than 1,500 (US $2,000) to the opera, golf
tournaments and other events from a supplier
of offce equipment.
4
The highest-profle
corruption case in recent years involved the
Finnish Maritime Administration and came
to a close in July 2004 when the Supreme
Court decided not to examine an appeal. The
head of the administration and two other
managers were sentenced in August 2003 to
conditional discharge for bribery through
accepting trips and other gifts, and using
credit cards given them by a client.
5
Although bribery through direct monetary
gifts is undoubtedly rare, there is increasing
evidence of Finnish companies forming
cartels. While cartels are not necessarily a
form of corruption, they undermine the goal
of open, public tenders. Their possible link to
corruption is two-fold. First, the formation
of cartels involves collusion, which is a
deception of the public. Collusion results in
public tenders being manipulated and public
funds being wasted. Second, companies
may use corrupt means to secure cartel
arrangements, for example by bribing insiders
of the contracting agency to get confdential
information on acceptable prices.
In May 2004, an amendment to the
competition law came into force to fulfl EU
requirements.
6
Under the new legislation,
if a company blows the whistle on a cartel
in which it has participated, it can avoid
a fne, or see its fne reduced. The law has
proved unusually successful in uncovering
the use of cartels. The frst frm to denounce
a cartel was a timber products company,
UPM-Kymmene, which admitted in May
2004 to participating in a price-fixing
agreement with forest sector giants Stora
Enso and Metsliitto. EU investigators raided
the latters offces looking for evidence of
agreements made by company executives on
price and production quotas during informal
meetings.
7
The investigation is ongoing.
In another case, the Finnish Competition
Authority ruled in March 2004 that seven
companies controlling 70 per cent of
the tarmac market had agreed on prices,
participation in public tenders, customers
and geographical sectors from 1994 to 2002,
at an annual cost to the public purse of 30
million (US $39 million).
8
A number of
municipalities have begun legal action to
reclaim the wasted funds and the Market
Court (a special court hearing market law,
competition and public procurement cases)
is investigating.
According to Matti Purasjoki, former
head of the Finnish Competition Authority,
price cartels have been a standard business
practice for decades, having originated in
the post-war reconstruction period. In the
mixed economy era, the state encouraged
companies to collaborate, primarily to
compete against foreign frms. Price cartels
and monopolies became illegal in 1992
when Finland joined the EU, but the culture
persists.
9
In September 2004, the European Com-
mission fned the metals and technology
corporation Outokumpu 36 million (US $46
million) for participating in a price cartel for
copper pipes with KME, Sanco, Boliden, IMI,
Mueller, Halcor SA, HME Nederland BV, KKE
and Wieland Werke from 1988 to 2001.
10

According to the Commission, the cartel
was a traditional one in which members
colluded on production quotas, market
segments, target prices and price rises during
informal meetings at airports.
11

I n a c c o r d a n c e wi t h OE CD
recommendations,
12
Juhani Jokinen, head
of the Finnish Competition Authority, has
Country reports FINLAND
GC2006 02 part2 155 8/11/05 17:53:54
Country reports 156
SanteriEriksson(TIFinland)
Further reading
Corruption:ARisktotheEffectivenessofBilateralDevelopmentCooperation (Helsinki: State Audit
Office, Performance Audit Reports 77/2004, 2004). Abstract (in English): www.vtv.fi/
chapter_images/2985_772004_Corruption.pdf; document in full (in Finnish): www.vtv.f/
chapter_images/3664_772004.pdf
proposed that executives incriminated in
price fxing ought to be personally liable since
the current system of fning has not deterred
them from forming cartels. Trade and Industry
Minister Mauri Pekkarinen confrmed that
the amended law had contributed towards
rooting out cartels, but more severe penalties
were required for those who participated. In
March 2005, ministries were considering a
proposal to punish executives as individuals.
In addition to a lack of appropriate penalties
for forming cartels, there is no clear system for
individuals to denounce them. Companies
brought all the recent revelations to public
attention under the amended act; a system
for individual whistleblowers would further
strengthen the authorities ability to uncover
other cartels.
Finnish companies drop no-bribes
policy abroad
Bribery is as rare as corruption within
Finlands borders, but there is substantial
evidence that Finnish companies use bribes
when doing business abroad, particularly in
Russia and the Baltic States, as highlighted
by the 2002 report on the application of the
OECD Anti-Bribery Convention.
13
A guidebook to doing business in Russia,
entitled Takilikakvenlisttapakulttuuria
suomalaisille(A Little of This, a Little of That:
Russian Customs for Finns), published by the
Finnish-Russian Chamber of Commerce in
2003, outlines in detail instances in which
bribes may be paid and gives examples of
their size and kind. In January 2005, the
guidebook was taken off the market following
widespread media criticism. The fact that
such a book had ever been published by a
reputable trade organisation funded by the
government scandalised the public, as it
openly acknowledged that Finnish companies
break the law when operating abroad.
A sales manager of Wrtsil, a ship power
supplier, is currently under investigation
for alleged bribery amounting to 1 million
(US $1.3 million) in deals with a Swedish
shipbuilding company, Rederi AB Gotland,
between 1999 and 2001. Wrtsil maintains
that the company was misled and the sum
was not intended for a private individual.
14

Another scandal erupted after it was alleged
that Instrumentarium Corporation Medko
Medical had bribed offcials in a 32 million
(US $41 million) deal to supply medical
equipment to Costa Rica that had been
supported by 12 million (US $15 million)
in interest subsidies from the Ministry of
Foreign Affairs aid budget (see Chapter 2,
page 26). According to Costa Rican media,
a 6.5 million (US $8.5 million) commission
was paid to a company called Fischel and
ended up in the accounts of the heads of
the Costa Rican social security offce and
the family of former president, Rafael ngel
Caldern.
15
When Finnwatch, an NGO that monitors
Finnish company activities overseas,
demanded an inquiry, the Ministry of
Foreign Affairs opened an investigation. On
4 March, Foreign Trade and Development
Minister Paula Lehtomki declared that the
purchasing price had been fairly high and
that the quality of the equipment delivered
by Instrumentarium was not 100 per cent up
to scratch.
16
The case demonstrated that the
activities of independent watchdog agencies
like Finnwatch need to be strengthened and
that monitoring mechanisms need to be
institutionalised in all state-aided schemes
involving Finnish companies abroad to
ensure public funds are not misused.
GC2006 02 part2 156 8/11/05 17:53:55
157
Olli Menp, Hallintolaki ja hyvn hallinnon takeet (Administrative Procedure Act and the
Guarantees of Good Administration) (Helsinki: Edita, 2003)
Organisation for Economic Co-operation and Development (OECD), EconomicSurveyofFinland
2004 (Paris: OECD, 2005), abstract available at www.oecd.org/document/26/0,2340,en_2649_
201185_33750554_1_1_1_1,00.html
PreventingCorruption.AHandbookofAnti-CorruptionTechniquesforUseinInternationalDevelopment
Cooperation (Helsinki: Ministry for Foreign Affairs, 2002), global.fnland.f/english/publications/
pdf/preventing_corruption.pdf
ValuesintheDailyJobCivilServantsEthics.AHandbookfortheStateAdministration (Helsinki:
Ministry of Finance, State Employers Offce, 2005), www.vm.f/tiedostot/pdf/en/91383.pdf
Notes
1. HelsinginSanomat (Finland), 18 May 2005.
2. HelsinginSanomat (Finland), 24 June 2004.
3. HelsinginSanomat(Finland), 19 February 2005.
4. HelsinginSanomat (Finland), 17 December 2004.
5. HelsinginSanomat(Finland), 30 August 2003.
6. The law amended the 1992 legislation on controlling competition (Laki kilpail-
unrajoituksista).
7. HelsinginSanomat (Finland), 26 May 2004.
8. TekniikkaandTalous(Finland), 31 March 2004.
9. See the speech by Matti Purasjoki and Juhani Jokinen, available at www.kilpailuvirasto.f/cgi-
bin/suomi.cgi?sivu=kilpailupolitiikan-odotukset.html
10. www.eureporter.co.uk, 3 September 2004.
11. HelsinginSanomat(Finland), 4 September 2004.
12. OECD Economic Survey, Finland 2004.
13. OECD Directorate for Financial, Fiscal and Enterprise Affairs: Finland,Phase2,Reporton
ApplicationoftheConventiononCombatingBriberyofForeignPublicOffcialsinInternational
BusinessTransactionsandthe1997RecommendationonCombatingBriberyinInternationalBusiness
Transactions (Paris: OECD, 2002).
14. HelsinginSanomat (Finland), 17 November 2004.
15. HelsinginSanomat (Finland), 13 October 2004.
16. STT (Finland), 4 March 2005.
Conventions:
Council of Europe Civil Law Convention on Corruption (signed November 1999; not yet
ratifed)
Council of Europe Criminal Law Convention on Corruption (signed September 1999; not
yet ratifed; Additional Protocol signed May 2003; not yet ratifed)
OECD Anti-Bribery Convention (ratifed July 2000)
UN Convention against Corruption (ratifed July 2005)
In July 2005, a law was passed to align the judicial system with EU legislation in the
following areas: improving access to cross-border justice; introducing the concept of
international repeat offences in the feld of counterfeiting; rules on combating corruption
France
Country reports FRANCE
GC2006 02 part2 157 8/11/05 17:53:55
Country reports 158
in the private sector; and the freezing of assets and the gathering of evidence. These new
provisions should reduce the impunity enjoyed by corrupt offcials who hide the evidence,
or proceeds of their crimes, abroad or in France.
Two laws passed in March 2005 authorise the approval of the May 2000 Convention on
Mutual Assistance in Criminal Matters between the member states of the European Union
and its protocol on banking information signed in October 2001.
1
The convention, initiated
by France, aims to make cross-border judicial cooperation more rapid and fexible,
while the protocol gives the judicial authorities improved access to banking information,
an important tool for increasing the effciency of transnational criminal investigations
and the detection of money laundering. The laws should facilitate cooperation between
judicial, police and customs authorities in other EU states and make the prosecution of
cross-border crimes, including corruption, easier. An earlier law (loiPerbenII), passed
in March 2004, introduced a number of changes in the criminal justice process. It will
strengthen the investigative powers of the police and public prosecutors, provided that
the case is classifed as an investigation into organised crime, and introduces a new
mechanism for determining penalties. This could have an impact on offences involving
corruption, as the penalties imposed are less likely to be reduced after a certain period of
time.
An interdepartmental directive issued in October 2004 outlined plans announced in late
2003 to create and operate a central anti-corruption squad within the criminal police.
Composed of some 20 offcers specially trained in economics and fnance, the squad will
operate in conjunction with the economic and fnancial branches of the national police
and the gendarmerie.
A circular from the justice minister to public prosecutors and judges in June 2004 set
out the principle that the fght against corruption is a fundamental element in the fght
against economic and fnancial crime. It reaffrmed the direction of Frances criminal
policy in relation to the detection, prosecution and punishment of corruption. Some of
the circulars main points reaffrm that: public sector employees and auditors must inform
immediately the public prosecutors offce of any evidence of corruption; prosecutors
must investigate with care all complaints of corruption and follow through quickly
with criminal proceedings; and the state reserves the right to confscate all proceeds of
corruption.
Public procurement and the Ile de
France trial
The Ile de France trial, one of the biggest
trials involving alleged corruption in public
procurement ever held in France, opened in
March 2005. Seven years of investigations
were required to expose an extensive system
of corruption in procurement contracts for
the construction or renovation of 300 of
the 470 high schools in the Ile de France,
the region around Paris. The case involves
47 defendants, who if found guilty face up
to 10 years in prison for collusion, conceal-
ing corruption and influence peddling.
The accusations centre on allegations that
companies paid major political parties to
win contracts to renovate schools around
Paris. The defendants include a former coop-
eration minister, an ex-president of the Ile
de France regional council and a former
labour minister, as well as the former treas-
urers of three political parties and business
executives.
2
Following a decision by the Ile de
France regional council to upgrade the
school facilities, it reportedly signed 114
10-year construction and maintenance
contracts valued at close to 1.4 billion
GC2006 02 part2 158 8/11/05 17:53:55
159
(US $1.68 billion) in total, with only fve
multinational companies. It was alleged
that these companies made an unoffcial
and secret deal, involving the payment of
2 per cent of the value of the contracts to
various political parties: 1.2 per cent to the
ruling Rassemblement Pour la Rpublique
and 0.8 per cent to the Socialist Party, with
smaller allocations to the Republican and
Communist parties. The payments took the
form of apparently legal gifts to fnance the
parties campaigns. Between 1991 and 1996,
some 30 million (US $36 million) were paid
out under the scheme.
The scandal highlights the role played by
the media in denouncing corruption. Having
assumed a surveillance and detection role in
the feld, the media constitutes a major power
centre in its own right, and its revelations
frequently lead to judicial enquiries. The
public reaction to the Ile de France trials
illustrates how opinion has become more
sensitive to corruption than it used to be.
Elected representatives now proclaim their
willingness to fght corrupt practices.
As a consequence, a number of standards,
mechanisms and bodies have been created
since the mid-1990s, using EU legislation as
a model, to control and monitor the imple-
mentation of public works, and sanction
corruption. Moreover, financial authori-
ties, such as the Cour des comptes (Court
of Auditors) and the Chambres rgionales
des comptes (Regional Courts of Accounts),
are playing an increasing role in corruption
prevention by issuing frequent notices on
the management of private and state-owned
companies and, more generally, on the
management of public funds. Regulatory
authorities have also played a role. The regu-
latory authority for telecommunications, for
example, has encouraged the sector to open
up to competition and adopt regulations to
increase transparency.
The new procurement code that came
into force in January 2004 restates the
principle of freedom of access to public
tendering and equal treatment of bidders,
and includes stricter publication rules. The
threshold beyond which publishing bids
is mandatory has been drastically reduced
from 90,000 (US $110,000) in the previous
code to the ceiling required for very small
purchases by a public body which is usually
around 10,000 (US $12,000) and depends
on the size of the body. An added transpar-
ency measure requires public purchasers,
including local governments, to publish
details of all contracts signed in the past
year, including the name of the contractor.
The courts do not hesitate to cancel
contracts or procedures that do not comply
with these principles. Bidders who fail to
win contracts are able to find out why,
and may refer the matter to court if the
process appears improper. Frances highest
administrative court, the Conseil dtat,
recorded an increase of 35 per cent in the
number of suits fled in the feld of public
contracting in 2004: 180 cases were recorded
in that year as compared to 133 in 2003.
The new procurement code was followed
by the development of publicprivate
partnerships in June 2004, making it easier
to involve private companies in public sector
projects. Though an interesting development,
Transparency International France, among
other civil society organisations, have
criticised such contracts for being vulnerable
to fnancial abuse, inter alia because of their
complexity, which increases the risks of
corruption. But they, too, are supposed to be
subject to the principles of transparent, open
and competitive bidding, and the allocation
procedure for such contracts is strictly
regulated and monitored by a judge.
The public contracting system in place
when the Ile de France procurement
was negotiated has now effectively been
superseded. The introduction in the 1990s
of the offence of favouritism also played a
preventive role in fghting corrupt practices
in contracting.
3
Nevertheless, the continuing
importance of negotiated contract procedures
closed public bids allowed under article
35 of the new procurement code could
increase the risk of corruption.
The 2004 procurement code has not had
a direct impact on reducing corruption, but
it has streamlined and simplifed the rules.
Country reports FRANCE
GC2006 02 part2 159 8/11/05 17:53:55
Country reports 160
AntoineGenevois(Docteurendroit,UniversitParis-Sorbonne,
memberoftheLaboratoiredeDroitEconomiqueFrancophone)
Further reading
Thierry Beaug, Lenouveaucodedesmarchspublics.Commentairesetanalysedesrformesde2001et
2004 (The New Public Procurement Code. Commentaries and Analysis of the 2001 and 2004
Reforms) (Paris: AFNOR, 2004)
Daniel Dommel, Facelacorruption.Peut-onlaccepter?Peut-onlaprvenir?Peut-onlacombattre? (Can
Corruption be Accepted? Can it be Prevented? Can it be Fought?) (Paris: Karthala, 2003)
Bruno Fay and Laurent Olivier, Lecasierjudiciairedelarpublique (The Republics Criminal Record)
(Paris: Ramsay, 2002)
Antoine Genevois, Leffcacitinternationaledesdroitsanti-corruption(The International Effectiveness
of Anti-corruption Laws), 2004, PhD thesis pending publication by Presses Universitaires de
la Sorbonne
GRECO (Group of States against Corruption), Council of Europe, EvaluationReportonFrance,
SecondEvaluationRound,2 December 2004, available at www.greco.coe.int
Eva Joly and Laurent Beccaria, Est-cedanscemonde-lquenousvoulonsvivre? (Is This the World in
Which We Want to Live?) (Paris: Les Arnes, July 2003)
TI France: www.transparence-france.org
Notes
1. See http://europa.eu.int/scadplus/leg/en/lvb/l33108.htm
2. BBC News, 21 March 2005.
3. This offence was introduced into French law in 1991 and its application was extended in
1995.
Conventions:
Council of Europe Civil Law Convention on Corruption (ratifed May 2003)
Council of Europe Criminal Law Convention on Corruption (signed January 1999; not yet
ratifed)
ratifed)
Hence the ethical conduct of both public
purchasers and contracting parties should
receive more prominence. Transparency
International France has encouraged elected
representatives to ask bidding companies to
sign a no-bribes transparency pact, through
which they pledge not to offer bribes, and
to require public purchasing agencies to
subscribe to a code of conduct. Although
it is true that public outcry against political
party fnancing through public procurement
contracts has motivated change, there is still
a great deal to be done. The mechanisms
for the allocation of public procurement
contracts need to be monitored, particularly
when contracts are part of major projects.
This scrutiny should be extended to
subcontractors.
Georgia
GC2006 02 part2 160 8/11/05 17:53:56
161
Two sets of laws adopted as part of a package on judicial reform are intended to augment
the independence of the courts and strengthen the governments ability to prosecute
corrupt judges. A law passed in February 2005 elaborated the governments disciplinary
response to violations by judges. Two other laws adopted in December 2004 raised the
salaries of judges in the Supreme Court and the Constitutional Court to the level of state
ministers. Higher salaries were one of the new governments most important measures
for fghting corruption among civil servants.
Parliament adopted a revised tax code in December 2004. Though too early to assess, the
new code should reduce corruption by streamlining the existing system and increasing
the capacity and incentives for tax payment. Changes include the introduction of a fat
tax rate of 12 per cent, replacing a higher progressive income tax and potentially reducing
the tendency of wage earners to hide their income. However, the new code could also
contribute to Georgias smuggling problem. Large increases in tax up to 180 per cent on
cigarettes and 67 per cent on alcohol were intended to boost state revenues by 95 per
cent, but excise returns from January and February 2005 are down, indicating increased
smuggling. Smuggling is a critical issue in Georgia and there are indications that senior
offcials have been involved.
1
Also in December, Minister of Education Alexandre Lomaia pushed through parliament
a law that standardises the university admissions system and is aimed at eliminating
the practice of students securing their place in college by paying bribes. State support
for universities will now depend on the number of students admitted, reducing the
opportunities for rectors to keep as personal income arbitrary sums from the ministry. A
number of rectors have been fred or have resigned amid a wave of corruption charges
since the law was adopted.
A presidential decree in January 2005 established an anti-corruption working group
with the goal of developing an anti-corruption strategy. Though fghting corruption has
been one of the governments main aims, it has notably lacked any targeted legislative
or policy initiatives. The new working group, composed of members of government
and NGOs, falls under the auspices of the recently established Anti-Corruption Policy
Coordination Department in the National Security Council and is required to come up
with a strategic plan by June 2005 (see below).
Adhering to Georgias anti-
corruption initiatives
President Mikheil Saakashvili, who led the
campaign to remove Eduard Shevardnadze in
the rose revolution of 2003, has successfully
altered perceptions of corruption in Georgia.
According to TIs Global Corruption
Barometer 2004,
2
Georgia saw the highest
increase in optimism of all countries surveyed
that corruption would diminish over the
next few years. Recent polls, however,
suggest that Saakashvilis popularity is
waning and critics have accused him of
assuming too much power, and weakening
both parliament and the judicial system.
The unexpected death in February 2005 of
Prime Minister Zurab Zhvania, considered
the only counterweight in government
to the president, further destabilised the
country. Zhvania had pushed for a coherent
anti-corruption strategy and his demise has
lessened the momentum for reform.
One problem is the sheer number
of anti-corruption recommendations
to which the government has made a
commitment without, in the view of
Country reports GEoRGIA
GC2006 02 part2 161 8/11/05 17:53:56
Country reports 162
domestic NGOs, making much progress.
None of its recommendations has been
institutionalised, while individual ministries
reform themselves at their own pace. The
government has not instituted national-level
anti-corruption initiatives, such as reform of
the civil service, the streamlining of existing
anti-corruption laws or the creation of an
independent anti-corruption agency. It
took steps in this direction by creating a
Ministry of Economic Reform and an Anti-
Corruption Policy Coordination Department
at the National Security Council, and by
reviving the formerly disbanded Public
Service Bureau. The latter, re-established
after the state transferred to a ministerial
system of government, envisions resolving
the overstaffng and low wages that increase
the frequency of bribe-taking and corruption
in the public sector.
Georgia enjoyed unprecedented levels
of international support in 2005. President
George W. Bushs visit in May 2005 was
a triumph for bilateral relations, and the
US Millennium Challenge Corporation
has signed a compact with Tbilisi worth
US $295.3 million. Anti-corruption goals,
however, are not tied to aid or any other
leverage mechanisms, which diminishes
the incentive to implement them. Georgia
has signed a partnership agreement with
the G8 on promoting transparency and
combating corruption, implementing the
recommendations from the Council of
Europes Group of States against Corruption
(GRECO) and the OECDs Anti-Corruption
Network for Transition Economies. It also
presented a report describing its anti-
corruption achievements and outlining its
future activities in the feld at an EU donor
meeting.
Compliance with these documents has
not been as brisk as their adoption, however.
In the governments defence, anti-corrup-
tion targets have been overshadowed by
the campaign to restore Georgias territorial
integrity through the reintegration of South
Ossetia and Abkhazia. The documents,
moreover, are vague, set forth contradic-
tory information and lack specifc details on
timeframe or implementation, making them
wish-lists more than feasible plans.
Whether the new anti-corruption working
group will be able to establish a workable
anti-corruption plan remains to be seen.
Though established in mid-January 2005,
it met for the frst time in March, and only
after its NGO members published an open
letter urging it to convene. The working
group covers much the same ground as
other anti-corruption initiatives, with the
signifcant difference that it must come up
with deadlines for activity completion and
details about the responsible institutions,
expected outcomes and fnance required.
This attention to specifcs may ensure a more
constructive plan for developing a national
policy to curb corruption, but the group had
made little progress by April 2005.
Plea bargains: new possibilities for
corruption?
The governments use of plea bargains to
confiscate illegally obtained funds from
public offcials was welcomed as a valuable
new tool in the fght against corruption when
introduced in February 2004. Georgians are
now considering the ethical dimension
of plea bargains and asking whether the
amendment that made them possible truly
upholds the rule of law.
In spring 2004, the Saakashvili admin-
istration went after a number of offcials
known to have taken millions of dollars in
some of the countrys most famous cases of
public sector graft. But the idea behind the
campaign to penalise individuals protected
by the so-called impunity syndrome is
viewed by the more cynical as a means of
raising additional funds for the budget.
Plea-bargaining, a deliberately vague
addition to the Criminal Procedures Code,
allows a defendant to cooperate with the
investigation rather than plead guilty to a
crime. While a guilty plea means automatic
jail time, cooperation is an informal
arrangement whose outcome is decided by
offcials in the prosecutors offce.
GC2006 02 part2 162 8/11/05 17:53:56
163
Increasingly, the issue has developed
into a debate about methods and goals.
Saakashvilis administration argues that it has
held corrupt offcials accountable, but others
including the infuential NGOs Georgian
Young Lawyers Association and Institutional
Reform and the Informal Sector (IRIS) claim
that lack of information on plea bargains and
the arbitrary manner in which they are being
handled creates far greater concern about the
protection of civil liberties.
Crucial details in plea-bargaining cases,
including the identity of the individuals
in question, the number of cases and the
sums of money restored, are only partly
documented at present. Since cases are
settled arbitrarily by prosecuting offcials, it
is evident that plea-bargaining could lead to
other forms of corruption.
The prosecutors offce created a special
fund from the monies it recovered
from corrupt officials for use by the law
enforcement bodies. But the funds division
between these bodies, and the total amount
involved, are both unknown. One estimate
puts the seized funds at 55.7 million lari
(US $31 million) from January to November
2004.
3
Nor are there accurate figures on
how many cases have been heard since the
amendment came into force: the prosecutors
offce puts the number at 100, but lawyers
involved say it is closer to 1,000. Even when
a case has ended, information is no easier
to obtain, leading people to question the
administrations secrecy. There is no system
of monitoring and none of the information
is transparent, said David Usupashvili, head
of IRIS and chairman of the Republican
Party of Georgia. The procedural rules are
meaningless and, as a result, human rights
violations and levels of corruption will only
increase.
The government recently made a further
amendment to the criminal procedures code
that somewhat improves the existing law.
Though informal discussions had taken place
with a view to removing the amendment
altogether, the current compromise has
been to reduce pre-trial detention from
a maximum of nine to four months from
January 2006. Five months is a signifcant
difference for defendants in Georgia, where
prison conditions are notoriously squalid.
Indeed, pre-trial detention is used to scare
people into paying their way out of jail before
being sentenced. Moreover, the authorities
use preliminary detention as a sign of guilt;
offcials make statements accusing detainees
of corruption before their case has even been
heard.
Corruption is down, but crime is not
The most visible sign of Georgias progress
this past year was the overhaul of the police
patrol force, the largest of the interior
ministrys many units, in August 2004.
Equipped with American-style uniforms,
modern cars and special-issue equipment at a
total cost of US $4.7 million, the new force is
a ubiquitous and oddly juxtaposed presence
on Tbilisis gently decaying streets.
Police reform is no small feat in Georgia
where law enforcement ranked as its most
corrupt institution in TIs Global Corruption
Barometer 2004. Extortion fourished under
the previous system in which a bloated force
was forced to survive on wages as low as US
$20 per month. Prior to reform, the ministry
employed 54,000 personnel, or one offcer
per 89 civilians, a figure more reflective
of a police state than a democracy. As MP
Giga Bokeria said, The state was giving the
policemen torn uniforms and a gun, and
telling them to shakedown drivers and bring
a share to us.
4
The ministry drastically cut personnel
to one third of its previous size, reducing
the officer:civilian ratio to 1:214; fired
all employees suspected of corruption;
and offered signifcant salary raises to the
remaining staff. Other moves included
streamlining the ministrys internal
organisation and the transfer of two of the
units most notorious for corruption, the
fnancial police and civil registration, to the
ministries of fnance and justice respectively.
In July 2004, it abolished four units with
overlapping responsibilities the transport
Country reports GEoRGIA
GC2006 02 part2 163 8/11/05 17:53:56
Country reports 164
DariaVaisman(TIGeorgia)
Further reading
Georgian Opinion Research Business International (GORBI), CorruptionSurvey (Tbilisi: GORBI,
2003), www.gorbi.com
Alexandre Kukhianidze, Aleko Kupatadze and Roman Gotsiridze, Research Report on Georgia
(Tbilisi: Georgia Offce of the American Universitys Transnational Crime and Corruption
Center, 2003)
TI Georgia: www.transparency.ge
Notes
1. In March 2005, President Mikheil Saakashvili dismissed more than 20 police offcials in Shida
Kartli after accusations they had engaged in smuggling with traders in the breakaway region
of South Ossetia (RFE/RL Newsline 9 (49), part I, 15 March 2005). The media also reported
allegations of smuggling of timber by senior offcials in the Ministry of Interior (RFE/RL
Newsline 9 (52), part I, 18 March 2005).
2. See www.transparency.org/surveys/index.html#barometer
3 RFE/RL Newsline 9 (2), 5 January 2005.
4. AmCham(Georgia) 3, 2004.
Conventions:
Council of Europe Civil Law Convention on Corruption (ratifed February 2002)
ratifed; Additional Protocol signed May 2003; not yet ratifed)
OECD Anti-Bribery Convention (ratifed February 1999)
ratifed)
In response to a wave of corruption scandals involving the judiciary, parliament adopted
a new law in March 2005 that introduces increased monitoring and transparency within
police, traffc police, public order police and
ecological police and replaced them with
police patrol units.
The civil registration unit was a source
of insidious corruption in the regions.
Many Georgians simply refused to register
rather than pay the bribes that were
demanded, with the result that the countrys
demographic records remain incomplete,
increasing the potential for tax evasion
and for misrepresentation of the number of
ethnic minorities living in the country.
The government has coasted along on
these reforms, holding them up as a tangible
beneft of its reform-friendly environment,
but the new force is not without problems.
Crime rates have doubled since the 2003
revolution and, while the ministry claims
this is the result of improved crime
registration, others claim that the new
force simply lacks the expertise of offcers
they have replaced.
Greece
GC2006 02 part2 164 8/11/05 17:53:57
165
the branch.
1
Under the new legislation, the bribing of judges will no longer be treated
as a delinquency but a felony, raising the maximum prison sentence from fve years to
life. The law also includes stipulations for safeguarding transparency in the selection of
judges who preside over criminal courts and rule on cases involving injunction measures
(see below).
Under an amendment to the constitution passed in 2001, any allegation of wrongdoing
by a government minister, even if unfounded, must be directly forwarded to parliament,
rather than being investigated by the prosecuting authorities. In October 2004, the frst
parliamentary inquiry was set up to investigate allegations of corruption in arms
contracts signed in the late 1990s. The inquiry examined allegations that a former
defence minister and other offcials had accepted bribes from Russian arms dealers to
sign contracts for the procurement of anti-aircraft missiles. According to a parliamentary
committee, the deals allegedly cost taxpayers 300 million (US $373 million). The inquiry
concluded its work in January 2005 after deciding that the evidence uncovered did not
suffce to initiate a prosecution.
A new code of conduct for police offcers was adopted by presidential decree in December
2004.
2
Under the code, offcers are obliged to refuse offers of bribes or to use their
positions to obtain advantages for themselves, or their friends and relatives. The code
stipulates that police officers should report acts of corruption immediately to the
competent authorities.
Corruption scandals rock the
judiciary and the church
A series of corruption scandals in the
judiciary and the Greek Orthodox church
has tarnished their reputation and led
to widespread public outcry. In March
2005, the reported discovery that a priest,
Archimandrite Jacobos Josakis, had bribed
three judges to obtain rulings in his favour
in cases involving the misappropriation of
antiquities and illegal excavation appeared
to be an isolated case.
3
But journalists
investigating related cases uncovered
evidence suggesting that this might only
be the tip of the iceberg.
4
At the time of writing, 32 cases involving
Josakis were under investigation. In addition
to accusations of partiality by the judges
ruling in these cases, the court proceedings
against him, all in Piraeus, took longer than
expected. The priest has been remanded in
jail while awaiting trial.
Judicial proceedings in Greece are usually
very slow, but the authorities have been
remarkably quick in probing this scandal,
given the unprecedented level of corruption.
In February 2005, four judges came under
investigation. One of them, Antonia Ilia,
was fred in June 2005 and charged on seven
counts, including money laundering and
accepting a bribe.
5
The Josakis investigation led to the
discovery of a series of other scandals
involving alleged bribery of the judiciary.
The media reported that a judge from
Chania in Crete apparently accepted bribes
on a regular basis to issue biased rulings.
The authorities claim to have evidence that
a local businessman had deposited 60,000
(US $73,380) into his account to obtain
a favourable ruling. The same judge had
taken a vacation aboard a yacht belonging
to another individual whose case he had
presided over, and other suspect, albeit
smaller, amounts of money were deposited
in a similar manner.
6
A common feature of these cases was
the overwhelming amount of evidence
uncovered. Previous exposure of corruption
in the Greek judiciary has been extremely
rare, but, although the number of judges
named in the current scandal is small (15
of the countrys 2,700 to date),
7
the stories
Country reports GREECE
GC2006 02 part2 165 8/11/05 17:53:57
Country reports 166
rocked society and prompted massive media
coverage. Greeces judiciary once enjoyed a
reputation as a corrupt-free institution with
strict moral values and a keen sense of duty,
despite occasional reports to the contrary,
8

and this reputation remains to a great extent
merited. But the Josakis case highlighted
systemic faws in the judiciary that could
facilitate corruption.
At the time of writing, four judges had
been fred for alleged corruption (mainly
bribery) and three other cases were pending
before the Supreme Court. Constantina
Bourboulia faces charges of receiving 40
million drachmas (US $143,000) for a
favourable ruling in a stock market case in
June 2001.
9
In June 2005, a case was fled
against appeals court judge Kyriakos Karosas
for bribery and breach of duty in cases
involving 15 defendants, including Josakis.
In the same month, allegations were made
against a Supreme Court judge and president
of the judges union, who is under investiga-
tion for allegedly having his summer house
built by a contractor to whom he gave a
favourable ruling.
10
Both the Supreme Court and justice
ministry responded to the crisis in confdence
with remarkable speed, implementing
measures to address systemic defects, as well
as taking preventive action to reduce further
scandals. The justice ministry has proposed a
draft law which was adopted by parliament
in March 2005. Its aim is to introduce
measures to strengthen internal monitoring
and transparency in the judiciary. It stiffens
penalties for bribing judges, elevating it from
a misdemeanour to a felony, and raises the
maximum sentence from fve years in prison
to life. The law also includes stipulations for
safeguarding transparency in the selection of
judges to preside over criminal court cases
and injunction measures. The Supreme
Court, which is responsible for evaluating
the selection of judges, also proposed a
preventive measure for the relocation of 70
judges and 15 prosecutors who had served
in the same location for over eight years.
11

Since it was based on the hypothesis that
working in the same place for many years
could lead to partiality and corruption of the
judiciary, this decision sparked a ferce outcry
in the legal community. Judges and their
union objected, saying any judge relocated
would automatically fall under suspicion of
involvement in corrupt activities.
Public scrutiny of the activities of the Greek
Orthodox church is another development to
have come out of the corruption scandals.
Indeed, questions of corruption or lack
of transparency in the church were taboo
until the recent events. In addition to the
arrest of Archimandrite Josakis, there were
allegations that the Bishop of Attica had
suspicious deposits of 1 billion drachmas
(US $3.6 million) in his bank account, of
which 100 million drachmas were allegedly
misappropriated from a monastery.
12
He
was dismissed in February 2005. At the
same time, four bishops were asked to
give explanations regarding allegations
of possessing fortunes that cannot be
justifed. The scandals apparently led to the
resignation of the Bishop of Thessaliotidos in
February 2005; though not directly involved,
he had introduced accused persons to the
archbishop and proposed that the church
should employ them.
Another scandal involved the Chrysopigi
organisation, founded in the 1970s by the
current archbishop and some of his bishops,
who are still members of the organisation.
According to media reports, members of the
Chrysopigi organisation are alleged to have
unduly infuenced elections in the church,
including the Patriarchate selection process
in Jerusalem.
13
Though the allegations have
not been proven, the organisation is to be
audited for fnancial irregularities by both
the church and state authorities.
The string of scandals highlighted the
institutions complex and unique set of
regulations. Under the constitution, the
Orthodox church is an autonomous and
self-regulating legal entity with its own
auditing and monitoring mechanisms, and
sanctions. But the church is also a public
institution. Priests are public employees,
subject to criminal law, although criminal
offences by priests are adjudicated by state
GC2006 02 part2 166 8/11/05 17:53:57
167
MarkellaSamara(TIGreece)
Further reading
Levteris Drakopoulos, StateandOrganisedCrime(Athens: Ekati Publications, 2002)
Nestor Kourakis, Corruption as a Problem of Greek Criminal Policy, PoinikosLogosIssue 1/02
(Athens: Ant. N. Sakkoulas Publishers, 2005)
Vassiliki Prigkouri, Corruption in the Greek Public Administration, unpublished masters thesis,
University of Athens, 2004
TI Greece: www.transparency.gr
Notes
1. Law no. 3327/2005.
2. Presidential decree no. 274/23.12.2004/A243.
3. It should be noted that the media presented tapes containing evidence, but the prosecuting
authorities will not admit their contents, which were acquired illegally. Instead, the charges
will be based on legitimate means of evidence, such as witnesses, bank accounts, and so
on.
4. The following information is based on newspaper articles and public statements. As the cases
are very new, no court decisions or formal documents on the issue have been published
yet.
5. www.lawnet.gr, 23 June 2005.
6. Kathimerini(Greece), 10 March 2005.
7. Authors interview with justice ministry offcials.
8. In February 2005, Kathimerini newspaper published a document from 1993 written by a
Supreme Court judge and addressed to the current president of the parliament, warning of
the high level of corruption in the judiciary.
9. Kathimerini (Greece), 17 June 2005.
10. www.lawnet.gr, 17 June 2005.
11. TaNea, 15 March 2005.
12. Kathimerini (Greece), 1 April 2005.
13. Kathimerini (Greece), 27 February 2005.
14. For previous bribery cases, see Thessaloniki Court of Appeals 55/61, published in Poinika
ChronikaIA282 (in Greek).
15. Kathimerini (Greece), 11 and 12 March 2005.
high courts.
14
The exposure of corruption in
this important institution has led to a series
of chain reactions.
In March 2005 the government announced
that church fnances would henceforth be
audited and that the legislation requiring
MPs, ministers, judges and senior public
employees to declare their income and
assets would in future apply to bishops.
15

The issue of financial auditing came up
in parliament and is to be regulated by a
joint decision of the education and fnance
ministers. The main problem is that the
body charged with the task, the Synodos,
includes among its members the very
bishops that have been accused of abusing
their positions.
Meanwhile, the church announced on
several occasions in March 2005 that it
would take measures to fight corruption
within its ranks. The fact that many priests
and other bishops have actively demanded
that disciplinary action be taken bodes well
for the churchs future transparency.
Country reports GREECE
GC2006 02 part2 167 8/11/05 17:53:57
Country reports 168
Conventions:
OAS Inter-American Convention against Corruption (ratifed July 2001)
Legislative and institutional changes
A proposal to reform the penal code, drafted by the Presidential Commission for
Transparency and against Corruption, the public prosecutors offce and the NGO
Accin Ciudadana, was made public in February 2005. It has yet to be submitted to the
legislature. The reforms would bring the legal framework into line with the Inter-American
Convention against Corruption by defning existing corruption crimes, adding new
crimes such as transnational bribery and illicit enrichment, and increasing penalties for
corruption by public offcials. However, the reforms are unlikely to dent corruption unless
accompanied by additional measures, such as the approval of an access to information
law; increased powers for the auditor general to analyse asset declarations and make them
public; mechanisms to identify and resolve conficts of interest; and more transparent
public contracting mechanisms.
In February 2005 Congress passed a law guaranteeing the impartiality of appointment
commissions. Public offcials are forbidden from hiring, nominating or authorising
the appointment to a position within their institution of any of the members of the
appointment commission involved in hiring them. Members of appointment commissions
are allowed to apply for positions through the ordinary competitive processes provided
they fulfl advertised requirements for the job. The law is especially signifcant for
protecting the independence and impartiality of the heads of the Supreme Court, the
auditor general, the public prosecutor and the supreme electoral court.
The Commission for Transparency and against Corruption, established as a temporary
presidential body in 2004, had its mandate extended for another year from March 2005.
The commission is responsible for advising the president, drafting anti-corruption policies
and legislative reform proposals and promoting the creation of the Multidisciplinary
Council for Transparency, made up of members of government and civil society. The
prolongation of the commission refects positively on the governments commitment to
anti-corruption, though changes to the commissions structure and operation are needed.
Of concern, is the absence of norms outlining the competencies of the commission and
its independence from the president.
In February 2005, Congress created an Extraordinary National Legislative Commission
for Transparency, at a time when the auditor general (Contralora General de Cuentas,
CGC) was in crisis, following the dismissal and prosecution of its two former heads and
the failure to appoint a successor. The commission is empowered to conduct studies,
including monitoring the CGC, issue recommendations and draft legislative proposals.
Concerns have been raised about the overlap between the commissions work and the
work of the Commission on Probity, which was set up in 1994 and could also have
looked into problems at the CGC. Indeed, a memorandum of understanding was signed
in September 2004 between the civil society organisation Coalition for Transparency, the
Commission on Probity and the CGC on their commitment to work jointly with the aim
of strengthening the two signatory public bodies.
Guatemala
GC2006 02 part2 168 8/11/05 17:53:58
169
Electronic system helps fight
corruption in public contracting
Guatemalas Internet-based public contract-
ing system, GUATECOMPRAS, was launched
in September 2003 amid expectations that it
would help clean up an area of government
that has long been the subject of numerous
corruption scandals. Its inception was com-
plicated; it was created two months before
general elections by a government that had
been repeatedly accused of corruption by the
media.
1
Fears that the new party in power
would scrap the project proved unfounded,
however. Instead, GUATECOMPRAS has
been extended and strengthened.
When initially launched, government
bodies could opt voluntarily to put their con-
tracting processes online. In February 2004,
President Oscar Berger issued a government
agreement within his council of ministers
that reformed implementing regulations for
the Law on State Contracting, making use
of the GUATECOMPRAS system mandatory.
Since then, all information related to the
purchase, sale and hire of goods, services and
public works must be put online.
2

The use of GUATECOMPRAS has increased
notably over the past year. It was used by
305 government agencies in April 2005,
compared with just 75 in July 2004. Around
60 per cent of municipalities currently use
the system, as well as 89 per cent of central
government bodies.
3
But the success story of its usage is qualifed
by GUATECOMPRAS structural weaknesses.
It operates within the framework of the
Law on State Contracting, which includes
significant exemptions to transparency
requirements. Chief among them is an
exemption for the Ministry of Defence,
which is not required to participate in
GUATECOMPRAS, and did so on only six
occasions from October 2004 to May 2005.
In only two of these cases were contracting
processes fnalised.
4
Another weakness is that GUATECOMPRAS
legal status is weak because it was regulated by
a ministerial agreement and not a legislative
vote. This has caused problems. For example,
in October 2004, the national association of
municipalities (ANAM) requested that the
system be suspended on the grounds that
they lacked the necessary computers and
Internet facilities to use it. They also argued
that making GUATECOMPRAS mandatory
violated municipal autonomy since it was
based only on an executive agreement.
5

After a months debate, the presidents
offce stated that the municipalities would
continue to use the system, given that 147
had managed to by October 2004, and
47 per cent of contracting processes had
been completed without problems.
6
The
communiqu has not encouraged some
municipalities with large budgets to use the
system, however, including the capital city
and the municipality of Mixco.
Another weakness with the current legal
framework is that the contracting process is
split into four processes depending on the
sums involved, with larger contracts subject
to greater scrutiny. This has led to contracts
being sub-divided in order to avoid the
highest degree of scrutiny. Also of concern
is that the Law on State Contracting exempts
from transparency requirements the social
investment funds created from international
loans or donations from private, international
or national bodies, and institutions. These
funds are considerable, but may be spent
on public goods and services in processes
that fall outside of the reach of the Law on
State Contracting and the GUATECOMPRAS
system.
The Law on State Contracting needs to be
reformed to strengthen GUATECOMPRAS.
Various reform bills exist: one of the best was
drafted by the Presidential Commission for
Reform, Modernisation and Fortifcation of
the State (COPRE) which, if adopted, would
go a long way to correcting shortcomings
in the system.
7
Civil society organisations
consider the system to be an effective tool to
fght corruption and promote transparency
in state contracting and purchases. But it
remains to be seen whether Congress will
give it the necessary support to enable it to
perform its task to the full.
Country reports GUATEmALA
GC2006 02 part2 169 8/11/05 17:53:58
Country reports 170
AlejandroUrizar(AccinCiudadana,Guatemala)
Access to information: a right still
to be enshrined in law
The right of citizens to access public
information has been enshrined in the con-
stitution, which states that all administrative
acts should be public and that every citizen has
the right to request any public document or
fle at any time.
8
But the right is eroded by the
fact that despite constitutional recognition,
there is no law regulating provision or facili-
tating access to information held by public
institutions. Access to information is crucial
to fghting corruption, since monitoring by
civil society depends on information about
how money and power are used by public or
political bodies.
In the absence of an access to informa-
tion law, requests for information are dealt
with haphazardly and ineffciently. While
it is possible to fle a complaint before the
Constitutional Court if public information is
denied, this rarely happens since few know
about the process.
The constitutional right is continuously
violated, according to studies by the NGOs
Accin Ciudadana (Citizen Action) and
Observatorio Ciudadano para el Libre Acceso
a la Informacin (Citizens Observatory for
the Free Access to Information). They found
that between October 2002 and June 2004, 6
of every 10 requests for public information
were denied. The rate of denial of requests for
information increased during the electoral
period, when 78 per cent of requests were
rejected, while in the post-electoral period
the rate went down markedly to 32 per
cent.
9
In April 2005, Accin Ciudadana
monitored access to information about social
investment funds. They found that half of
all requests for information were denied or
not answered, while only one in four was
answered appropriately.
10
In November 2004 another report on
implementation of the Inter-American
Convention against Corruption found that
the institutional and legal framework did
not help citizens to seek information that
was their constitutional right and, worse,
acted as an incentive for offcials to violate
the constitutional requirement that they
make information available. The fact that
there is no express obligation to organise,
publish and provide offcial information;
the absence of procedures for accessing
information; ambiguous definitions of
information exempt from the right to
access; the lack of public bodies to enforce
the right; and the lack of sanctions when
the right is violated, all lead to a situation
where the right to access to information
is continuously violated, the authors
asserted.
11
The legislature has shown a lack of political
will to tackle the problem. There is still no
access to information law, though seven
drafts have been submitted to Congress since
2000.
12
One of the bills to get further in the
legislative process was Bill Number 2594,
called Law of Free Access to Information.
It was submitted to the legislature in 2001
and went through all of the appropriate
legislative processes until the last phase in
March 2003, when the process stagnated and
the bill was shelved.
There was hope that the new parliament
would take a different approach to the issue
after the December 2003 elections. A broad
group of civil society organisations worked
expectantly on a new proposal, which as well
as including access to public information
and a writ of habeas data provision, included
stipulations concerning the classifcation
and declassifcation of reserved information.
This proposal was presented in November
2004 by Congressmen Eduardo Zachrisson
and Nineth Montenegro, and debated by the
plenary in February 2005.
13
Despite being
given an offcial bill number and title, the
60-day period given to the congressional
commission to analyse the bill expired
without it ever being properly debated. The
bill was still awaiting discussion at the time
of writing.
GC2006 02 part2 170 8/11/05 17:53:58
171
Further reading
Accin Ciudadana, Manualanticlientelarparalafscalizacinycontrolparlamentariodelosfondos
sociales(Anti-clientilistic Manual for Parliamentary Auditing and Control of Social Funds)
(Guatemala City: Editorial Magna Terra, April 2005)
Accin Ciudadana, Manualparalafscalizacinparlamentariadelascontratacionespblicasatravs
delsistemaGUATECOMPRAS(Manual for Parliamentary Oversight of Public Contracting through
the GUATECOMPRAS System) (Guatemala City: Editorial Magna Terra, April 2005)
Accin Ciudadana, El rgimen disciplinario en el Sistema de Justicia y la lucha contra la corrupcin
(The Disciplinary Regime of the Judicial System and the Fight against Corruption), February
2005, www.accionciudadana.org.gt
Accin Ciudadana and partner NGOs, Informeindependientedeseguimientoalaimplementacin
delaConvencinInteramericanacontralaCorrupcin (Independent Report on the Follow-up of
the Inter-American Convention against Corruption) (Guatemala City: Editorial Magna Terra,
2005)
Asociacin de Investigacin y Estudios Sociales (ASIES), La cultura poltica de la democracia en
Guatemala (The Political Culture of Democracy in Guatemala), March 2003, www.asies.org.
gt/informes.htm
Coalicin por la Transparencia, Losconfictosdeintersenelsectorpblico (Conficts of Interest in
the Public Sector) (Guatemala City: Editorial Magna Terra, August 2004)
Accin Ciudadana (Guatemala): www.accionciudadana.org.gt
Notes
1. Agreement no. 3862003 of the fnance ministry, published in the offcial gazette on 25
September 2003.
2. Agreement no. 802004 of the executive body, published in the offcial gazette on 23 February
2004.
3. www.guatecompras.gt
4. Ibid.
5. Boletn Municipal, InforpressCentroamericana 85, Guatemala, November 2004.
6. DiariodeCentroamrica(Guatemala) 36, 302, 3 November 2005.
7. Presidential Commission for Reform, Modernisation and Strengthening of the State and its
Decentralised Entities (COPRE), Formal Proposal of Reforms to the Law of State Contracting,
April 2005.
8. Article 30 of the constitution. The constitution, however, grants important exceptions to the
right to information: military or diplomatic matters that are considered national security, or
information involving individuals who have been given a guarantee of confdentiality do
not need to be disclosed.
9. Accin Ciudadana and Observatorio Ciudadano para el libre acceso a la informacin, El
accesoalainformacinpblicaenGuatemala,informedetresexperienciaspiloto (Access to Public
Information in Guatemala: Report on Three Pilot Experiences) (Guatemala City: Editorial
Magna Terra, 2004). A total of 268 requests were issued to central government or municipal
authorities. Just under half of the requests were made in the name of individuals and the
rest in the name of the institutions involved in the study.
10. Accin Ciudadana, Manualanticlientelarparalafscalizacinycontrolparlamentariodelosfondos
sociales (Anti-clientilistic Manual for Parliamentary Auditing and Control of Social Funds)
(Guatemala City: Editorial Magna Terra, 2005).
11. Coordinated by Accin Ciudadana, Informeindependientedeseguimientoalaimplementacin
delaConvencinInteramericanacontralaCorrupcin (Independent Report on the Follow-up of
the Inter-American Convention against Corruption) (Guatemala City: Editorial Magna Terra,
2005).
12. www.congreso.gob.gt
13. It has been given bill number 3165 and is called Law on Access to Information and
Classifcation and Declassifcation of Reserved State Information.
Country reports GUATEmALA
GC2006 02 part2 171 8/11/05 17:53:58
Country reports 172
Conventions:
Council of Europe Civil Law Convention on Corruption (signed November 1999; not yet
ratifed)
Council of Europe Criminal Law Convention on Corruption (ratified October 2003;
Additional Protocol ratifed July 2005)
OECD Anti-Bribery Convention (ratifed September 2003)
ratifed)
The Proceeds of Crime Act was ratifed in January 2005 to amend the 2001 Prevention of
Corruption (Amendment) Act and increases the powers of investigation of the Criminal
Assets Bureau (see below).
The Commissions of Investigation Act, passed in July 2004, provides for the creation
of Commissions of Investigation that will investigate matters of signifcant public
concern, including corruption. One of the main reasons for the legislation was to provide
an alternative mechanism to the Tribunal of Inquiry (see below).
The Central Bank and Financial Services Authority of Ireland Act, passed in July 2004,
complements the Central Bank and Financial Services Authority of Ireland Act, approved
in 2003. It provides for the establishment of an independent Financial Services
Ombudsman to deal with consumer complaints against fnancial institutions, and
provides for greater transparency and accountability in the fnancial sector.
The Public Service Management (Recruitment and Appointments) Act of October 2004
reforms the recruitment process in the civil service and other public bodies under its
remit for the frst time since 1926. It replaces the Civil Service and Local Appointments
Commission with two new bodies: the Commission for Public Service Appointments
(CPSA) and the Public Appointments Service. The CPSA publishes codes of practice for
recruitment to a number of public service bodies and grants licences to some of them
to recruit on their own behalf, allowing for more fexible and locally focused hiring
arrangements. Concerns have been raised that the relocation of recruitment might
facilitate a culture of local favouritism in appointments to departments located outside
Dublin and politicise appointments in the civil service.
1
A Civil Service Code of Standards and Behaviour for Irelands 30,000 civil servants
was published in December 2004. It places in a single document matters related to the
principles of integrity, impartiality, effectiveness, equity and accountability. The Civil
Service code establishes a 12-month moratorium and an outside appointments board to
address possible conficts of interest when civil servants take positions in the private
sector. It also advises civil servants how to deal with gifts received, and prohibits civil
servants from engaging in outside business or activities that would confict with the
interests of their departments, or abuse their offcial positions to beneft themselves
or others.
Ireland
GC2006 02 part2 172 8/11/05 17:53:59
173
The Garda Sochna (Police Service) Bill 2004 has passed the upper house of parliament
and is likely to come into effect before the summer 2005 legislative recess.
2
It provides
for the establishment of the three-person independent Garda Sochna Ombudsman
Commission for the purposes of ensuring openness, transparency and accountability in
the way complaints against the police are investigated (see below).
An Irish chapter of Transparency International was launched in December 2004, refecting
increased concern about corruption following a series of legislative changes and a string
of parliamentary, tribunal, civil society and international reports on corruption.
An independent organisation, the Centre for Public Inquiry, was established in February
2005 with a brief to investigate matters of importance within Irish political, public and
corporate life, and to heighten public awareness of the need for whistleblower protective
legislation. The centre has high-profle directors, including former high court judge
Feargus Flood, and generous funding from the Irish-American charitable foundation,
Atlantic Philanthropies. Political fgures, including the leader of the Seanad Eireann
(upper house of parliament), have expressed reservations about the Centres broad terms
of reference, particularly its lack of accountability for the focus and direction of potential
investigations.
Reform of the tribunals
The Houses of the Oireachtas (parliament)
established the Mahon Tribunal (formerly
the Flood Tribunal) in 1997 to investigate
allegations of corruption involving political
and business interests in the planning
process.
3
Its work has been frustrated and
constrained by the archaic structures it must
operate within and by the persistent non-
cooperation of key witnesses.
Justice Mahon acknowledged this non-
cooperation by his use of discretion in
granting costs to witnesses who, though
involved in corruption, had chosen to
cooperate with the tribunal. In the absence
of whistleblower legislation, this was
interpreted as a whistleblowers charter.
4

As further evidence of the constraints of
the tribunal of inquiry method, eight legal
challenges have been filed against the
process. These have proved time-consuming
and disruptive.
In a climate of mounting criticism, the
diffculties of the tribunal acts have fnally
been addressed and their investigative
powers strengthened. The commissions of
investigation, established under a 2004 act,
will have powers to compel witnesses to
give evidence, search premises and remove
documents. This new body will operate
alongside the tribunals. A commission of
investigation will primarily be a private
investigative process designed to encourage
cooperation by moving away from the
adversarial approach that applies within the
courts and tribunals. There is less likelihood
of a need for legal representation. A
commission established under this act must
submit a report on its fndings and be timely
and cost-effective. In April 2005, the frst
commission of investigation was established
to investigate alleged collusion in the Dublin
and Monaghan bombings of 1974.
The Tribunal of Inquiry into Certain
Planning Matters and Payments Act 2004
removes the obligation of the tribunal to
inquire into every matter before it. The
tribunal now has power of discretion over
what it investigates. Its fnal report has been
given a deadline of 31 March 2007. If it is
not met, the tribunal will continue to work
but barristers fees will drop from 2,500 (US
$3,058) a day to 900 (US $1,100).
The far-reaching Proceeds of Crime
(Amendment) Act 2005 eliminates existing
legislative difficulties that require that a
specific instance of corruption must be
Country reports IRELAND
GC2006 02 part2 173 8/11/05 17:53:59
Country reports 174
linked to a specifc payment and a specifc
favour. The act increases the powers of the
Criminal Assets Bureau (CAB), which now
requires a lower burden of proof to confscate
the assets of corrupt individuals and seize a
gift suspected of being a bribe.
The two acts not only challenge the
lengthy, costly and complex nature of the
tribunals, they eliminate the need for the
tribunal inquiry method altogether. These
departures are overdue, but represent a
closing of the stable door after the horses
have bolted.
Even the sternest critics of the tribunals
acknowledge their catalytic role in focusing
cultural change in Irish society toward
corruption since they began in 1997. No
individual has successfully been convicted
on corruption charges arising from the
tribunals, but George Redmond, the former
assistant city and county manager for
Dublin, will face new corruption charges in
December 2005.
5
Former minister Ray Burke
was convicted for making false tax returns
identifed by the tribunal and began a six-
month jail sentence in January 2005.
morris report points to need for
further police reforms
The Morris Tribunal issued a damning report
into corruption in the Donegal County An
Garda Sochna (police) in July 2004. The
government dismissed one superintendent
and a chief superintendent resigned after
the tribunal found they had been motivated
by career ambition to plant ammunition
and hoax explosives. The report cited 17
members of the Donegal force for varying
degrees of culpability ranging from gross
negligence to being uncooperative. The
report highlighted failures in management,
accountability and standards.
As the Mahon Tribunal also reportedly
experienced, the principal obstacle to the
Morris Tribunal was the culture of non-
cooperation in the Garda Sochna, which
the justice minister described as a hedgehog
culture.
6
The report suggested that Garda
primarily feel loyalty to their colleagues,
rather than the law, and cooperation is
withheld from disciplinary investigations
and tribunals.
The Garda bill was initiated in February
2004 and is anticipated to pass before the
summer 2005 legislative recess. It will replace
all laws pertaining to the police since 1924
and is the frst serious effort in the history
of the state to reform policing structures.
Though long overdue, many regard the
bill as a missed opportunity to engage in a
broader and deeper reform programme.
The bill proposes the creation of
an independent Police Ombudsman
Commission to replace the inadequate
Police Complaints Board. The commission
will investigate public complaints against
members of the Garda, initiate investigations
in matters in the public interest and examine
Garda practices, policies and procedures.
Legal experts branded a proposal to
establish a hybrid between an ombudsman
and a commission as misconceived.
7
This
departure from the ombudsman model, as
adopted in Northern Ireland, to a multi-
member model, will detract from its capacity
to take a robust and decisive approach to the
investigation of complaints against Garda
and public concerns about policing.
8
This
is evident from structural weaknesses of the
ombudsman commission, in particular, the
absence of specifcity in qualifcations for
appointment and the fact that appointments
will be made by the government, rather than
through open competition.
The Garda bill was subsequently amended
to provide for the establishment of an
independent civilian inspectorate that will
give advice and support to the ministry,
audit management systems and introduce
international standards, practice and
performance benchmarks. The fact that the
inspectorate answers directly to the justice
minister drew particular criticism from the
Garda Representative Association and the
opposition that it was using the excuse of
the report of the Morris Tribunal to obtain
a hands-on approach.
9
The proposals
do not allow inspectorate reports to be
GC2006 02 part2 174 8/11/05 17:53:59
175
ElaineByrne(UniversityofLimerick,Ireland)
Further Reading
Neil Collins and Mary OShea, Political Corruption in Ireland, in M. J. Bull and J. L. Newell (eds),
CorruptioninContemporaryPolitics (Basingstoke: Palgrave Macmillan, 2003)
Council of Europe, GRECO, First Evaluation Round, Compliance Report on Ireland (2003), www.
greco.coe.int/evaluations/cycle1/GrecoRC-I(2003)14E-Ireland.pdf
Paul Cullen, WithaLittleHelpfrommyFriends:PlanningCorruptioninIreland(Dublin: Gill and
Macmillan, 2003)
publicly available as is the case in the United
Kingdom. Nor do they provide for the Garda
commissioner to be directly accountable to
the Dil (lower house of parliament) on
operational policing matters.
The Morris Tribunal hopes to deliver a
second report on its fndings before June
2005. In an attempt to speed up proceedings,
it introduced a fve-point ruling that banned
oral objections and applications, and limited
cross-examination. However, a number of
obstacles could potentially prevent the work
of the tribunal. In March 2005, it cancelled
planned public sittings in Donegal when
a key witness, Frank McBrearty, refused to
cooperate after he was denied free legal
representation.
10
The issue of costs is now
before the European Parliament.
In January 2005, a key witness for the
tribunal had tapes stolen during a robbery
at her home. No other items were taken.
Reflecting the general loss of faith in
Donegals police, the witness has taken
High Court proceedings to have Garda from
outside the county investigate the case. This
had not been resolved at the time of writing.
It remains to be seen whether the tribunal
will report as expediently or as comprehen-
sively as it hopes.
Whistleblower protection still
elusive
The reported systemic nature of corrup-
tion within the police force and planning
process, as the Morris and Mahon Tribunals
have identifed, warrants the introduction of
whistleblower legislation more than ever.
Despite momentous change in the Irish
statute books since 1995 and various tribunals
of inquiry and parliamentary investigations,
whistleblower legislation remains elusive.
It has been on the legislative books since
March 1999. Six years later the initiator of
the bill concluded: This bill probably holds
some form of parliamentary record as the
longest-standing bill on the Dils order
paper.
11

Following a lengthy investigation, three
reports were published in 2004 regarding
alleged fnancial malpractice at the National
Irish Bank Limited and National Irish Bank
Financial Services Limited (NIB) and Allied
Irish Bank (AIB).
12
These incidents involved
complicity in widespread tax evasion at the
NIB and the AIBs failure to comply with
regulatory obligations over a period of eight
years. Although these episodes were not
directly corrupt, they served to illustrate the
systematic culture of non-compliance that
dominated sectors of Irish life in the 1980s
and 1990s. As with the Mahon and Morris
Tribunals, the NIB report cited frustration
regarding a lack of full cooperation.
13
Acknowledging this, the Irish Financial
Services Regulatory Authority has advocated
a change in cultural practice regarding
hostile attitudes to whistleblowing. Staff
members of fnancial institutions should not
feel that they have to go to outside agencies
in order to raise issues of importance to
that institution, said chief executive Liam
OReilly in January 2005. They should feel
comfortable raising issues up the line. Those
who wish to raise such issues should not be
held responsible for the issue they are high-
lighting, simply because they have raised the
matter.
14
Whistleblower legislation is vital
to combat an engrained cultural acceptance
of corruption in Ireland.
Country reports IRELAND
GC2006 02 part2 175 8/11/05 17:53:59
Country reports 176
Justice Feargus M. Flood, TheSecondInterimReportoftheTribunalofInquiryintoCertainPlanning
MattersandPayments (Dublin: Government Stationery Offce, 2002), www.food-tribunal.ie
Colm McCarthy, Corruption in Public Offce in Ireland: Policy Design as a Countermeasure,
in Economic and Social Research Institute, QuarterlyEconomicCommentary (2003), www.esri.
ie/pdf/QEC1003SA_McCarthy.pdf
Justice Frederick R. Morris, ReportoftheTribunalofInquirysetuppursuanttotheTribunalofInquiry
(Evidence)Acts19212002intocertainGardaintheDonegaldivision(Dublin: Government
Stationery Offce, 2004), www.morristribunal.ie
Gary Murphy, Payments for No Political Response? Political Corruption and Tribunals of Inquiry in
Ireland, 19912003, in John Garrard and James Newell (eds), ScandalsinPastandContemporary
Politics (Manchester: Manchester University Press, 2005)
TI Ireland: www.transparency.ie
Notes
1. Dil Debate 578, (2) 21 January 2004, Joan Burton, TD, debates.oireachtas.ie/Xml/29/
DAL20040121.PDF
2. Minister for Justice, Equality and Law Reform, Michael McDowell, address at the Garda College
Graduation Ceremony, Templemore, 28 April 2005, www.justice.ie/80256E01003A02CF/
vWeb/pcJUSQ6BVKH8-ga
4. IrishTimes (Ireland), 1 July 2004.
5. See GlobalCorruptionReport2005for details of the charges against him.
7. Professor Dermot Walsh, The Proposed Garda Sochna Ombudsman Commission: a Critique,
IrishCriminalLawJournal 14(1), 2004.
8. Ibid.
9. IrishTimes (Ireland), 6 August 2004.
10. IrishTimes (Ireland), 22 March 2005.
11. IrishTimes (Ireland), 25 April 2005.
12. The Irish Financial Services Regulatory Authority Interim Report (July 2004) and Final Report
(December 2004) into the affairs of Allied Irish Bank (AIB); High Court Inspectors Report into
the affairs of National Irish Bank Limited and National Irish Bank Financial Services Limited
(July 2004).
14. www.ifsra.ie
Conventions:
ratifed)
A Supreme Court ruling in November 2004 set a precedent for the interpretation of the
offence of breach of trust.
1
In a special appeal, Shimon Sheves, a former director general
in the Prime Ministers Offce, was found guilty in two cases of using his position to
promote the fnancial interests of friends. The case established norms for the behaviour
Israel
GC2006 02 part2 176 8/11/05 17:54:00
177
of civil servants by prohibiting senior offcials from involvement in serious conficts of
interest. It also placed breach of trust at the centre of efforts to combat corruption.
In October 2004, the attorney general directed ministers and deputies in the Knesset not
to promote the private interests of members of their partys central body or any other
institution that helps choose their lists of candidates. This follows the regular appearance
of instances of conficts of interest where ministers have juggled their obligations as public
servants with their vested interests of gaining party members support. The directive also
provides guidance for the conduct of ministers where conficts of interest may arise.
In March 2005, the ministerial committee on legislation approved a private bill that, if
passed, would increase the range of trustee positions to extend to positions including the
treasury accountant general, the director of capital markets, the anti-trust commissioner
and the head of the National Security Council. This defnition is currently limited to posts
such as secretaries and director generals, and is taken by political practice in Israel as a
licence to appoint non-professional and partisan members. If the bill is approved, some
of the highest-ranking jobs in the civil service will be turned into political appointments
(see below).
money, elections and corruption
In February 2005, Attorney General
Menachem Mazuz indicted Omri Sharon,
son of Prime Minister Ariel Sharon and a
member of the Knesset, for campaign fnance
violations during his fathers campaign for
the leadership of the Likud party in 1999
and, allegedly, the 2001 national elections.
2

The attorney general, however, stopped short
of indicting the prime minister. According
to the state comptroller, Ariel Sharon took
illegal donations of NIS5.9 million (US $1.3
million) to enhance his chances of winning
the 2001 national elections. The money
was funnelled through a number of straw
companies, including a US corporation,
Annex Research Ltd, founded by Sharons
lawyer, Dov Weisglass, and run by Omri
Sharon.
3
Sharon said the money was used to fnance
a campaign against Benjamin Netanyahu, a
fellow Likud member, and not the former
prime minister, Ehud Barak, whom he
defeated in the 2001 election.
4
His lawyers
argued that the Parties Law, which governs
internal party campaigns, should be applied
to the case, rather than the Party Financing
Law, which relates to election campaigns
between parties.
5
The importance of this is
that a violation of Party Financing Law can
result in a prison sentence, while violating
the Parties Law invokes only a monetary fne.
The comptroller accepted Sharons defence
regarding the lions share of the donation,
but insisted that 20 per cent of it, or NIS1.4
million (US $310,000), be charged against
Likud.
6

Sharon took steps to return the illegal
contribution in October 2001 by borrowing
NIS4.2 million (US $920,000) from the
bank.
7
This led the attorney general to
open an investigation in October 2001 that
resulted in charges being brought against
Omri Sharon for violating both the Parties
Law and the penal code. However, in January
2002, when long-term family friend, South
African businessman Cyril Kern, paid US
$1.5 million into the account of his other
son, Gilad Sharon, a second scandal erupted.
While running the frst investigation, the
attorney general launched an investigation
in January 2003 into the more serious
suspicions that Kern did not have suffcient
resources to raise such an amount, and may
have only been a cover for another wealthy
businessman with investments in Israel.
8

The investigation into the Cyril Kern affair
is still ongoing. The matter is complicated by
the fact that the funds were transferred from
Austria and South Africa, neither of which
has a cooperative framework of investigation
Country reports ISRAEL
GC2006 02 part2 177 8/11/05 17:54:00
Country reports 178
with Israel, while Gilad Sharon retains the
right to silence.
9
Although Israels political and legal
systems have relatively tight supervision
over parliamentary election campaigns,
intraparty contests are mired in ineffciency
and influence peddling. Politicians can
resort to illicit means including at times
violating the law to win a favourable place
on their party list in order to get into parlia-
ment at all.
10
Politicisation of the civil service?
The private bill to confer trustee status on
a number of infuential government posts,
proposed by Likud deputies in March 2005, is
part of a wider concern that the civil service
is at risk of becoming more politicised.
Public service in Israel has always been
exploited for patronage to some extent.
11

The past three years, however, have seen the
Likud central committee, a body of 2,500
delegates elected by party members, attain
even greater infuence over decision-making.
The committees power emanates from its
responsibility to select party candidates
for the Knesset, which arguably creates a
dangerous infuence on members once they
are elected. The problem is made more acute
by the size of Likud, by far the countrys
largest political group with more posts
in government than any other. Although
there have been minor cases of politicised
appointments not connected to Likud,
12

this party is the most closely associated with
the practice.
The growth in power of Likuds central
committee provided the basis for a
damning report by State Comptroller Eliezer
Goldberg in August 2004 that examined
Tzachi Hanegbis use of public resources
to appoint Likud central committee
members and their relatives while serving
as minister of environment in 2002.
13

Political appointments, some by Hanegbi
and others at the order of the then director
general of the environment ministry, Shmuel
Hershkovitz, were found highly suspicious.
Although Hanegbi defended himself by
arguing that his actions were in line with
the ministrys norms, Goldberg rejected
this saying that it was the ministers duty to
stamp out unacceptable norms. According
to the comptrollers report, methods used
to appoint his cronies included appointing
acting offcials to positions that should have
been flled through tenders; presenting single
candidates for positions exempt from tenders;
giving associates preference in external
tenders; and increasing the number of jobs at
the ministers and director generals bureaus.
Falsifcation of information also occurred in
order to tailor jobs for associates.
By the time the report was published,
Hanegbi had moved to become Minister
for Internal Security, thus becoming head
of the police as well. Following Goldbergs
report, Attorney General Menachem Mazuz
ordered a criminal investigation against
Hanegbi for breach of trust and electoral
bribery. This investigation was under way
at the time of writing. Hanegbi resigned
in September 2004 following advice from
Mazuz. He was replaced by Gideon Ezra,
who received a warning from the attorney
general for interfering with police investiga-
tions (see below).
String of defeats for law
enforcement bodies
Although the law enforcement agencies have
tried to tackle conficts of interest within the
civil service, they have been less active in
confronting more complicated cases such
as those involving allegations of grand
corruption. A series of events in the past
year suggest a clear reluctance to challenge
potential abuses.
In June 2004, the newly appointed
attorney general, Menachem Mazuz, decided
to close a case involving bribery allegations
in which Prime Minister Ariel Sharon was
considered a major suspect. The Greek island
affair centred on allegations that Sharon and
his son, Gilad, had accepted bribes from
businessman David Appel between 1997
and 2003 in return for favours from Sharon
in his capacities as prime minister, foreign
GC2006 02 part2 178 8/11/05 17:54:00
179
DoronNavot(TIIsrael)
Further reading
Daphne Barak-Erez, Judicial Review of Politics: the Israeli Case, JournalofLawandSociety 29(4),
Tel Aviv, 2002.
minister and minister of infrastructure.
14
The
charges revolved around the alleged support
of two of Appels real estate ventures in return
for political support for the Likud primary
for the Knesset slate in February 1999 and
the Likud leadership contest in December
1999.
15
Furthermore, Appel allegedly
hired Gilad to help implement the island
project, paying him hundreds of thousands
of dollars as a means of getting to Sharon.
Ariel Sharon was twice seen having dinner
with offcials supposedly for the purpose of
supporting Appels projects. Having written a
draft indictment against Ariel Sharon before
leaving offce, ex-attorney general Edna Arbel
held that the dinners were rewards for the
payment of Gilad and the political support
that Appel had given Sharon.
16
In other
words, those meetings were part of quid pro
quo relations between Sharon and Appel.
The new attorney general concluded that
Appel had hired Gilad because he genuinely
believed he was a good worker, adding that
the fee was not disproportionate to those
paid to others in the project. Concerning
the allegation that Appel had bribed Ariel
Sharon by helping him in the two election
campaigns, Mazuz concluded that asking
for support and promising support are all
a part of politics that no one takes too
seriously. Mazuz rejected allegations that
Sharon had intervened to save Appels real
estate ventures.
While reading out his decision, Mazuz
reproached former state prosecutor Edna
Arbel, who had recommended indicting the
prime minister.
17
Mazuzs decision to close
the case led to strong criticism by one of
Israels most respected legal experts, Professor
Mordechai Kremnitzer, who added his name
to a group manifesto that expressed shock
and anxiety at Mazuzs attack on the legal
system.
18
Another significant blow for the law
enforcement system was the dismissal in
November 2004 of the head of the Criminal
Investigations Department, Moshe Mizrahi, a
leading fgure in the fght against corruption.
19

On the recommendations of Mazuz and a
former attorney general, acting Minister of
Internal Security Gideon Ezra reportedly
discharged Mizrahi over his handling of an
investigation in the late 1990s. Mizrahi had
placed court-approved wiretaps on Knesset
member Avigdor Lieberman when the police
were investigating suspicions of Russian
mafia activities.
20
Mizrahi was allegedly
overly enthusiastic about transcribing
conversations that lacked substantive
relevance to the investigation.
21
Although
the then chief of police and the former state
prosecutor recommended that Mizrahi
receive only a departmental warning for his
actions, he was dismissed. In direct contrast
a few months later, Ezra asked the police to
give special treatment to one of the Likud
central committees most powerful members,
Uzi Cohen. In March 2005, the attorney
general warned Ezra against interfering any
further in police investigations, adding that
this was all the more essential when a fellow
Likud member was involved.
22
Another case of the legal system being
overshadowed by political fgures was the
prosecution of former public prosecutor
Liora Glatt-Berkowitz for leaking information
about the Cyril Kern inquiry (see above) to
the Haaretz daily before the 2003 elections.
Glatt-Berkowitz only received an eight-
month suspended sentence and a NIS10,000
(US $2,200) fne in March 2005.
23
The Greek island affair, Mizrahis dismissal
and the sentence on Glatt-Berkowitz seem
to indicate that the law enforcement system
is backing away from challenging the
immunity of leading political fgures.
Country reports ISRAEL
GC2006 02 part2 179 8/11/05 17:54:01
Country reports 180
Menachem Hofnung, Fat Parties-Lean Candidates: Funding Israeli Internal Party Contests, in
Asher Arian and Michal Shamir (eds), TheElectionsinIsrael (New Brunswick, NJ, and London:
Transactions Publications, 2005)
TI Israel: www.ti-israel.org
Notes
1. The offence of breach of trust, set out by legislation from 1977, establishes prohibitions on
civil servants aimed at limiting conficts of interest. But in its current form, it is too wide and
poorly worded.
2. Attorney generals decision, in The primaries in the Likud (Annex Researches), 17 February
2005. See www.justice.gov.il. The indictment was submitted to court on 28 August 2005, see:
Haaretz (Israel), 29 August 2005.
3. State comptrollers report, 30 September 2001.
4. Ibid.
5. Haaretz (Israel), 21 November 2004.
6. According to the state comptrollers report on the 2001 elections: The prime minister, while
head of the opposition, employed a team of advisors who were paid by overseas donors to
advance his position and his public image His personal political activity is the activity
of the party. The chairman of the party is also allowed to prepare for primaries, as long as
they make the distinction clear between their activity and the activities of the partys own
mechanisms. That distinction was not made in Sharons case.
7. Haaretz(Israel), 7 January 2003; BBC News (UK), 13 January 2003.
8. Attorney general, The Primaries in the Likud, article 1.
9. Haaretz(Israel), 11 December 2003.
10. See Menachem Hofnung, Fat Parties-Lean Candidates: Funding Israeli Internal Party Contests,
in Asher Arian and Michal Shamir (eds), TheElectionsinIsrael2003 (New Brunswick, NJ, and
London: Transactions Publications, 2005).
11. For a description and analysis of the relations between partisan members and politicians
and the civil service, see David Nachmias, Israels Bureaucratic Elite: Social Structure and
Patronage, PublicAdministrationReview 51(5), 1991.
12. Haaretz(Israel), 18 April 2004, reported on Avigdor Liebermans efforts to appoint a close
associate as a director of the civil aviation service.
13. State comptroller, Auditing Report on Political Appointments and Inappropriate Appointments
in the Environment Ministry, August 2004. In May 2005, the publication of yet another report
by the State Comptroller led Attorney General Menachem Mazuz to order an investigation
into suspicions that illegal appointments were made in the agriculture ministry.
14. Attorney generals report on the Greek island affair, published 15 June 2004.
15. Ibid.
16. Attorney general, Opinion on Prime Minister Ariel Sharon Issue, 28 March 2004.
17. Haaretz (Israel), 16 June 2004; BBC News (UK), 15 June 2004.
18. Haaretz(Israel), 1 August 2004.
19. Haaretz(Israel), 7 November 2003.
20. Attorney general, The Tapping Affair in National Unit to Investigate International Relations:
Superintendent Moshe Mizrahi, 23 October 2003.
21. Ibid.
22. Haaretz(Israel), 15 March 2005.
23. Haaretz(Israel), 17 March 2005.
GC2006 02 part2 180 8/11/05 17:54:01
181
Conventions:
OECD Anti-Bribery Convention (ratifed October 1998)
ratifed)
Amendments to the unfair competition prevention law, the legislation that enforces
the OECD Anti-Bribery Convention, came into effect in January 2005 and introduce a
jurisdiction based on nationality to the offence of bribing foreign public offcials. Two
months later, the OECD published a review of the implementation of domestic legislation
that found Japan has not demonstrated suffcient efforts to enforce the offence of bribing
a foreign public offcial. It said it would carry out a further review in 2005.
Although the Diet (parliament) approved the ratifcation of the UN Convention against
Organized Crime in 2003, an implementing bill to amend the penal code and laws
related to the prevention of transnational and IT crimes are still pending. The amendment
would make it a criminal offence to conspire in organised crime and to bribe court
witnesses; strengthen powers allowing the seizure of the proceeds of crime; and apply
jurisdiction based on nationality under the penal code to some other offences, including
bribing public offcials. The bill is expected to clear the Diet in 2005.
In March 2005, the government announced that the public interest discloser protection
law, the whistleblower protection legislation enacted in 2004, will be enforced from
April 2006. Besides the seven laws in the penal code already designated, 407 laws have
been identifed to which the whistleblower protection law is also to be applied. Those
include the commercial code, the labour standard law, the anti-monopoly law, the unfair
competition prevention law, and laws stipulating codes and ethics for professionals such
as doctors and lawyers.
The cabinet approved revisions in March 2005 to the public service offcials ethics code,
enacted in 1999. They include provisions prohibiting a public offcial from: accepting
any fees for compilation or supervision of the publications funded or subsidised by the
government; from accepting fees from publications of which more than half the issues
are procured by the ministry or agency to which the offcial belongs; from knowingly
receiving or enjoying the proprietary beneft that another offcial gained in violation
of the ethics code; and from not reporting to the authorities when there is reasonable
suspicion that a violation of the ethics code has taken place.
Japan
Social Insurance Agency in the eye
of the corruption storm
With its rapidly greying population,
reform to the national pension system is
an increasingly sensitive issue in Japan as
a diminishing number of younger workers
struggles to carry the pensions load. Growing
public concerns over a possible collapse in
the existing system were compounded last
year by a series of corruption and misman-
agement scandals.
Country reports JAPAN
GC2006 02 part2 181 8/11/05 17:54:01
Country reports 182
The Social Insurance Agency, which is
affliated with the Ministry of Health, Labour
and Welfare, has been roundly criticised for
wasting pension insurance contributions on
the construction of staff accommodation,
the payment of membership dues for a
prefecture association and even the payment
of golf course fees. Employees of the agency
were also in the habit of receiving fees from
private companies for compiling books and
videos produced with government subsidies.
An in-house investigation in October 2004
found that 1,475 officials of both the
ministry and the agency had been paid 750
million (US $6.8 million) over fve years for
supervising the work. The vice-minister and
other senior officials who received sums
surrendered part of their salaries because
they admitted their actions had undermined
public trust, though they had not actually
broken the law. The investigation further
revealed that 1,500 agency employees, or 8
per cent of its total staff, had accessed other
peoples pension records including the
prime ministers out of sheer curiosity.
In September 2004, a manager of
the ministry responsible for pensions
management and a company president
were indicted for bribery in procuring cash
registers, while two other senior ministry
officials were disciplined for receiving
dubious money from lawmakers amid
a scandal involving the Japan Dental
Association.
Public anger at this series of mini-scandals
persuaded the government to consider
overhauling the Social Insurance Agency as
part of a broader programme for pensions
reform. The problem is how to do this. In a
recent blueprint, the government outlined
a privatisation in the near future, but the
ministry balked at anything so drastic.
The most recent information suggests the
government is likely to keep the agency as an
independent public body, and not privatise
it. Whatever is decided, pensions reform is
an issue that will not go away.
100 million donation scandal of an
LDP faction
In July 2004, a newspaper report revealed
that a political faction led by former prime
minister Ryutaro Hashimoto of the ruling
LDP falsified its 2001 political accounts
report, by failing to report a 100 million (US
$900,000) donation from the Japan Dental
Association (JDA). Allegedly, Hashimoto
received the cheque from the JDA president
at a meeting in a Tokyo restaurant in 2001
when other faction members, including
LDP heavyweights Mikio Aoki and Hiromu
Nonaka, were present.
After the disclosure was made, the
faction admitted receiving the money
and Hashimoto resigned as its head. The
opposition DPJ fled a complaint against
Hashimoto, Aoki and Nonaka with the
Tokyo Prosecuting Offce. The prosecuting
authorities instead indicted the factions
treasurer and Kanezo Muraoka, a former LDP
secretary general and MP, for violation of the
political funds control law, but dropped all
charges against the other three politicians
for lack of evidence. Muraoka, who was the
factions deputy chairman at the time of
the donation, said that he had been made
a scapegoat by the other three who initially
received immunity from the authorities. He
pleaded innocent in court.
The Tokyo District Court sentenced the
treasurer to a suspended 10-month prison
term in December 2004. The opposition
parties tried to bring the issue up in
parliament by summoning Hashimoto and
fve others to answer questions about the
cover up in sworn testimony before the
Diet, but the ruling coalition refused to
do so.
This was not the end of the story, however.
An independent watchdog panel, charged
with reviewing prosecutors decisions,
concluded in January 2005 that they had
indeed erred when they decided not to
indict Hashimoto and his associates. They
resumed their questioning of Hashimoto,
Aoki and Nonaka in February 2005.
GC2006 02 part2 182 8/11/05 17:54:01
183
Traditional money politics has always
played an important role in the Japanese
model of corrupt practices, and corporate
control of politicians has been a recurring
factor for years. In this case, the JDA had
allegedly donated the money to Hashimotos
faction, because its membership had become
increasingly worried about Koizumis
structural reform policies. More importantly,
the government sets the level of fees for
health services in Japan and the dentists
were trying to have their fees raised by
buying political infuence.
The issue of political funding is
sensitive. No party or politician follows the
requirements of the political funds control
laws attentively. Funds are given and taken
in secret and the presence of black money
in political life means donors and recipients
alike further their interests to the detriment
of voters. There have been moves by political
parties to reform political fnance regulations
in response to the scandal, by introducing
limits on individual contributions, for
example, but commentators suggest that
this will do little if external accounting is
not introduced and money is not required
to be routed through accounts rather than
in cash.
Changes have been promised in the
political donation sphere, but few people
expect much from a system where such
problems are endemic, not only in the
ruling Liberal Democratic Party but also in
many ways in the major opposition party,
the Democratic Party of Japan. The ruling
Liberal Democratic Party together with its
partner, the Komeito Party, has announced
plans to introduce new reforms in response
to the scandal, primarily limiting the
maximum of such contributions to 50
million (US $423,000).
Even when political funding scandals
erupt, small fry are usually sacrifced for
the big fish. In 1991, when Hashimoto
was fnance minister, his privately funded
secretary was involved in transacting an
unsecured loan worth more than 1 billion
(over US $9 million). When questioned,
Hashimoto denied all knowledge and
escaped without sanction. In the JDA
scandal (referred to above), LDP treasurer
and faction accountant, Toshiyuki Takigawa,
and a former LDP cabinet secretary, Kanezo
Muraoka, were accused, while Hashimoto,
Aoki and Nonaka denied responsibility.
osakas secret allowances
In late 2004, Osaka city government
announced it had paid secret retirement
allowances and pensions to 20,000 retired
employees at a cost of 30 billion (US $273
million) over the previous 11 years.
1
The
city government also shouldered the life
insurance premiums that each employee
should have paid at a further cost of some
10 billion (US $87 million) over 22 years,
and paid 130 million (US $1 million)
in unjustified overtime for 20,000 other
employees between April and October
alone.
2
Analysts said that the fact that the past
fve mayors of Osaka had won elections with
the support of employee unions had helped
such collusion take root. After a public and
media furore, the city government set up a
committee to review the payroll that led to
an announcement in March that the city
would abolish the special labour allowances
and slash 16.2 billion (US $141 million)
from the fscal budget for 2005.
Osaka is not the only municipality that
hung on to special allowances like these. A
survey in 2005 revealed that 37 of the 47
prefectures and 13 city governments had
similar practices, but nearly half had decided
to abolish them by the end of fscal 2004.
In a related development, a Kyodo
News survey revealed that 23 prefecture
administrations had used tax revenues to
help employees and their family members
pay medical expenses. The fnding sparked
criticism that local government employees
have enjoyed subsidised health benefits
while private sector employees have been
compelled to pay more.
The central government is proceeding with
a programme of decentralisation that will pass
the fnancial burden and its management
Country reports JAPAN
GC2006 02 part2 183 8/11/05 17:54:02
Country reports 184
TransparencyInternationalJapan
Further reading
Yuu Anekoji, CorruptionInvestigation (Tokyo: Kodansha, June 2003) [Japanese]
Masao Kato, ConfessionsofBid-rigging (Tokyo: Saito-sha, 2005) [Japanese]
Kazuo Kawkami, CorruptionandBribery (Tokyo: Kodansha, September 2003) [Japanese]
Japan Fair Trade Commission, A Report on Bidding and Public Contracts in Local Governments,
September 2004 [Japanese]
Shinichi Yoshida, DocumentaryEvidenceofCorruptioninLocalAuthorities (Tokyo: Asahi Shinbun-
sha, 2004) [Japanese]
TI Japan: www.ti-j.org
Notes
1. AsahiShinbun(Japan), 31 December 2004.
2. AsahiShinbun (Japan), 31 December 2004.
Conventions:
ratifed)
ADB-OECD Action Plan for Asia-Pacifc (endorsed May 2002)
to local governments, and enforce better
governance in the municipalities. It is also
pressing ahead with a merger policy that
reduced the number of municipalities from
3,200 in 1999 to 2,500 in March 2005, and is
expected to further cut their number to 1,800
by 2007. Decentralisation will hopefully lead
to trimmer central government and reduced
opportunities of corruption.
Alongside the entrenched collusion
between unions and city governments,
another strand of local corruption exists,
known as dango, that involves collusion
between construction companies in a process
of bid-rigging. Dango sometimes involves
government collusion, whereby government
offcials leak inside information to bidders
who set both the price and the name of the
winner. Dangohas become so endemic that
it is close to standard operating procedure
and completely defeats the purpose of
competitive bidding. To demonstrate how
endemic it has become, the Fair Trade
Commission (FTC) investigated 5,000
contracts between 1999 and 2003 and found
370 rigged bids in sewage and construction,
and implicated 113 companies in bid-rigging
scandals. Authorities are taking important
steps to reduce such practices.
In October 2004, a senior offcial in the
Niigata municipal government was arrested
for leaking the planned spending amounts
for a sewage facility to a company to help it
win the contract. Takayuki Yuki, a councillor
in the urban development bureau who
previously headed the sewage construction
division, was accused of obstruction of a
public tender under the anti-monopoly law.
Tadashi Uchida, president of the Niigata-
based MSG Uchida Construction, was
arrested on the same charges. Information
had been leaked through municipal offcials.
Yuki subsequently committed suicide.
Kazakhstan
GC2006 02 part2 184 8/11/05 17:54:02
185
In April 2005, the president signed a decree on measures to step up the fght against
corruption and to strengthen discipline in the activities of state bodies and offcials.
Disciplinary councils in all provinces will be restructured, and their work will be more
accessible to the public. The fnance police are due to present a national anti-corruption
strategy for 200610 by the end of the third quarter of 2005. The decree also contains
provisions aimed at achieving greater transparency in procurement and reducing
government interference in business (see below).
Since January 2005, responsibility for investigating 44 offences has been transferred to
the Agency for Fighting Economic Crime and Corruption, an innovation intended to
avoid duplication between law enforcement agencies. Among the crimes for which it is
responsible are bribe-taking and other benefts connected to commercial activity, abuse
of authority and smuggling. Thirty other crimes in the economic category remain under
the jurisdiction of the internal affairs ministry or the fnance police. The transfer places
the agencys activities under the presidents offce, leaving some concern over how it
will fulfl its obligations of accountability to parliament. Civil society groups have made
repeated recommendations on how to improve the agencys effciency, including laws
that guarantee it an independent budget and defne more clearly its powers and goals.
In November 2004, a presidential decree created a permanent National Commission on
Democracy and Civil Society, a consultative body aimed at developing national dialogue,
increasing the transparency of public bodies and engaging civil society in the decision-
making process. The commissions membership includes the heads of all political parties,
two deputies from both chambers of parliament and two representatives each from the
offce of the president and the government. It has held fve sessions since November on
reforming the judicial system, forming a national programme on the political system
and strengthening the role of parliament. The commission involves representatives of
civil society, such as TI Kazakhstan, in discussions with politicians and international
organisations.
The Baikonur scandal
Local and international media uncovered
several scandals involving senior offcials in
200405, increasing pressure on government
to address corruption within its ranks.
Although the president signed an anti-
corruption decree in April 2005, the new law
will have little impact unless it is properly
enforced.
One area of concern is public procure-
ment. Despite a reasonably progressive
law on procurement passed in May 2002,
Kazakhstan has had serious problems in
implementing it. This is due in part to the
absence of oversight and monitoring of
irregularities in contracting processes. In
the words of Kairbek Suleimenov, a former
internal affairs minister, after each tender,
it is confdently possible to lead everyone
[involved] to court.
1
The alleged embezzlement of funds in an
agreement between Russia and Kazakhstan
over the use of the Baikonur space facility
was a case in point. The case was particularly
salient since it appeared to involve the
head of the presidential administration,
Imangali Tasmagambetov. In August 2004,
two deputies from the Russian Federation
Duma (parliament), Petr Rubezhanskii
and Aleksei Guzanov, wrote to the Kazakh
parliament enquiring about Russias
payments for rental of the Baikonur complex
in the Kazakh steppes.
2
They described
how Russia had provided the state railway
concern, Kazakhstan Temir Zholy (KTZh),
with a credit of US $65 million in 2003 to
purchase equipment, instead of paying cash
Country reports KAzAKHSTAN
GC2006 02 part2 185 8/11/05 17:54:02
Country reports 186
to rent Baikonur. KTZh awarded the tender
to two companies based in Omsk, Russia,
to supply it with equipment.
3
According to
the deputies, these enterprises had infated
the US $19 million cost of the equipment by
an extra US $46 million, and pocketed the
difference. As a result, Kazakhstan lost US
$46 million, while Russia lost US $13 million
in taxes.
4
In September 2004, Sergey Stepashin,
chairman of Russias audit chamber,
announced a joint investigation of the
deal in collaboration with the Kazakh audit
chamber.
5
In the meantime, the Kazakh
newspaper Respublika was conducting its
own enquiry. In August, it revealed that the
one person who could shed most light on the
missing funds was Imangali Tasmagambetov,
head of the presidential administration,
who had been prime minister when the
deal was struck, and had both signed the
agreement and nominated KTZh as the
preferred operator.
6
Moreover, Amangeldy
Ermegiyaev, son of the vice-president of
the ruling OTAN party, had supervised the
tender commission, and Alexander Pavlov,
the deputy prime minister, had monitored
the execution of the deal. The offcials who
were allegedly linked to the Baikonur scandal
denied any wrongdoing.
7
In late September, the fnance minister,
Arman Dunaev, insisted that all the rental
money had been paid into the national
budget in January and February 2004.
However, in February 2005, Omarkhan
Oksikbayev, chairman of the Kazakh audit
chamber, announced that the fndings of the
Russian audit chamber had been forwarded
to the prosecutor generals offce and the
fnance police. Oksikbayev confrmed that
KTZh had used the credit to buy equipment
in Russia at prices three times higher than
the amount normally demanded by the
manufacturers.
8
Investigations were still continuing at the
time of writing, but the situation has been
complicated by the lack of coordination
between law enforcement bodies and the
fact that they often interfere with one
anothers work in high-profle cases. So far,
the public prosecutors offce has prevented
the Agency for Fighting Economic Crime
and Corruption from bringing charges
against KTZhs executive director, Talgat
Ermegiyaev.
9
Whatever the outcome, it is
clear that public procurement has a long
way to go in Kazakhstan before it can claim
to be transparent. Contracting should be
monitored by independent bodies, including
civil society organisations.
Lack of transparency in the banking
sector
Another trend over the past year has been
a government tendency to manipulate the
courts, regulatory agencies and the media to
bring about the collapse of private banks that
have stepped out of line. These incidences
became more frequent in the run-up to the
parliamentary elections of September 2004.
Apart from the state-owned national
bank, most banks in Kazakhstan are
privately owned and include a range of
merchant, investment and retail activities.
Under current legislation, banks are allowed
to fnance political parties and many are
controlled by enterprises with political
affiliations. However, these loyalties are
not always transparent. The names of the
real owners are hidden behind fgureheads
or corporations and, although the Kazakh
national bank itself is required by law to
disclose the names of its proprietors, it is not
required to make this information accessible
to the public. One bank recently targeted
by the government was Kazkommertsbank,
founded in 1990 and the countrys largest
private bank. In an offcial press report in
May 2004, presidential adviser Ermukhamet
Ertysbayev accused Kazkommertsbank of
becoming too closely affiliated with the
opposition Ak Zhol party and denounced
its chairman, Nurzhan Subkhanberdin, as
a dangerous person, a rival of the president
and a power broker.
10
The latter denied he
had provided either fnancial or political
support to Ak Zhol, or any other party.
Nonetheless, the tax committee in the
GC2006 02 part2 186 8/11/05 17:54:02
187
SergeyZlotnikov(TIKazakhstan)
Further reading
G. S. Maulenov, OrganisedCrimesandCorruption (Almaty: Interlegal Publishing House, 2001)
Transparency Kazakhstan, AssessmentofCorruptionintheFieldofPrivateBusinessoftheRepublicof
Kazakhstan (Almaty: Interlegal Publishing House, 2002)
Transparency Kazakhstan, ProblemsandProspectsoftheNationalFundoftheRepublicofKazakhstan
(Almaty: Interlegal Publishing House, 2004)
TI Kazakhstan: www.transparencykazakhstan.org
fnance ministry launched an exhaustive
investigation into the banks tax records,
levying fines of US $30 million in June
2004.
11
The pro-presidential coalition of the
Agrarian and Civic parties, in collaboration
with the newspaper Express-K, argued that
the politicisation of the banks top managers
and the subsequent persecution of the
bank by the tax authorities had pushed it
to the edge of bankruptcy, and called for
the creation of a commission to protect
private investors. However, the managers
of Kazkommertsbank interpreted this media
publicity as a coalition ruse to damage the
banks reputation and steal their business.
The bank promptly took Express-K to court
and won their case.
12
At the same time, allegations that senior
members of government misuse their
positions to infuence the management of
banks are rife. One notable case concerned
the head of the presidential administration,
Imangali Tasmagambetov, and the Nauryz
Bank Kazakhstan (NBK). According to
NBKs chairman, Orazaly Yerzhanov, when
Tasmagambetov was prime minister in
2002 he offered to participate in NBKs
authorised capital with the sum of US $25
million, together with Yerlan Atamkulov,
president of the state railway concern,
KTZh. Yerzhanov agreed and US $10 million
in cash was immediately transferred, with
the expectation that the balance would be
paid within 18 months. This did not happen
because Tasmagambetov was unable to raise
the remaining US $15 million. In March 2004,
Tasmagambetov and his partner terminated
the agreement and demanded their money
back. When Yerzhanov refused, arguing such
a large withdrawal would damage the bank,
Tasmagambetov allegedly used his infuence
to set the public prosecutors office and
other state agencies on the bank chairman.
Between March and June 2004, the public
prosecutors offce investigated the NBK three
times for fnancial irregularities.
13
In June
2004, an opposition MP publicised a letter
that Yerzhanov had written to the president,
begging protection from Tasmagambetovs
arbitrariness.
14
Yerzhanov subsequently left
the country.
The investigation of the bank by the
Agency for Fighting Economic Crime and
Corruption continued, while the compulsory
liquidation of its assets was threatened. When
the agency submitted NBKs tax records to
the public prosecutors offce and the Internal
Affairs Ministry, the ministry stayed the
prosecution and the agency was told that the
investigation was the responsibility of other
law enforcement bodies, in contradiction
to existing legislation on economic crimes.
Then suddenly in January 2005, the Internal
Affairs Ministry dropped the case against
NBK.
15
These cases show that the lack of transpar-
ency in the Kazakh banking system makes it
diffcult to monitor the links between com-
mercial banks and political parties, or to rule
out the possibility of abuse of such connec-
tions for private gain. What is clear, however,
is that commercial banks must be seen to be
close to the ruling party if they are to have
any chance of operating successfully.
Country reports KAzAKHSTAN
GC2006 02 part2 187 8/11/05 17:54:03
Country reports 188
Notes
1. www.navi.kz/articles/?artid=4168
2. Respublika (Kazakhstan), 18 February 2005, www.kubhost.com/~kubkz/respublika.
php?sid=8366
3. Report of Russias audit chamber on the rental of Baikonur space complex, 20 January 2005,
Ref. 0166/051. See also www.rferl.org/reports/centralasia/2004/09/34-140904.asp
4. Respublika (Kazakhstan), 20 August 2005, www.kubhost.com/~kubkz/respublika.
php?sid=6593
5. www.ach.gov.ru/bulletins/1999/8-10.php; www.rferl.org/reports/centralasia/2004/09/34-
140904.asp
6. Respublika(Kazakhstan), 7 August 2004.
7. Vremya(Kazakhstan), 26 August 2004.
8. www.gazeta.kz/art.asp?aid=56271
9. Express-K (Kazakhstan), 29 March 2005, www.procuror.kz/rus/jscrpt/_center/_news_
gprk/2005/14-04-05_11.htm
10. Vremya (Kazakhstan), 13 May 2004.
11. Nezavisimayagazeta (Russia), 21 July 2004. See www.ng.ru/cis/2004-07-21/5_kazakhstan.
html
12. Express-K (Kazakhstan), 14 September 2004, and news.kkb.kz/news/show.asp?no=152438
13. Kazkommertsbank press release, available at news.kkb.kz/news/show.asp?no=79746
14. www.eurasia.org.ru, 10 June 2004.
15. Vremya(Kazakhstan), 24 February 2005.
Conventions:
AU Convention on Preventing and Combating Corruption (signed December 2003; not
yet ratifed)
UN Convention against Corruption (ratifed December 2003)
UN Convention against Transnational Organized Crime (acceded June 2004)
John Githongo, President Mwai Kibakis special adviser on governance and ethics,
resigned in February 2005. The Minister for Justice and Constitutional Affairs subse-
quently announced in April that the offce would be scaled down because some of its
functions were already being performed by the Kenya Anti-Corruption Commission
(KACC), which became operational in February 2005.
1
Githongos resignation and the
diminution of his offce could weaken the fght against corruption and may signal that
corruption is no longer on the presidents list of priorities (see below).
In August 2004, parliament passed a law on public procurement and disposal. The law
is aimed at establishing transparent and accountable procedures for procurement and the
disposal of unserviceable, obsolete or surplus stores and equipment by public entities. It
also proposes the establishment of a public procurement oversight authority.
In June 2004, the Commission of Inquiry into Illegal and Irregular Allotment of Public
Lands published a report on illegal allocation of land under previous governments.
It recommended the need for a redress policy to ameliorate the crisis resulting from the
illegal allocation of public land and, in particular, public utility land. The report further
Kenya
GC2006 02 part2 188 8/11/05 17:54:03
189
proposes the enactment of legislation to ensure that the revocation process is conducted
effectively and to modify any existing obstructive provisions in Kenyas land laws. It
also proposes the establishment of a land titles tribunal to review suspect cases. At the
time of writing, however, very few of these recommendations had been implemented
(see below).
Further setbacks to the fight against
corruption
There is growing pessimism about the gov-
ernments fght against corruption. Part of
the problem lies in the governments lack of
a coherent anti-corruption strategy and its
inability to investigate and prosecute new
cases of graft. As President Mwai Kibaki,
who came to power in December 2002, has
been unable to stamp his authority on the
fragile National Rainbow Coalition (NARC),
he has built new alliances, including some
with members of the previous government
who are suspected of corruption. This makes
it risky for him to take drastic measures
against corrupt political and administrative
heavyweights, as it could take only a few
arrests to make the entire coalition crumble.
Indeed, the presidents chief adviser on
governance and ethics, John Githongo,
resigned in February 2005, frustrated by
new corruption networks and what was
perceived as ineffectual support from the
president. In February 2005, the US and
German governments suspended millions
of dollars of grants they had promised in
support of anti-corruption programmes in
the wake of Githongos resignation and the
governments failure to deal with known
cases of corruption.
2
Other donors stated
that they were reviewing their stance, but
requested to see steps taken to combat new
cases of corruption.
3
Also in February, the
British High Commissioner, Edward Clay,
announced he had presented a dossier to
the authorities detailing alleged graft in 20
procurement contracts, and demanded a full
and transparent investigation of them.
4
This is only the latest in a series of setbacks.
The presidents main strategy in 2003 was to
create new anti-corruption institutions and
set up inquiries into past scandals. The new
institutions have proved to be ineffectual,
however, and inquiries inconclusive. For
instance, a report by the Commission
of Inquiry into Illegal and Irregular
Allocation of Public Lands, presented to
the president in June 2004, made sweeping
recommendations, proposing changes to the
law and demanding that illegally obtained
land titles be revoked.
5
Grants of government
land were widely abused under the former
government. The Ministry of Lands has
promised action, but little has been taken
since the reports publication, except for the
eviction of squatters, which critics see as a
political move.
6
The fate of the Public Offcer Ethics Act
is also indicative of the weakening fight
against corruption. The 2003 law requires
public offcers to disclose their assets and
eschew conficts between private interests
and public duty. But asset disclosures are
confdential and inaccessible to the public.
In the meantime, the fate of prominent
political fgures allegedly involved in the
Goldenberg scandal, which is estimated to
have cost Kenya more than US $600 million,
has yet to be decided. These include former
president Daniel arap Moi, the former vice-
president and current education minister,
George Saitoti, and the former finance
minister and vice-president, Musalia
Mudavadi.
7
In another high-profle case,
known as the Anglo-Leasing scandal, six
people were charged in February 2005,
8

including senior government offcials, but
no cabinet members resigned in the wake
of the scandal.
Even where reforms have been attempted,
as in the judiciary, they are incomplete.
For example, tribunals set up in 2003 to
investigate High Court and Court of Appeals
Country reports KENyA
GC2006 02 part2 189 8/11/05 17:54:03
Country reports 190
WachiraMainaandNoelinaNabwire(TIKenya)
judges suspended for corruption were
halted in late 2004 by a spate of litigation
by the judges concerned. This could make
it harder to appoint such tribunals in
future. In April 2005, the Kenyan branch
of the International Commission of Jurists
released a report on judicial independence
and accountability. It pointed out that
measures aimed at fghting corruption in
the judiciary were not in accordance with
international standards, noting in particular
that publicising allegations of corruption
against judges and magistrates before they
had been notifed themselves was deeply
irregular. Concerns were also raised about
the lack of transparency in disbanding the
tribunals set up to investigate judges, and
the subsequent creation of new tribunals.
9
In September 2004, the commissioners of
the Kenya Anti-Corruption Commission were
appointed with Aaron Ringera, a prominent
judge, as its director. While this could restore
some public confdence, the KACC lacks the
power to prosecute and its investigations
depend on the diligence of Attorney General
Amos Wako, who is embroiled in a scandal
of his own. In July 2005 the High Court of
Kenya asked President Kibaki to appoint
a judicial tribunal to suspend Wako over
alleged misconduct,
10
after the Law Society
of Kenya fled a private case against him over
allegations of abuse of offce and failure to
prosecute corruption cases. Wako used
his powers to terminate the case, but the
legality of this move when he himself was
the subject of the indictment is before the
Constitutional Court.
In the meantime, the alliance between
civil society and the government is
crumbling and key civic groups have pulled
out of joint anti-corruption initiatives. In
February 2005, the Child Rights Advocacy,
the Documentation and Legal Centre, the
Coalition on Violence Against Women, the
International Commission of Jurists Kenya,
the Kenya Human Rights Commission, the
Centre for Minority Rights and Development,
TI Kenya, the Federation of Women Lawyers,
the National Council of NGOs and the
Law Society of Kenya all suspended their
participation in the Governance, Justice,
Law and Order Sector reform programme,
citing loss of faith in the governments
commitment to anti-corruption reform.
Earlier, representatives of the Federation
of Women Lawyers, TI Kenya, TheStandard
newspaper and the Institute for Education
in Democracy resigned from the National
Anti-Corruption Steering Committee, the
governmentcivil society body launched in
May 2004 to lead a national anti-corruption
campaign. Its executive director, Jane Kiragu,
also resigned, saying the committee needed
more logistical support than was available.
In August 2005, while opening a meeting
for anti-corruption offcials in Nairobi,
11
Minister for Justice and Constitutional
Affairs Kiraitu Murungi admitted that the
NARC governments fght against corruption
had lost momentum.
The prognosis for the future fght against
corruption is not good. In December 2004,
Transparency International published the
Global Corruption Barometer 2004, which
showed the persistence of corruption in
Kenya and low levels of public confdence
in the governments ability to deal with it.
Some 36 per cent of Kenyans reported that
they or their family members had paid a bribe
in the past 12 months.
12
The police topped
the list of the most corrupt institutions by
scoring a fgure of 4.3 on an index of 1 to 5.
This appeared to correlate to rising levels of
insecurity. Political parties, parliament and
customs ranked next. Though 41 per cent
of Kenyans thought that corruption would
decrease, 55 per cent thought that it would
stay the same (20 per cent) or increase (35 per
cent). TI Kenyas 2005 Kenya Bribery Index
paints a similarly gloomy picture. Incidences
of corruption have fallen somewhat, but the
average size has increased, particularly in
dealings with the judiciary and police. More
than 57 per cent of those surveyed believed
that corruption in Kenya has remained
the same.
GC2006 02 part2 190 8/11/05 17:54:03
191
Further Reading
Kivutha Kibwana et al., InitiativesagainstCorruptioninKenya:LegalandPolicyInterventions1995
2001 (Nairobi: Claripress, 2001)
ReportoftheTaskForceonPublicCollectionsorHarambees (Nairobi: Government Printer, 2003)
TI Kenya: www.tikenya.org
Notes
1. The directors of the KACC were appointed in September 2004 and its staff in February 2005;
see GlobalCorruptionReport2005.
2. TheStandard (Kenya), 8 February 2005.
3. TheStandard(Kenya), 19 February 2005.
4. BBC News (UK), 3 February 2005.
5. ReportoftheCommissionofInquiryintoIllegalandIrregularAllocationofPublicLand (Nairobi:
Government Printer, 2004).
6. TheStandard(Kenya), 16 July 2005.
7. For more details, see Global Corruption Report 2005, and http://news.bbc.co.uk/2/hi/
africa/4025375.stm
8. DailyNation (Kenya), 17 February 2005.
9. International Commission of Jurists, Kenya:JudicialIndependence,CorruptionandReform, April
2005, available at www.icj.org/IMG/pdf/kenyareport.pdf
10. ThePeople(Kenya), 8 July 2005.
11. DailyNation (Kenya), 10 August 2005.
12. The feldwork for the Global Corruption Barometer 2004 was conducted between July and
September 2004.
Conventions:
ratifed)
In October 2004, the Council of Ministers merged its economic and legal standing
sub-committees to address the issue of corruption within the public sector. These sub-
committees had not previously been delegated with the task of dealing with corruption.
However, since corruption had become an important government issue, it was deemed
prudent to merge the two committees in order to draw from a wider pool of expertise
on corruption-related issues.
In January 2005, the Council of Ministers set up four working groups in accordance with
the joint economic and legal committees recommendations. The groups will submit
a report to the Council by the end of 2005 and will be responsible for: examining
measures to standardise internal government procedures; putting in place guidelines
for procedures for the provision of government services; outlining specifc standards
for the appointment of senior government offcials; and monitoring the progress of
e-government efforts. Once this has been done, the Council will focus its attention on
Kuwait
Country reports KUWAIT
GC2006 02 part2 191 8/11/05 17:54:04
Country reports 192
creating an independent administrative overview body and/or enhancing the role of the
Citizens Services and Governmental Bodies Assessment Agency.
1
The government brought in the Infocomm Development Authority of Singapore (IDA)
in September 2004 to integrate its different information systems and create a blueprint
for e-government by June 2005. Current e-government schemes include an On-line
Directory of Services that specifes the documents and timeframe required for the delivery
of certain government services. The municipality has also established a website detailing
its services, as well as publishing building regulations and other information.
2

The Council of Ministers set up a committee within the Finance Ministry in December
2004 with responsibility for drawing up a code of conduct for dealing with unsolicited
offers. Public land is scarce and expensive in Kuwait, leading to a situation in which
private sector representatives approach offcials with proposals for projects in return for
access to public land (referred to as unsolicited offers).
Serving judges will no longer be allowed to act as government advisers due to potential
conficts of interest, following a Council of Ministers resolution in February 2005.
3
In March 2005, the National Assembly passed the municipality reform law, which
separates the elected municipal council from the administrative institutions, thereby
reducing the infuence of individuals in one branch over those in the other. An added
check includes the appointment of a new minister to oversee the municipal sector. The
law also states that the central plan has to be approved by Emiri decree, rather than the
municipality, making it harder for corrupt offcials to manipulate.
Corruption no longer taboo
The dichotomy between a critical private
space in Kuwaiti society and a stagnant
public one is still in the process of being
reconciled. One indication of this is the
governments long overdue recognition of
the problem of corruption, which previously
was only discussed openly by individuals
and in the private media.
In October 2004, Prime Minister Sheikh
Sabah al-Ahmad al-Jabir al-Sabah highlighted
that corruption had become a key issue on
his governments political agenda.
4
Speaking
to the press one month earlier, he criticised
the municipal sector, saying incidents of
corruption there seemed to outnumber
those in all the other sectors combined.
These comments should not be viewed as
isolated blips on the political radar, but as
part of a trend in increasing transparency
that became particularly evident last year.
For example, the respected daily Al-Qabas
published a secret report by the Citizens
Services and Governmental Bodies Assess-
ment Agency (C2G) in December 2004.
5
The
Council of Ministers, in consultation with
the World Bank, had tasked the C2G with
reporting on administrative corruption in the
public sector and formulating a strategy to
combat the phenomenon. The report listed
the most common types of corruption, such
as bribery and favouritism, and highlighted
the government sectors most vulnerable,
notably public contracts and procurement.
It also identifed the following defciencies
in the administrative framework: lack of
accountability by leaders and politicians;
absence of a code of conduct and a work
ethic; absence of deterrents for violators;
lack of meritocracy in appointments and
hiring; and poor scrutiny of managers and
offcials. It concluded that Political corrup-
tion lies at the heart of corruption.
6
One peculiarity of Kuwait is that,
although there are bodies for monitoring
financial and criminal accountability,
no realwatchdog agency exists to ensure
administrative accountability. The C2G was
established with this mandate in mind, but
GC2006 02 part2 192 8/11/05 17:54:04
193
its capabilities are inadequate. Not only does
it lack institutionalised mechanisms, it has
no authority to seize documents or question
witnesses without prior consent. The only
weapon in the agencys arsenal is its proximity
to the offce of the prime minister, and its
ability to report (and blacklist) uncooperative
officials or departments directly. The
government is currently weighing the
benefts of either a new investigative body
for the administrative sector, or giving the
C2G greater powers to deter corruption.
After a fact-fnding trip to South East Asia
in July 2004, the authorities have taken
other initiatives to improve transparency, in
addition to the blueprint for e-government
outlined above. In December 2004, the
Council of Ministers set up a committee
within the fnance ministry to formulate a
code of conduct, to deal with BOTs (build,
operate and transfer) and unsolicited offers.
From January 2005, the C2G began working
with the Criminal Investigation Department
to establish an anti-corruption police unit.
One illustration of the governments
changed response to administrative
corruption involved an embezzlement
conspiracy at the Ministry of Public Works
that came to light in the summer of 2004,
when the press published allegations that
six employees had been drawing illicit
amounts of KD30,000 (around US $100,000)
a month from the budget since 1995. The
Public Prosecutors Office subsequently
discovered that the network was far more
widespread and targeted 35 staff, including
senior managers, for investigation. The scam
involved the transfer of salaries to other
staff above their actual level and requests
for the return of the difference, which was
then pocketed by the fraudsters. Two of the
defendants were sentenced to 10-year prison
terms in April 2005. As a result of the case,
the government has introduced an electronic
system whereby salaries are transferred
directly to employees accounts.
It is essential to understand that it is
the Kuwaiti state itself which generates
the incentives determining the supply and
demand for corruption. The public sector
employs an astonishing 94 per cent of the
labour force, spans 54 institutions and
provides around 3,000 services. An all-
inclusive cradle-to-grave welfare system
has created unparalleled dependence,
while sprawling bureaucracies and excessive
regulations give offcials a monopoly over
a wide range of activities. Streamlining
the administration would limit officials
discretionary powers and their ability to
seek favours in return for speeding up
bureaucratic procedures.
At the crux of the governments dilemma
is its concern that reducing corruption
would also shrink the functions of state.
If it is to fght corruption in earnest, the
authorities must be willing to accept this
transformation.
Blame without accountability?
Kuwait has a long tradition of civic
participation due to the formula of joint
governing established at an early stage of
development when the al-Sabah family was
chosen to rule by other leading families,
rather than taking power by force. The
diwaniyas, or salons, where men gather to
talk politics in the evenings, are a vivid
illustration of the publics interest in
politics. The press is private and does not
shy away from contention. Indeed, at frst
glance, suffcient constitutional guarantees
and mechanisms seem to exist to ensure
accountability. The Audit Bureau is an
independent agency with responsibility
for monitoring spending in all ministries
and government agencies. A permanent
parliamentary committee is charged with
the protection of public funds and MPs can
question ministers over improprieties, and
have them removed when necessary.
However, the critical observer is more
likely to see these customs and committees
as window dressing, rather than genuine
tools of accountability. A recent study of
parliamentary investigative committees
by Khaldun al-Naqeeb and Ali al-Zuabi of
Kuwait University indicated that, despite the
Country reports KUWAIT
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Country reports 194
KuwaitEconomicSociety
sharp rise in the number of committees set
up in the 1990s, MPs failed to achieve any
decisive achievements with regard to offcial
corruption.
7
Several parliamentary investi-
gations led to dissolution of the legislature
to prevent further government scandals
being revealed.
8
Failure to achieve real accountability
reflects the fundamental flaws in the
political system. Opposition parties are
banned, leaving a series of semi-nebulous,
shifting factions confned to opposing the
government on specifc issues, but lacking
the continuity or ability to formulate policy
alternatives, let alone form a government.
This weakness is compounded by the
executives right to dissolve parliament,
which makes MPs wary of overstepping the
boundaries. Many citizens are dissatisfed
with parliamentary interpellations, which
they perceive as a tool to bludgeon ministers
into acquiescing to questionable patronage,
to enhance MPs popularity or to bully
members of opposition factions.
There is also the matter of MPs
accountability, which is achieved at the
ballot box in most democracies. The Kuwaiti
democratic process is unrepresentative due
to the narrowness of its electoral base,
and is marred by pervasive vote buying.
According to Ghanim al-Najjar, the narrow
electoral base has created a situation where
only 14 per cent participate. This is due to
the law excluding members of the security
services, the under-21s and, until 16 May
2005, women.
9
Following that momentous
parliamentary session, which granted women
the right to vote and run for elections, the
voter base will expand to 35 per cent of the
population.
10
The other contentious electoral reform
issue that has received signifcant attention
this year involves replacing the current 25
voting districts with 10, as was the case
prior to the 1981 Election Law, when the
government redrew electoral boundaries
according to demographic characteristics
that would be in its favour. Proponents of the
reform say it would reduce the propensity
for corruption and vote-buying, as well as
diminishing the scope for reliance on ethnic
and personal connections, since candidates
would need to appeal to broader coalitions
and formulate more ideological platforms
across larger districts. The enfranchisement
of women could compound this effect by
increasing the number of potential voters, as
well as further institutionalising the process
of political campaigning, since candidates
would need to address more formal and
open associations to get their message across,
rather than resort to the more closed system
of addressing male-dominated diwaniyas.
Increasing constituency sizes could come
against resistance from the government, if
it believes that such a move would dilute
its influence over the Assembly. Others
postulate that changing constituencies in
such a way would make the government
the only credible buyer of votes. Thus rather
than reducing the level of corruption, it
would merely change its distribution. These
issues are still being debated.
The issue of MPs legitimacy is not helped
by lack of transparency in the fnancing of
their electoral campaigns, nor are there laws
or restrictions on MPs receiving gifts.
11
Par-
liamentarians also beneft from immunity,
perpetuating the myth that they are above
the law. A mechanism exists to strip MPs of
their immunity in cases of criminal wrong-
doing, but it requires a request from the
attorney general to parliament, followed by
a majority vote in the chamber.
Nor are there any clear means for ordinary
citizens to monitor the states provision of
public services. This is due partly to the
absence of laws ensuring access to information
by which to measure performance. Another
deterrent to more effective auditing is the
diffculty in registering new NGOs and civil
society organisations, since the Law of Public
Benefit Societies gives the government
complete discretion to grant, license, ban
and regulate any such associations.
GC2006 02 part2 194 8/11/05 17:54:04
195
Further reading
Michael Herb, Princes and Parliaments in the Arab World, MiddleEastJournal 58(3), Summer
2004 (Washington, DC: Middle East Institute, 2004)
Mary Ann Tetreault, StoriesofDemocracy.PoliticsandSocietyinContemporaryKuwait (New York:
Columbia University Press, 2000)
Kuwait Economic Society: www.economic-society.org
Notes
1. The Citizens Services and Governmental Bodies Assessment Agency was established in October
2002. Its mandate is to evaluate the performance of government bodies in providing public
services and in complying with the general policy of the state according to the government
work programme.
2. See baladia.gov.kw, c2g.gov.kw, csc.net.kw and www.moi.gov.kw
3. Al-Watan (Kuwait), 1 March 2005.
4. Prime ministers speech on 23 October 2004.
5. Al-Qabas (Kuwait), 29 November4 December 2004. The report was secret since the study
had been requested by the Council of Ministers and all documents and proceedings within
the council are confdential under the constitution.
6. Ibid.
7. Khaldun al-Naqeeb and Ali al-Zuabi, The Role of National Assembly in Combating Corruption,
Hewar al-Arab Journal, 10 September 2005. This analysis of parliamentary investigative
committees has rendered disappointing results: of the 38 committees established since 1963,
only three cases have been sent to the attorney general, with the rest being ignored or failing
to produce any tangible results. There has been a consistent lack of parliamentary follow-up
of these cases, and the government has missed opportunities to correct alleged defciencies
or use these instances as momentum for reform.
8. Some of the cases investigated involved the embezzlement of public funds, arms procurement
and military contracts, and the misuse of public authority and power.
9. Ghanim al-Najjar, The Challenges Facing Kuwaiti Democracy, MiddleEastJournal 54(2),
Spring 2000.
10. Al-ShallReport(Kuwait) 15(201), May 2005.
11. C2G Report, Al-Qabas (Kuwait), 29 November4 December 2004.
Conventions:
Following the overthrow of President Askar Akayev in March 2005, the new government
was quick to commit itself to a renewed fght against corruption, having witnessed the
role it had played in fuelling the revolution that unseated the former president. In May,
the government announced the creation of an anti-corruption centre in the mayoralty
of Bishkek. Provisionally, it provides for the creation of a monitoring agency, composed
Kyrgyzstan
Country reports KyRGyzSTAN
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Country reports 196
of civil society organisations, with oversight for the institutions of local government,
including public works and services delivery.
In August 2004, parliament adopted Law 108 concerning the income and property
declarations of politicians, their close relatives and the sources of their earnings. Under the
law, politicians and senior administrators, including ministers, must publish information
on their incomes annually in the media. Though intended to create greater openness about
wealth at the highest levels of power, the law establishes no complementary agency to
verify whether the income and property declarations are factually accurate. In the event,
President Akayev declared his income as US $300 per month and other offcials followed
with equally dubious claims (see below).
In August 2004, parliament adopted a law to regulate and modernise the civil service.
More progressive than the law it replaces, Law 114 contains a number of anti-corruption
measures. For the frst time, civil servants can be temporarily suspended from duties
that present a confict of interest and managers can exercise increased control in such
cases. Regulations concerning the declaration of income by public offcials have also
been amended. Under Law 114, the civil service affairs agency must ensure access to the
income and property declarations of offcials, and in some cases their close relatives, by
publishing the information in the offcial gazette and on the Internet. Legal procedures
exist to ensure that civil society and media can appeal against anyone who refuses to
comply with this regulation. Law 114 also includes provisions for a new state service
agency to develop a unifed policy on the civil service. The tasks of the agency, established
by presidential decrees in September and October 2004, are to secure the stable succession
and independence of the civil service; attract qualifed staff; increase management
effectiveness; participate in the process of improving legislation on government service;
create a system of transparency of incomes of government offcials and other offcers of
state bodies; and to protect the rights and legal interests of government offcials.
Tulip revolution gains second wind
The year of 2005 will be remembered as the
year of the tulip revolution in Kyrgyzstan,
when a wave of protests swept away the
authoritarian regime of President Askar
Akayev after 14 years in power. Government
manipulation of the parliamentary elections
in February and March was the fnal straw
that sparked the 2005 uprising that was
already brewing, due to a combination
of the pervasive poverty, corruption and
concentration of wealth in the hands of
few that had characterised Akayevs time
in offce. Four weeks after the frst show of
resistance in the southern city of Jalalabad,
on 24 March, thousands of demonstrators
stormed the White House, the seat of the
presidential administration in Bishkek.
Akayev fled the city to Moscow where
members of his family later joined him. He
formally resigned on 4 April, apparently
assured that he would enjoy the immunity
granted under the constitution, but the
acting chief prosecutor, Azimbek Beknazarov,
denied this was the case since Akayev had
fed the country. A formal resignation was
needed to pave the way for new presidential
elections in July 2005.
One of the Bishkek protesters first
objectives was to free Felix Kulov, who used
to head the Ministry of Interior and was the
leader of the opposition Ar-Namys (Dignity)
Party. Kulov, a northerner, was imprisoned
in 2000 before the presidential election
campaign of that year on charges of alleged
corruption and abuse of power. Although
subsequently released for a few months,
he was given a 10-year prison sentence in
2001. In the aftermath of the initial protests,
Kulov was asked to take charge in Bishkek
where there was widespread looting, but
GC2006 02 part2 196 8/11/05 17:54:05
197
he held the post only for a week, telling
a Western NGO he would not work with
the new authorities.
1
In the meantime, a
second potential crisis emerged as both the
incumbent and newly elected legislatures
vied for legitimacy. On 26 March, the
incoming assembly appointed Kurmanbek
Bakiev acting president and prime minister.
President Bakiev, an economist from the
south, was prime minister from 2000 to May
2002, when he resigned after the police shot
and killed six demonstrators in the district of
Aksy. In April, a special working group of the
Supreme Court exonerated Felix Kulov of all
charges of corruption, effectively clearing the
way for his own bid for the presidency.
2
In spite of the colourful way they came
back into the limelight, President Bakiev
and Kulov held positions in Akayevs
previous administrations and are veterans
at manipulating the northsouth divide that
plays such an important role in political
life. Considerably weaker in the south, the
cradle of the revolution, Akayev had also lost
popularity in the north since the crackdown
in 2002. With Kulov sidelined, however, the
opportunity to form a northsouth coalition
of all opposition forces was lost. President
Bakiev and other new leaders began to appoint
friends, family and clan members, many
from the south, and former or incumbent
ministers to high offce, essentially repeating
the pattern followed by Akayev.
3
The chaos
in the appointments process has undermined
the image of Bakiev, said one NGO leader in
Bishkek. Who has come to power? The old
Communist Party nomenklatura, the Akayev
nomenklatura, and those who participated in
the storming of the White House.
4
While President Bakiev clearly needed
to fill the void left by Akayevs sudden
departure, the euphoria generated by the
tulip revolution evaporated and ministries
became paralysed by what one analyst
called a wild scramble for power.
5
The
appointment of Tashtemir Aitbaev, a former
KGB offcer and Akayev stalwart, as head of
the National Security Service, disconcerted
the International Crisis Group among other
civil society actors, who had hoped for a
sign of a softer position on human rights.
But it was the case of the fnance minister
Akylbek Japarov that drew most protest. A
letter to a local newspaper from a group of
businessmen alleged rampant corruption in
the ministry as Japarov appointed relatives
to key posts in the tax and customs services,
and employed members of the financial
police as his personal bodyguard.
6
Similar incidents have occurred in state
companies and local governments in
different parts of the country, dispelling
any hope that the legal and institutional
apparatus created to combat Akayev-era
corruption would be deployed in the Bakiev
presidency very soon. Another trend in the
post-revolutionary period has been a series
of land seizures in Bishkek by some 30,000
people who began building homes or selling
the property despite lacking title deeds.
7
These political and social tensions
appeared set to erupt at a replay of the spring
presidential elections, which had been so
tainted by the exclusion of candidates, vote-
buying, infringements on press freedom and
the falsifcation of results that they sparked a
revolution. However, in May 2005, President
Bakiev and Felix Kulov unexpectedly
announced a coalition agreement that
effectively removed the prospect of a more
critical northsouth rift in the near future.
Bakiev would stand for president under
the deal and, if he won, appoint Kulov
prime minister, but with greatly expanded
powers. Indeed, with Akayev stripped of his
political rights, the BakievKulov team won
a relatively clean sweep in July 2005.
The frst priorities of the post-election
presidency will be to regain control of
the country; adapt the constitution to
accommodate the prime ministers enhanced
role; and reshuffe the cabinet and other
senior appointments in accordance with
the coalitions requirements. With Kulovs
support, President Bakiev has an opportunity
to begin the process of change required
to dismantle the Akayev system and to
implement the backlog of anti-corruption
legislation that has been sitting largely
unused on the statute book. It remains to be
Country reports KyRGyzSTAN
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Country reports 198
AigulAkmatjanova(TIKyrgyzstan)
seen, however, how long the BakievKulov
alliance will remain intact.
The Akayev investigation
Former president Askar Akayevs last
declaration of assets before he was
overthrown included a four-room apartment
in Bishkek, an old Mercedes and a modest
dacha in Moscow. A commission set up
in April 2005 to investigate the business
interests of the ex-president and members
of his family is examining an extensive list
of properties. These range from newspapers,
radio stations and supermarkets, to hotels,
banks, an airport and the countrys largest
mobile telephone company, BiTel, worth an
estimated US $250 million.
8
Unravelling the
complex web of ownership surrounding these
companies has been diffcult, the deputy
prime minister and commission chairman
Daniyar Usenov admitted. The founders
of BiTel were three offshore companies
registered in the Isle of Man. The founders
of those were two companies registered in
the Seychelles, and the founders of those are
two Liberian companies. According to our
information, he said, the founders of those
companies are, in turn, the Akayev family
on the one hand, and [BiTels] management
on the other. Other companies have
been tracked back to shell companies in
Cyprus, the Cayman Islands, Liechstenstein,
Panama, Turkey and Germany. Establishing
the link between the Akayev family and
these alleged business interests, however,
may be impossible.
9
Though stripped of his
privileges by an act of parliament, Akayev
has yet to face prosecution.
Less than 10 days after it was created, the
commission announced a tentative list of
42 companies to be investigated for links to
the Akayev family. A further 31 companies
were added to the original list within days
and, by late May 2005, 136 other companies
had been added to the original list. The
commission is also investigating money
transfer schemes through offshore zones,
schemes for skimming from the budget, and
from such enterprises as the Kumtor [gold
mine]. A further 48 companies are under
investigation for making arrangements with
the tax inspectorate to avoid paying taxes.
Usenov suggested that Manas International
Service, an aircraft fuel supplier allegedly
owned by Aydar Askayev, the presidents
son, had posted sales of US $30 million a
year, but profts of only a few thousand
dollars.
10
If one calculates the damage done
to the country from illegal privatisation, tax
avoidance, non-payment of duties, illegal
seizure of business from businessmen, in
all areas, Usenov himself a businessman
said, I would assess this at billions of
soms.
11
The acting general prosecutor Azimbek
Beknazarov announced in June that the gov-
ernment had agreed to pay a Vienna-based
legal frm US $500,000 and 5 per cent of any
monies returned to pursue an out-of-country
investigation, because Kyrgyz investigators
were not licensed to operate abroad.
12
Earlier
in the investigation, the commission sent
formal requests to Interpol and the fscal
authorities in the United States and the UK
for information about the ex-presidents
bank accounts.
Although the authorities have launched
nearly 120 criminal cases against companies
connected with the Akayevs and their
circle, not a single one has directly named
the former president. In response, he has
accused Usenov of exacting vengeance on
a former political adversary and launched a
defamation case through a Russian lawyer.
13

During a press interview in April 2005 about
the tax evasion schemes businessmen
used while Akayev was in power, Usenov
stressed future compliance rather than past
wrongdoing. Were not asking about what
happened yesterday, he said. Otherwise
well have to put half the country in jail.
14
GC2006 02 part2 198 8/11/05 17:54:05
199
Notes
1. International Crisis Group, www.crisisgroup.org/home/index.cfm?id=3411&CFID=6511543
&CFTOKEN=86901627
2. http://eurasianet.org/departments/business/articles/pp050505_pr.shtml
3. http://eurasianet.org/departments/insight/articles/eav040805a.shtml
4. International Crisis Group, Kyrgyzstan: After the Revolution, 4 May 2005, available at www.
crisisgroup.org/library/documents/asia/central_asia/097_kyrgyzstan_after_the_revolution.
pdf
5. http://eurasianet.org/departments/insight/articles/eav040805a.shtml
6. MSN (Kyrgyzstan), 5 April 2005.
7. http://eurasianet.org/departments/insight/articles/eav040805a_shtml
8. http://eurasianet.org/departments/business/articles/pp050505.shtml
10. Ibid.
11. www.iwpr.net/index.pl?archive/rca2/rca2_383_1_eng.txt
12. Ibid.
13. Ibid.
Conventions:
The Central Bank introduced two public complaints and redress forums in 2005.
The Financial Mediation Bureau (FMB), launched in January, is an integrated dispute
resolution centre for fnancial institutions. The FMBs predecessors, the Banking Mediation
Bureau and the Insurance Mediation Bureau, handled a total of 1,515 cases in 2004. The
FMB provides an avenue of redress for a wider spectrum of the public since it covers the
consumer areas of Islamic insurance, development fnance institutions, as well as non-
bank issuers of credit and charge cards. In February, the Central Bank set up a website,
LINK, to facilitate a rapid response to the public, as well as small and medium enterprises,
on matters related to the fnancial sector. LINK also has the potential to encourage internal
and external whistleblowers to disclose corruption in the fnancial sector.
In December 2004, the Treasury issued new guidelines for public procurement on
infrastructure maintenance projects that outline the selection process for contractors,
the use of open tenders and the participation of a broader group of public offcials to
ensure transparency. Though the guidelines cover one area of public procurement only,
they apply to all departments of government (see below).
The Anti-Corruption Academy, frst announced in December 2003, is expected to become
operational in September 2005. Its main role is to train offcials of the domestic Anti-
Corruption Agency, but it will function as a regional centre for anti-corruption capacity
building, promoting best practice in investigation, monitoring and enforcement, as well
as forensic accounting and engineering (see below).
malaysia
Country reports mALAySIA
GC2006 02 part2 199 8/11/05 17:54:06
Country reports 200
A number of civil society organisations, including TI Malaysia, formed a lobbying
group in October 2004, Infokl, to press for greater freedom of information. Housed
at the Centre for Independent Journalism, Infokl will draft a freedom of information
bill, including provisions for whistleblowers, for submission to government. It will also
call for a review of the Offcial Secrets Act, which inhibits comment on many public
sector activities.
The governments anti-corruption
campaign
The fght against corruption has been the
centre piece of Prime Minister Abdullah
Badawis government since it came to power
in October 2003. The campaign has focused
on prevention, including the formation
of the National Integrity Plan (NIP), the
Integrity Institute of Malaysia (IIM) and
the Anti-Corruption Academy, but it has
punitive aspects as well. It is too early to
assess the real impact of the campaign but
the signs are encouraging.
In April 2005, the government announced
that the IIM would develop a National
Integrity Index (NII), to assess progress
in areas including corporate governance.
The IIM was established in April 2004 to
implement an NIP for 200408, aimed at
reducing corruption and abuse of power,
mainly through education and training.
Since its inception, the IIM has conducted
numerous courses on integrity for the
private and public sectors, and in universities
and schools.
The Anti-Corruption Academy, which
is expected to open its doors in September
2005, is the frst of its kind in the Asia-Pacifc
region. Established by the Anti-Corruption
Agency (ACA) to train anti-corruption offcials
in Malaysia and from across the region, the
academy will function as a centre for anti-
corruption capacity building, promoting
best practices in investigation, monitoring
and enforcement, and in newer areas such
as forensic accounting and engineering.
Although it has yet to begin operations, it has
been welcomed by the Asian Development
Bank and the Organisation for Economic Co-
operation and Development.
Meanwhile, the ACA stepped up
enforcement of the Anti-Corruption Act
with a 47 per cent increase in corruption-
related arrests in 2004, compared to 2003,
and 179 new cases registered for trial.
1

Among those charged in 2004 were the
former land and cooperative development
minister, Kasitah Gadam, and Eric Chia Eng
Hock, a businessman closely associated with
former prime minister, Mahathir Mohamad,
who retired in October 2003 after 22 years
in offce. The charges were remarkable since
the agency had been criticised for targeting
only small fish, with some observers
blaming this on the lack of independence
of the attorney general, who held the fnal
decision to prosecute.
2
Other anti-corruption
laws have not been enforced so effectively.
The frst prosecution under the Anti-Money
Laundering Act of 2001 was only initiated in
2004, but a spate of prosecutions is expected
in the near future.
3
Despite this, there is continuing concern
about the ACAs independence. It forms part
of the prime ministers offce and, though
the king appoints the director general, he
does so on the prime ministers advice. This
does not necessarily translate into executive
interference with its investigations, but the
former prime minister did remove ACA
director general Datuk Ahmad Zaki in March
2001, in spite of his diligence and record of
effectiveness.
Another aspect of the governments
strategy has been to limit the opportunities
for corruption by improving public service
delivery. To this end, an internal circular in
November 2004 repealed the 1979 auditing
system, setting out new objectives, functions
and responsibilities. The new auditing regime
will be responsible for all monetary and
fnancial transactions, including verifying
all the expenditure, profts, assets and stock
managed.
GC2006 02 part2 200 8/11/05 17:54:06
201
In January 2004, the Public Complaints
Bureau (PCB), which many had criticised
for the complexity of its procedures,
launched the MESRA Rakyat programme
whereby it tours the country to listen to
local complaints. Heads of government
departments are also present at these meet-
the-people sessions. At a session in Melaka
state in July 2004, 278 citizens met 49 heads
of department and raised over 40 issues.
The offcer in charge reported that of the
40 cases brought up, 37 had been settled,
while three were pending. All cases relating
to corruption are referred to the ACA for
further investigation. The PCB plans to
monitor these investigations to ensure that
action has been taken.
Procurement policies on the mend
In November 2004, a local newspaper
published a front-page story on defective
buildings and roads that had cost the
taxpayer an estimated MYR2 billion (US
$500 million).
4
The response of the public
works minister was that the fasco was not
the fault of his department, but of a group of
contractors known as Project Management
Consultants (PMC), set up in the 1990s and
registered with the fnance ministry.
PMC comprises several contractors who
were awarded projects through direct
negotiation, circumventing procurement
regulations. A treasury circular in September
2000 sanctioned privileged consortia to
cover fve regions and exempted government
departments from normal procurement
procedures.
5
This allowed agencies to
implement their own projects through
limited tenders or direct negotiations. The
usual procedure had been to go through the
public works department and, only if the
latter were unable to take on the contract,
could other contractors be selected. The
justification for the new procedure was
speedier completion of projects,
6
but the cost
doubled in some cases and the construction
was seriously fawed. With a consultancy
fee fxed at 1.5 per cent of a projects cost,
the PMC concept contributed to massive
overruns and individual project failures.
7
For example, the health ministry was
forced to close the MYR500 million (US
$133 million) Sultan Ismail Hospital on
27 September 2004 due to structural and
design faws. Repairs to bring it up to safety
standards were estimated at MYR8 million (US
$2 million).
8
Work on the MYR167 million
(US $44 million) Malaysian External Trade
Development Corporation tower, due to have
been completed in 1997, was not fnished
until mid-2005 and the costs rocketed to
MYR400 million (US $106 million). Defects in
the building were estimated to cost MYR28.4
million (US $7.5 million).
9
Even on modest
projects, PMCs came in substantially over
costs. According to Public Works Minister
Samy Vellu, the ministry could construct a
classroom for MYR55,000 (US $15,000), but
when taken over by a PMC, the bill would
soar to MYR120,000 (US $32,000).
10
The public welcomed the new governments
move to abolish the PMC in March 2004.
Departments have been directed to comply
with current procurement policies that use
the tender system to ensure transparency
and accountability. New guidelines may be
issued to deal with specifc contracts. For
example, a treasury circular in December
2004 provides guidelines for the selection
of contractors for public infrastructure
maintenance, applicable to all government
departments.
11
The terms detail the use
of open tenders and the participation of
a more balanced group of public offcials,
including a representative from the public
works department.
These conditions comply with the Model
Law on Procurement of Goods, Construction
and Services, issued by the UN Commission
on International Trade Law in 1995, but
they do not divide the roles of selection and
supervision, as outlined in TIs Minimum
Standards for Public Contracting.
12
Even
more significant is Malaysias failure to
require companies to adopt a code of ethics
against corruption, or to blacklist companies
with a track record of corrupt practices.
Country reports mALAySIA
GC2006 02 part2 201 8/11/05 17:54:06
Country reports 202
MehrunSirajandSunitaChima(TIMalaysia)
Further reading
Tunku Abdul Aziz, Fighting Corruption: My Mission (Kuala Lumpur: Konrad Adenauer
Foundation, 2005)
Zarinah Anwar and Kar Mei Tang, Building a Framework for Corporate Transparency: Challenges
for Global Capital Markets and the Malaysian Experience, InternationalAccountant 18, 2003
Khaliq Ahmad Mohd Israil and Abul Hassan M. Sadeq, EthicsinBusinessandManagement:Islamic
andMainstreamApproaches(Kuala Lumpur: Asian Academic Press, 2001)
Mazilan Musa, Izal Arif Zahrudin and Suzanna Che Moin (eds), Ethics and Integrity in Malaysia:
Issues and Challenges (Kuala Lumpur: Integrity Institute of Malaysia, 2005)
TI Malaysia: www.transparency.org.my
Notes
1. Keynote address by Prime Minister Abdullah Ahmad Badawi, World Ethics and Integrity
Forum, Kuala Lumpur, 2829 April 2005.
2. Transparency International, National Integrity Systems Country Study: Malaysia (Berlin:
Transparency International, 2003).
3. Information provided by the deputy public prosecutor in the office of the attorney-
general.
Police corruption under fire
The Royal Commission on Enhancing the
Operations and Management of the Police
(RCP), set up in February 2004 to reform the
police force, submitted a report of its fndings
to the king on 19 April 2005. Of the 926
complaints the commission received from
the public between March 2004 and March
2005, 98 concerned police corruption.
The RCPs enquiries revealed widespread
corruption within the police force,
including: monthly kickbacks from illegal
factory owners and employers of illegal
immigrants; demands for payments in
exchange for providing detainees with food,
or allowing them to make telephone calls;
and accepting bribes to detain innocent
people, or to decline from taking action
against guilty parties. The report also accuses
police personnel of bribing senior offcers to
obtain promotions or transfers.
The report cited public complaints of the
lavish lifestyle some offcers enjoy. One is
alleged to have declared assets of MYR34
million (US $9 million), but no investigation
was conducted to determine how he had
acquired such a fortune. Infuenced by the
fnding that corruption awareness is low
among police personnel at all levels, the
commission recommended that eliminating
it must rank high on the reform agenda. It
made 125 recommendations, of which 10
relate to corruption.
There were some indications that the
government may be sitting on the RCPs
report, as it does with reports from the Human
Rights Commission. The deputy prime
minister announced that it would have to be
scrutinised by all central agencies, the fnance
ministry and the department for public works,
before any of its recommendations could
be implemented.
13
However, in May 2005,
Prime Minister Badawi announced that a task
force would meet to determine an order of
priority for implementation and, a few weeks
later, police were reportedly investigating
the corruption cases cited in the report. In
late June, fve sub-committees were set up to
study the recommendations in greater detail.
Civil society has welcomed the RCPs fndings
and is monitoring its implementation.
GC2006 02 part2 202 8/11/05 17:54:07
203
4. NewStraitsTimes(Malaysia), 21 November 2004.
5. Treasury Circular, no. 4, 2000, at www.treasury.gov.my/design/web/b_pekeliling.htm
6. UtusanOnline (Malaysia), 14 November 2004.
7. NewStraitsTimes(Malaysia), 21 November 2004.
8. TheStar(Malaysia), 15 November 2004.
9. Bernama(Malaysia), 22 October 2004.
10. UtusanOnline(Malaysia), 14 November 2004.
11. Treasury Circular, no. 7, 2004, at www.treasury.gov.my/design/web/b_pekeliling.htm
12. See GlobalCorruptionReport2005,p. 4.
13. Bernama(Malaysia), 17 May 2005.
Conventions:
In April 2005, the government announced a new six-point plan to fght corruption.
One measure will require all senior offce holders to make a formal disclosure of their
assets and net worth before and after holding public offce. Other measures include a
proposed new law on money laundering; the creation of an offce responsible for keeping
track of known corruption cases; and the consolidation of transparency in the process of
awarding government contracts to private businesses.
A law passed in September 2004 replaced the Special Court of Justice (CSJ) with fve
Courts of Appeal.
1
Offences involving corruption, extortion, the dishonest receipt of
money by offcials, infuence peddling and the embezzlement of public funds will be
handled by courts of frst instance in the case of lesser offences, and the criminal divisions
of the Courts of Appeal when offences are deemed more serious. The CSJ had dealt with
offcial corruption since 1965. Under the pretext of greater effciency, its procedures
were faster but had less regard for individual liberties. The penalties were also more
severe than those laid down in the Criminal Code. The CSJ was closely dependent on
the justice minister, who had sole authority to initiate proceedings. This meant that the
decision of whether or not to bring a case to trial was at the discretion of the executive.
Non-governmental organisations, including Transparency Maroc, had called for the
CSJs abolition.
The same law also introduced changes to the Criminal Code by stiffening penalties
for the offences of corruption, extortion, the dishonest receipt of money by offcials,
infuence peddling and embezzlement. It also provides for the mandatory confscation
by the state of all or part of the assets or income obtained through the offence and, in
the case of bribery, the confscation of the items supplied by the bribe payer. The law
exonerates bribers that report an offence before a corrupt offcial has taken any action,
or who are able to show that they were forced to make an illegal payment to achieve a
certain outcome.
In November 2004, a law was passed that is expected to end the states broadcasting
monopoly in 2005 and convert the radio and TV stations, RTM and 2M, into companies
morocco
Country reports moRoCCo
GC2006 02 part2 203 8/11/05 17:54:07
Country reports 204
open to private capital. However, NGOs have criticised some limitations to freedom of
expression such as the requirement that media organisations granted licences must promise
to scrupulously respect the values of the monarchy and the kingdoms achievements in
Islamic matters and territorial unity.
2
Rabat Spring?
When King Mohammed VI was crowned
in July 1999, there were high hopes for an
all-out assault on alleged corruption by the
privileged class during the 38-year reign of
his father, King Hassan II. Although delayed,
the new king did try to meet some of these
expectations, using the partially liberalised
press and an emboldened state auditor,
Inspection Gnrale de Finances (see below),
as the agents of change. The most remark-
able development in 200405, therefore, was
the medias new freedom to discuss the issue
of corruption.
The press has helped to transform
domestic perceptions by unravelling
complex accounts of reported corruption in
parastatal agencies and banks, going as far as
examining the business activities of senior
offcers in the Royal Armed Forces (FAR),
hitherto considered unmentionable.
Much of the attention focused on
the Hassan II Mosque, the kings giant
mausoleum in Casablanca, which was built
over a period of 13 years, at a cost variously
estimated at US $500800 million, and
finally opened in 1993. That financial
irregularities should only come to light
more than a decade later is indicative of
the restrictive measures imposed on the
press during that time. Construction was
fnanced partly by voluntary contributions
and partly by the compulsory deduction
of employees salaries, providing ample
opportunities for racketeering and the
embezzlement of funds.
3
Reporters also
investigated irregularities involving suppliers
of materials to the mosque, including the
Grandes Marbreries du Sud (GMS) in Agadir,
which operated a marble treatment plant
and whose board was chaired by the deputy
to King Hassans former infuential interior
minister, Driss Basri.
4
Though no arrests
have been made, this example points to
a lack of accountability for large sums of
public money during the late kings reign.
Nor has the army been immune to
revelations of alleged abuse of position,
particularly with regard to the fishing
industry. The army has unprecedented
control over the industry, due to the security
role it plays on the coast, in addition to
policing the catches of Moroccan and EU
trawlers. Suspicions that the fshing industry
had fallen into the hands of military
offcers surfaced in 2001, when the press
reported that a number of senior offcials
in the military and security agencies, and
members of their families, owned companies
or shares of companies that exported fsh
to Spain.
5
These allegations resurfaced in a
more authoritative article in January 2005
that further detailed these connections, and
which alleged the existence of conficts of
interest between the professional duties
and private interests of members of the
military. How could these offcers, it asked,
effectively oversee compliance with fshery
conservation policies when their trawlers
stood to lose millions of dirhams?
6
The situation in the military is not helped
by the fact that the defence budget is
approved by the executive without debate in
parliament, and that military procurement
contracts are at least in practice not
subject to the law on public contracting,
limiting oversight to internal checks only.
This does not allow for the transparent
management of an important part of the
state budget.
Despite the rare publicity afforded to all
these cases, not one has come before the new
Courts of Appeal, leading to the conclusion
that corruption will continue to fourish in
the absence of an independent judiciary
GC2006 02 part2 204 8/11/05 17:54:07
205
AzeddineAkesbi,SihamBenchekroun,KamalElMesbahi,
RachidFilaliMeknassiandMichleZirari(TransparencyMaroc)
and impunity of high-ranking officials.
A number of NGOs and journalists have
called for an independent inquiry to fnd out
the extent of the wealth that was amassed
illegally during Hassans long reign,
7
while
others say this is impossible because of the
sheer number of business transactions that
occurred in the past 40 years. One thing
appears certain. Greater freedom of speech
has not been accompanied by any signifcant
improvement in accountability. Greater
freedom of speech is not enough, said
journalist Farida Mouha. What is needed
are effective policies against corruption.
8
IGF publishes bold reports, but
there is little follow-up
The second weapon in the governments
arsenal is the Inspection Gnrale de
Finances (IGF), a once moribund government
auditing office of 160 accountants with
oversight responsibility for the activities of
public sector institutions and funding from
donors.
While the auditing activity of the IGF
was limited in the past, the IGFs work
picked up steam in 2003. Its inspections
have revealed evidence of gross fnancial
fraud or embezzlement in banking, social
security, agricultural credit, public housing,
state contracts, public companies, municipal
councils and international aid projects.
Some of the biggest names in the banking
frmament including Credit Immobilier
et Htelier (CIH), Banque Populaire,
Caisse Nationale de Scurit Sociale and
Banque Nationale pour le Dveloppement
Economi que (BNDE) have been
investigated for alleged mismanagement and
corruption. According to the IGF, the BNDE
management dipped into its DH19 billion
(US $2.1 billion) reserves in the CDG, a fund
that can only be used with the agreement of
the fnance ministry, the Al Maghrib Bank,
the Credit Commission and the board of
directors.
9
Procedures normally required for
withdrawals of this kind were not followed.
This case is still ongoing.
A similar theme surrounds the CIH,
the prestigious tourism and housing
development credit fund that, according to
a parliamentary inquiry in 2000, lost DH14
billion (US $1.3 billion) over several years.
Fifteen former senior CIH officials were
investigated for embezzlement, including
the former director general, who blamed the
banks failure on demands for unguaranteed
loans from well placed businessmen close
to the seat of power. Fictional businessmen
using fctional companies obtained credit
from the bank and were later declared
bankrupt. With so many senior politicians
allegedly involved, it is doubtful that full
and thorough disclosures will be possible in
either case.
In early 2005, the IGFs attention switched
to the Offce de la Formation Professionale
et de la Promotion du Travail (OFPPT), the
body responsible for providing 70 per cent
of the countrys professional training and
construction of the infrastructure required,
often with the support of donors such as
Canada and the European Union. In 2004,
an IGF investigation uncovered an extensive
web of fictitious training schemes, with
misappropriated funds estimated at DH60
million (US $6.7 million).
10
This signalled
a complete breakdown of the monitoring
systems in place at the OFPPT, but also in
other public bodies responsible for oversight.
According to the IGF inquiry, between 1996
and 2001, only 45 cases out of a total of
6,247 that received subsidies for training had
been monitored at all.
For all of its newfound bravado, the
IGF is still critically underfunded and its
reports receive little follow-up.
11
When cases
involving senior officials are uncovered,
the judicial system freezes. Only until the
IGFs audits are made fully available for
public scrutiny will the warnings become
impossible to ignore.
Country reports moRoCCo
GC2006 02 part2 205 8/11/05 17:54:07
Country reports 206
Further reading
Transparency Maroc, Universitdelatransparence (University of Transparency) (Rabat: Transparency
Maroc, 2003) (Also available in Arabic)
Transparency Maroc, LacorruptionauMaroc:synthsedesrsultatsdesenqutesdintgrits (Corruption
in Morocco: A Summary of the National Integrity System Survey) (Rabat: Transparency Maroc,
2002)
TI Morocco: www.transparencymaroc.org
Notes
1. Law no.7903, published in the BulletinOffciel, 17 September 2004.
2. Reporters Without Borders, Morocco2005AnnualReport, available at www.rsf.org/article.
php3?id_article=13310
3. TelQuel (Morocco), 410 December 2004.
4. Al Ayyam (Morocco), 1925 January 2005. The article gives precise information about
unpaid invoices and people close to the minister receiving large amounts of marble without
paying.
5. http://sahara_opinions.site.voila.fr/kbeirouk2001.htm
6. AlAyyam (Morocco), 1925 January 2005.
7. VueEconomique(Morocco), 10 December 2004.
8. Libration (Morocco), 14 December 2004.
9. AhdatAlmaghribia (Morocco), 7 January 2005.
10. Assahifa (Morocco), 30 June6 July 2004.
11. Interview with IGF director Abdelali Benbrik in AujourdhuileMaroc (Morocco), 24 January
2005.
Conventions:
ratifed)
Legal and institutional developments
King Gyanendra issued a decree in February 2005 that created a Royal Commission for
Corruption Control (RCCC). Although the commission was initially formed through a
clause in the constitution on the issuing of a state of emergency, the king extended its
mandate after the state of emergency was lifted. Though the measure addresses popular
grievances about corruption in the country, it has been widely criticised by politicians and
civil society. There is general agreement that a measure that gives a single agency both
investigative and judicial powers violates the basic principle of separation of powers. The
commission has also been criticised as redundant, given the existence of the Commission
for Investigation of Abuse of Authority (CIAA), an anti-graft body set up in 1991, which
has been seen as increasingly effective (see below).
Nepal
GC2006 02 part2 206 8/11/05 17:54:08
207
In accordance with a directive on public service, 71 district committees were formed
in March 2005 to monitor public service delivery for,among other things, abuse of
authority and bribery. The local administration act was also amended by royal decree to
include the appointment of fve regional and 14 zonal administrators. The additional
provisions were made to ensure that offcials are more conscious of their duties and to
put a check on bribe-taking. However, the new administrative tiers could clash with
previously existing ones, due to overlap of jurisdiction and authority.
A draft act against money laundering was prepared by the fnance ministry in July
2004; a draft bill on public procurement and regulation was prepared in January 2005
by the general offce of the fnancial comptroller; and draft regulations on the National
Vigilance Centre (NVC) were prepared in March 2005 by the NVC. All were in the process
of public consultation before being fnalised, but have now been put in jeopardy in the
absence of a functioning parliament.
The Royal Commissions question-
able role in corruption control
On 1 February 2005, King Gyanendra
dissolved the four-party coalition govern-
ment headed by Sher Bahadur Deuba,
assumed executive control and introduced
a state of emergency under article 115 of
the 1990 constitution. The reasons given for
this royal takeover were the deterioration
in security, the failure of past governments
to improve law and order, and rampant cor-
ruption. The dissolution of the government
was widely criticised for being undemocratic
and unconstitutional.
The new government quickly announced
a plan to launch a vigorous campaign
against corruption and in February 2005 the
Royal Commission for Corruption Control
(RCCC) was established. Past measures to
control corruption have not succeeded due
to political instability and weak checks and
balances in Nepalese institutions. This most
recent initiative is similarly questionable,
given the absence of parliament and local
government, the non-conducive atmosphere
for elections, delayed justice from the courts,
continuing confict and security problems,
and the deepening economic crisis.
Many political party leaders, human rights
activists and journalists have been detained
while political gatherings are strongly
discouraged. The promulgation of restrictive
measures concerning the press, in particular,
has deprived anti-corruption bodies, the
media and members of civil society of their
right to freedom of speech. Anti-corruption
activists have been told that their enquiries
or watchdog activities should not lower the
morale of those in civil service.
1
Nonetheless,
segments of the population are convinced
that the kings takeover of government was
in the best interests of the nation.
The six-member RCCC is headed by Bhakta
Bahadur Koirala, a former government
secretary, and enjoys the powers of both
the Commission for the Investigation of
Abuse of Authority (CIAA) and the Special
Court. This goes against the basic principles
of justice and the separation of powers. The
CIAA was established in 1991 and its powers
of investigation were extended to the prime
minister and to MPs in 2002. As a prosecuting
body, the CIAA investigates charges and
refers its cases to the Special Court for trial.
The Special Court, formed in 2002, deals
specifcally with corruption cases.
Since its creation, the RCCC has pursued
a number of cases involving high-ranking
officials and politicians. Former prime
minister Sher Bahadur Deuba was convicted
in July 2005 for irregularities committed
in the award of a contract related to the
US $464 million Melamchi Water Supply
Project, whose main fnancier is the Asian
Development Bank. The former public
works minister, Prakash Man Singh, and
four others were also convicted.
2
Deuba and
Country reports NEPAL
GC2006 02 part2 207 8/11/05 17:54:08
Country reports 208
Singh were jailed for two years and fned
US $1.3 million each. Civil society groups,
lawyers and foreign governments criticised
the verdicts for their extra-judicial nature.
In another case, in March 2005, the
RCCC began the prosecution of six former
ministers for misusing the prime ministers
relief fund to distribute some NPR4 million
(US $57,000) to political supporters in the
guise of relief aid to Maoist insurgency
victims. The media dubbed the alleged scam
the Dashain allowance, Dashain being an
important Hindu festival. According to the
RCCC, the six former ministers misused
monies from the relief fund to cover Dashain
expenses for 21 party supporters.
3
Then in
June 2005, the RCCC made an abrupt U-
turn and cleared the former prime minister
of these charges, as well as the six members
of his cabinet and the 21 benefciaries of the
expenses. According to the RCCC chairman:
The decision to distribute cash could not
be established as a case of corruption under
Clause 17 of the Anti-Corruption Act 2002.
Critics saw the move as evidence of the com-
missions excessive discretionary powers.
The RCCCs investigations invited
condemnation from political parties and
sectors of civil society, including the Nepal
Bar Association, for what was termed an
arbitrary, political vendetta. In April 2005,
the RCCC issued fresh orders to Nepals banks
to provide the fnancial records of more than
100 selected politicians and bureaucrats;
according to media sources, none of the
names belonged to loyal royals.
4
In the view of its detractors, the RCCC
is in danger of becoming an instrument
for political manipulation. The RCCC has
been further criticised because it sidelines
the CIAA, the constitutionally designated
anti-corruption agency. The RCCCs life was
extended under a clause in the same article
in the constitution that lifted the state of
emergency in April 2005. It would have
been logical to discontinue the RCCC as
soon as the state of emergency was lifted.
Why this has not happened is a point that
continues to baffe politicians, lawyers and
civil society.
CIAA gains strength but corrupt
officials can still escape justice
The CIAA was established in 1991 and has
withstood pressure and political attack in
its drive to investigate improper conduct by
politicians and offcials. The professionalism
of the CIAA has resulted in a remarkable 84
per cent conviction rate in the 250 or so cases
it has fled at the Special Court since the
latter was conceived in 2002. The CIAA has
saved substantial revenues, both through the
prosecution of individuals and the discovery
of fnancial irregularities.
One recent instance when the CIAA
proved its worth was in checking
irregularities concerning money owed to the
Civil Aviation Authority of Nepal (CAAN).
In March 2005, the CIAA issued a directive
to Royal Nepal Airlines (RNA) as well as
other airlines to pay charges owed to the
aviation authority following a study that
found it was in arrears by NPR540 million
(US $8.1 million). The CIAA demanded
that the CAAN fulfl its legal obligation to
prepare monthly bills for RNA jets landing,
parking and using other airport facilities for
payment within 21 days. By the end of April,
the authority informed the CIAA that it had
started to collect arrears.
Anti-corruption activists cite this as a
positive example of good practice on the part
of regulatory bodies in checking fnancial
irregularities and recovering public monies.
The non-payment of dues was apparently a
temporary measure undertaken by mutual
consent by offcials at RNA and the CAAN,
but this had been neglected for fve years
until the CIAA alerted them.
Public confidence in the CIAA also
received a boost with action against senior
government offcials, including the fling
of corruption cases in August 2004 against
three former chiefs of police. Moti Lal
Bohara, Achyut Krishna Kharel and Pradip
Shumsher Rana were accused of abusing
their offce to illegally amass several hundred
thousand dollars each.
5
This was the frst
GC2006 02 part2 208 8/11/05 17:54:08
209
RamaKrishnaRegmee(KantipurCityCollege,Kathmandu)
Further reading
Baburam Dhakal, EmpireofCorruption (Kathmandu: Baburam Dhakal, 2005)
CIAA and TI Nepal, CompilationsofAnti-corruptionLaws, 2nd edition (Kathmandu: CIAA and TI
Nepal, 2005)
Hari Bahadur Thapa, BideshiSahayatakaBisangati(The Distortion of Foreign Aid) (Kathmandu:
National Book Centre, 2004)
Rama Krishna Regmee, Nepal NationalIntegritySystemStudy2004 (Kathmandu: TI Nepal, 2004)
TI Nepal: www.tinepal.org
Notes
1. Authors interview with a district administrator of Pokhara, February 2005.
2. BBC News (UK), 28 July 2005; Dawn(Pakistan), 28 April 2005.
3. www.gorkhapatra.org.np/pageloader.php?fle=2005/03/24/topstories/main6
4. Dawn(Pakistan), 28 April 2005.
time that the CIAA had laid charges against
the polices top brass, a move that exposed
institutionalised corruption in the law
enforcement agencies.
For its part, the Special Court was widely
acclaimed in 200405 for verdicts penalising
three senior offcials in different corruption
cases filed by the CIAA. In July 2004,
former public works minister and leader
of the Nepali Democratic Congress Party
Chiranjibi Wagle was sentenced to two and
a half years in prison and a fne of NPR27.2
million (US $411,000) for corruption.
6
This
was considered historic in Nepal since no
corruption case has ended with such a huge
penalty. The CIAA claimed that Wagle had
made a fortune of nearly NPR30 million
(US $450,000) by misusing his authority. In
January 2005, the Special Court convicted
Ramagya Chaturvedi, head of the state-
owned Nepal Oil Corporation, for corruption,
imprisoned him for two years and ordered
the confiscation of illegal earnings of
over NPR19 million (US $287,000). The
CIAA said he had misused his authority to
accumulate more than NPR70 million (US
$1.1 million).
7
In March, the former chief of
Mechi Customs Offce, Keshar Jung Khadka,
was given a one-year sentence and a fne
of over NPR2.5 million (US $35,000) for
corruption, and property to the value of US
$144,000 was confscated.
8

However, all three escaped the courts
premises moments before the verdicts were
delivered. The fact that these high-ranking
offcials were permitted to go free was the
result of a loophole in the judicial system
whereby the Special Court does not have the
authority to order the arrest of corruption
offenders. Instead, its verdicts must be
executed through the relevant district
court, which can take some days to effect
due to administrative procedures. Hence
judgments by the Special Court are not
always implemented. Another problem is
that the accused are often released on bail,
enabling them to strengthen their cases by
mobilising their resources. Anti-corruption
activists believe that anyone held on serious
corruption charges should pursue the
defence from prison.
The three cases raised questions about
more effective means of implementing
Special Court orders. At present, the court is
considering more than 150 corruption cases
involving senior politicians, administrators
and police offcials prosecuted by the CIAA.
Many are likely to escape justice unless the
current shortcomings in the judicial system
are fully addressed.
Country reports NEPAL
GC2006 02 part2 209 8/11/05 17:54:08
Country reports 210
5. NepalNews (Nepal), 14 August 2004.
6. NepalNews (Nepal), 22 July 2004.
7. TheHimalayanTimes(Nepal), 21 January 2005.
8. www.gorkhapatra.org.np/pageloader.php?fle=2005/04/05//topstories/main3
Conventions:
OECD Anti-Bribery Convention (ratifed June 2001)
UN Convention against Transnational Organized Crime (ratifed July 2002)
In December 2004, four existing laws aimed at promoting integrity in the public sector
were amended. As a result, the State Services Commission, the agency responsible for
overseeing all core government departments, now has explicit responsibility over a far
broader range of state agencies than before (see below). Under the new legislation, the
commissions annual reports on the agencies progress in promoting ethical standards
must be made available to the public. In early 2005, the commission began drawing up
a set of pilot guidelines for the affected agencies.
In January 2004, New Zealand ceased to use Britains Privy Council as its fnal court of
appeal. A new Supreme Court began hearing cases in 1 July 2004 following the passage
of the Supreme Court Act of October 2003. During the transitional period, there was an
unprecedented degree of tension between the government and the judiciary over funding
for the new court. In May 2004, the Chief Justice made a speech in London criticising
the New Zealand government for the funding process, as well as the amount available
to the new Supreme Court. The independence of the judiciary is well established in New
Zealand, and the controversy over the Supreme Court was seen as a litmus test of the
countrys standing on good governance.
New zealand
Corruption gains profile in New
zealand
Transparency Internationals Corruption
Perceptions Index consistently fnds New
Zealand to be one of the least corrupt countries
in the world. In the past year, however, the
issue has received unprecedented attention
due to a number of allegations concerning
the misuse of public funds for community
services.
Since reforms were launched in 1984 to
reduce state intervention in the economy,
successive governments have increasingly
contracted out service provision. In some
cases, this process of devolution occurred too
quickly and community service organisations
lacked the capacity to manage funds
effectively. This broadened the scope for
fnancial misappropriation and other corrupt
activities within such organisations.
One recent and highly publicised case of
mismanagement of public funds involved
an opposition MP, Donna Awatere Huata,
who established a charitable trust in 1999 to
promote reading programmes in homes that
targeted Maori children. She successfully
lobbied government departments to raise
funds for the trust, but was then alleged to
have used a large part of them for her private
beneft. Huata was charged with fraud in
November 2003,
1
but at this writing, she had
GC2006 02 part2 210 8/11/05 17:54:09
211
not yet been tried and has continued to deny
the allegations. The protracted scandal even-
tually led to her dismissal from parliament
in November 2004, although this was also
due to a confict within her own political
party.
2
Allegations of fnancial impropriety
involving MPs are virtually unknown in New
Zealand and no one in living memory has
hitherto been expelled.
This scandal was followed by allegations
of fnancial mismanagement in the countrys
largest tertiary education institution, Te
Wananga o Aotearoa. Evidence was tabled in
parliament that pointed to nepotism in the
award of contracts to companies owned by
the organisations senior executives or their
relatives.
3
Several inquiries were initiated
in the wake of the allegations and are still
ongoing. Although media reports suggested
that this could be a case of mismanagement
rather than actual misappropriation, the
case highlighted that such problems could
have been avoided if more time and money
had been invested in capacity building in
the frst place.
Periodic instances of misuse of funds by
small, government-funded service providers,
including Maori organisations, have started
to attract more attention, sparking a debate
about corruption at the community services
level. For example, there have been reports
of Maori organisations mismanaging sub-
stantial assets, many of which were acquired
as compensation for breaches of the Treaty
of Waitangi, signed by Maori chiefs with the
British in 1840. The most notable example
occurred in the late 1990s and involved
the Tainui nation, and assets given by the
government as compensation for breaches
of the treaty dating back to the 1860s. The
compensation was in both cash and land.
The Tainui management body, however,
invested in assets including a contentious
sporting franchise.
4
As a result, considerable
internal confict ensued over control of the
assets, generating negative publicity.
The public perception is that bad fnancial
management, revealed in audited accounts
and often accompanied by allegations of
corruption and nepotism, has led to the
squandering of legitimate settlements using
state assets. This is matched by the view of
some of the intended benefciaries of these
organisations that their own leaders deprived
them of resources. Although some of these
allegations were well founded, there have
been few cases where criminal charges were
actually pressed.
Given growing public concern, the
government has taken steps to address the
issue by introducing fnancial management
training, beginning in January 2005, for
community service organisations which
receive state funds to deliver services, or as
compensation for treaty breaches. Since the
beginning of 2005 there has also been greater
emphasis on the importance of government
departments assessing the organisations
management capability before funds and
land are released.
Promoting integrity in the public
sector
Legislative moves to promote integrity in
the broader public sector received less media
attention, but brought about significant
changes. The legislation amending four
existing acts of parliament, passed in
December 2004, widens the remit of the
State Services Commission in monitoring
government agencies.
In New Zealand, there are three main
areas in the public sector: the core public
service consisting of traditional departments
such as health, education, police, foreign
affairs and statistics; service and advisory
agencies, funded by parliament with boards
of directors appointed by the government
(covering a diverse range of roles, from
administering New Zealands no-fault
accident compensation legislation, to
separate agencies that ensure road, air and
maritime safety); and state-owned business
enterprises, such as New Zealand Post, which
provides postal services and operates a retail
trading bank.
Previously, the heads of all these
departments reported to the State Services
Country reports NEW zEALAND
GC2006 02 part2 211 8/11/05 17:54:09
Country reports 212
Commissioner, a public servant appointed
in a strictly non-partisan manner. The
commissioner is effectively the employer
of all heads of government departments,
and has personal contracts with each
departmental head. These individuals are
personally responsible to the commissioner
on employment and performance matters,
as well as setting standards for integrity,
which is included in their contracts.
Under the amended legislation, the
government-appointed boards of directors of
other non-core state agencies (the second and
third groups described above) will also have
to report to the commissioner. Non-core state
agencies now have clear lines of responsibility
for setting standards and cultivating an ethos
of integrity. The State Services Commissioner
will now be able to ensure that these agencies,
which are often powerful, are obliged to
promote integrity. According to the new
legislation, the commission also has to
monitor how these agencies fulfil their
obligation to promote integrity, and any
reports regarding this matter will be available
to the general public.
Since the economic reforms initiated in
1984, many observers felt that serving public
interest and honesty, once considered the
distinguishing features of New Zealands
public sector, were in danger of being lost.
The reforms aimed to promote a more
competitive society and a more fexible public
service by doing away with government
intervention in many areas of the economy.
Agency heads had fxed-term contracts and
their performance was evaluated by set
criteria with an emphasis on effciency, a
factor highly valued by the private sector,
upon which public sector management was
being increasingly modelled. No comparable
emphasis, however, was placed on the
proactive inculcation of ethical standards.
In 1999, the newly elected government
established a special body, the State Sector
Standards Board (SSSB), to review the public
sector; former senior public sector executives,
state sector union leaders and senior private
sector executives were its members. They
presented two reports to the government,
which emphasised the loss of a cohesive
sense of public interest service since the
reforms of the 1980s. The SSSBs frst report
to the government in 2001 concluded that
an over-emphasis on economic effciency
as an outcome and performance measure
has distorted behaviours and undermined
trust and support from the public and
employees.
5
Board members highlighted
similar concerns in their second report. The
new legislation seems to have addressed the
SSSBs concerns by extending the commis-
sioners responsibilities for the promotion
of ethical standards to the broader public
sector.
Promoting transparency abroad
New Zealand has made no substantive
progress in implementing the legislation
enacted in 2001, in response to the OECD
Anti-Bribery Convention. Little knowledge
of the foreign bribery law exists among
exporters and the government has made
no effort to generate awareness of the legal
liabilities. Only one reference to the new law
was made in a speech by the Trade Minister
while out of the country.
6
No investiga-
tions or prosecutions have resulted from
the legislation.
While there is little evidence of New
Zealand companies paying bribes overseas,
it is thought to occur on a minor scale
and some companies lobbied against the
legislation when it was frst drafted. The
scale of bribery is largely a reflection of
the size of the countrys exporters, which
are overwhelmingly small businesses.
Moreover, New Zealand has opted out of
the WTO Government Procurement Code,
due to the compliance costs that would arise,
since its procurement system is currently
deregulated.
Yet, together with Australia, New Zealand
has stepped up joint efforts to promote better
governance and transparency within the
broader Pacifc region. This has been achieved
through a multitude of programmes, many of
which are coordinated via the Pacifc Islands
GC2006 02 part2 212 8/11/05 17:54:09
213
ShaneCave(TINewZealand)
Further reading
John Henderson, Shane Cave and Murray Petrie, NewZealandsNationalIntegritySystem (Wellington:
TI New Zealand, 2003)
Alan Webster, SpiralofValues:TheFlowfromSurvivalValuestoGlobalConsciousnessinNewZealand
(Hawere: Alpha Publications, 2001)
Reports of the State Sector Standards Board: www.ssc.govt.nz/display/document.asp?NavID=196
Notes
1. www.sfo.govt.nz (see Info. Bulletins and Alerts 4 November 2003).
2. tvnz.co.nz/view/news_politics_story_skin/459577?format=html
3. Hansard(New Zealands parliamentary record), 15 February 2005.
4. See commentary on the Kingi Michael Porima case in theMaoriLawReview, September 2000,
available at www.bennion.co.nz/mlr/2000/sep.html
5. www.ssc.govt.nz/display/document.asp?navid=196&docid=2330&pageno=2#P29_1346
6. Authors interview with trade ministry offcials.
7. www.forumsec.org.fj/docs/FEMM/2002/femv04.pdf
Conventions:
OAS Inter-American Convention against Corruption (ratifed May 1999)
Article 68 of the Constitution, which exempts the media from paying import duty on
supplies, was revoked in March 2005. The measure is expected to have an adverse effect
on the medias ability to report on corruption.
A fawed Judicial Career Law, which the National Assembly ratifed in September
2004, was due to enter into effect in September 2005. The law establishes competitive
examinations for judges, but leaves open the possibility that judges will be appointed
Forum, the core regional body representing
the 14 independent island nations of the
South Pacifc, as well as New Zealand and
Australia.
New Zealands international aid agency,
NZAID, has expressed mounting concern
about standards of governance in Pacifc
Island countries. Support for governance
reforms to combat corruption is now a
top priority of NZAID and it has provided
assistance to civil society actors in the
region. NZAID also backs efforts by Pacifc
Island governments to improve governance
and fnancial management, and has played
a major role in supporting the development
of the Pacifc Plan that was initiated by the
members of the Pacifc Forum. The Pacifc
Plan emphasises governance reform in the
region. However, surveys by the Fiji-based
Pacific Islands Forum Secretariat have
found that previous regional commitments
to standards of good governance have
been largely ignored by the Pacifc Island
signatory nations.
7
Nicaragua
Country reports NICARAGUA
GC2006 02 part2 213 8/11/05 17:54:10
Country reports 214
without competing for their positions. It also fails to separate the Supreme Courts
administrative and judicial functions, and assigns responsibility for oversight of the
judicial career processes to a commission formed of Supreme Court judges, rather than
an independent body.
In March 2005, the Partido Liberal Constitucionalista (PLC) tabled a bill that, if passed,
would grant an amnesty to anyone accused of a crime against the public administration
during the past 20 years. This includes the PLC leader and former president, Arnoldo
Alemn, who was sentenced to 20 years under house arrest in 2003 for money laundering,
embezzlement and fraud (see below).
Rival parties stranglehold over
government stymies anti-corruption
efforts
President Enrique Bolaos anti-corruption
efforts had a promising start when he decided
to press charges against his political mentor,
former president Arnoldo Alemn, who is
currently serving a 20-year sentence under
house arrest for fraud, money laundering
and embezzlement (see Global Corruption
Report2005). But the fght against corruption
has since stagnated as the two main parties
in the National Assembly collude to
block prosecutions and exploit Bolaos
weaknesses by promoting legal action for
alleged campaign funding abuses.
Investigations against former officials
have been shelved and, with the exception
of Alemn, no member of the former
government has been imprisoned for cor-
ruption. Nor are they likely ever to spend
time in prison, thanks to a fve-year statute
of limitations that applies to their crimes.
The time period for prosecuting members
of the former government for corruption
could expire even sooner if an amnesty bill
peddled by the Partido Liberal Constitucion-
alista is approved.
Emblematic of the failure to act decisively
against corruption is the case against Byron
Jerez, the former director general of income
and Alemns close associate. He was
exonerated in fve separate trials in 200405
and in the one case in which he was convicted,
the sentence was overturned even though
there was ample and convincing evidence
against him, according to attorney general
Alberto Novoa. Novoa is in the process of
recovering seized assets, including the beach
house allegedly built with money diverted
from Hurricane Mitch relief funds.
Bolaos, who came to power at the helm
of an alliance of fve political parties, lost the
support of his party, the PLC, in 2002 when
his government prosecuted Alemn, head of
the PLC, who had originally picked him as
presidential candidate. Since then, the PLC
and the main opposition party, the Frente
Sandinista de Liberacin Nacional (FSLN),
which together control over 90 per cent
of the National Assembly, have gradually
tightened their hold over the institutions
of state, making it practically impossible to
act against corruption.
The two parties leaders, Alemn and
Daniel Ortega, reached an informal pact in
2000 to push through a constitutional
change that enhances their control of
institutions and grants Alemn an automatic
seat in the National Assembly and therefore
parliamentary immunity. The pact has since
widened in scope and plays a critical role for
their political survival since both face high
rates of disapproval within their parties and
externally, and are being investigated for
corruption in Nicaragua and third countries.
1

They are both unpopular with the US
government, and featured on a list of high-
level party offcials who have been denied
entry visas to the United States on the
grounds of corruption.
2
Control of the legislative branch has
enabled the two parties to steer through
several laws that make it more diffcult to
tackle corruption. They have ended tax
concessions for media companies who
complain that the move was motivated
by a desire to crack down on freedom of
GC2006 02 part2 214 8/11/05 17:54:10
215
RobertoCourtney(GrupoCvicoEticayTransparencia,Nicaragua)
expression. Another controversial move saw
the passing in September 2004 of a judicial
career law that allows the Supreme Court to
continue to exercise responsibility for both the
administration and dispensation of justice.
This went directly against recommendations
of several civil society organisations. The
law allows judges and other court staff to be
hired and promoted without participating in
competitive processes.
The law also ratified existing judicial
positions, which effectively amounted to
the PLCs approval of the appointment of
judges whom it had denounced a year before
for working for the FSLN.
The PLC has shifted power to the FSLN
in other ways as well, most signifcantly by
handing it the presidency of the National
Assembly, marking the first time in two
years that a member of that party has held
a senior post in the legislature. The apparent
quid pro quo for the numerous concessions
made by the PLC to the FSLN is support for
Alemns release.
A rash of lawmaking in mid-November
2004 saw 14 laws adopted in four days (when
none had been approved in the previous six
months) many of which helped to shift the
balance of power from the government to
the legislature. Both the Central American
Court of Justice and the Organization of
American States have criticised the new laws
for eroding the powers of the executive.
3
Among the new legislation is a law that
grants the National Assembly the power to
ratify or dismiss nominees to ministerial and
diplomatic posts, and reduce the number of
legislators required to reject a presidential
decree. The National Assembly was also
granted power not only to accept or reject
the budget, but also to modify it. Another law
places a number of new institutions under
Assembly control, including the supervisory
bodies for the public services, social security
and private property claims.
A strong legislature is important and a
decade ago it was wide-ranging presidential
powers that were cause for concern. But the
worry now is whether the balance has shifted
too far, leaving insuffcient counterweights
granted to the executive or other institutions.
This is especially worrying given Nicaraguas
weak democratic tradition. Although
political parties are required by law to
select candidates using the most democratic
method available,
4
this stipulation is almost
universally ignored. Party grandees do not
hold primaries, but rather draw up closed
lists of their favoured candidates to fll the
powerful National Assembly. These same
favoured candidates also end up flling key
positions within the judicial, electoral, audit
and other institutional bodies.
The political duopoly is becoming
entrenched through laws and practices that
make it diffcult for opponents to compete, or
for state institutions to gain independence.
The legal framework ushered in by the two
main parties since 2000 makes it next to
impossible to create new parties,
5
while the
lack of internal party democracy means that
reformists within the two main parties are
consistently blocked. Though Alemn and
Ortega are unpopular within their parties and
amongst the electorate, at least one of them
and perhaps both will run in 2006. In
the past, with involvement from politicised
state institutions, popular candidates Pedro
Solrzano and Jos Antonio Alvarado had
their electoral ambitions derailed (in 2000
and 2001, respectively). Now, the same fate
threatens popular candidates Herty Lewites
(FLSN) and Eduardo Montealegre (PLC) in
the run-up to the 2006 general election.
The control exerted by the two main
parties over the Supreme Electoral Council
(CSE), the body charged with monitoring
electoral activity, has prompted fears that
the CSE is too disinterested to act neutrally
in the 2006 elections, and that the elections
will not be free or fair.
6
Even if an outsider were to win the presi-
dency, however, the increased authority
granted to the National Assembly, and the
frm grip Alemn and Ortega have over it,
all but guarantee them enough power to
continue to pose a serious obstacle to efforts
to fght corruption.
Country reports NICARAGUA
GC2006 02 part2 215 8/11/05 17:54:10
Country reports 216
Further reading
G8 countries and the Government of Nicaragua, G8/Nicaragua Partnership Compact to Promote
Transparency and Combat Corruption: A New Partnership Between the G8 and Nicaragua,
June 2004, www.whitehouse.gov/news/releases/2004/06/20040610-35.html
Universidad Centroamericana, Tercera encuesta sobre Percepcin de la poblacin sobre la
corrupcin (Third Survey on the Populations Perceptions of Corruption), April 2005, www.
uca.edu.ni
Grupo Cvico Etica y Transparencia (TI Nicaragua): www.eyt.org.ni
Notes
1. Accounts opened under Alemns name have been frozen in Panama, where investigations into
alleged money laundering are under way. US authorities are investigating similar charges.
2. US authorities have refused entry visas to at least 13 Nicaraguan state or party offcials, including
two Supreme Court judges, an electoral court judge and the state supervisor for public services
for suspicions or investigations related to terrorism or corruption.
3. The OAS has sent a number of missions to evaluate whether the reforms and the stalemate
between the executive and the legislature represent a rupture of the democratic order.
Nicaraguan analysts are consistent in their criticisms of the reforms, which they argue affect
the balance and independence of powers.
4. Article 63 of the electoral law.
5. See GlobalCorruptionReport2004 and 2005 for an analysis of the impact of the 2000 electoral
law.
6. The civil society electoral monitoring groups Grupo Cvico Etica y Transparencia and el Instituto
para el Desarrollo y la Democracia (IPADE) declared a state of yellow alert in March 2005, citing
the high level of risk of electoral fraud and the failure of the state to tackle the problem even
after the EU, the OAS and the Carter Center criticised the legal framework and the performance
of the electoral authorities in the 2001 elections. Electoral monitors discovered irregularities in
the 2004 municipal elections, which they argue is evidence that the problems have not been
rectifed ahead of the 2006 general elections: voters encountered diffculties in acquiring or
renewing the ID cards mandatory for voting, or did not appear on the electoral list, despite
having registered; electoral authorities overturned the result in Granada, the countrys third
largest city, giving victory to the FSLN in place of the APRE (Alliance for the Republic) on
grounds that critics have called fctitious.
Conventions:
OAS Inter-American Convention against Corruption (ratifed October 1998)
UN Convention against Corruption (ratifed May 2005)
UN Convention against Transnational Organized Crime (ratifed August 2004)
Executive Decree No. 335, issued on 1 September 2004, the day President Martn Torrijos
Espino took offce, derogates Executive Decree No. 124 of May 2002 which regulated the
transparency law. The 2002 decree was issued under former president Mireya Moscoso
and was an obstacle to accessing information since it restricted offcial information
to any interested person with a direct relationship to the information requested. The
Supreme Court had rejected many habeas data writs by appealing to the earlier decree.
Panama
GC2006 02 part2 216 8/11/05 17:54:10
217
In May 2004, the Supreme Court voted that some of the most restrictive articles of the
earlier decree were illegal.
When the new government took offce in September 2004, Minister of the Presidency
Ubaldino Real promised to publicise how the president utilised his discretional budgetary
allocations and to reduce the amount from US $25 million per year to less than US $5
million. Both promises have been fulflled. Information is available at both the president
and ombudsmans websites.
1
The amount approved in the frst year of the current
administration was US $3.9 million. The auditor general has prepared draft regulations
for the use by future presidents of the funds, which tended in the past to be used to cover
personal expenses, or to beneft family and friends. The two websites and investigations
by the newspapers LaPrensa and ElPanamAmrica reveal details of numerous allegations
of misuse of funds to buy jewellery, artwork, clothes, to pay for entertainment and bribe
journalists during the administrations of Ernesto Prez Balladares (199499) and Mireya
Moscoso (19992004).
In December 2004 a code of ethics was issued that forbids public servants from: soliciting
or accepting gifts or other benefts; maintaining relationships or entering situations in
which their personal, economic or fnancial interests could be in confict with their ability
to carry out their work properly; directing, managing, advising, endorsing, representing or
providing services (paid or voluntary) to people who manage or exploit state concessions
or privileges, or who have contracts with the state; and maintaining links, benefts or
obligations to bodies that are directly supervised by the body employing the public
servant. The code states that public servants should refrain from appointing relatives to
public positions. Sanctions for violating the code range from a verbal dressing-down to
dismissal. Each government body is responsible for enforcing the code, however. There
are no external monitoring mechanisms as yet.
Executive Decree No. 179 of October 2004 created the National Council for Transparency
against Corruption, a consultative body that provides advice to the executive branch of
government on matters relating to transparency and corruption prevention. In January
2005, its members were named as the Minister of the Presidency, the attorney general,
the attorney for administrative matters, the auditor general, the ombudsman and one
representative each from the private sector, unions, civil society, the church and the
media. The council, which works on a voluntary basis, has been tasked with drawing up
a working plan whose implementation will be supported by US funds (see below).
In January 2005, the newly appointed attorney general, Ana Matilde Gmez, appointed
a new anti-corruption prosecutor, taking the number of such prosecutors to three.
In March, the government signed a State Pact for Justice that created a special commission
with six months to analyse and propose improvements to the judicial system. The
Supreme Court has been the subject of particular scrutiny since a number of its judges
have accused one another of corruption. Civil society organisations have demanded the
resignation of all judges and a revision of the procedure for selecting them in order to
eliminate all possibility of political interference (see below).
National Council for Transparency
against Corruption
Corruption and the high level of impunity
for people implicated in it are major concerns
in Panama, second only to unemployment,
accordi ng to recent surveys.
2
The
administration of President Martn Torrijos
Espino took offce with a pledge to promote
greater transparency and to clamp down
Country reports PANAmA
GC2006 02 part2 217 8/11/05 17:54:11
Country reports 218
on corruption. He promised to appoint a
National Council for Transparency against
Corruption; derogate a decree that limited
the effectiveness of the transparency law;
disclose the use of discretionary funds;
professionalise the civil service; introduce
a general salary law; introduce policies to
make public contracting more transparent;
and select a new attorney general. Torrijos
has taken steps to fulfl most of these pledges,
though their impact on corruption levels has
still to be demonstrated.
Most of the legal changes have been tabled,
if not adopted, and Ana Matilde Gmez was
named attorney general in January. One of
her frst tasks was to investigate progress
in some of the countrys more scandalous
corruption cases. On releasing her report she
said she would open further investigations,
including one into alleged illicit enrichment
involving allies of former president Mireya
Moscoso. The government has so far fled
a number of complaints against illicit
enrichment, but many are stalled in the
Supreme Court.
The National Council for Transparency
against Corruption (NCTC) was created by
decree on 27 October 2004 and was intended
to fll a perceived gap in anti-corruption
strategy by focusing on prevention. Former
public prosecutor Cristbal Arboleda was
named its frst executive secretary for a period
of four months. On taking up his post, he
said he would only investigate allegations
of corruption made in the media, and with
an administrative, rather than criminal,
process.
Nepotism has also been alleged in
certain institutions, but the anti-corruption
secretary failed to respond. One such
allegation concerned the appointment to
the Panamian consulate in the Dominican
Republic of Sandra Noriega, daughter of the
jailed former president Manuel Antonio
Noriega, in spite of the fact that she had
been barred from holding public offce for
10 years following a conviction for abusing
public funds in 1996. The anti-corruption
secretary again failed to comment, though
the government had specifcally identifed
due levels of competence and integrity of
appointees for the diplomatic and consular
corps as one of its priorities.
The civil society representative on the
NCTC wrote to Arboleda in February 2005
asking him to request all public institutions
to investigate possible cases of nepotism
and to sanction any proven cases in line
with the new code of ethics for public
servants. The letter featured in the national
television and print media. The following
day Arboleda offered his resignation, which
President Torrijos accepted. In March,
Alma Montenegro de Fletcher took over
the position. She was attorney general for
administrative affairs from 1994 to 2004
when she created a public ethics network.
She is now pushing for support at each of the
public offces under her jurisdiction in order
for the councils work to be more effective.
There is much scepticism about the value
of the executive secretary and the NCTC,
though the first steps have been taken
to develop an anti-corruption plan with
short-, medium- and long-term objectives.
The council is well aware that it must show
results soon.
Among its goals is a plan to reform Law
59, which regulates asset declarations, so
that they can be properly audited. Another
priority is to reform the administrative
career law so that appointments are based
more on merit (Panama was ranked bottom
alongside El Salvador on this issue by the
Inter-American Development Bank). Other
possible activities are the development of
whistleblower protections and citizens com-
plaints mechanisms.
Recently, the NCTC has required public
bodies to provide information about their
compliance with the governments 16 anti-
corruption targets. Five of the 16 goals have
been attained so far, according to research
by TI Panama. Without any real reform of
the justice system, however, the councils
efforts are unlikely to improve domestic
or international perceptions of corruption
in Panama.
GC2006 02 part2 218 8/11/05 17:54:11
219
AnglicaMaytnJustiniani(TIPanama)
Pact for Justice
Panamas institutions have been in a state of
crisis since January 2002 when Congressman
Carlos Af announced that he and several
of his colleagues had been bribed to vote in
favour of a contract between the government
and a private consortium to build a Multi-
modal Industrial and Service Centre (CEMIS)
in the Coln Port area. Afs colleague from
the ruling Partido Revolucionario Democ-
rtico (PRD) party, Balbina Herrera, had
earlier told the National Assembly plenary
that he had received a US $1.5 million
bribe from high-level government offcials
to break ranks and vote for two of Mireya
Moscosos nominees to the Supreme Court
(one was a minister at the time, the other a
congressman: both belonged to the Partido
Arnulfsta, which was then in power). Since
then, various organisations have been
pushing for the two judges to resign and
for the congressmen who took bribes to be
prosecuted. This has not happened to date.
The court closed the CEMIS case on the
grounds that the congressmen had immunity
when the investigation was initiated. On
30 March, the Commission for Oversight
of Credentials and Judicial Affairs in the
National Assembly decided not to investigate
a further complaint, frst aired in the media
and repeated at a press conference by Judge
Adn Arnulfo Arjona, who alleged that one
of his colleagues consistently ruled in favour
of drug traffckers.
In an attempt to retrieve the Supreme
Courts crediblity, the government called
together the heads of the legislature and
judiciary, the two attorney generals, the
ombudsman, the president of the national
college of lawyers, and the civic society NGO
Alianza Ciudadana Pro Justicia, to sign a Pact
for Justice. The pact creates a Commission
of State for Justice, with 180 days to present
recommendations for restructuring and
modernising the judiciary and public pros-
ecutions service. Civil society organisations
and the public were given the opportunity
to submit their proposals.
Some of the most important areas to be
revised are:
changes to the organisational structure,
and procedures and regulations to
increase the independence, effciency
and competence of the judiciary and
public prosecution offces;
improved transparency in the selection
process for Supreme Court judges;
accountability mechanisms and
evaluation processes for judges, mag-
istrates, public attorneys and public
prosecutors in order to ensure that
the judiciary and public prosecution
budgets are properly used;
drafting of a legal reform bill that sim-
plifes judicial processes and makes the
judicial system easier to use.
The publics attitude to the pact was initially
negative because what it wanted most was
concrete action, not another commission of
inquiry. The proposal that generated most
interest involves the selection and removal
of Supreme Court judges. According to the
proposal, a pre-selection committee of fve
civil society NGOs would send a shortlist of
15 candidates to the president, who would
then select the winner. The proposal was
criticised for providing too many candidates.
A fnal draft was to be presented in September
2005, along with the commissions other
proposals.
Once drafted, the reforms will still need
National Assembly approval if they involve
legal or constitutional reform. While the
commission ponders, the complaints against
the two Supreme Court judges are on hold. A
report that fails to propose the deep-rooted
reforms that civil society hopes for, or that
meets with resistance from the government
or legislature, will probably result in the
two cases being reactivated and possibly
wider protest.
Country reports PANAmA
GC2006 02 part2 219 8/11/05 17:54:11
Country reports 220
Further reading
Alianza Ciudadana Pro Justicia, Audito ciudadano del Caso CEMIS (Citizens Audit of the CEMIS
Case), 2004, www.alianzaprojusticia.org.pa
Fundacin para el Desarrollo de la Libertad Ciudadana, Propuestas para fortalecer las instituciones
que investigan y previenen la corrupcin en Panam (Proposals to Strengthen Institutions that
Investigate and Prevent Corruption in Panama), 2004, www.libertadciudadana.org
TI Panama: www.libertadciudadana.org
Notes
1. See www.presidencia.gob.pa and www.defensoriadelpueblo.gob.pa
2. TI Panama, Corruptmetro, www.transparency.org/tilac/herramientas/2001/dnld/cap03/
corruptrometro_panama.pdf
Conventions:
A private members bill to protect whistleblowers has been drafted, but by mid-2005
had yet to be submitted to parliament for debate by its sponsor, the MP Kimson Kare.
There is limited support in government for the bill.
Parliament passed the Proceeds of Crime Bill in July 2005. The legislation provides measures
against money laundering, including the confscation of illegally gotten gains.
Attempts to establish an independent commission against corruption (for which the
GlobalCorruptionReport2003 argued strongly) have again come to nothing. Despite
statements of endorsement by all leading government politicians, a sponsor for the bill
supporting the creation of the commission has yet to be found. The bill was tabled under
the Bill Skate government, but lapsed after the demise of his administration in 1999.
Amendments to the Forestry Act 1991 have been announced. The original act was
introduced in response to the widespread corruption and abuse in the countrys timber
sector uncovered by the Barnett Commission of Inquiry. The Forestry Amendment Bill
2005 is ostensibly aimed at updating and eliminating inconsistencies in the earlier act,
but there are concerns that it might generate increased opportunities for corruption.
There are concerns that it concentrates authority for awarding logging permits in the
forestry minister and makes it more diffcult for the public to gain access to information
about permits and licences. Transparency International Papua New Guinea (TI PNG) is
currently monitoring the sector to see if these concerns are valid.
The government agreed in July 2004 to create the National Anti-Corruption Alliance
(NACA), a loose alliance of all the government agencies with responsibility for monitoring
and fghting corruption.
1
Comprising the auditor general, the solicitor general, treasury
Papua New Guinea
GC2006 02 part2 220 8/11/05 17:54:11
221
department fnancial inspectors, the ombudsman commission, the police fraud squad,
the public service inspectorate and provincial affairs inspectors; the alliance is intended to
bring greater effciency to the fght against corruption in public services. The NACA had
a successful beginning when it visited Western Province and uncovered massive fraud in
the provincial government. Seventeen provincial offcials, including the governor, were
successfully prosecuted as a result.
NGOs concerned with corruption have widened their activities to cities other than the
capital, Port Moresby. Representatives of the Media Council, TI PNG and the Ombudsman
Commission travelled to Lae in late 2004 with a view to establishing a branch of the
Community Coalition against Corruption (CCAC) there. The CCAC is a coalition of
churches, youth groups, womens groups, NGOs and citizens, and claims to represent
about 2 million of the countrys 5.7 million population.
Audit of by-elections uncovers
need for strengthening elections
machinery
Detailed monitoring of three by-elections
held in mid-2004 by civil society groups and
the Electoral Commission has shed light
on weaknesses in the legislative framework
and problems in the fnancing of political
parties.
2
These need to be addressed ahead
of the 2007 general elections.
The audit was launched in response to
concerns about the capacity of the electoral
authorities to manage the electoral process.
Some of the key worries are the infuence
of private funding on the election process
and the transition from a frst-past-the-post
system to a system of limited preferential
voting.
The report followed on from the fndings
of a team of electoral observers from TI PNG,
who noted that the by-elections were in the
main conducted successfully, but that their
high cost cast doubts over the financial
sustainability of future elections. The costs
of security including a policing bill of 3.5
million (US $4.5 million) or 70 per cent of
the total election cost, and of counting and
administering the electoral roll were consid-
ered especially high.
The audit looked at the by-elections in
greater detail, and questioned the integrity
of various aspects of the election process.
The electoral roll was found to contain a
number of fictitious voters. In Chimbu,
for example, 40 per cent more votes were
counted than the entire total population for
that area, according to the 2000 National
Census.
The introduction of the limited preferential
voting system under the 2001 Organic Law
on the Integrity of Political Parties and
Candidates (OLIPPAC)
3
was deemed to have
successfully reduced the ethnic polarisation
of voters and ensuing violence, which had
become a hallmark of elections in Papua
New Guinea.
4
Administrative complexity and low voter
awareness remain a concern. In terms of
corruption in the fnancing of politics, the
OLIPPAC is important in that it provides for
registration of political parties and public
funding of registered parties, and sets limits
on contributions to parties from local and
foreign sources.
Enforcement of the law has been poor,
however. The Office of the Registrar of
Political Parties has statutory responsibility
for monitoring and enforcing the OLIPPAC,
including oversight of annual returns from
both individuals and parties that outline
their funding sources and powers to
scrutinise returns for accuracy. But the offce
lacks the resources needed to successfully
perform these tasks. To date, a large majority
of candidates and parties fail to comply with
these requirements.
The Electoral Commission was a core
partner for the audit, and has taken on board
the fndings outlined in the audit report.
The government has since established a task
Country reports PAPUA NEW GUINEA
GC2006 02 part2 221 8/11/05 17:54:12
Country reports 222
TransparencyInternationalPapuaNewGuinea
Further reading
Steven Gosarevski, Helen Hughes and Susan Windybank, Is Papua New Guinea Viable? in Pacifc
EconomicBulletin19(1), 2004, peb.anu.edu.au/pdf/PEB19-1Hughes-policy.pdf
Helen Hughes and Susan Windybank, PapuaNewGuineasChoice:ATaleofTwoNations (St Leonards,
NSW: Centre for Independent Studies, 2005), www.cis.org.au/IssueAnalysis/ia58/IA58.pdf
Albert Mellam and Daniel Aloi, National Integrity Systems TI Country Study Report, Papua New
Guinea, 2003, www.transparency.org/activities/nat_integ_systems/dnld/pap_new_guinea_
25.09.03.pdf
force to reform the electoral system ahead of
the 2007 elections.
Police chiefs told to curb corruption
The Internal Security Minister has given
the Commissioner of Police and his senior
offcers until the end of 2005 to introduce a
series of reforms aimed at reducing incidences
of mismanagement of funds and corruption,
as well as improving leadership within the
police force. Failure to adopt the suggested
reforms could result in disciplinary action
against the police chiefs.
The reform proposals resulted from the
frst-ever internal review of the Royal Papua
New Guinea Constabulary (RPNGC),
5
which
took place between February and September
2004. The report was coordinated by a review
committee made up of representatives of the
Ombudsman Commission, the Chamber of
Commerce, the police union, the attorney
generals department and a womens repre-
sentative. An external opinion was provided
by a former commissioner of the Australian
Federal Police.
The committee took written submissions
and toured the country, taking oral
submissions from police as well as the
general public. It toured neighbouring Pacifc
Island nations and Arnhemland in northern
Australia to gain frst-hand knowledge of
policing in comparable environments.
The report was tabled in parliament and a
monitoring task force is to be set up to ensure
that the recommendations are not ignored.
A key finding of the report was that
internal disciplinary mechanisms within
the RPNGC have almost completely
collapsed. Unprofessional and unethical
conduct by members of the RPNGC has
gone largely unpunished.
6
This has led to
the loss of confdence and trust that once
existed between the government, the wider
community and the RPNGC.
The report called for the government to
increase its support for the RPNGC, with
funds as well as in offcial rhetoric. Progressive
disinvestment by the government has left
the RPNGC in a fragile state.
7
The quality of
managerial leadership within the RPNGC is
poor, and the report recommended setting
up an Office of the Inspector General of
the Constabulary to strengthen internal
discipline, monitor effectiveness and
audit performance across the whole of the
RPNGC.
More wide-ranging recommendations
addressed the need for more police offcers:
at present there is one police officer per
1,121 inhabitants
8
and consequently the
police force draws heavily upon reserves
and auxiliaries. Undisciplined and violent,
the actions of poorly trained reserves and
auxiliaries have cost the government dearly,
in legal fees and loss of trust in the police.
Finally, the committee called for the
implementation of an immunity process
whereby police offcers would be able to
admit to less serious past misdemeanours,
including acts of corruption, without the
risk of prosecution for these offences. This,
the committee argues, will allow police to
perform their duty and enforce discipline
without fear of being reported for a previous
indiscretion.
GC2006 02 part2 222 8/11/05 17:54:12
223
Mekere Morauta, The Papua New GuineaAustralia Relationship, PacifcEconomicBulletin20(1),
2005, peb.anu.edu.au/pdf/PEB20-1morauta.pdf
TI Papua New Guinea: www.transparencypng.org.pg
Notes
1. www1.oecd.org/daf/asiacom/pdf/refpro_2impcyc_papuanewguinea1.pdf
2. The audit was conducted by TI PNG, the Institute of National Affairs (PNG), the Institute of
Policy Studies of New Zealand and the PNG Electoral Commission.
3. This change of voting systems was just one of a number of important changes brought in by
the OLIPPAC, which was aimed primarily at reducing post-election horse trading and vote-
buying in the legislature.
4. www.thenational.com.pg/0607/nation2.htm
5. TheAge (Australia), 19 November 2004. Full report available at www.inapng.com/Police%20R
eview%20Report%20fnal.pdf
6. The review was not mandated to investigate individual cases of unprofessional and unethical
conduct, and thus did not pursue them beyond its own terms of reference.
7. The review stated explicitly that the low salaries were an issue for police misconduct. The
minister responded in early 2005 by raising police salaries by an average of about 10 per
cent.
8. The UN recommended police:population ratio is 1:450. Police:population ratios for other
jurisdictions are: Fiji, 1:550; Solomon Islands, 1:500; Queensland 1:475; and Northern Territory
of Australia 1:280.
Conventions:
UN Convention against Corruption (ratifed November 2004)
Reforms to the penal code and code of criminal procedures were approved in July 2004
and will enter into force in February 2006. They make it easier for prosecuting judges to
prepare their fnal reports and broaden the instances in which preventative detention
can be used to include complicated cases where more than 10 people are implicated (thus
reducing the number of suspects implicated in the drawn-out corruption cases benefting
from house arrest or release under bail). Sanctions for public offcials found guilty of
corruption have been increased and a clear difference established between those who
propose or extort a corrupt transaction who will receive on average four years more
than under the previous sanctions regime; and those who carry out the corrupt act who
face a sentence of two years more than before. Sentences for illicit enrichment are also
increased to 818 years for senior public offcials.
A new law on state contracts and acquisitions was adopted in July 2004 and secondary
regulations implementing it entered into force in December. The law contains details of
an online system of state contracts (SEACE) that has been in development since 2002.
It clarifes which bodies come under the laws jurisdiction; creates a national register of
Peru
Country reports PERU
GC2006 02 part2 223 8/11/05 17:54:12
Country reports 224
providers; broadens the list of grounds for disqualifcation from state contracts; increases
the cooling-off period for former public offcials who wish to enter into contracts with
the state; declares void any contracting processes that are not included in the annual
purchasing plans of state institutions; and clarifes which supply contracts qualify as
urgent, and therefore can be issued without tenders, because the institution would be
paralysed without them. The main faw is that there is no need to prove what kind of
situation qualifes as urgent.
The law governing the Financial Intelligence Unit (UIF) was modifed in July 2004, and
grants it new powers to request any information from any public institution (previously
it could only request information about suspect transactions). The modifcation also
increases its sphere of operations to include the prevention and detection of fnancing of
terrorism, and increases cooperation with international organisations and other domestic
public institutions. The reform was criticised for reducing the UIFs independence, however,
because the head of the body will now be directly responsible to the cabinet and not the
superintendent for banking and insurance (SBS), which is constitutionally independent.
The bodys fnancing has been restricted to funds provided by the treasury, funds recovered
from the Fujimori regime (which are limited) and fnes imposed by the UIF.
The Congressional Ethics Commission was reformed in September 2004 in an attempt
to bolster its poor performance. Since it was created in March 2003, it had failed to fnd
fault with a single MP in spite of the dozens of complaints brought to its attention. It
now consists of seven MPs under a new president. Since it was reformed, the commission
recommended a 120-day suspension for an MP who assaulted a government offcial, but
Congress later reduced the sanction.
A commission created by Justice Minister Blado Kresalja in May 2004 to design an
anti-corruption programme (see GlobalCorruptionReport2005) collapsed in July, following
the ministers resignation in opposition to a new media law that allows up to 40 per cent
foreign ownership of Perus radio and television stations.
A complaints and redress commission for corrupt acts committed by teachers, school
directors or offcials related to the education sector in Lima was created in February
2005.
Attempts to dismantle Fujimoris
machinery foiled
After four years of legal and political struggle
against the criminal mafa led by former
president Alberto Fujimori and his close
adviser, Vladimiro Montesinos, there have
been some important achievements, albeit
partial ones. By September 2004, 201 cases
had been opened involving more than 1,400
suspects, and US $175 million had been
recovered. The investigation has now entered
a second, crucial stage, focusing on the
states ability to sanction those responsible.
Successful convictions at this stage would
go a long way towards overcoming the
widespread public perception that impunity
is the rule in Peru, not the exception.
The governments reluctance to tackle the
roots of corruption was confrmed during the
course of investigations led by Luis Vargas,
who headed the FujimoriMontesinos
inquiry, when he discovered clear links
between a member of President Alejandro
Toledos inner circle and a leading fgure
in the organisation that looted so much of
Perus wealth in the 1990s. The investigations
revealed that Csar Almeyda, Toledos
friend, adviser and former lawyer, had had
communications with former general Oscar
Villanueva, also known as Montesinos
GC2006 02 part2 224 8/11/05 17:54:12
225
treasurer. The evidence supplied was a
recorded conversation in which Almeyda
allegedly offered Villanueva improved prison
conditions in exchange for information
that could be used against Toledos political
enemies. Villanueva committed suicide when
this recording was made public in September
2002. The conversation implicated those at
the highest levels of power and Toledo was
unable to prevent Almeydas subsequent
arrest. However, the case didnt stop there.
Vargas wanted to take charge of the
new investigation to determine how far
the tentacles of the FujimoriMontesinos
network had penetrated the current
administration. The government expressed
its trenchant opposition, arguing that the
special investigators offce had been created
solely to deal with events from 1990 to 2000
and that its remit should not go beyond
that period. The auditor general, public
prosecutor and head of the legal defence
council all supported the governments
position, but Justice Minister Baldo Kresalja
was reportedly in favour of widening the
terms of reference initially, though he later
changed his mind.
Relations between the investigating team
and the government deteriorated further
after the media revealed in July 2004 that
Per Posible, the ruling party, had allegedly
falsifed hundreds of thousands of signatures
in order to register as a new party in time
for the 2001 general elections. This had
apparently been achieved because of the
partys close links to the Ofcina Nacional
de Procesos Electorales (ONPE), the electoral
body, which was still under the control of
Fujimori and Montesinos (see below).
Vargas term of offce was due to expire in
October 2004, though offcials had already
suggested he be replaced during a smear
campaign that had belittled the results
of his inquiry, and his failures to secure
more convictions or extradite Fujimori
from Japan.
1
Vargas term could easily
have ended there and then were it not for
a large public demonstration and several
opinion polls that showed most Peruvians
wanted him to stay. Public opinion won
through, but his contract was renewed for
only three months, after which Antonio
Maldonado was appointed the new special
investigator.
A number of Vargas team resigned in
protest, citing their concern that Maldonado
would not tackle in suffcient depth either
the Almeyda case or the allegation of
signature faking, because they involved the
investigation of highly placed politicians.
The conviction that the corrupt enjoy
immunity from prosecution is strong
among the population, as evidenced by
the annual opinion poll conducted by the
anti-corruption NGO, Protica, which found
that 79 per cent of respondents believe that
corruption charges do not lead to any form of
sanctions, and 83 per cent think corruption
will be as bad or worse in fve years time.
With its reputation tarnished by alleged
links to the Fujimori regime, the govern-
ment is caught dangerously off-balance. Torn
between the desire to protect the president
and his party, and a public commitment to
punish corruption, it chose to emasculate its
special investigation team, rather than risk
opening itself up to further enquiry.
Toledos reaction to the case of the
signature factory
The Toledo governments precarious popu-
larity with voters (his approval rating at the
time of writing hovered at 10 per cent) was
further damaged by news that signatures had
been falsifed to qualify the ruling party to
fght the 2001 election.
Among the methods allegedly employed
by Per Posible was the creation of a
signature factory, staffed by personnel
hired by the party chiefs who were charged
with manufacturing the 500,000 signatures
required by law to register a new party.
Since July 2004, a string of further
revelations has come to light. A key witness
appeared, then disappeared in a mysterious
manner; retracted his original statement;
then later accused politicians of involvement
in his disappearance, implicating a number
Country reports PERU
GC2006 02 part2 225 8/11/05 17:54:13
Country reports 226
SamuelRottaCastillaandLeonardoNarvarteOlivares(Protica)
Further reading
Beatriz Boza, AccesoalainformacindelEstado:Marcolegal y buenasprcticas (Access to State
Information: Legal Framework and Good Practices) (Lima: Fundacin Konrad Adenauer,
2004)
Defensora del Pueblo, ndice de Buen Gobierno. Resultados del IBG aplicado a los Gobiernos
Regionales en el Per: enero 2003junio 2004(Good Governance Index: Results of the Index
Applied to the First Six Months Administration of the Regional Governments in Peru: January
2003June 2004) (Lima: Defensora del Pueblo, 2004)
Instituto Prensa y Sociedad (IPYS), AccesoalaInformacindelasEntidadesdelSectorSalud (Access
to Information in Health Sector Bodies) (Lima: IPYS, 2004)
Felipe Portocarrero S. (ed.), ElPactoInfame.EstudiossobrelacorrupcinenPer(The Infamous
Pact: Studies on Corruption in Peru) (Lima: Red para el Desarrollo de las Ciencias Sociales en
el Per, 2005)
Protica, III Conferencia Nacional Anticorrupcin (Third National Anti-corruption Conference),
Lima, 2005, transcripts of proceedings published at www.proetica.org.pe/Descaragas/Conclusi
ones%20Finales%20TALLERES%20III%20Conferencia.doc
Protica (TI Peru): www.proetica.org.pe
Note
1. See GlobalCorruptionReport 2004. At the time of writing, the Japanese authorities were examining
an extradition request fled in late 2004. Analysts expected the request to be rejected since
Fujimori holds Japanese citizenship and Japan does not extradite nationals. While banned
under the constitution from standing in the next election, Fujimori has said that he is still
considering a political role.
of offcials along the way. While this saga
continued, other witnesses stepped forward
with contradictory statements and another
signature factory was discovered, linked
to Congressman Rafael Rey and his Code-
Renovacin party. Rey was well known for his
pro-Fujimori stance in the 1990s, but claims
to have severed links with the regime.
This last revelation created the impression
that the majority of parties engaged in
falsifying signatures and other forms of
corruption to compete in the election.
Indeed, Fujimori and Montesinos were
both reported to control the electoral
commission, the ONPE and the national
elections jury (JNE). This view was reinforced
when Heriberto Bentez, one of five
members of a parliamentary commission
set up to investigate the signature factories,
proposed a blanket amnesty for all parties
implicated in order to avert a crisis in the
political system. Housing minister Carlos
Bruce accepted that Per Posible had falsifed
signatures, but defended it on the grounds
that the ends defeating the Fujimori regime
justifed the means.
The commission had made little progress
by the time it presented its conclusions in
May 2005. The members agreed that the
leaders of Per Posible, including President
Toledo, were responsible, but failed to agree
on what sanctions to impose. One of the
commissions aims had been to question
President Toledo, but the request was
denied. He eventually did agree to attend
on condition that the meeting was not
recorded, a decision that confrmed to many
his unwillingness to collaborate with the
commission. The case has now been sent to
the public prosecutors offce.
The case and Congress failure to punish
those responsible can only contribute to
the low regard in which the electorate holds
political parties in Peru. A poll by Lima Uni-
versity in 2003 showed that 81 per cent of
citizens do not trust political parties.
GC2006 02 part2 226 8/11/05 17:54:13
227
Conventions:
Council of Europe Civil Law Convention on Corruption (ratifed September 2002)
Council of Europe Criminal Law Convention on Corruption (ratifed December 2002)
UN Convention against Transnational Organized Crime (ratifed November 2001)
Parliament adopted an amendment to the law governing MPs and senators in January
2005 that came into force in mid-May. Under new provisions, parliamentarians who
have been arrested or imprisoned will automatically be deprived of their rights and
obligations as representatives, including remuneration. There is a right of appeal. The
amendment was introduced following a series of criminal cases and scandals involving
MPs (see below).
In a bid to eliminate corruption in the courts, the Sejm (lower house) approved a bill
in September 2004 giving citizens the right to lodge a complaint against drawn-out
proceedings in criminal, civil and administrative cases. The provision was adopted after
Polish claims at the European Human Rights Tribunal in Strasbourg rose to a record
5,784 in 2004, mostly as a result of tardy court processes. Polands old-fashioned case
registration system gives poorly paid court clerks wide discretionary power to infuence
the order of proceedings.
An act on freedom of economic activity was passed in August 2004 limiting tax offcials
ability to exploit their power for bribes. Business start-ups now require fewer permits to
commence trading and the law prevents tax offces from conducting more than one audit
at a time, unless an offcial investigation is in progress.
An amendment to the law preventing assets from illegal sources from entering the
fnancial system, which was passed after the 9/11 terrorist attacks, entered into force in
July 2004, further tightening fnancial regulation. Financial institutions, the National
Deposit of Securities, the lottery, the postal system, public notaries, real estate agents and
others are required to register any transaction exceeding 15,000 (US $19,000) with the
authorities and to notify the General Inspector of Financial Information on a monthly
basis of any suspicious deals.
By December 2004, all provincial police forces had established specialised anti-corruption
departments. The frst was established in Silesia in 2000. The units provide police with a
set of new tools for combating corruption, including aiding whistleblowers, for example
through controlled bribery (when, under a court order, police provide whistleblowers
with marked banknotes, a tape-recorder or camera to catch a public offcial extorting
a bribe). The new methods may have already begun to have an impact. In the frst
quarter of 2005, police initiated 1,664 investigations of corruption, compared to 2,825
throughout 2003.
Poland
Country reports PoLAND
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Country reports 228
Lay judges tamed, but still powerful
The judiciary has been criticised for many
years for its lengthy proceedings and
perceived corruption. Files went missing,
cases were barred before entering the
docket and verdicts were delivered on the
basis of false evidence. The judges were not
exclusively to blame. Public attention has
recently focused on dishonest court experts
who falsify evidence and corrupt lay judges
who are available for hire. Lay judges are
members of the panels that preside over
the criminal, family and labour courts.
In the three-person panel system used in
Polish courts, the two lay judges exert a
decisive infuence. According to the 2001
law that defines their conditions, any
citizen of impeccable character, who has
lived for a year in the place where the court
presides, is qualifed to become a lay judge.
Organisations, trade unions, presidents of
courts or groups of 25 citizens can all put
forward a candidate who must prove that
he or she does not have a criminal record.
Gmina (municipality) councils elect lay
judges for a four-year term of offce.
The current regulations concerning lay
judges, based on those of the communist
legal regime, are seriously defcient. For a
start, the existing law does not adequately
define the term organisation, with the
result that political parties nominate their
own candidates to administer local justice.
In some gminas, councillors from different
parties agree on the quota of judges each
will appoint. They or their family members
can also assume this infuential post, as do
people against whom penal proceedings
are pending in other districts. According to
the presidents of Polands district courts, as
many as 135 criminal court proceedings had
been completed or were in progress against
lay judges in March 2004.
Though irregularities in the election of
lay judges have been commonplace since
the early 1990s, the issue rarely captured
the publics interest. This changed after the
last election in late 2003. In June 2004, the
administrative court in d declared that
the appointment of lay judges by the city
council of d was against the law. The
Administrative Court in Cracow overruled
one election in July 2004 on the grounds
that not all the elected lay judges had the
appropriate police recommendations. In July
2004, the administrative head of Mazowieckie
region overruled a resolution in Legionowo
because political parties had recommended
the judges for election (though the law does
not actually prohibit this).
The question of lay judges political
affiliations became the focus of media
attention in the same year. As a result, the
government prepared a draft amendment
to the law on the structure of the common
courts that was submitted to parliament
in March 2005. Under this bill, lay judges,
like professional judges, will henceforth
be apolitical. The draft amendment also
limits the participation of lay judges in
the administration of justice. They will
not participate in cases related to social
insurance and their involvement in family
cases will be much reduced. Candidates for
the post will have to provide a statement
to the effect that no criminal proceeding is
underway against them. The draft provisions
also require that candidates have attained a
secondary education, at the very least.
The adoption of the amendment is
expected to improve the situation, as will a
justice ministry instruction in August 2004
that bars councillors from standing as lay
judges. Opinion varies from wanting to
abolish lay judges entirely to arguments that
politicians should not be responsible for the
election of lay judges for fear of nepotism
and cronyism.
Tackling the log roll
In May 2005, the Sejm adopted an
amendment to the acts on the civil service
and on local government aimed at ending
the widespread practice of log rolling
whereby every election is followed by a
major turnover of personnel at every level
of state and local hierarchies. The basis of
GC2006 02 part2 228 8/11/05 17:54:13
229
recruitment is often kinship, party affli-
ation and ties of friendship with those in
power. This nepotism in the administration
produces a lower quality of public service
and makes the oversight of offce operations
diffcult.
Under new regulations, information
about vacancies in the civil service and local
administration must be published, specify-
ing the requirements of any given position
and the relevant dates of the recruitment
procedure. The list of candidates meeting
the criteria must also be published, along
with the name of the winner and a justif-
cation for why he or she was selected. The
procedures are binding on all government
institutions.
The amendment is a step in the right
direction, but more decisive legislation is
required if the forced rotation of experienced
personnel is not to impact on the quality
of administration and even the economy.
The new law does not provide suffcient
safeguards against the detrimental practice
of awarding public tenders to companies
owned by relatives of local offcials. Further
measures are required to restrict another
harmful log rolling of reserving top
managerial posts in state or municipally
owned companies for members of the
winning party.
Some local governments have begun to
understand that good governance is also a
route to political success and are introducing
transparent standards of operation on
their own initiative, despite the dearth of
offcial regulations. In 2004, the head of
the administration of Pabianice introduced
competitive procedures to the recruitment
of public officials. At the end of 2004,
two competitions to fll vacancies in the
administration were announced and the
requirement details were published on the
Internet and the local bulletin board.
In early 2005, the Pabianice administration
issued six more regulations to align its
policy with EU standards. In addition to the
competitive recruitment process, the district
now possesses formal rules for performance
assessment, remuneration and career
advancement, and an ethical code for its
offcials. Similar changes are being introduced
by a group of gminasin Wielkopolska, in
collaboration with TI Poland.
mPs above the law
A number of high-profle cases involving
Polish politicians have come to light.
Zbigniew Sobotka, former deputy minister of
internal affairs and administration, Henryk
Dugosz and Andrzej Jagieo, both senior
officials in the regional organisation of
the ruling Democratic Left Alliance (SLD),
were sentenced in January 2005 to three
and a half, two, and one and a half years in
prison respectively for leaking information
of an organised raid to a criminal ring in
Starachowice which the police had targeted.
Another MP and former leader of the SLDs
dzkie chapter, Andrzej Peczak, was
arrested in 2004 on charges of corruption.
Court proceedings are underway against
Renata Beger, a deputy from the radical
Samoobrona party, and Jzef Skowyra, from
the right-wing League of Polish Families.
Both Beger and Skowyra were charged with
forging signatures on lists supporting their
candidatures for the elections. MPs involve-
ment in crime opened a debate on the need
to limit their rights, which remain largely
intact even after imprisonment. Following
public pressure, parliament adopted an
amendment to the law on the performance
of MPs and senators in January 2005. The
new provisions strip arrested or imprisoned
MPs of their obligations and rights, including
their salaries. However, the amendment
does not apply to sentenced MPs who are
still eligible for appeal. This legislation did
not therefore affect the three MPs arrested
in the Starachowice case, who carried on
as usual. Furthermore, even after the arrest
and imprisonment of an MP, they still
retain their mandate and immunity. Under
the constitution, fresh charges can only be
brought with the approval of the Sejm.
The criminal scandals swirling around
Polish MPs led to calls for a ban on anyone
Country reports PoLAND
GC2006 02 part2 229 8/11/05 17:54:14
Country reports 230
JuliaPitera(TIPoland)
Further reading
EU Acccession Monitoring Programme of the Open Society Institute, Korupcja i polityka
antykorupcyjna.Raportykrajowe.Polska(Corruption and Anti-corruption Policy) (Warsaw: EU
Accession Monitoring Programme, Open Society Institute, 2002)
Maria Jarosz, Wadza,przywileje,korupcja(Power, Privileges and Corruption) (Warsaw: Wydawnictwo
Naukowe PWN, 2004)
Wojciech Krupa, Marzena Rogalska and Maciej Wnuk, Elementykorupcjogennewwybranychprzepisach
prawnychregulujacychfunkcjonowaniesamorzadugminnego (Corruption-generating Elements in
Selected Legal Provisions Regulating the Functioning of Gmina-level Self-government) (Warsaw:
TI Poland, 2003)
Celina Nowak, Dostosowanieprawapolskiegodoinstrumentwmidzynarodowychdotycz cychkorupcji
(Adaptation of Polish Law to the International Instruments Concerning Corruption) (Warsaw:
Fundacja Batorego, 2004)
TI Poland: www.transparency.pl
Conventions:
Council of Europe Civil Law Convention on Corruption (ratifed April 2002)
Council of Europe Criminal Law Convention on Corruption (ratifed July 2002; Additional
Protocol ratifed November 2004)
UN Convention against Transnational Organized Crime (ratifed December 2002)
An urgency ordinance in February 2005 waived the immunity protections of members
of the former government in line with the recommendations of the Council of Europes
Group of States against Corruption (GRECO), paving the way for prosecution of past
corruption crimes (see below). But there are categories of people who still beneft from
immunity. Under a modifcation to the law on the legal profession in June 2004, lawyers
cannot be prosecuted or indicted without the approval of the general prosecutor of the
court of appeal where they are registered.
A law on the protection of whistleblowers, passed in December 2004, improves safeguards
for public employees who disclose breaches of the law inside the institutions where they
with a criminal record from standing for
parliament. A group of MPs from the left-
wing Polish Social Democrats tried to change
the constitution in March 2005 by adding
a clause excluding from parliament anyone
sentenced for intentional crimes and crimes
prosecuted ex offcio. The initiative failed
due to the lack of the required number of
signatures. The Sejms legislative committee
took another approach to the problem. It
proposed giving courts the power to deprive
a sentenced person of the right to stand for
parliament. This initiative also failed to
win the necessary support. MPs are now
discussing a third possibility in the form of
a legal obligation to publish information if
a candidate for parliament has been logged
in the register of convicted persons.
Romania
GC2006 02 part2 230 8/11/05 17:54:14
231
work. It guarantees whistleblowers disciplinary and administrative protection in the event
of retaliation by their administrative superiors or colleagues, and introduces an inverted
burden of proof whereby a whistleblower is legally presumed to be in good faith, requiring
the accused to bring evidence to rebut the allegations made. Critics have pointed out that
this might make the law a platform for frustrated civil servants to denounce or harass
their superiors. Another strong point of the law is that whistleblowers can report to a
wider array of public and private authorities than is usual in most Western whistleblower
acts.
1
The laws effectiveness will depend on raising awareness of its existence and raising
the level of trust among civil servants.
An amendment to the law on the prevention, disclosure and punishment of corrupt
acts, passed in November 2004, closes an important gap in the criminal law framework.
Before the amendment was adopted, criminal law treated certain acts of corruption as
crimes of abuse, which were often converted in court into crimes of negligence and
sanctioned with fnes rather than imprisonment. For example, if a civil servant took or
refused a decision to grant an authorisation or a lease against the rules, incurring damage
to a party, it would be treated as a crime of abuse, irrespective of the personal benefts
obtained by the civil servant or a third party. The sanction for these crimes will now be
315 years in prison, as in bribe-taking cases.
An amendment of the Criminal Procedure Code, passed in November 2004, widens
the plaintiffs litigation guarantees by introducing the mandatory motivation and
communication of all prosecutorial decisions in a case. This gives the plaintiff legal
backing to attack any prosecution decision that runs counter to law. The modifcation
is particularly relevant for situations in which the prosecution refuses to start, drops
or suspends criminal proceedings on unjustifed grounds, allowing criminals to escape
prosecution.
A law published in July 2004 provides a new legal framework for gifts received by
dignitaries, magistrates and civil servants during the course of their duties. All goods
received in protocol activities must be declared to the head of the relevant department
within 30 days of receipt. When their value exceeds 200 (US $240), the benefciary can
either surrender them to a special commission or keep them, having frst reimbursed their
cost. Any gifts worth less than 200 may be retained. The law does not provide similar
provisions for services of protocol which may include trips, bursaries, and events and so
on, that may amount to important sums of money. Nor does it provide a mechanism for
monitoring or sanctioning false declarations or the potential refusal to declare gifts.
A law on the running of the Superior Council of Magistracy (CSM) was adopted in
July 2004 as part of a package intended to meet the EU accession requirement of an
effective and independent judiciary.
2
The amendments mainly targeted the career
path and disciplinary responsibility of magistrates, which were placed defnitively under
the auspices of the CSM. Other responsibilities formerly held by the justice minister and
now transferred to the CSM include decisions on the establishment or dissolution of
courts; acts regarding the organisation of the judiciary; and the budgets of courts and
prosecutors offces. The CSM has fnancial autonomy
3
and may initiate draft laws that
relate to the functioning of the judiciary (see below).
The National Anti-Corruption Prosecution Offce (PNA) continued to draw fre for its
performance in 2004. A 23 per cent increase in personnel (prosecutors, judicial police
and other experts) authorised in April 2004
4
was offset by the decision to simultaneously
broaden the PNAs mandate to include smaller acts of corruption.
5
This stretched the
Country reports RomANIA
GC2006 02 part2 231 8/11/05 17:54:14
Country reports 232
agencys capacity to breaking point. By the end of 2004, the government intervened
with another ordinance that restored the bribe threshold to 5,000 (US $6,000), still well
above its original level. Under the judicial reform package outlined above, PNA does not
answer to any state authorities (see below).
6
EU membership depends on anti-
corruption drive
Romanias hopes for accession to the EU
in 2007 depend on it discovering remedies
to its deep-seated problems of corruption
and the rule of law. The judicial reform
package, adopted in July 2004, alleviated
some concerns over the independence
of the judiciary, but qualms remain as to
whether the new government of President
Traian Basescu will implement its framework
on time. The anti-corruption programme
is on much thinner ice as debates in the
European Parliament showed in December
2004. Recent strategy has been designed to
secure signature of the EU Accession Treaty,
which it did in April 2005, but the lack of
convincing progress in the fght against grand
corruption could trigger a delay clause that
puts back EU entry for one year.
MEPs doubts about Romanias ftness to
join the Union were encapsulated in the
ReportonRomaniasProgresstowardsAccession,
presentedby parliamentary rapporteur Pierre
Moscovici in December 2004. He noted the
low rate of successful high-level corruption
prosecutions and urged Romania to resume
its campaign. More critical voices could
be heard in the chamber after accession
negotiations ended two days later. One MEP
submitted a motion for the reopening of
negotiations on the grounds that Romania
was incapable of tackling its problems by
the date of the treaty signature.
7
The motion
was rejected.
The newly elected government took
offce later that month with a mission to
resolve these concerns. President Basescu
paid calls on all the authorities responsible
for combating corruption the CSM, PNA,
intelligence services to insist on their full
and effective cooperation, and warned that
corruption was now a threat to national
security.
8
He stressed his support for the
independence of the magistracy and
appointed a non-political fgure to head the
justice ministry as a sign of that support.
9

Basescus get-tough approach contrasted
sharply with that of his predecessor, Ion
Iliescu, who was characterised as a passive
president surrounded by controversial
associates. After this, heads began to roll
in the police force and elsewhere in the
administration, a move that the opposition
Social Democratic Party (PSD) called political
dismissals. Another signifcant decision was
to waive immunity for crimes committed
by former ministers while in office (see
above). Concurrently, a spate of arrests,
investigations and prosecutions scooped
up a number of high-level figures in the
business and administrative world related
to the former and present governments.
10
In February 2005, the justice ministry
ordered an independent audit of the frst
National Anti-Corruption Strategy (2001
04) as part of a pledge to the EU to provide
a future basis for anti-corruption measures
in the run-up to accession.
11
Its fndings
broadly refected those reached by the EUs
parliamentary rapporteur, but it reserved
particular scorn for the PNA, which it called
ineffcient, and the previous administration,
which it accused of infuencing the judiciary
in its fght against corruption. The report
was well received by the public, the govern-
ment and EU institutions alike, but offcials
from the institutions it targeted and the PSD
criticised its lack of professionalism.
In March 2005, the government approved
a new anti-corruption roadmap focusing
on three fronts prevention, sanctions and
institutional cooperation with measures
ranging from the strengthening of freedom
of information legislation to restructuring
GC2006 02 part2 232 8/11/05 17:54:14
233
the CSM and PNA, to tightening anti-money
laundering laws. The strategy also envisions
the creation of a new agency to check asset
declarations and conficts of interest and
to monitor the implementation of the law
on the protection of whistleblowers. The
governments plan of action was unveiled
amid considerable fanfare and against a
backdrop of intense public discussion about
corruption and the future of Romania.
On the day the government approved
the anti-corruption strategy, the Romanian
president stated that he was backing reform
of an ineffcient and corrupt judiciary.
12

This statement marked a new turn in
the presidents attitude towards public
authorities, in particular the judiciary, and
raised eyebrows among advocates of judicial
independence.
President Basescu has indicated a change
of direction, but has yet to start to turn the
corner. Time is short for Romania, but the
goal of a speedy EU accession should not
be grounds for riding roughshod over the
judiciary or the existing legal framework.
Romanias infrastructure
nightmares
There are roughly 200 km of highways
in Romania which has a similar surface
area to Italy, where there are 6,000 km of
highways. Among its EU commitments,
Bucharest must build some 1,500 km of
highways under the Pan-European Corridor
IV that links Germany with Turkey through
the Czech Republic and Hungary at a total
cost of 2 billion (US $2.4 billion). Under
the programme, Romania is due to build a
highway from Arad in the west to the Black
Sea port of Constanta by 2015.
Despite these commitments, the previous
government decided to invest in a highway
running parallel to the Pan-European
Corridor from Oradea to Brasov, in the centre
of the country. In late 2003, it announced
the signature of a contract with US company
Bechtel, at a cost of roughly US $2.5 billion.
However, there was no public procurement
bid for the tender,
13
even though it was
the largest motorway project in Europe.
Moreover, the contract was signed a few
months before Romania was given the green
light for entry into NATO in March 2004.
14
After signing the Bechtel deal, the
government embarked on a raft of contracts
without orthodox procurement procedures.
One of the most controversial was with
the Franco-German-Spanish consortium
European Aeronautic Defence and Space
(EADS) to secure the national borders at a cost
of around 1 billion (US $1.2 billion). The
contract was classifed as secret and awarded
without a public tender.
15
The EADS contract
was signed in August 2004, a few months
before Romania needed to close the EU
accession negotiations under very diffcult
conditions. Smaller contracts followed,
including one with French company Vinci,
also signed without a public tender, to build
a motorway between Bucharest and Brasov.
After the elections in November 2004,
the new government rescinded all contracts
signed outside normal procurement
regulations by the previous administration.
After the contractors complained, the
government agreed to renegotiate terms
with Bechtel and EADS so as to make
conditions fairer for Romania.
16
Both
companies accepted this compromise, which
raised questions about the soundness of the
original contracts.
The government has made an effort to
bring in those responsible for the questionable
contracts. In June 2005, the administration
and interior minister, Vasile Blaga, announced
that he had launched a criminal investigation
against several heads of the police, within
the ministry, for a suspected breach of the
basic requirements of public procurement
legislation.
17
Prime Minister Tariceanu in
turn announced an investigation would
be initiated against the former transport
minister, Miron Mitrea, to probe irregularities
in the Bechtel contract.
18
Both contracts have
been criticised by EU offcials for breach of
procurement requirements. At this writing,
the investigations were still ongoing and
Country reports RomANIA
GC2006 02 part2 233 8/11/05 17:54:15
Country reports 234
AdrianSavin(TIRomania)
Further reading
Freedom House, The Anti-Corruption Policy of the Romanian Government: Assessment
Report, (Washington, DC: Freedom House, 2005), available at www.gov.ro/engleza/presa/
documente/200503/FH_Audit_EN_16_031.pdf
Government of Romania, NationalAnti-CorruptionStrategy(Bucharest: Government of Romania,
2005), available at www.just.ro/fles/lupta_anti_coruptie/Lupta%20anticoruptie/National%20
Anticorruption%20Strategy.htm
Transparency International Romania,RaportulNationalasupraCoruptiei2005(National Corruption
Report 2005) (Bucharest: TI Romania, 2005), www.transparency.org.ro/doc/rnac2005_
ro.pdf
TI Romania: www.transparency.org.ro
Notes
1. These authorities include the immediate superior, head of institution, disciplinary commissions
within the institution, public prosecutions bodies, parliamentary commissions, the media,
NGOs, unions, professional associations and employers associations.
2. The other two laws in the judicial reform package were on the statute of magistrates and the
organisation of the judiciary.
3. The CSM elaborates its own budget in consultation with the fnance minister.
4. The institutions capacity to fght corruption was hampered from the outset because it
employed fewer than 100 prosecutors for the entire country.
5. The bribe threshold that mandates a PNA investigation was lowered from 10,000 (US
$13,000) to 3,000 (US $4,000).
6. Amendments to the law on the judiciary passed in July 2005 altered this. PNA must now
present an annual report to the Superior Council of the Magistracy and justice ministry,
giving them more authority over the institution. The justice ministry can also forward the
report to parliament for further discussion.
7. www.euractiv.ro, 2 March 2005.
8. www.euractiv.ro, 29 December 2004.
9. Before being appointed Minister of Justice, Monica Macovei was executive director of the
Association for the Defense of Human Rights, Helsinki Committee.
10. Ziua (Romania), 30 March 2005.
11. The audit report was written by Freedom House (see Further reading).
12. See www.gov.ro/engleza/presa/afs-doc.php?idpresa=4712&idrubricapresa=&idrubricaprimm
=&idtema=&tip=&pag=1&dr=
13. TheEconomist (UK), 15 April 2004.
14. FinancialTimes (UK), 2 February 2004.
15. FinancialTimes (UK), 23 February 2005.
16. Prime Minister Calin Popescu Tariceanu was quoted as saying the renegotiation with EADS
saved the budget about 150 million (US $180 million), according to ProVest TV, 26 June
2005.
17. Press release of the Romanian Ministry of Administration and Interior, 15 June 2005.
18. ZiarulFinanciar (Romania), 27 June 2005.
no prosecutions had been made. But the
lifting of former ministers immunity in
early 2005 (see above) opened the way for
prosecutions.
The stakes are indeed high: the renegotia-
tion of past contracts that fouted the rule
of open, competitive bidding, the initiation
of criminal investigations against offcials
in charge of shady contracts and a marked
improvement in the handling of future
contracts will be critical if Romania is to
receive a green light for EU entry.
GC2006 02 part2 234 8/11/05 17:54:15
235
NB: This report does not cover developments in Montenegro or Kosovo
Conventions:
Council of Europe Civil Law Convention on Corruption (signed April 2005; not yet
ratifed)
Council of Europe Criminal Law Convention on Corruption (ratifed December 2002)
After considerable delay, parliament adopted the law on access to information in
November 2004.
1
The law introduces the public right to any information held by the
government, local authorities, public enterprises and all other agencies or organisations
fnanced by the state, unless it can be legally shown there is an overriding interest in not
disclosing the information. Statutory exemptions include the protection of life, health
and security of persons, the judiciary, national security, public safety, economic welfare
and classifed information. Even in such cases, grounds for denying access must be cross-
checked against a clause in the law that requires that the interest in question could not
be otherwise protected in accordance with the standards of a democratic society. The
law also provides for fnes for violations and the creation of the post of Commissioner for
Information of Public Importance as a decision-making and appeals body (see below).
The Board for Resolving Confict of Interest, envisaged under legislation adopted in April
2004, was assembled in December 2004 through a combination of judicial appointments
and parliamentary votes. Given that most of the April law could not be implemented
without a full board, critics suspected that the delay in flling the nine-member panel
was not mere negligence or poor pre-session negotiation between parliamentary groups,
but rather a sign of a lack of political will to see the law implemented. Despite lacking
premises and funding, the board produced its frst signifcant output in March 2005 with
new regulations for implementing the law and detailed forms for public offcials property
and income disclosure (see below).
Serbia
Anti-corruption laws: lip service or
business as usual?
Serbias law on access to information largely
survived its passage through parliament,
though the right of appeal against decisions
of the highest state authorities (such as
the president, government, parliament,
Supreme Court, and so on) concerning access
and provisions to protect whistleblowers
was absent. It also fails to apply to the
institutions of the Serbia and Montenegro
State Union, though they are almost entirely
fnanced from Serbias budget.
2
However,
the essence of the original, drafted by
an NGO, the Centre for Advanced Legal
Studies, remains. In addition to guarantees
of free access to any information held by
the executive, legislature, judiciary, local
government, public enterprises and other
institutions fnanced by the state or local
government with the usual exemptions
the law obliges the relevant authorities
to publish an annual directory containing
the most important data on their activities,
Country reports SERBIA
GC2006 02 part2 235 8/11/05 17:54:15
Country reports 236
and encourages them to publish data on the
Internet.
3
With all its imperfections, the law
represents a signifcant addition to the statute
book and a potential blueprint for root-and-
branch reform of public administration and
the governmentcitizen relationship.
Given the international communitys
interest in Serbias institutional evolution,
legislation is often introduced more to
comply with external pressure than to meet
domestic needs. The implementation of laws
adopted under these conditions is often weak.
This applies equally to the information law
and much of the anti-corruption legislation
adopted in recent years.
Early evidence of this comes from the fact
that parliamentary discussion of the draft
law on information was chiefy confned to
disputes between two opposition parties, the
Serbian Radical Party and the Democratic
Party. MPs from pro-government parties, by
contrast, mainly abstained, either because
they did not wish to unsettle relations
in the coalition, or because they never
considered the effects of the law and were
thus uninterested in its details.
Since the laws entry into force in
November 2004, the authorities have done
little to make it function smoothly. No
funds were allocated to implement it in the
2005 budget although Rodoljub Sabic, vice-
president of the Social Democrat Party, one
of the ruling coalition members, was elected
to the post of commissioner in December
2004 (he resigned from the party after his
nomination). No offce was assigned to Sabic
until April 2005 and he had to pay the cost
of his offcial stamp himself. Though neither
corruption nor obstruction was necessarily
to blame for depriving the new law of teeth,
its neglect certainly pointed to a lack of
strategy and care.
According to research undertaken by TI
Serbia during the frst quarter of 2005, only
65 per cent of ministries, 33 per cent of
public enterprises and 19 per cent of local
governments responded to requests for
information about the measures taken to
implement the law by the end of March.
4

The percentage of those that had appointed
staff to deal with public requests for informa-
tion was far lower.
Salaries of public officials:
between populist policy and need
to prevent corruption
Over the past four years, political discus-
sion has often turned to the need for an
appropriate level of salary to ensure the
integrity of offcials entrusted with power
over decision-making. The existing system
is anchored in a basic wage, established
by the government or National Assembly,
supplemented by coeffcients based on the
responsibility of the post, level of education,
working conditions and job complexity. This
works out to an average public sector salary
of around 190 (US $230) per month, which
is no disincentive to bribery or other forms
of corruption.
5
The coalition government that ruled
after the overthrow of Slobodan Miloevi
in 2001 opted to pay its members modest,
uncompetitive salaries out of deference to
public sensitivity. Attitudes to salary have
altered since the new coalition government
assumed power in March 2004.
6
Ironically,
the law on the prevention of conflict of
interest, in force since July 2004, is partly
to blame since it eliminated the legal means
whereby offcials boosted their salaries by
barring them from working for private
companies, consultancies or managing their
own enterprises. In October 2004, 205 of the
250 MPs sought a salary increase through a
new law, only to encounter a furious reaction
from the public that led to the withdrawal
of what was otherwise a necessary piece
of legislation. A few months later, the
government discreetly but signifcantly
increased the salaries of its own offcials
in a manner that is legally problematic.
7
In February 2005, the MPs followed
suit through a legitimate parliamentary
procedure.
8
Again there was tumult in the
media. President Boris Tadi, who heads
the opposition Democratic Party, distanced
himself from the award, but the majority
GC2006 02 part2 236 8/11/05 17:54:16
237
argued that higher salaries were an anti-
corruption preventive measure
9
and
dismissed the presidents statement as
populist.
10
Minister of Finance Mlad
jan
Dinki said in March 2005 there were insuf-
fcient funds to pay the increase.
Few would claim that higher salaries
will eliminate corruption or even ensure
better work by MPs, but there are other
reasons to take the issue seriously. Under
a Constitutional Court ruling in May
2003, MPs are ultimately masters of their
mandate even when elected from a partys
list, rather than directly. When MPs cross
the foor to join other parties, they remain
the representatives of their constituencies.
In 2003, the defection of MPs to parties
defeated in the elections led Dr Vladimir
Goati, a political analyst at the University of
Belgrade, to refer to Serbia as an example of
non-elective parliamentarism. Even if they
accept bribes to vote for a law or join another
party, MPs are not liable for corruption since,
under Serbian law, there is nothing that
representatives should or should not do in
the scope of their authorisation.
Doubtful effects of conflict of
interest legislation
Confict of interest legislation was adopted
in April 2004 and dealt with duties in the
public and private sector, gifts, and the
declaration of assets and incomes.
11
Public
offcials, including some 1,000 people in the
central government and at least 10,000 in
lower levels of administration, were obliged
to comply with two deadlines. The frst, due
in July 2004, was to cancel all consultancy
arrangements, to resign from management
jobs and to transfer any managerial roles in
private enterprises. The second was to fle
property and income declarations for them-
selves and their immediate family after the
launch of the Board for Resolving Confict
of Interest.
The board was envi saged as an
independent, autonomous body, but in
reality it suffered a number of hindrances.
The procedure for nominating members was
long-drawn-out, the government did not
provide enough resources for it to function
by the deadline of May 2004, and nor
did it beneft from the 2005 budget. Such
oversights obstructed the laws intent since
the deadline for submission of disclosures
was set to coincide with the boards creation,
and no other agency existed to verify and
punish violations. By the first deadline,
the government announced on its offcial
website, www.srbija.sr.gov.yu, that all
offcials appointed by the government have
complied with their prescribed duties, but
there was no agency in place to check. The
media quickly detected two prominent cases
of non-compliance.
Bogoljub Lazi, then deputy minister of
capital investment, came to his job from the
Mobtel telephone company which he was
also investigating as part of a commission
responsible for determining the extent of the
states holding in it. When appointed, Lazi
froze his position in Mobtel in line with
the legislation valid at the time, but failed
to terminate his contract as required under
the new law. The government removed him
from his post in September 2005. A weightier
confict of interest issue concerned Lazis
manager, the Minister of Capital Investment,
Velimir Ili. The media pointed out that Ili,
who is president of the New Serbia party,
which also has close relations with the Force
of Serbia Movement (FoSM), is inevitably
linked with Bogoljub Kari, who is both head
of the FoSM and effective owner of Mobtel.
Since Ilis ministry is partly responsible
for regulating Serbias telecoms industry,
this posed a serious confict of interest. The
second victim was Oliver Bogavac, former
head of the money-laundering prevention
unit in the Ministry of Finance. The media
reported that Bogavac had agreed to act as
a consultant for the state-owned enterprise
Belgrade Airport in 2004 and had not
cancelled his contract.
12
The government
dismissed him from the post in February
2005.
Events passed more smoothly with regard
to the second deadline but its overall success
Country reports SERBIA
GC2006 02 part2 237 8/11/05 17:54:16
Country reports 238
NemanjaNenadic(TISerbia)
Further reading
Ivana Aleksi and Sreko Mihajlovi, KorupcijauNovimUslovima (Corruption in a New Environment)
(Belgrade: Centre for Policy Studies, 2002)
Boris Begovi, CorruptioninCustoms:CombatingCorruptionattheCustomsAdministration (Belgrade:
Centre for Liberal-Democratic Studies, 2002)
Vladimir Goati, Nemanja Nenadi and Predrag Jovanovi: FinancingthePresidentialElectoral
CampaigninSerbia2004ABlowtoPoliticalCorruptionorPreservationofStatusQuo? (Belgrade:
TI Serbia, October 2004), www.transparentnost.org.yu/english/PUBLICATIONS/index.
html#fnancing
TI Serbia: www.transparentnost.org.yu
Notes
1. A nearly identical version of the bill was submitted to parliament in 2003 but was soon
withdrawn by the former government (see GlobalCorruptionReport2005).
2. These include fve ministries, including the Ministry of Defence and Ministry of Foreign
Affairs.
3. Article 39. Among other information, the directory will include: description of powers, duties
and in-house organisation; data on budget; procedures for submitting requests for access to
information or complaints against decisions made; overview of requests, complaints and
other measures undertaken by interested parties; data on the manner, medium and place of
storing information; and type of information held.
4. See www.transparentnost.org.yu/english/ACTIVITIES/ACCOUNTABILITY/2001-e05.html
5. See www.srbija.sr.gov.yu/vesti/vest.php?id=13926
6. The coalition, headed by Prime Minister Vojislav Kostunica, is comprised of the Democratic
Party of Serbia, G17 Plus, the Serbian Renewal Movement and New Serbia, supported by the
Socialist Party of Serbia.
7. The basis for calculating salaries in the executive branch was changed through a conclusion
of the government, which is not published in the offcial gazette and therefore not public,
contrary to new laws on access to information and confict of interest. Moreover, the ruling
establishes a different basic wage for various categories of offcials, although their level of
responsibility is already mirrored in the different coeffcients assigned to different posts.
8. www.beta.co.yu/korupcija/default.asp?st=a&str=1&p=1&lis=1&pi=1164523
9. See, for example, the statement of Zoran Andjelkovic, chair of the Socialist Party group, at
www.beta.co.yu/korupcija/default.asp?st=a&str=&p=1&lis=1&pi=1114390
10. www.nspm.org.yu/PrenetiTekstovi/2005_evropa_dinkic_feb.htm
11. See also GlobalCorruptionReport 2005.
12. Blic (Serbia), 9 February 2005.
was limited. Most central and provincial post
holders submitted disclosures by 1 April, but
offcials in local governments and public
enterprises largely ignored the requirement.
The boards next task is to follow up the
names and assets of those who failed to
respond. But members of the public, who
might have more precise information about
the wealth of individual offcials, are denied
access to the contents of the disclosure fles,
cutting off a huge resource of information
for the board.
GC2006 02 part2 238 8/11/05 17:54:16
239
Conventions:
Council of Europe Civil Law Convention on Corruption (ratifed May 2003)
Council of Europe Criminal Law Convention on Corruption (ratifed June 2000; Additional
Protocol ratifed April 2005)
UN Convention against Transnational Organized Crime (ratifed December 2003)
In February 2005, parliament approved an act regulating the fnancing of political parties
and electoral campaigns. From the viewpoint of corruption, it contains several principles
that improve regulation and increase transparency of party fnancing, but weaknesses
remain, most notably the monitoring of the laws implementation (see below).
An amendment to the act on administrative proceedings, effective since November 2004,
strengthens citizens right of access to information by requiring all authorities to post
details of their decisions on the Internet or an accessible notice board. The amendment
requires authorities to inform the public clearly and in good time about all meetings, their
conduct and the decisions reached that could constitute a subject for public interest.
A law on the property of the municipality, effective since September 2004, amended
the previous act and offers further potential to fght corruption at the local level. The
frst of two amendments stipulates that no municipality may transfer ownership of its
property to any employee mayor, deputy, budget directors, or any persons or companies
close to them other than by public tender under the commercial code. The second
amendment allows for a reasonable exception by stating that an apartment, a plot of
land or a movable asset worth less than SK50,000 (US $1,600) may be transferred to an
employee of the municipality without a public tender.
The law on the establishment of a special court and prosecutor to fght corruption
and organised crime entered into force in September 2004.
1
By December 2004, the
prosecutors offce had investigated 416 cases, 12 per cent of them involving corruption.
The establishment of the special court, meanwhile, was delayed. Following the failure of
the Judicial Council (the body responsible for nominating judges) to elect the requisite
number of special judges, its powers were temporarily delegated to the Bansk Bystrica
regional court. By June 2005 the special court had fnally reached the number of judges
required for it to begin work.
Slovakia
New party law plagued by loopholes
Since 1991, Slovakia has fnanced political
party activity partly from the national budget,
due to the poor economic situation and
the lack of a culture of private donations.
2

However, the transparency of management
has remained low and the monitoring mech-
anisms created have been far from adequate.
The tendency to increase state support
continued until 2004 and politicians, irre-
spective of the parties they belonged to, were
the systems main advocates. In that year,
civil society NGOs warned that citizens no
longer felt adequately represented by their
parties, and harboured suspicions that their
political leaders were mired in corruption,
cronyism and conficts of interest.
Country reports SLovAKIA
GC2006 02 part2 239 8/11/05 17:54:16
Country reports 240
The legislation regulating party fnances
has changed several times. Amendments in
2000 and 2001 improved monitoring by
imposing obligations on parties to publish
annual accounts, lists of donors and to submit
statements to an independent auditor, but
the act contained defects that enabled it to
be circumvented. It did not limit the amount
members could contribute; it emphasised
transparency in only one form of income
(gifts from persons and legal entities); and
it placed the onus of monitoring on a par-
liamentary committee, thereby effectively
licensing parties to monitor themselves.
3
In February 2005, a new act on political

parties and political movements was passed,
replacing the original 1991 act. It contains
anti-corruption provisions, some of which
were recommended by the Council of
Europe and civil society groups, including
Transparency International Slovakia.
The new act has both positive and
negative implications. One disadvantage is
that it introduces the principle of unlimited
expenditure for election campaigns and
increased state funding for political activities.
According to the Fair Play Alliance, an NGO
that monitors party finance in Slovakia,
parties can expect to receive SK617 million
(US $19.9 million) in the next election and, if
their showings remain consistent, they could
receive SK1.2 billion (US $38.7 million) over
the period 200610. An increasing amount
of money will fow into political parties from
public funds, but that does not necessarily
mean that all party funds (including those
from private donors) will be open to public
scrutiny. Until now, parties could invest a
maximum of SK12 million (US $390,000)
in their campaigns, a restriction cancelled
under the new act. The frst test of the new
legislation will be the elections in autumn
2006.
The new act does introduce better trans-
parency of fnancial fows. Parties will only
be allowed to accept gifts of more than
SK5,000 (US $160) if they sign a contract. If
the gift exceeds SK100,000 (US $3,200), the
donors signature will require verifcation.
Parties are also required to keep records of all
member contributions exceeding SK25,000
(US $800), which are publicly accessible.
This is expected to increase transparency
of campaign fnancing, but real change will
depend on the enforcement mechanism, in
particular, the checks in place to ensure that
records are kept and action taken if irregu-
larities are found.
According to Pavel Nechala of TI Slovakia,
the parties have left their options open
with the new legislation. They are entitled
to establish companies whose operations
are not monitored publicly. A party, for
example, could publish a book and have all
the copies sold to a sponsor whose identity
will remain unknown.
4
Moreover, parliamentarians could not
agree on SMERs (Social Alternative for
Slovakia) proposal to create a special
committee to scrutinise the parties annual
accounts and monitor their management.
Jn Drgonec, the MP who heads the
parliamentary constitutional law committee,
is convinced such regulation would prove
futile. The parties would monitor each
other, he said. I do not see there being an
honest interest in monitoring. Rbert
Madej, a SMER MP, prepared a draft
amendment of the constitution that would
delegate these powers to the Supreme Audit
Offce, but the lawmakers turned it down.
5
The Fair Play Alliance argues that the
monitoring of parties is still not suffcient.
It is useless to make rules stricter if nobody
will strictly monitor their observance, said
Zuzana Wienk who has disclosed breaches
of the act in the past. In most cases, no
prosecutions followed. The group proposes
instead the creation of an independent
authority to monitor party fnancing or at
the very least, monitoring by a ministry, such
as the Ministry of Interior. However, none
of the parties agree. Any approval of stricter
rules for themselves is diffcult for them and
deputies try to avoid it, said Wienk.
6
First senior public officials tried for
corruption
A spate of high-level bribery cases in early
2004 could have sparked more energetic
GC2006 02 part2 240 8/11/05 17:54:17
241
EmiliaSickov-Beblav(TISlovakia)
anti-corruption measures, but the year ended
without adoption of important changes in
strategy. For the frst time in recent history,
these cases concerned the municipality
level, which had been out of the public
eye for a long time. The cases were spread
evenly across the country and involved the
representatives of several political parties,
including the Movement for Democratic
Slovakia (HZDS), the Christian Democratic
Movement (KDH), the Slovak Democratic
and Christian Union (SDKU) and the Party
of Hungarian Coalition (SMK).
In March 2004, two HZDS members, MP
Gabriel Karlin and Milan Mrz, who heads
the administration in Bansk Bystrica,
were indicted on charges of accepting a
SK500,000 (US $16,000) bribe in exchange
for a favourable decision concerning a SK17
million (US $550,000) building contract for a
local school in late 2003. Karlin was stripped
of his parliamentary immunity two days
after police raided his offce and retrieved
the cash from his briefcase. In court, Karlin
maintained that the secret services had
framed him and Mrz in turn claimed Karlin
had framed him. Karlin was found guilty in
May 2005, but is appealing and has retained
his post, while Mrz was found innocent and
is still head of the Bansk Bystrica regional
offce.
7
In April 2004, Pavol Bielik, chairman of
the regional branch of the KDH in Bratislava
and mayor of Bratislava-Raca, was charged
with accepting a SK5 million (US $160,000)
bribe for promising to deliver the approval
of MPs to rehabilitate a building and
construct two new ones in Raca. In May,
Bielik was charged with the further offence
of negligence in administering entrusted
property. According to the weekly Domino
frum, police suspect that Bielik approved
other improper allocations worth SK750,000
(US $24,000) for various projects in 1999.
8
In August 2004, the media reported that
evidence incriminating Bielik, including
the record of his tapped telephone calls,
had mysteriously disappeared.
9
The special
prosecutor confirmed this and began an
investigation into how the records were
lost. Following the initial indictment against
Bielik, KDHs chairman Pavol Hruovsk
called for him to resign from all his party
posts, which Bielik has refused to do.
Though offcially charged with corruption,
he continues to chair the KDH regional
council whose membership includes the
Interior Minister Vladimr Palko.
10
In March 2004 Eugen Cuno, a member
of the SDK central council and deputy
mayor of Koice, was detained for accepting
a SK18 million (US $581,000) bribe for a
SK180 million (US $5.8 million) contract
to build 150 municipal apartments in the
city. According to the Interior Minister, the
bribe by construction company Kame was
disguised as a loan.
11
The investigator also
charged another SDKU member, Ladislav
Lumtzer, mayor of a district in Kosice, and
Maro M, a Kame employee who had been
helping the police to entrap Cuno. Kame
allegedly issued invoices for works that were
never executed; Lumtzer approved them and
ordered their settlement; and Maro M, as
construction supervisor, signed them off.
12

As a result of the scandal, construction of the
housing was halted and the SDKU suspended
Cuno and asked Lumtzer to resign as mayor.
Cuno insists on his innocence and several
prominent individuals from Kosice support
him. At the time of writing, the case was
still open.
These and other scandals appear to
illustrate a decentralisation of corruption in
imitation of the fscal decentralisation that
has taken place in Slovakia. One proposal to
stem its further spread is to give the Supreme
Audit Office the right to control local
government expenditure. This requires an
amendment to the constitution, which was
approved by the cabinet in June 2005 and
at this writing was still awaiting adoption
by the parliament in September 2005. But
the measure is very unpopular among local
government officials, some of whom are
members of parliament.
Country reports SLovAKIA
GC2006 02 part2 241 8/11/05 17:54:17
Country reports 242
Further reading
E. Sickov-Beblav, Transparentnos a korupcia(Transparency and Corruption), in M. Kollr
and G. Mesenkov (eds), Shrnnsprvaostavespolocnosti(Global Report on the State of
Society) (Bratislava: Institute for Public Affairs, 2004)
E. Sickov-Beblav (ed.), KorupciaaprotikorupcnpolitikanaSlovensku2004,hodnotiacasprva
(Corruption and Anti-corruption Policy in Slovakia, Evaluation Report) (Bratislava:
Transparency International Slovakia, 2005)
TI Slovakia: www.transparency.sk
Notes
1. For more details, see GlobalCorruptionReport2005.
2. In 2000, the government introduced a contribution of SK500,00 (US $16,000) per National
Council deputy, complemented by two other forms of subsidy: a contribution for votes, paid
at SK60 (US $1.90) per vote to each party which obtained over 3 per cent in the previous
election); and a contribution for activities, paid at a quarter of a qualifying partys contribution
for votes.
3. Z. Wienk, Financing of the Political Parties in 2004, in E. Sickov-Beblava (ed.), Corruption
andAnti-corruptionPolicyin2004(Bratislava: Transparency International Slovakia, 2005).
4. Hospodrskenoviny (Slovakia),7 May 2005.
5. Hospodrskenoviny (Slovakia),7 February 2005.
6. Sme(Slovakia), 5 February 2005.
7. TheSlovakSpectator(Slovakia), 16 May 2005.
8. Dominofrum(Slovakia), 19 May 2004.
9. Sme(Slovakia), 19 August 2004.
10. Sme (Slovakia), 13 September 2004.
11. Sme (Slovakia), 12 March 2004.
12. Ibid., and Sme (Slovakia), 19 July 2004.
Conventions:
AU Convention on Preventing and Combating Corruption (signed March 2004; not yet
ratifed)
SADC Protocol against Corruption (ratifed May 2003)
UN Convention against Transnational Organized Crime (ratifed February 2004)
The Division of Revenue Act came into effect in April 2005. Its objective is to promote
transparency and equity in the allocation of resources to municipalities and provinces,
and to promote accountability by ensuring that all allocations are refected in their
budgets. Corruption is rife at local government level, with serious backlogs of service
delivery in many poorer areas. The act is an attempt to improve public expenditure
management, although the Financial and Fiscal Commission has raised concerns over
the conditionalities introduced through the act in the allocation of funds.
South Africa
GC2006 02 part2 242 8/11/05 17:54:17
243
The Financial Services Ombud Schemes Act 2004 was signed into law in February 2005.
The act provides for the recognition of fnancial services ombudsman schemes; outlines
minimum requirements for them; promotes consumer education; and empowers the
Ombud for Financial Services Providers to act as a statutory ombudsman in certain
cases. Though many providers have been members of voluntary complaints schemes;
unscrupulous, non-member institutions have in the past sold inappropriate products,
given inadequate advice or otherwise duped naive, less-literate citizens.
The Companies Amendment Act, signed into law in October 2004, aligns company
law with the Prevention and Combating of Corrupt Activities Act of April 2004. The
amendment empowers the Registrar of the Court to debar directors and other company
offcers who have previously been convicted of fraud or other criminal activities in the
operation of a company, and to maintain a public register of their identities. Such naming
and shaming is intended as a deterrent against fraud.
The Second National Anti-Corruption Summit in March 2005 resolved to include ethics
education in school curricula to raise awareness among young people. The summit also
asked the Law Commission to investigate the Protected Disclosures Act regarding the
inadequate protection of whistleblowers and to report to parliament by the end of the
year (see below).
The Johannesburg Securities Exchange Social Responsibility Index launched in 2003
was revised in October 2004 in an attempt to implement the recommendations of
the governments 2002 King 2 report on corporate governance. The index includes a
requirement that companies report on their political donations. The index is voluntary,
but it sets a standard and is thought to be the frst of its kind in the developing world.
mPs incriminated in Travelgate
scandal
MPs are issued with vouchers each year
to defray travel expenses between their
constituencies and the parliament in
Cape Town. Allegations of misuse of the
vouchers first surfaced in 2003, leading
to an investigation in which more than
100 MPs and seven travel agencies were
questioned in 2004.
1
The alleged frauds
included the exchange of vouchers for
cash; use of vouchers by family and friends;
use of airfare vouchers for accommodation
and vehicle hire; and MPs holding shares
or receiving financial benefits from the
travel agents involved. When two of the
travel agents involved were closed down,
40 MPs entered plea bargains with the elite
Scorpions investigation unit.
2
The frst fve
MPs were convicted in March 2005, with
sentences ranging from R40,000 (US $5,800)
or one years imprisonment, to R80,000 (US
$12,000) or three years in prison.
3
Under
the constitution, an MP can only lose a
seat if sentenced to more than 12 months
imprisonment, without the option of a fne.
South Africa now fnds that nearly a quarter
of its legislators have been incriminated in
questionable behaviour.
The confdential report of the investigation,
undertaken by PricewaterhouseCoopers
(PwC), recommended new investigations
and legal action. Parliament appointed a
special task team to consider its fndings and
the National Prosecuting Authority (NPA),
which oversees the Scorpions, South Africas
elite crime unit, is also investigating. The
report points out that the entire system for
processing air tickets for MPs was overseen
by a single employee, whose work was
never checked by her superiors. The PwC
report says there was insuffcient accounting
information available to determine whether
MPs were party to the fraud, what the extent
of the fraud was and whether MPs received
undue benefts from travel agents.
4
Country reports SoUTH AFRICA
GC2006 02 part2 243 8/11/05 17:54:17
Country reports 244
Smuts Ngonyama, spokesman for the
ruling African National Congress (ANC),
noted that the party will initiate relevant
organisational disciplinary processes against
its MPs and the opposition has called for
convicted MPs to do the honourable
thing and resign.
5
In June 2005, the ANC
announced that fve of the convicted MPs
had resigned, while three more who had
plea-bargained are no longer in parliament.
Another 21 current or former MPs are
expected to stand trial in July 2005.
The fallout from Travelgate has been
varied. On the one hand, it showed that the
anti-corruption bodies and judiciary have a
fair degree of independence and are able to
carry out their functions without hindrance,
even when high-ranking members of the
ANC were involved. On the other, there
have since been moves to muzzle the
Scorpions by incorporating the unit into the
regular police force. A judicial commission
of inquiry has been convened to determine
the Scorpions future. That decision could
signal the strength of the governments
commitment to fghting corruption at the
highest levels.
Deputy president removed for
alleged bribery
The US $5 billion arms purchase of 2000
came under intense scrutiny in 2003
when former NPA head Bulelani Ngcuka
announced that, although the Scorpions had
found prima facie evidence of corruption
against Deputy President Jacob Zuma, the
state would not prosecute because the case
was not winnable.
6
Some interpreted the
trial since October 2004 of Zumas fnancial
adviser, Schabir Shaik, as a trial of Zuma by
proxy. When Justice Squires found there was
a generally corrupt relationship between
Shaik and Zuma, President Thabo Mbeki
removed Zuma from his post in June 2005.
The NPA announced plans to indict Zuma,
whose frst court appearance was scheduled
for 29 June. Zuma maintains he is innocent,
retains the deputy presidency of the ANC
and enjoys wide grassroots support among
trade unionists and youth, who claim that
he was framed. The judge found that Shaik
had solicited a bribe on Zumas behalf from
French defence company Thomson-CSF
(now renamed Thales) to protect it from the
investigation into the arms deal.
7
The trial
also investigated questionable loans totalling
more than R1 million (US $146,000) from
Shaik to Zuma.
8
The consequences for the former deputy
president and the countrys oversight
institutions are far-reaching. Zuma has
refused to comment on whether he
will enter the race to succeed President
Mbeki, but his supporters maintain that
the Scorpions investigation and Shaiks
trial were designed to discredit Zuma and
stall his presidential ambitions. The trial
highlighted weaknesses or abuse in oversight
mechanisms in parliament, the director of
public prosecutions, the public protector and
the auditor general. The Joint Investigation
Team (JIT), which frst looked into the arms
deal in 2001, found that although there was
some corruption, it did not significantly
influence the contracts.
9
Since the JIT
included investigators from all the above
oversight bodies, the court verdict calls into
question the rigour of their enquiries.
There have been allegations of extensive
executive interference in the auditor-
generals report.
The opposition Democratic Alliance (DA)
has called for the former defence secretary,
Pierre Steyn, to testify before the Parlia-
mentary Standing Committee on Accounts
(SCOPA). Steyn had resigned from his post,
questioning the legality of the arms deal and
arguing that the procurement process was
irregular.
10
The fact that the JIT deliberately bypassed
SCOPA prevented it from exercising its
oversight role. Some commentators feel that
this whole episode has weakened SCOPA,
transforming it from a rigorous and non-
partisan regulator into an arena for political
manipulation. DA MP Eddie Trent stated:
The challenge now is for parliament to
GC2006 02 part2 244 8/11/05 17:54:18
245
ensure both the executive and the Auditor-
General are made to account for their
conduct in the arms deal.
11
The Shaik trial
highlighted Zumas alleged failure to declare
his loans from Shaik to parliaments Public
Accounts Committee.
12
The Shaik trial also shows up the respon-
sibility of multinational corporations for the
supply side of international bribery. The
OECDs 1999 Anti-Bribery Convention could
mean increased scrutiny for Thales and other
companies implicated in the arms deal.
Whistleblower law found wanting
In March 2005, the deputy director-general in
the justice department, Michael Tshishonga,
brought a R2 million (US $292,000) defama-
tion lawsuit against former justice minister
Penuell Maduna, alleging that Maduna had
called him a dunderhead and a relic from
the Bantustans in a televised statement in
October 2004. Tshishonga has recently been
reinstated as managing director of the Master
of the High Court after Maduna suspended
him on grounds of contravening the Public
Service Code of Conduct.
13
The office of the Master of the High
Court is responsible for the appointment of
liquidators of insolvent estates. Tshishonga
went public in October 2003 with allegations
of corruption and nepotism involving
Maduna, insolvency practitioner Enver
Motala, and a senior offcial in the Masters
office.
14
Tshishonga accused Maduna of
maintaining a corrupt relationship with
Motala that had earned the latter fees
of R50 million (US $7.8 million) over a
period of two years from appointments he
received from Leon Lategan of the Master
of the High Courts offce. Tshishonga had
initially reported his concerns about Motala
to the then director general of justice, Vusi
Pikoli. When nothing happened, he blew
the whistle. Tshishonga was then hauled
before an internal disciplinary hearing and
Maduna suspended him.
15
The internal hearing stemmed from the
Public Service Code of Conduct, which states
that an employee must use appropriate
channels to air his or her grievances or
to direct representations. The hearing
concluded in July 2004 that Tshishongas
statements were protected under the
Protected Disclosures Act (PDA) of 2000, the
legislation that protects whistleblowers.
However, the justice department refused
to reinstate Tshishonga on the grounds
that it is still studying the fndings of the
disciplinary hearing and will decide on the
course of action to take once this process is
complete. He took the department to Labour
Court, which ordered his reinstatement
as of February 2005.
16
Detectives arrested
Motala on 2 July 2004 on charges of fraud
and corruption, together with eight other
people. Lategan has been redeployed to
training and evaluation pending the
outcome of the investigation. South Africans
are now waiting to see if Maduna will be
prosecuted or will be allowed to walk away.
Will Pikoli, recently appointed national
director of public prosecutions, be called
upon to explain his failure to take action
after Tshishonga, then his deputy, informed
him of the irregularities? What message is
being sent to potential whistleblowers?
Though well intended, the PDA appears
to have failed whistleblowers in several
instances, not only because it sets out
exactly to whom disclosures are to be
made, but also how the informant wishes
to claim its protection. The act specifes that
a whistleblower must make what is referred
to as a protected disclosure to a specifed
group of persons if he or she wishes to avoid
suffering an occupational detriment. The
manner in which the disclosure is made
is also regulated. Government employees,
of whom Tshishonga was one, are free to
register grievances as long as a prescribed
procedure is followed. It was his apparent
failure to follow procedures that resulted
in disciplinary action being taken against
him. The disciplinary offence and the legal
confusion derives from the public service
regulations, and what they proscribe in terms
of communicating, especially outside the
Country reports SoUTH AFRICA
GC2006 02 part2 245 8/11/05 17:54:18
Country reports 246
AyeshaKajee(TISouthAfrica)
Further reading
John Daniel, Roger Southall and Jessica Lutchman (eds), StateoftheNation:SouthAfrica20042005
(Cape Town: HSRC Press, 2004)
Hennie van Vuuren, National Integrity Systems: South Africa (Johannesburg: Transparency
South Africa, 2005)
TI South Africa: www.tisa.org.za
Notes
1. SundayTimes (South Africa), 1 August 2004.
2. MailandGuardian(South Africa), 28 January 2005.
3. MailandGuardian(South Africa), 18 March 2005.
6. SundayTimes(South Africa), 24 August 2003.
7. TheWitness (South Africa), 29 June 2005.
8. MailandGuardian(South Africa), 26 November 2004.
9. Government of South Africa, Joint Investigation Report into the Strategic Defence Procurement
Packages, November 2001.
10. PretoriaNews(South Africa), 31 March 2005.
11. PretoriaNews(South Africa), 31 March 2005.
12. BusinessDay(South Africa), 15 March 2005.
13. www.iafrica.com/news/sa/237039.htm
14. www.armsdeal-vpo.co.za/articles07/pickle.html
15. www.info.gov.za/speeches//1999/9911091035a1017.htm
16. www.info.gov.za.speeches/2004/04080408151007.htm
Conventions:
OECD Anti-Bribery Convention (ratifed January 1999)
The Amendment on Anti-Corruption Act, proposed by the Korean Independent
Commission Against Corruption (KICAC) in November 2004, is currently under review
public services. There is therefore a tension
between the regulations and the PDA.
The jury is still out on the effectiveness
of the PDA, as many potentially successful
attempts to blow the whistle are likely to
go unreported; the act is up for review
by parliament in late 2005. But this case
highlights the diffculty of implementing
the legislation and the extent to which there
is resistance to sanctioning senior offcials.
South Korea
GC2006 02 part2 246 8/11/05 17:54:18
247
by the Legislation and Judiciary Committee. The act only applies to corrupt practices
in the public sector. The broad thrust of the amendment is to expand its coverage to
the private sector so as to root out bribe payers, as well as bribe recipients. Among the
proposed changes is the extension of existing whistleblower protection to employees
in the private sector to encourage more of them to come forward.
In December 2004, the government submitted a draft that provides for the creation
of the post of Citizen Ombudsman at local government level in order to increase the
protection of citizens rights. One of the main points of debate is whether to make the
post mandatory. Some civil society leaders suggest it should be introduced gradually so
as to minimise the resistance it is expected to encounter from members of local councils
who feel the post threatens their own duties. Another point at issue is the ombudsmans
degree of seniority. Since they must be independent, autonomous and neutral from
government, it is important to set their credentials and authority high enough for them
to be effective, but low enough to be realistic.
In November 2004, the State Council passed a bill establishing the Corruption
Investigation Offce (CIO) for investigating high-ranking public offcials suspected
of corruption. The CIO will be created under the KICAC as an independent agency
responsible for investigating corruption cases of high-ranking offcials, members of the
National Assembly, mayors, governors, judges and public prosecutors. At the time of
writing the National Assembly still had to debate how the agency will operate, but one
of its unspoken aims will be to provide a counterweight to the Prosecutors Offce, the
only organisation with power to indict. Proponents argue that complaints to KICAC have
decreased because it lacks investigative powers. Moreover, greater efforts are needed to
tackle corruption amongst senior government offcials who, according to KICACs annual
survey on perceived corruption, are considered most in need of reform. Many experts
are sceptical as to whether the body, if established under the presidential KICAC, will be
free from political intervention.
In April 2005, the Council for the Pact on Anti-Corruption and Transparency was
incorporated under the Korean Pact on Anti-Corruption and Transparency (K-PACT)
signed a month earlier. Its mission is to raise the level of cooperation among participants
and enforce agendas of inspection, evaluation, dissemination and renewal. Initiated by
Transparency International Korea, the K-PACT is a national alliance of representatives
from civil society and the public, private and political sectors committed to improving
transparency. Encouraging citizens to sign up to a 10-point Citizens Charter will be the
Councils most important task, because the K-PACT will not have much tangible impact
without widespread public support (see below).
K-PACT: a peoples compact against
corruption
A total of 120 leading fgures attended the
signing of the Korean Pact on Anti-Corruption
and Transparency on 9 March 2005. The event
was remarkable for the range of participants,
but also because it was the culmination of six
months work to ensure that the K-PACT is a
collective effort, involving the private sector,
civil society and government. The rationale
behind the K-PACT is that while South Korea
has many corruption prevention measures in
place, cases of corruption continue to recur.
The K-PACTs organisers, including TI-Korea,
argue that corruption could be reduced if
the population were involved in building
a more transparent society, and that public
pressure can be an effective deterrent against
corruption.
Country reports SoUTH KoREA
GC2006 02 part2 247 8/11/05 17:54:18
Country reports 248
In January 2005, the K-PACTs civil society
proponents met in Ankook-Dong and asked
the government to join the movement for
a social agreement on transparency under
the slogan, Together! Cleaner! After the
participants delivered the proposal to
President Moo-Hyun Roh, chairman of
the National Assembly Won-Ki Kim, the
Federation of Korean Industries and the
Korea Chamber of Commerce and Industry, a
number of intersectoral steering committees
were formed to discuss the K-PACT in detail,
and to divide the workload between the four
participating sectors.
1
As a result, the public sector has effectively
undertaken to: adjust the responsibilities
of South Koreas anti-corruption agencies;
improve local government transparency;
expand public participation; reform the
Information Disclosure Acts; strengthen
anti-corruption awareness; and improve
the transparency of public corporations.
The political sector agreed to impose limits
on immunity; strengthen the National
Assembly Ethics Committee; introduce the
blind trust system (see below); and eradicate
illegal political funding and lobbyism. The
private sector proposes to improve corporate
ethics; reduce subcontractor corruption;
strengthen the function of audit committees;
protect whistleblowers; enhance information
disclosure; and ensure the professionalism of
outside directors. Civil society committed
its efforts to improving the accountability
of civil society and introducing the post
of Citizen Ombudsman. To prevent the
recurrence of corruption, the K-PACT
contains a provision to limit the power to
grant amnesties to criminals convicted of
corruption.
The K-PACT is only likely to be effective
if it captures the imagination of South
Koreas citizens. The 10-point Citizens
Charter, which includes statements of
intent on aspects of corruption from tax
evasion, money laundering and bribery to
information on corruption and whistleblower
protection, provides some guidelines for
popular participation and awareness raising.
The K-PACT also includes a Code of Ethics
for Citizens as a standard for implementing
principles designed to overcome corruption.
Citizens can participate indirectly by signing
up to the charter and code, or actively as
inspectors to oversee the implementation of
the K-PACT. Civil society and the political,
public and private sectors have pledged
to organise regular inspection groups to
evaluate their performance and to publicise
progress in implementing the K-PACT.
Political observers and citizens groups are
doubtful that the K-PACT will make much
difference to the level of corruption in South
Korea, though they hope it will. The Council
for the K-PACT, established in April 2005 to
ensure cooperation between its participants,
is reliant for fnancial support from the very
sectors that it was set up to police, narrowing
its room for manoeuvre. Much depends on a
sense of popular vigilance as a campaigning
tool that carries more weight in Asia than
in other regions of the world. Koreans are
generally aware of the K-PACTs existence
and purpose, though they are perhaps less
certain of how to participate. The councils
primary mission in the short-term, therefore,
must be to advertise what Koreans can do
to help.
Preventing government officials
conflicts of interest
The problem of conflicts of interest at
senior government level has been a focus
of attention over the past few years,
following a series of allegations that private
businesses are infuencing policy making,
either by donating money to political parties
and expecting policy favours in return, or
because politicians have private interests in
particular companies fortunes. Amendments
to ethics codes for elected officials and
public servants, including a requirement
that high-ranking appointed offcials put
their stocks into a blind trust during their
tenure in offce, have been tabled in an effort
to address the problem.
There is public pressure for reform.
The 2003 JoongAng-EAI poll demon-
GC2006 02 part2 248 8/11/05 17:54:19
249
Geo-SungKim(TISouthKorea)
Further reading
TI Korea (South): www.ti.or.kr
strated that one in three people pointed
to anti-corruption reform as an immediate
social reform need, while on the political
agenda, collusion between politics and
business (41.3 per cent) topped the list of
concerns.
Since 2003, a code of conduct for
maintaining the integrity of public offcials
has regulated conficts of interest for civil
servants, though not elected offcials. This
code, enacted by presidential decree, specifes
the standards of conduct to be observed by
both state and local public offcials. It covers
areas related to the prevention of confict of
interest, the prohibition to use public offce
for private purposes, and the obligations of
neutrality and impartiality. It also regulates
the legitimate acceptance of gifts from
persons related to public duties. This is a
matter of particular importance given that
the presentation of gifts forms an integral
part of the national culture. But compliance
with the code has been weak and KICAC is
only looking now at establishing a procedure
for handling money, or expensive items
received in violation of the code.
The Public Service Ethics Act, a separate
document, focuses mainly on the asset
disclosure of high-level offcials and does
not have any provisions regarding conficts
of interest. A draft amendment submitted
to the National Assembly would incorporate
confict of interest mechanisms within the
act, including a blind trust system.
The purpose of this amendment,
submitted to parliament in May 2005, is to
require public offcials with stock holdings
that exceed a certain value to either sell or
place the excess stock into a blind trust,
unless the relevant commission rules that
the stockholding is not related to the work
of the offcial. High-ranking public offcials
would be prohibited from trading stocks or
infuencing stock prices with information
acquired while in offce, thus enabling them
to concentrate on their duties as public
servants.
The commission for blind trust assessment
will be established under the Ministry of
Government Administration and Home
Affairs, to examine whether those who
are required to disclose details about their
property hold stocks connected to their
work. The commission will be comprised of
nine members, appointed by the president
from a shortlist nominated by the National
Assembly and Chief Justice of the Supreme
Court. Once a contract with a blind trust
is entered into, those required to disclose
details of their property, as well as other
concerned parties, will not be able purchase
stocks until the contract terminates.
While the blind trust system is a positive
development, it is unlikely to do much to
assuage fears that some politicians use their
positions of power for personal gain. Indeed,
the governments messages on the need to
separate political and business interests
have not been entirely consistent. In May
2005, President Moo-Hyun Roh decreed an
amnesty for business people incriminated in
an illegal party funding scandal in the run-
up to the 2002 presidential elections.
2
The
president who earlier promised to resign if
it were demonstrated that his campaign had
received more than 10 per cent of the illegal
funds received by his opponent argued that
the amnesty, effective from 15 July, would
protect the economy from recession. A
number of civil society organisations argue
that the private sectors support for the K-
PACT was in order to improve the likelihood
of an amnesty. Article 6 of the K-PACT states:
Government should set up systematic
mechanisms to limit the presidential power
to grant amnesty.
3
Country reports SoUTH KoREA
GC2006 02 part2 249 8/11/05 17:54:19
Country reports 250
Notes
1. For full text, see www.ti.or.kr/k-pact/
2. www.koreafocus.or.kr/chronology.asp?vol=40
3. www.ti.or.kr/k-pact/
Conventions:
Council of Europe Civil Law Convention on Corruption (signed May 2005; not yet
ratifed)
Council of Europe Criminal Law Convention on Corruption (signed May 2005; not yet
ratifed)
OECD Anti-Bribery Convention (ratifed January 2000)
UN Convention against Transnational Organized Crime (ratifed March 2002)
A number of corruption-related initiatives have been adopted under the framework
of the Plan of Economic Reactivation presented by the Economy and Finance Ministry
in March 2005. The Council of Ministers has approved the plan, which includes steps
to tighten laws regulating the public sector, improve public access to information, the
regulation of contracts for publicprivate partnership schemes and the adoption of a
code of conduct for public contracting.
The Ministry of Public Administration approved a programme of actions for good
government in February 2005 which, if it passes the legislature, will regulate conficts
of interest by elected MPs and high-level bureaucrats (see below).
In February, an expert group advising the government on the reform of mass media laws
called for public television to be fully independent from the government with mixed
funding and content of public service quality. One of the purposes of the group is to
limit the political incumbents abuse of state media in their re-election bids.
Spain
zapatero tries to clean up
governance
Spains frst socialist administration since
Felipe Gonzlez lost power amid a series of
corruption scandals in 1996 came to offce
in April 2004. Prime Minister Jos Luis
Rodrguez Zapatero promised to deliver
clean government and to distance his
Socialist Party (PSOE) from its past misdeeds.
Zapatero lacks an absolute parliamentary
majority and needs the support of other
parties to push through the laws tabled by
his government.
At the heart of Zapateros governance
programme is a committee of experts,
which has proposed measures that would, if
applied, help obviate the risks of corruption.
Among the most important measures are: the
clarifcation of rules on conficts of interest,
and the monitoring of incompatibilities by
an independent body; the declaration of
assets and income by politicians and senior
officials; reform of party financing laws,
including a ban on company donations and
caps on campaign spending; the creation of
a national agency to evaluate public policy;
a law on access to information; and greater
GC2006 02 part2 250 8/11/05 17:54:19
251
independence for RTVE, the state-owned
broadcaster, whose programmes will be
monitored for political bias.
Two draft laws approved in early 2005
went some way toward meeting the frst
two items on this agenda. These were the
law on conficts of interest and a code of
good governance. The law on conficts of
interest amends a 1995 regulation that
had little effect. The only sanction for
breaching it was a note in the offcial gazette.
The body responsible for investigating
alleged misdemeanours was hampered by
its structural dependency on the central
government and usually failed to carry out
its tasks. The PSOE had acknowledged the
need to reform the law and several draft
bills were presented to parliament, without
success. The bill currently before parliament
refects recommendations by the OECD, the
UN and the Council of Europe.
Though an important step, the draft bill
could yet be modified by parliament. Its
weakest point is enforcement: the body
charged with sanctioning conficts of interest
is subordinate to a ministry and likely to
receive low priority. The most important
features of the legislation are: a ban on
offcials taking second jobs in the public or
private sectors; a two-year moratorium on
offcials taking private jobs related to their
work for government; the declaration of
assets by ministers, secretaries of state and
senior offcials; and the creation of a new
Offce of Conficts of Interest in the Ministry
of Public Administration. Where a confict
of interest involving a state contractor
is discovered, it will be investigated and
published in the offcial gazette. Those found
guilty of breaching the law will be dismissed,
lose the right to compensation and be asked
to repay any money lost as a result of their
actions. A contracting company that hires a
high-level public offcial during the two-year
cooling-off period loses the right to bid for
public contracts during the same amount of
time. Offcials who infringe the law will be
barred from competing for public posts for
between 5 and 10 years.
The second piece of anti-corruption
legislation, the new code of government,
became effective in March 2005. Successive
reports by international bodies, notably the
damning report in 2001 from the Council of
Europes Group of States against Corruption
(GRECO), pushed for the elaboration of
codes of conduct for public offcials. Laws
exist to proscribe the criminal behaviour of
public servants, but what was needed was a
set of guidelines to orient public employees
when they navigate the greyer areas of their
work, such as conficts of interest.
Under the new code, one of Zapateros
electoral pledges, senior officials will
be required to: provide timely public
information on the performance of their
departments; keep copies of their documents
for oversight by subsequent governments;
refrain from accepting jobs that infringe
upon their commitment to government
work; refrain from improper use of power;
reject any gift, favour or service that affects
the performance of their duties.
The code has a number of weaknesses,
however. There is no clear mechanism for
legally sanctioning infringements of the code.
Moreover, it does not apply to more junior
public officials or other state employees,
although a complementary code for public
servants is at the initial drafting stages.
Property is a corruption host
On 10 March 2005, police mounted a series
of raids on a money-laundering network in
the resort town of Marbella, the culmination
of an 18-month investigation involving
police in seven countries. At its nerve centre
was the law firm of Fernando del Valle,
alleged to have set up hundreds of shell
companies through which multimillion-
dollar investments were channelled from
groups linked to organised crime. Most of
the money had been funnelled into the
property sector on the Mediterranean shore,
which European police have long recognised
as a capital of organised crime.
Police estimate that more than 600
million (US $770 million) may have been
Country reports SPAIN
GC2006 02 part2 251 8/11/05 17:54:19
Country reports 252
ManuelVilloria(KingJuanCarlosUniversity,Madrid)
Further reading
Roberto Blanco Valds, Lasconexionespolticas (Political Connections) (Madrid: Alianza, 2002)
laundered through the del Valle firms
offices, fuelling a phenomenal boom in
the construction industry. Half of all new
construction projects in Spain take place on
the southern coast, around Malaga, a city
with one of the highest unemployment rates
in the country. They suspect that many more
law frms along the coast are involved in
money laundering.
The so-called Operation White Whale
marks the frst time police have established
a direct link between organised crime and
Spains construction and real estate indus-
tries. Where it exists, corruption at the local
government level, where decisions over land
use and ownership are taken, makes the sector
an ideal vehicle for laundering money.
A 2003 report by Malaga Universitys
Andalusian Criminology Institute points to
a tight relationship between construction
magnates and town halls; some of the latter
raise much of their municipal funds from
issuing licences to the former.
1
Real estate
deals require landowners to make payments
to local governments that are often above
the amount required by law, particularly if
the owner wants to develop the property.
A study in 2004 found that almost every
mayor in the coastal region was in favour of
development agreements as a way of obtaining
income.
2
Such agreements leave plenty of
room for negotiation. In Majorca alone,
municipalities modifed agreements on 227
separate occasions. There is little supervision
of illegal construction or planning alterations,
and sanctions almost never lead to demoli-
tion. A report by LaVanguardianewspaper
suggests that there are tens of thousands of
properties in Marbella that fail to comply with
building regulations, including some 1,600
properties in Marbella that are illegal because
they were built on parkland.
3
Marbella tops the list of town halls that
have suffered corruption scandals in recent
years. Two former mayors, Jess Gil and
Julin Muoz, were banned from holding
public offce. Gil approved a zoning plan
for Marbella that was illegal and was being
investigated on 15 counts of corruption and
links to Italian and Russian mafa bosses
when he died in 2004. The Andalusian
government announced plans in early
2005 to overhaul the Costa del Sols urban
planning process. The new plan would
take away zoning and licensing powers
from local authorities that consistently
fail to implement the appropriate building
regulations and laws.
Catalonia has also been in the headlines
for corruption involving real estate. In the
so-called 3 per cent case, investigators
uncovered a connection between corruption
in the construction sector and political party
fnancing. In February 2005, the president of
Catalonia accused the former government of
charging a 3 per cent commission on public
works contracted out during its period
in office. The sum was allegedly used to
fnance the coalition that has dominated
power for more than 20 years. In March
2005, Catalonias parliament established a
commission to investigate irregularities in
public works between 1995 and 2005 that
contributed to the collapse of houses in
the Barcelona neighbourhood of Carmelo,
due to errors in building a metro tunnel.
The commission will also look at possible
violations to political fnancing laws.
Suggestions of a link between corruption
in the construction industry and party
financing were raised in the Marbella
scandal as well. No substantive changes have
been made to the institutional and legal
framework governing party financing in
recent years, however, despite the prominent
scandals of the 1990s and many electoral
campaign pledges.
GC2006 02 part2 252 8/11/05 17:54:20
253
Carlos Jimnez Villarejo, La delincuencia fnanciera, los parasos fscales y la intervencin de los
bancos (Financial Crime, Tax Havens and the Intervention of Banks), mimeograph, 2004
Fernando Jimnez and Miguel Canzos, Political Corruption in Spain, in Martin Bull and James
Newell (eds), CorruptioninContemporaryPolitics (London: Palgrave, 2003)
J. M. Maravall, Elcontroldelospolticos (The Control of Politicians) (Madrid: Taurus, 2003)
TI Spain: www.transparencia.org.es
Notes
1. Jos Luis Diez Ripolles et al., Prcticasilcitasenlaactividadurbanstica.UnestudioenlaCostadel
Sol(Illicit Practices in Urban Activity: A Study of the Costa del Sol) (Valencia: Editorial Tirant,
Instituto Interuniversitario Andaluz de Criminologa, 2004).
2. Antonio Vercher, La corrupcin urbanstica (Urban Corruption), ClavesdeRaznPrctica 139,
JanuaryFebruary 2004.
3. LaVanguardia (Spain), 17 March 2005.
Conventions:
UN Convention against Corruption (ratifed March 2004)
ratifed)
After a three-month delay in appointing a new chairperson and two new commissioners,
the Commission to Investigate Allegations of Bribery and Corruption became
operational once again in March 2005. Its agenda includes awareness-raising programmes
and training on corruption issues for 30,000 graduates recently admitted into the public
services. It is also developing a curriculum to train investigative offcers in fnancial
auditing, investigations related to control systems, areas of corruption, and analysis of
evidence and technique. Certain key reforms are still needed within the commission if it is
to develop into a useful tool in fghting corruption. It needs to recruit more investigators
with experience in the practice of law, while reducing its dependence on the police for its
personnel needs. Another important step would be to allow the commission to initiate
investigations on its own accord. The commissions fnancial status is also problematic
since the Treasury may not release the funds allocated by parliament. Finally, a recruitment
criterion that all three commissioners must be recruited from among retired judges, police
or audit inspectors eliminates the prospects of younger, more dynamic anti-corruption
campaigners leading the commission.
Sri Lanka
Tsunami aid and transparency
The tsunami that struck 13 of Sri Lankas
25 provinces on 26 December 2004 affected
1,000 km of the islands coastline. By early
February, it was calculated that 30,974
people had died, 4,698 were still missing
and 558,287 displaced. Nearly 100,000
private houses were destroyed and 45,000
partially damaged.
1
As in other affected countries, it was
an unforeseen catastrophe requiring the
immediate attention of a large number
of international and local actors with no
Country reports SRI LANKA
GC2006 02 part2 253 8/11/05 17:54:20
Country reports 254
precedent to fall back on for guidance. A
food of donor aid overwhelmed the countrys
fnancial and institutional structures, leading
to administrative lapses that paved the
way for corruption. On the one hand, the
weakness of the accountability framework
highlighted the need for intensive public
participation to ensure transparency in
the use of post-tsunami reconstruction
funds. On the other, the lack of a freedom
of information law, weak parliamentary
oversight and an attenuated anti-corruption
body left Sri Lanka in particularly poor shape
to monitor funds correctly.
A multitude of allegations concerning
unethical behaviour or misappropriation
of relief funds has emerged. In April 2005, a
local newspaper revealed how World Food
Programme

volunteers recruited for disaster
relief activities were the spouses or relatives
of existing staff members with no relevant
expertise, but who were accommodated in
fve-star hotels.
2
Another case highlighted
how supplies allocated to the inhabitants of
Batticaloa allegedly ended up in Polonnaruwa
district through the relief arm of the ruling
coalition partner, Peoples Liberation Front
(JVP). Once in Pollanaruwa, the local JVP MP
stored the supplies privately and distributed
them to party supporters in Giritale, which
had been unaffected by the tsunami.
3
In
Rambukkana, police seized goods from
houses belonging to employees of the social
services department that were reportedly
stolen from supplies intended for refugees in
the Kalmunai area. They included clothing,
toys, plastic mats and 5,000 kg of lentils.
4
Other criticisms focused on the task
forces set up to handle the distribution of
relief. President Chandrika Kumaratunga
appointed several in the immediate wake of
the tsunami, but the main coordinating role
was given to the Task Force for Rebuilding the
Nation (TAFREN). Given the urgency of the
disaster, TAFREN members were appointed
outside normal parliamentary procedures. A
civil society group, the Alliance for Protection
of National Resources and Human Rights,
expressed concerns that they lacked disaster
relief expertise and alleged that private sector
delegates on the task force were politically
aligned. At the same time, the government
announced it would establish a statutory
body to handle all operations in relation to
post-disaster activities, sparking criticism
that it would be riddled with nepotism and
become another white elephant, unless a
strong legal framework were introduced. To
date, the government has given no indication
that it will present the proposed law to the
public before sending it to parliament. A
special Parliamentary Select Committee for
Natural Disasters was also formed, although
its mandate is restricted to investigating
the islands lack of preparedness and
recommending steps to minimise damage
in the event of a recurrence.
Instead of opening one central account to
handle the infow of funds, the government
set up several, raising fears over accountability,
lack of coordination between departments
and possible duplication of effort. Sri Lankas
limited freedom of information provision
played an important role in stimulating these
concerns. A draft freedom of information
law was due to go to parliament in 2004,
but no steps have been taken to proceed.
5

The current disempowerment of citizens
and communities affected by the tsunami
is not helped by the absence of legislation
on disclosure and whistleblower protection
that would have gone some way towards
rolling back corrupt practices during the
earliest phase of disaster relief. Nor did the
government consult tsunami victims when
the first damage and needs assessments
were made. As a result, the reconstruction
programme gives the impression of being a
top-down, one-size-fts-all affair. Civil society
made suggestions for more appropriate
reconstruction interventions, but has
received little response to date.
6
The state-controlled media painted
a far rosier picture of the success of the
reconstruction process than researchers on the
ground. A case in point is the allegedly uneven
distribution of aid to districts inhabited by
Sinhalese and Tamils, particularly in the
north-east which is controlled by the rebel
Liberation Tigers of Tamil Eelam (LTTE). A
GC2006 02 part2 254 8/11/05 17:54:20
255
ceasefre three years ago ended the civil war
between the LTTE and government, but
the post-tsunami relief effort surfaced new
tensions. The LTTE asked to receive relief
funds directly, citing the governments poor
record on corruption as justifcation, but was
refused. Political parties in the south raised
the issue that LTTE might use the money to
fuel the separatist war. To defuse the situation,
the two sides agreed on the formation of
a joint mechanism, known as the Post-
Tsunami Operational Management Structure
(PTOMS), to ensure the equitable allocation
of funds to all affected areas. The move was
the subject of great controversy in parliament
where it met resistance from the Party of
Buddhist Clergy, the Muslim parties and the
JVP, which claimed the PTOMS legitimised
the LTTE (the JVP later quit the coalition
over the issue).
7
Under the agreement, all
communities are expected to share the nearly
US $3 billion in aid pledged, and will divide
responsibility for reconstruction in the Tamil-
dominated north and east.
8
The funds are to
be channelled through the government, with
the World Bank to serve as custodian. The
PTOMS ran into further trouble in July 2005
when its constitutionality was challenged
in the Supreme Court.
9
The court issued an
interim order freezing the process until the
conclusion of the case.
Although earlier independent and govern-
ment reports tended to confrm the swifter
pace of reconstruction in the south compared
to the north, those most affected by the
nightmare waveare generally excluded from
the debate on aid relief, due to the lack of
investigative capacity in the print and elec-
tronic media.
10
Slow road to parliamentary fiscal
oversight
Corruption was certainly not introduced
to Sri Lanka by the tsunami. The lack of
accountability and transparency is pervasive,
starting with the scrutiny of public funds.
Two standing parliamentary committees are
responsible for carrying out the legislatures
oversight duties. The Committee on Public
Accounts (COPA) reviews the accounts
of ministries, departments and local
authorities, while the Committee on Public
Enterprises (COPE) deals with state-owned
corporations and the governments other
ventures. Contrary to practice in most
Commonwealth countries, Sri Lanka does
not have a budget or estimates committee
to deliberate the national budget.
Legislative scrutiny of public funds is poor
because the committees meet in camera, to
the exclusion of the media, general public
and even fellow MPs. The government is not
required to respond to the recommendations
of these committees within any stipulated
period of time, according to one civil society
observer. This leaves the accountability loop
open.
11
Nor do the committees have the adequate
technical capacities or incentives to enforce
accountability. A positive move occurred
in September 2004 when the membership
of COPA and COPE was increased to 19,
widening participation in the monitoring
process. The two committees also have
longer, uninterrupted sittings. This has had
little visible impact upon accountability,
however. Provisions were made in September
2004 for COPA and COPE for the creation
of sub-committees to handle different tasks
simultaneously, but they have yet to be
appointed and, in addition, they would
suffer from inadequate secretarial provision
and the absence of a filtering process
for prioritising items for discussion. To
help address these issues, the World Bank
and UNDP initiated a capacity-building
programme in early 2005, based on
reports prepared by Ernst and Young. Two
consultants have been recruited to provide
COPA and COPE members with advanced
training, fnanced by the Treasury.
Another problem is the large proportion
of ministers and deputy ministers to MPs;
at this writing it stood at 81, out of 225
parliamentarians. One by-product of such
concentration of MPs in office is that it
dramatically dilutes legislative scrutiny
of executive activities. Provisions were
made in the parliamentary period January
Country reports SRI LANKA
GC2006 02 part2 255 8/11/05 17:54:21
Country reports 256
AnushikaAmarasinghe(TISriLanka)
Further reading
Institute of Policy Studies, PhoenixfromtheAshes:EconomicPolicyChallengesandOpportunitiesfor
Post-TsunamiSriLanka (Colombo: Karunaratne and Sons, 2005)
Institute of Chartered Accountants of Sri Lanka, AccountingandManagementSystemsandProcedures
forTsunamiReliefProjects (Colombo: Institute of Chartered Accountants of Sri Lanka, 2005)
Transparency International, NationalIntegritySystemsCountryStudy2003SriLanka(Berlin,
Colombo: Transparency International, 2004), available at www.transparency.org/activities/
nat_integ_systems/dnld/sri_lanka_r.pdf
Transparency International Sri Lanka, ReportonKeyHighPosts (Colombo: Vishwaleka Publishers,
2004)
TI Sri Lanka: www.tisrilanka.org
Notes
1. Figures are derived from the PreliminaryDamageandNeedsAssessment prepared for Sri Lanka
2005 Post-Tsunami Recovery Programme by the Asian Development Bank, Japan Bank for
International Cooperation and the World Bank, 128 January 2005.
2. SundayLeader (Sri Lanka), 10 April 2005.
3. SundayLeader (Sri Lanka), 12 June 2005.
2002February 2004 for both committees
to be headed by an opposition MP, but
the chairman elected to COPE, Rohitha
Bogollagama, defected to the ruling
United Peoples Freedom Alliance (UPFA)
in November 2004. He is now technology
minister, but continues to serve as chairman
of the Parliamentary Oversight Committee,
raising concerns about his independence
and possible lack of scrutiny in his own
ministry.

A number of diagnostic studies on
parliamentary oversight mechanisms and the
auditor generals department were conducted
in recent years, leading to the drafting of a
new Audit Act at the end of 2003 that aims
to strengthen the powers and independence
of the auditor general, and make the position
an offcer of parliament.
12
Discussions with
the strong union in the auditor generals
department are continuing, while the fnance
ministry and cabinet have still to approve
the draft before it is submitted to parliament.
Thus, contrary to Commonwealth practice,
the auditor general remains a public offcer
and subject to the administrative control of
the executive.
The auditor generals reports are customar-
ily referred to the two oversight committees
for review and proposed recommendations.
In the past, delays in submission meant the
reports were usually outdated by the time
they came up for consideration with the
result that committees could not deal with
issues in a timely manner. In addition, their
contents were not debated in parliament. In
September 2004, the auditor general began
forwarding preliminary fndings to the com-
mittees to facilitate a more updated review
practice. The reviews are still not very useful,
however, due to the infrequency of meetings,
narrow focus on excess expenditure and
the lack of follow-up by the ministries
concerned.
With regard to the Fiscal Management
(Responsibilities) Act of 2003, the govern-
ment fulflled its duties by submitting two
reports on fscal policy and performance in
2004.
13
However, the reports were consid-
ered too technical, while public awareness of
the acts provisions is minimal. Civil society
has so far taken no initiative to participate
in the process of scrutiny, despite the provi-
sions made for this in the act.
GC2006 02 part2 256 8/11/05 17:54:21
257
4. DailyNews(Sri Lanka), 13 June 2005.
5. See A Critique of the Draft Freedom of Access to Offcial Information Bill 2003, published
by the Commonwealth Human Rights Initiative (New Delhi: CHRI, 2004), available at www.
humanrightsinitiative.org/programs/ai/rti/international/laws_papers/srilanka/foibill-critique-
v2-feb04.pdf. See also GlobalCorruptionReport2005.
6. www.tisrilanka.org/tsunamiedited/tsunami.html
7. DailyMirror(Sri Lanka), 13 June 2005.
8. BBCNews (UK), 27 June 2005.
9. SundayLeader (Sri Lanka), 3 July 2005.
10. See statement from the conference After the Tsunami: Human Rights and Vulnerable
Populations (34 June 2005, Bangkok, Thailand), sponsored by the University of California,
Berkeleys Human Rights Center; the University of Hawaiis Globalization Research Center;
and the EastWest Center, available at www.eastwestcenter.org/events-pr-detail.asp?press_
ID=383
11. Asanga Welikala, Research Associate, Centre for Policy Alternatives (Sri Lanka), in Transparency
International, NationalIntegritySystemsCountryStudy2003SriLanka (Berlin/Colombo: TI,
2004).
13. www.eureka.lk/fpea/
Conventions:
Council of Europe Civil Law Convention on Corruption (not yet signed)
Council of Europe Criminal Law Convention on Corruption (signed February 2001; not yet
ratifed; Additional Protocol signed June 2004)
OECD Anti-Bribery Convention (ratifed May 2000)
ratifed)
A new law on freedom of information entered into force in April 2005. Until then, the
principle of non-disclosure was paramount, every document was considered confdential
and people had to give reasons for seeking access to records. The list of exemptions to
the new law includes limits to protect public or private interests, such as commercial
and industrial information; the contents of penal proceedings; and information related
to internal or external security. The authorities are required to stipulate the legal context
of any offcial denial of access.
In March 2005, the National Council (lower house of parliament) passed a law requiring
companies quoted on the stock exchange to disclose the salaries paid to individual
members of their boards and the total amount paid to management. The same principle
will apply to other executive benefts, such as bonuses, stock options, loans, proft sharing
plans, assisted mortgages and all other components of payment. The bill is aimed at
protecting shareholders by increasing transparency. The law passed the Council of States
(upper house of parliament) in June 2005.
Switzerland
Country reports SWITzERLAND
GC2006 02 part2 257 8/11/05 17:54:21
Country reports 258
Switzerland redefines money
laundering
Instant transactions make all financial
centres vulnerable to playing host to money
launderers, but Switzerland is particularly
at risk since around 30 per cent of all
internationally invested private assets are
managed from there.
1
Recent legal proposals,
however, include a selective defnition of the
underlying criminal activity required for
a transaction to be categorised as money
laundering that could be seen as an incentive
to certain kinds of illegal operations.
Switzerland is a signatory nation of the
OECDs Financial Action Task Force (FATF),
the main forum against international
criminal money fows, and international
cooperation has helped in its fght against
money laundering. However, the fnancial
authorities have some way to go. A recent
OECD report recommended that Switzerland
strengthen its money-laundering oversight,
specifcally calling for greater transparency,
the independence of the intermediaries and
a tighter deadline for reporting suspicious
transactions.
2
In January 2005, the fnance
ministry launched a consultation round that
is hoped will produce new legal measures
to ensure full compliance with the 2003
revision of FATFs 40 recommendations. The
proposals extend the list of crimes connected
to money laundering to include commercial
piracy, counterfeit goods, insider trading,
human trafficking and some aspects of
smuggling. The list of intermediaries subject
to due diligence will be extended to include
dealers in art, precious stones and precious
metals, and property managers.
In March 2005, the Council of States
(upper house of parliament) accepted the
Federal Councils draft proposal to bring into
Swiss law the Council of Europe Criminal
Law Convention on Corruption. While this
was a positive step, dangerous loopholes are
built into the draft. Corruption involving
private entities (for example, a Swiss frm
that bribes a foreign frm to buy its goods
or services) is categorised as a simple offence
(punishable by fnes or imprisonment of up
to three years) and not a crime (sanctioned
with imprisonment of up to 20 years). This
has serious consequences because, under
the Swiss criminal code, the money must
have derived from a crime for laundering
to have occurred. Thus, funds transferred
and traceable to an offence such as bribery
among companies or the case of cigarette
smuggling mentioned below are not
considered money laundering under Swiss
law. The same problem arises with funds
arriving in the country with the purpose of
evading another jurisdictions tax system.
Tax evasion has proven to be a very effective
means of detecting money laundering
crimes, but the Swiss authorities cannot
respond to foreign requests for information
about suspected evasion because of domestic
banking secrecy regulations and the narrow
defnition of crime. Finally, with regard to
domestic oversight of money laundering,
when an intermediary accepts money arising
from private corruption, the intermediary
is not required to report it under Swiss law.
Transparency International Switzerland
views this situation as seriously defcient
and hopes that the National Council (lower
house of parliament) will recategorise private
corruption as a crime in autumn 2005, when
it is scheduled to discuss the draft law.
A positive development came in
November 2004 when finance minister
Hans-Rudolf Merz approved a plan to bring
the oversight of money laundering under a
single regulator, provisionally entitled the
Federal Financial Market Authority (FINMA).
Originally proposed in 1998, the project was
delayed due to the standard, lengthy con-
sultation with other offcial agencies and
private interest groups that accompanies
any legislative reform in Switzerland. It is
now due to be implemented in two years.
Responsibility for oversight of money laun-
dering is split between the fnance ministry,
the Swiss Federal Banking Commission, the
Federal Offce of Private Insurance, the Swiss
Federal Gaming Board and 11 self-regulating
bodies supervised by the fnance ministry.
According to the finance minister, the
new entity will allow the regulator to deal
GC2006 02 part2 258 8/11/05 17:54:21
259
better with the wide scope of transactions
and improve communications between the
various anti-money-laundering agencies.
The Money Laundering Reporting Offce
Switzerland (MROS) is the Swiss version of a
fnancial intelligence unit. The organisations
function is to insulate the prosecution and
enforcement agencies from intermediaries
while simultaneously protecting their
clientbanker confdentiality commitments.
Under the Money Laundering Act of 1997,
intermediaries (including banks, lawyers
and accountants) must file a suspicious
transaction report with the MROS whenever
they perceive one, or risk losing their licence.
The number of reports actually fled is low
compared to other major fnancial centres,
suggesting widespread non-compliance
within the countrys 7,000-strong fnancial
services sector, and the ultimate sanction has
never once been imposed. MROS referred
821 suspicious transactions for further
investigation in 2004, compared to 863 a
year earlier. Signifcantly, with just eight
permanent staff responsible for oversight in
one of the worlds largest fnancial centres,
the MROS is vastly understaffed.
According to MROS, 11 per cent of the
821 cases fled for criminal investigation in
2004 involved sums larger than 1 million
Swiss francs. The outcomes of the ensuing
investigations are less widely publicised.
The judgment in March 2002 against Pavel
Borodin, currently State Secretary of the
Union of Russia and Belarus, resulted in a
fne of just US $177,000, or the equivalent
of 0.3 per cent of the funds he is alleged to
have siphoned out of Russia, according to
an investigation by a Swiss judge. The lack
of cooperation from the Russian authorities
proved to be the cases undoing.
3
The
crucial role of international cooperation
is also indicated by the fact that referrals
outnumber domestic requests by two to one:
suspicious transactions referred onward after
foreign requests amounted to 1,701 in 2004,
compared to 821 from domestic sources.
In 2002, the finance ministry returned
US $77 million of laundered funds to the
government of Peru from accounts belonging
to former intelligence director Vladimir
Montesinos after it was determined that
they had resulted from criminal activities.
Another important case involved the fortune
accumulated by the late Nigerian dictator
Sani Abacha. The Supreme Court ruled in
February 2005 that US $458 million were
illegally obtained and ordered the amount
returned to Nigeria (in addition to US $200
million returned in 2003).
Not all the money-laundering news
has been positive. The problem of legal
interpretation resurfaced when a court
in 2001 gave a suspended sentence to an
Italian who had smuggled 1,000 tonnes of
cigarettes a month in defance of EU rules and
laundered the proceeds in Switzerland. Under
existing law, laundering criminal assets from
smuggling is only a fscal offence, rather than
a crime. The MROS annual report for 2004
provided for the frst time an account of the
cases it has referred for prosecution since the
law entered into force in 1998. Of the 2,708
transactions reported, only 47 convictions
were obtained and 1,397 cases are still in the
courts. More worrisome is the fact that there
is an unknown number of cases that have
not been reported to MROS.
Switzerland has made progress in devising
legislation and designing institutions to
combat money laundering, but interna-
tional cooperation is essential to improve
the number of convictions, and since two
crimes must be proven (the predicate crime
and money laundering), this is an especially
diffcult task. What is also required is more
insistent pressure on intermediaries to report
suspicious transactions, and to overcome
their tendency to report cases by new
customers, rather than by established clients.
MROS is to be congratulated for reporting
the status of cases referred in the past, but
the numbers show a disturbing trend toward
the suspension of investigations before they
get to court. The rate of successful prosecu-
tions must also be increased if Switzerland
is to gain a credible reputation as a foe of
money laundering.
Above all, the National Council must be
encouraged to consider private corruption a
Country reports SWITzERLAND
GC2006 02 part2 259 8/11/05 17:54:22
Country reports 260
JeffreyNilsen,AnneSchwbelandStefanieTeickner(TISwitzerland)
crime. If the current draft law is allowed to
stand, some cases of money laundering will
continue to be ignored due to the narrow
categorisation of the crime under the Swiss
penal code.
Political finance in the spotlight
The principle that politics is voluntary and
unremunerated is paramount in Switzerland.
Parties do not benefit from government
funding, apart from small contributions to
party factions, and politicians work on a
voluntary basis, while supporting themselves
through other jobs. Initiatives to profession-
alise parliament have tended to fail because
of the prevailing opinion that politicians
choose their profession through conviction,
rather than for fnancial gain. As a result,
Swiss politicians fnance their own election
campaigns and fnd their own sponsors. Nor
is there any requirement to declare the source
or amount of any fnancial aid they receive.
This makes Switzerlands party funding
system one of the murkiest in Europe.
Since 1 December 2003, a new law on
the Federal Assembly has introduced a little
more transparency. Parliamentarians are
now required to declare their membership
of administrative boards and all consultant
activities to prevent conflicts of interest
arising. If they fail to publish the informa-
tion, they are subject to removal or exclusion
from their positions for a period of six
months. But watchdog groups, including TI
Switzerland, point out that the new law does
not go far enough since it does not address
the question of parliamentary sponsorship.
The existence of this loophole was high-
lighted by last years donation scandal.
In summer 2004, it was alleged that Anita
Fetz and Roberto Zanetti, both Socialist Party
MPs, had not declared their membership of
the board of Pro Facile, a foundation that
runs investments. This left them open to
disciplinary action, but the case blew into
a scandal because the foundation had
been applying the controversial methods
developed by hedge-fund manager and
socialite Dieter Behring to the donations
it received. His system promised investors
a return of 8 per cent, half of it accruing
to the foundation. This fell way beyond
the conventions of good foundation
management. In October 2004, Behring was
arrested on suspicion of investment fraud
involving hundreds of millions of francs.
4

Behring had allegedly been a major backer
of Fetzs political ambitions, giving large
sums to her re-election campaign. Behring
later went to prison for six months before
being released on bail in April 2005,
5
and
Fetz resigned from offce after the media
broke the story.
For the notoriously discreet Swiss, the
donations scandal was a grandeaffaire. Why
had Fetz, previously considered of open and
honest character, not declared her member-
ship of Pro Facile in the frst place? As board
member of two respected banks, why had
she not resigned immediately instead of
waiting for the media to expose the foun-
dations alleged fraudulent practices? Why
had she not admitted that Behring was her
election sponsor?
The scandal also focused attention on
the faws of Switzerlands existing system of
political fnancing. Until there are regulations
that require politicians to declare donations
and other support, the space for irregularities
and corruption will persist. Until parties are
obliged to account for their use of funds and
disclose the identities of their donors, it will
be impossible to decide if they are acting
according to their own principles or in the
interests of their sponsors. It would be naive
to believe that no return service is expected
for the large sums that sponsors invest in
politicians election campaigns.
In spite of the damage to their profes-
sion caused by the donations scandal, not
one of the major parties has come up with
proposals to increase the transparency of
private money in the political system. This,
no doubt, refects a reluctance to disclose
their own funding sources.
GC2006 02 part2 260 8/11/05 17:54:22
261
Further reading
Tiziano Balmelli and Bernard Jaggy (eds), LesTraitsinternationauxcontrelacorruption.LONU,
lOCDE,leConseildelEuropeetlaSuisse(International Anti-Corruption Treaties: The UN, the
OECD, the Council of Europe and Switzerland) (Lausanne, Berne, Lugano: Edis, 2004)
Othmar Hafner, KorruptionundKorruptionsbekmpfunginderSchweiz.EinebersichtvonTransparency
InternationalSchweiz (Corruption and the Anti-corruption Fight in Switzerland. An Overview
by Transparency International Switzerland) (Bern: TI Switzerland, 2003)
Daniel Jositsch, DasSchweizerischeKorruptionsstrafrecht.Art.322terbisArt.322octiesStGB (Anti-
corruption Criminal Law in Switzerland) (Zrich: Schulthess, 2004)
Ivo Kaufmann, Lnderexamen Korruption die Schweiz im internationalen Vergleich (An
International Comparison of Corruption: Report on Switzerland), Volkswirtschaft78, March
2005.
Mark Pieth and Gemma Aiolf (eds), AComparativeGuidetoAnti-MoneyLaundering,ACriticalAnalysis
ofSystemsinSingapore,Switzerland,theUKandtheUSA (Cheltenham, UK, and Northampton,
USA: Edward Elgar Publishing, 2005)
TI Switzerland: www.transparency.ch
Notes
1. The Swiss Financial Centre (Bern: Swiss Federal Department of Finance, June 2003).
2. Switzerland: Phase 2, Report on the Application of the OECD Anti-Bribery Convention (Paris:
OECD, December 2004), www.oecd.org/dataoecd/43/16/34350161.pdf
3. www.albionmonitor.com/0203a/swissbankrussialaunder.html
4. NeueZrcherZeitung (Switzerland), 5 March 2005.
5. Neue Zrcher Zeitung (Switzerland) online, 12 August 2005.
Conventions:
AU Convention on Preventing and Combating Corruption (ratifed August 2004)
UN Convention against Corruption (ratifed September 2004)
UN Convention against Transnational Organized Crime (ratifed March 2005)
The government issued a White Paper in October 2004 recommending that the Inspector
General of Government (IGG) be given more latitude to arrest and prosecute persons
involved in corruption or abuse of public offce. This would amend sections of the
Leadership Code Act of 2002 to bring it in line with the 1995 Constitution, which grants
the IGG prosecutorial powers. A previous constitutional ruling in May 2004 trimmed the
IGGs powers. To strengthen the institution, the White Paper proposed the creation of an
anti-corruption tribunal to try cases. The agency was re-energised after the appointment
in January 2005 of a new IGG, Justice Faith Mwondha, and her deputy, Raphael Obudra
Baku. They instructed all MPs and political leaders to declare their wealth before the
end of March 2005 and warned that those who did not comply would face legal action
(see below).
In July 2004, the Directorate of Ethics and Integrity (DEI) launched a four-year strategy
to combat corruption and rebuild integrity in public offce. The programme, due to
Uganda
Country reports UGANDA
GC2006 02 part2 261 8/11/05 17:54:22
Country reports 262
run from 2004 to 2007, aims to improve the enforcement and coordination of existing
law and to ensure that the public is actively involved in the fght against corruption.
The DEI has drafted whistleblower protection legislation that will be submitted to
parliament after the presidential and parliamentary elections in March 2006. The DEI is
also reviewing the Prevention of Corruption Act 1970 with a view to presenting a new
version to parliament.
Institutional failure looms
Despite an extensive legal framework and
ample opportunity for participation by
media and civil society, the lack of political
will to curb corruption has led Uganda to the
brink of institutional failure. Corruption by
politicians and offcials is one of the biggest
challenges facing the country.
One case involved Major Roland Kakooza
Mutale, a senior adviser to President Yoweri
Museveni who made a major contribution
to his re-election in 2001. A May 2003 report
by the Inspector General of Government
recommended that Mutale be sacked for
refusing to declare his wealth under the 2002
Leadership Code Act. He was relieved of his
post as adviser soon afterwards.
This was the start of a widening rift
between the IGG and the government.
Senior offcials were already disgruntled to
fnd their wealth and possessions published
in the media in 2002. Mutale took the matter
to court and got President Museveni to
swear an affdavit in his support, effectively
condoning his refusal to comply with the
law.
1
By March 2004, a constitutional court
ruling in Mutales favour had contrived to
render entire sections of the Leadership Code
Act null and void. This duel between the IGG
and the government is a clear demonstration
of a fagging institutional system in Uganda.
It also exposed a weakened judiciary that is
unable to temper the powerful executive.
A second incident occurred in May
2004 when the solicitor general refused
to surrender files on the James Garuga
Musinguzi case when asked by the IGG. The
IGG had expressed alarm at the amount of
compensation awarded by the government
to Musinguzi, a city tycoon and rancher.
Musinguzi was due to receive UShs13 billion
(US $7.4 million) as compensation for the
confscation and redistribution of his ranches
in Rakai. The case was handled out of court
through an amicable arrangement between
the solicitor generals offce and Musinguzi.
2

When the solicitor general refused to hand
over the fle, the ombudsman ordered his
arrest. Mutale promptly mobilised a platoon
of soldiers to protect him.
3
This interference
in the execution of the IGGs duties was a
serious breach of the 1995 constitution which
states that the IGG shall be independent in
the performance of its functions and shall
not be subject to the direction or control
of any person or authority and shall only
be responsible to parliament.
4
The fact that
Mutale could carry out such an operation
without legal or political backlash indicates
how cosmetic the governments commitment
is to implementing the rule of law. It also
raises questions about the IGGs survival.
Another negative milestone was passed in
August 2004 when the High Court nullifed
a report into allegations of corruption at the
Uganda Revenue Authority.
5
A petition was
issued by two members of the commission
of inquiry after a disagreement with the
chairperson over sections in the report.
Instead of allowing further inquiries to be
made regarding the contested passages, the
court decided to expunge the document
altogether. The decision refected a failure of
the courts moral responsibility to bring acts
of corruption to justice; it also meant that no
further legal action could be taken against
those implicated. Following cases like these
it is no surprise that, according to various
auditor general reports from 2001 to 2003,
more than UShs2 billion (US $1.1 million)
is lost to corruption every year.
A further setback nearly occurred in
September 2004 when the cabinet proposed
GC2006 02 part2 262 8/11/05 17:54:23
263
to the Constitutional Review Commission
that the offces of the Ombudsman and the
Human Rights Commission be merged, a
move that would have stripped the latter
of its powers of prosecution. The proposal
was dropped after protests from public and
civil society organisations questioning the
governments commitment to fighting
corruption.
6

Ugandas institutions are facing challenges
of a systemic nature, making them subject
to the whims of politics. The constitution
of 1995 is a case in point: while clearly
providing for presidential term limits and
the question of succession, parliamentarians
voted to scrap term limits in July 2005,
paving the way for President Museveni
to seek re-election in March 2006. The
decision to amend the constitution sets a
bad precedent that a hallowed document
can be altered to suit the political climate.
Corruption decentralised along
with government functions
Political corruption at local government
level has increased since 1996 when the
new government ushered in a process of
decentralisation of governance to local
councils under the 1997 Local Government
Act. Ugandas local governments have
responsibility for revenue collection,
planning, resource allocation and service
delivery, including primary education,
primary health care, water and sanitation,
rural roads and agriculture. Such weighty
responsibilities combined with weak
legislation, lack of oversight, poor
remuneration, costly campaign bids
and an electorate that expects favours
from politicians, rather than transparent
government, provide ample opportunities
for corruption.
In some cases, local politicians have
virtually taken over the award of tenders,
especially for the construction of schools,
dams and health units, usurping the
mandate of district tender boards. In a
tender for electrical installations for the
Kasaali maternity ward in Rakai district
in 200304, the only pre-qualified firm,
Kamungolo General Services, was not
awarded the contract, which went instead
to a frm that had not even put in a bid.
7
In
Kabira sub-county in 2004, the construction
of teachers residences for Bukaala Primary
School was awarded before a call for tenders
was issued, making it effectively futile for
other contractors to bid.
8
Decentralisation was aimed at offering
citizens increased participation at the local
level. But a detailed study of corruption
in local government found that peoples
confdence has been eroded, and the quality
of public infrastructure and services is
deteriorating.
9
The main channels of political corruption
in Ugandas local government bodies are:
infuence peddling; diversion of resources;
giving contracts and jobs to supporters and
family members; presenting bogus allowance
claims; colluding with civil servants to
embezzle resources; bribery; presenting false
documents in order to qualify for elected or
competitive positions; using public vehicles
for personal work; and political interference
in decision-making.
The position deemed most corrupt by the
general public is that of district chairman,
which wields so much power that it has
virtually usurped local boards, commissions
and civil servants, including tender boards
and public accounts committees, in
deciding resource allocations. Residents
of Baitambogwe and Buwaya in Mayuge
reported that many politicians and council
or board members have new properties
and expensive lifestyles, yet they have no
other clear sources of income to back up
such wealth. Politicians feel pressure to
amass wealth before leaving offce so that
re-election bids can be fnanced, and so they
can survive if not re-elected.
The health and education sectors are
worst hit by local-level corruption. The
Muggi Health Centre II in Buwaya sub-
county, Mayuge district is one example.
There, the local MP halted construction
Country reports UGANDA
GC2006 02 part2 263 8/11/05 17:54:23
Country reports 264
CharlesMubbaleandPaulOnapa(TIUganda)
Further reading
Directorate of Ethics and Integrity, NationalStrategyDocumenttoCombatCorruptionandRebuild
EthicsandIntegrityinPublicOffce,20042007,Kampala, 6 April 2005
Human Rights and Democratisation Programme of DANIDA, Anti-Corruption Manual for Civil
Society in Uganda (Kampala: DANIDA, unpublished)
Transparency International Uganda (TIU), TheImpactofPoliticalCorruptiononResourceAllocation
andServiceDeliveryinLocalGovernmentsinUganda (Kampala: TIU, 2005)
TI Uganda: www.transparencyuganda.org
Notes
1. NewVision(Uganda), 24 September 2003.
2. TheMonitor(Uganda), 2 June 2004.
3. The Monitor(Uganda), 1 June 2004.
4. Article 227 of the 1995 constitution.
5. NewVision(Uganda), 17 August 2004.
6. TheMonitor(Uganda),4 September 2004.
of the health facility in 2002 because he
wanted it built at Kasutaime just two
kilometres from an existing health centre
an area where he was seeking to bolster his
political support. Also in Mayuge district,
local councillors interfered in the selection
process for 30 nursing assistants in 2003,
10

handpicking their favourites regardless of
whether minimum qualifcations were met.
In the education sector, there are many
examples of sub-standard construction
across the districts studied, and of
scholarships going to relatives of members
of the district bursary commission, or
district councillors.
An important causal factor is that local
government positions are poorly paid
and there are few institutional and legal
constraints to prevent politicians from
embezzling money. Indeed, the Local
Government Finance and Accounting
Regulations and the Local Government Act
1997 exempt politicians from accounting for
public resources. Civil servants must account
for the budgets they control, but politicians
who may have infuenced or pressured civil
servants to misuse funds cannot be held
liable. This problem is further compounded
by a weakness of the Local Government Act,
which gives politicians authority over civil
servants, including recruiting them.
The private sector, as main supplier of
goods and services to local government,
further fuels corruption. The fact that much
of the private sector is informal makes it
difficult to tackle bribery. Public sector
and donor-sponsored programmes aimed
at improving performance, sensitising the
private sector to the problems of corruption
and improving the regulatory framework
have had little effect.
There is a clear need to fght corruption
and break a cycle of despondency in
which voters are reluctant to waste time
holding politicians to account, rather
than demanding immediate, if piecemeal,
returns for votes or support.
11
Initial steps
must include improving the legal and
institutional framework so that politicians
do not hold sway over civil servants, and
civil servants cannot determine outcomes
of tendering process or other resources
allocation mechanisms that are vulnerable
to corruption. Politicians must also respect
the rule of law and declare assets before and
after taking up offce.
GC2006 02 part2 264 8/11/05 17:54:23
265
7. Transparency International Uganda, TheImpactofPoliticalCorruptiononResourceAllocation
andServiceDeliveryinLocalGovernmentsinUganda (Kampala: TIU, June 2005), and author
interview with district councillors.
8 Transparency International Uganda, TheImpactofPoliticalCorruption.
9. Ibid. Research took place in 200405 in four districts: Kampala, Mayuge, Ntugamo and
Rakai.
10. Author interview in 2003 with District Service Commission of Mayuge district.
11. Survey respondent from Rakai district, Transparency International Uganda, TheImpactof
PoliticalCorruption.
Conventions:
Council of Europe Civil Law Convention on Corruption (ratifed March 2005)
ratifed; Additional Protocol signed May 2003; not yet ratifed)
ratifed)
Although delayed, plans to set up an independent body, the National Bureau of
Investigation, remain a top priority. In March 2005, the government set up a working
group on the development of a concept for the bureau, which will focus on fghting
corruption. It remains to be seen, however, how the creation of this agency will
complement existing anti-corruption bodies.
In April 2005, an anti-smuggling programme was approved by cabinet to address the
problem of bribing to avoid customs duties and import taxes. A single window concept
was introduced with instant dismissal for anyone reported demanding or receiving a
bribe (see below).
In May 2005, the president issued an edict regarding the liberalisation of entrepreneurial
activities and state support of entrepreneurship. The aim is to review laws, in order to
eliminate conficting regulation, licensing and other procedures that affect business
activities. These are often so confusing and uncertain, in terms of relevance, that the only
way to satisfy all the requirements one is presented with is to employ an intermediary
expert who will pay an inevitable bribe. It is therefore hoped that this new edict will
help curb corruption.
In June 2005, the government approved an action plan for 2005 for the adaptation of
Ukrainian legislation to that of the European Union. This includes a series of policy
commitments to uphold European norms and values in the political, social and economic
spheres, all of which would be instrumental in reducing corruption (see below).
In July 2005, the president issued an edict regarding the dissolution of road traffc
police structures, after months of frustration at the lack of obvious progress in reform
and several public warnings (see below).
Ukraine
Country reports UKRAINE
GC2006 02 part2 265 8/11/05 17:54:23
Country reports 266
yushchenkos new anti-corruption
measures: the first six months
In January 2005, Viktor Yushchenko was
inaugurated as the new president marking
the end of the orange revolution. This
had been initiated by widespread popular
protest in response to allegations of massive
corruption, voter intimidation and direct
electoral fraud during Ukraines presidential
election in November 2004. In the former
regime, despite the fact that corruption was
endemic, existing legislation appeared to
support the hypothesis that corruption was
not a problem and any transgressions were
considered to be minor. If laws were applied
they were generally misused to intimidate
opponents of the regime, such as opposition
activists or journalists, while criticism from
foreign investors was ignored. Moreover,
local business people who spoke out were
often harassed by state bodies, including the
tax authorities. Transparency and openness
were thereby discouraged and foreign
investment dwindled to a mere trickle of
what should have been achieved by a country
with the size and potential of Ukraine. One
principal driving force behind the orange
revolution was the sense of public outrage at
the extreme methods used by the outgoing
corrupt regime to remain in power.
In June 2005, one of the main themes
of the roundtable conference organised by
the World Economic Forum was the issue
of corruption in Ukraine. Ten action steps
were proposed to the president and all
appeared to be accepted with enthusiasm.
The first nine steps have an indirect
impact on corruption, but the tenth deals
specifcally with corruption in the following
way: blacklisting companies; basing future
appointments to the civil service and
judiciary on merit and not on politics; raising
salaries of civil servants to reduce incentives
for corruption; introducing a new system
of public procurement such as an effcient
online system; and disclosing salaries and
business affiliations of senior members
of government, judges and legislators. It
remains to be seen, however, how these
recommendations will be implemented
concretely in the near future.
President Yushchenko now faces a huge
challenge to implement successful reform,
while the expectations of his electorate to
address rampant corruption hang heavily on
his shoulders. Various initiatives have been
pursued by the new government with varying
degrees of success. The most notable is a
new anti-smuggling programme approved
by cabinet in April 2005 to address the
problem of bribing to avoid customs duties
and import taxes. A single window concept
was introduced with instant dismissal for
anyone reported demanding or receiving a
bribe. This was initially reinforced by offcers
of the security services observing customs
offcers while performing their duties. In the
frst month of this operation, the revenue
from customs reportedly doubled, but it
did cause delays. Customs duties on some
items have been dramatically reduced, but it
is clear that all duties need to be reduced to
a level that renders the payment of a bribe
uneconomic.
At the June roundtable conference,
President Yushchenko repeated his
earlier declaration that neither he nor his
government would steal from the Ukrainian
people and then made a commitment to
make public the fnancial declarations of
his ministers and top offcials. Many civil
servants at all levels have grown accustomed
to supplementing their meagre salaries
through corrupt means and have assets that
could never have been acquired through
previously declared personal incomes. Yet no
formula has been found for providing them
with reasonable remuneration. However,
there is a limit to what the government can
afford in terms of public sector wages and
other measures could also be explored. In
addition, it probably needs some form of
amnesty to get the declaration process going
in a thoroughly honest and open manner.
In July 2005, the road traffc police was
restructured, after months of frustration at
the lack of obvious progress in reform and a
number of public warnings. It is not yet clear
how this restructuring will work out, but it
GC2006 02 part2 266 8/11/05 17:54:24
267
TransparencyInternational
Further reading
TI Ukraine: www.transparency.org.ua
Conventions:
Council of Europe Civil Law Convention on Corruption (signed June 2000; not yet
ratifed)
seems to refect a similar initiative taken in
Georgia, where a completely new force was
recruited and trained in the space of a few
months and then paid appreciably more
than under the previous regime.
In the meantime, the opening up of
the media is currently under way, one of
the most important measures a state can
take to expose corrupt behaviour to public
scrutiny and hold offcials to account. The
media operates more freely in contrast to
the previous regime, when intimidation,
pro-government ownership, favouritism in
granting broadcast rights and frequencies,
and government press guidance were the
order of the day. However, self-censorship
and concentrated ownership of the media
are still a concern. A confdential hotline
for people wishing to report instances of
corruption has also been established.
Perhaps the most significant change
to come out of the orange revolution
was a series of policy commitments to
uphold European norms and values in the
political, social and economic spheres, all
of which could be instrumental in reducing
corruption. The key document outlining
this is the EUUkraine Action Plan, but the
Ukrainian authorities have gone beyond
the commitments contained in the plan
and stated their intention to fulfl all the
Copenhagen criteria for EU membership,
with the hope of submitting an application
in three years time. This has far-reaching
implications for the relationship between
the state and society, for the development
of democratic institutions and a democratic
political culture, for the expansion of civil
society and for the protection of human
rights. Most studies show that these factors
are strongly associated with lower levels of
corruption.
Whilst Yushchenkos commitment to
route out corruption is well publicised, his
ability to achieve lasting change depends on
whether his pro-reform team will achieve a
working majority in the March 2006 parlia-
mentary elections. Currently, parliament is
still dominated by powerful business groups
who are quite prepared to reject government
initiatives if they do not suit their interests.
This is due to the fact that the different
personalities with varying political agendas
only came together to unseat Kuchmas
previous corrupt regime. So there is frequent
public controversy between MPs and it is
diffcult to see how the prime minister can
run an effective cabinet when there is no
dominating vision. Another problem is
the lack of evidence that acts of corruption
committed by the previous regime or during
the fraudulent presidential election process
will be pursued and prosecuted effectively.
Unless there are exemplary prosecutions of
important individuals, the public will be
hard pressed to believe that any real change
has taken place. Nevertheless, the authorities
must avoid perceptions of political retribu-
tion so strongly associated with the previous
government.
United Kingdom
Country reports UNITED KINGDom
GC2006 02 part2 267 8/11/05 17:54:24
Country reports 268
Council of Europe Criminal Law Convention on Corruption (ratifed December 2003;
Additional Protocol ratifed December 2003)
ratifed)
In July 2004, the Cabinet Offce announced the appointment of Sir Patrick Brown, a
former permanent secretary, to undertake a review of the arrangements for senior civil
servants moving to jobs in industry, including the requirement for a cooling-off period
before jobs are taken up. Sir Patricks terms of reference require him to ensure that [the
rules] are compatible with a public service that is keen to encourage far greater interchange
with private and other sectors.
1
His report will be published in 2005.
The government published its updated strategy to fght money laundering in October
2004.
2
However, the new strategy did not address defciencies in the UKs anti-money-
laundering regime, notably the lack of supervision of trusts and company service providers
(see below).
In December 2004, the Export Credits Guarantee Department (ECGD) revised the
strengthened procedures to combat bribery and corruption that it had adopted in May
2004. This followed lobbying by major customers and industry bodies, and has the effect
of signifcantly weakening the provisions (see below).
The Freedom of Information (FOI) Act came into force on 1 January 2005. It provides
a general right of access to all information held by public authorities in the United
Kingdom (though separate legislation applies to Scotland). A request for information is
made directly to the public authority holding the information. There are 7 absolute and
16 qualifed exemptions. Absolute exemptions include information supplied by, or relating
to, bodies dealing with security matters, where disclosure would breach parliamentary
privilege, and where disclosure would constitute a breach of confdence. Qualifed
exemptions include the need to safeguard national security; information relating to the
formulation of government policy; ministerial communications and advice by law offcers;
and information held by public authorities with audit-related functions. There is a right
of appeal against any refusal to release information to the Information Commissioner.
Too little priority given to foreign
bribery and corruption
The OECDs Phase Two Evaluation of the
United Kingdoms Application of the OECD
Anti-Bribery Convention was published in
March 2005. While it complimented the
United Kingdom on some progress made,
its general tenor was critical and conveyed
a sense of disappointment at the low level
of priority accorded to the subject of foreign
bribery, reinforcing a perception that there
is a lack of will in government to address
the problem.
The OECD regretted that legislative
changes to reform the corruption laws
had not been enacted, but acknowledged
an attempt to make progress in 2003 by
consulting an all-party Joint Parliamentary
Committee (JPC) on a draft corruption bill.
The OECD found no indication, however, of
when there might be suffcient time in the
legislative programme for it to be enacted.
The JPC strongly criticised the draft bill,
arguing that it would not be readily under-
GC2006 02 part2 268 8/11/05 17:54:24
269
stood by the police, by prosecutors, by jurors
and by the public, including especially
the business and public sector communities,
and their advisers, both here and abroad.
3

Anti-corruption laws continue to derive from
ancient common law offences and statutes
that were adopted between 1889 and 1916,
and updated for overseas bribery offences
by part 12 of the Anti-Terrorism Crime and
Security Act of 2001.
In the six years since the United Kingdom
ratified the OECD Convention, not a
single company or individual has been
indicted or tried for the offence of bribing
a foreign public offcial, though several UK
companies have allegedly been implicated.
It took until February 2002 for foreign
bribery to be effectively criminalised. The
OECD report expressed concern that the
very large number of investigative bodies
has resulted in excessive fragmentation of
efforts, lack of specialised expertise, lack
of transparency both for the public and
investigative authorities, and problems in
achieving coherent action. At present, initial
reports of foreign bribery are channelled to
the National Criminal Intelligence Service
(NCIS); cases are then passed to the Serious
Fraud Offce (SFO) for vetting, but if the SFO
does not accept a case for investigation and
prosecution, it is passed to one of 43 police
forces. The OECD would prefer to see a single
body, such as the SFO, holding centralised
responsibility for both investigation and
prosecution.
The government has taken action to
remedy a similar problem of fragmentation
in the fght against serious organised crime
in particular large-scale drug and people
trafficking which it sees as a priority.
Legislation was passed by Parliament in
April 2005 to establish the Serious Organised
Crime Agency (SOCA), which will absorb the
NCIS, the National Crime Squad and parts
of Customs and Excise. The SFO is already
under-resourced, however, and there is
concern that setting up SOCA may weaken
its ability to pursue overseas corruption cases
since both agencies draw on a limited pool
of experienced personnel.
The OECD report suggests there is a lack
of awareness of the OECD convention and
the foreign bribery offence among law
enforcement agencies, judicial authorities
and UK offcials involved with UK companies
operating abroad. It recommends more
effort to raise awareness among these
groups, and also among trade unions and
small- and medium-sized enterprises that
do international business. It recommends
measures to publicise the conditions under
which parent and affliate companies can
be liable in connection with foreign bribery,
and to encourage UK companies to report
to the appropriate authorities any instances
of foreign bribery they encounter in their
operations.
The OECD report wel comed the
confscation provisions of the Proceeds of
Crime Act 2002 in the context of combating
money laundering and the theft of state assets.
But the act requires all confscated sums to
be paid over to the Treasury, and there is no
requirement for the whole of any confscated
sum (with or without a reasonable deduction
for costs) to be repatriated to the country of
origin. However, the United Kingdom can
deal with asset sharing on an ad hoc, purely
administrative basis. The Home Offce has
an agreement with the Treasury to return up
to 50 per cent net of costs without further
authority.
The OECD examiners were concerned
that the lack of a clear defnition of what
was understood by the UK authorities to
constitute a facilitation payment to foreign
public officials could result in a much
wider range of payments being effectively
exempted than was intended by the
convention. Furthermore, responsibility for
investigating defence contracts where the
Ministry of Defence (or the Defence Export
Sales Organisation) is party to the contract
rests with the Ministry of Defence police, a
situation that clearly gives rise to potential
conflicts of interest. Finally, the Crown
Dependencies, which are seen as fnancial
and tax haven jurisdictions, still allow
the deduction of bribes for tax purposes
if wholly and exclusively for purposes of
GC2006 02 part2 269 8/11/05 17:54:24
Country reports 270
trade a clear contradiction of the OECD
convention and one which the UK Treasury
needs to address.
Finally, in the area of money laundering, the
abuse of companies and trusts for laundering
dirty money is a recognised risk. Tackling this
abuse requires effective regulation of the
service providers, who set up and maintain
these vehicles. The United Kingdom has
included such service providers within its
revised money-laundering regulations, but
so far it has not implemented an effective
supervision regime. The supervision of trusts
and company service providers is under
discussion in the EU in connection with
the implementation of its Third Money-
Laundering Directive. But the United
Kingdom has already recognised the case for
such a regime by pressing the governments of
its overseas territories to improve regulation
of company formation and management.
4

While there are now regulatory structures
in place in Gibraltar, Guernsey, Jersey and a
number of other jurisdictions, there is still no
supervisory regime in the United Kingdom.
ECGD buckles under business
pressure
In May 2004, the UKs Export Credits
Guarantee Department (ECGD) introduced
a number of requirements designed to
guard against bribery and corruption in the
business it insures. It changed procedures to
include requirements for listing the names
and addresses of all agents, and amounts of
commission paid to them; stronger powers
to inspect exporters contractual documents;
and requirements for due diligence in
relation to the activities of applicants joint
venture or consortium partners.
While most ECGD customers accepted
the changes, there was strong opposition
from a minority of large companies, led
by British Aerospace (BAe) Systems, Airbus
Industrie-UK and Rolls-Royce, supported by
the Confederation of British Industry (CBI).
In letters to the ECGD, BAe said that the
provisions were unduly onerous. Airbus
felt that its network of agents was part of
its competitive advantage and that it was
inappropriate to disclose this information.
The companies succeeded in obtaining a
qualifcation of the expression to the best
of our knowledge and belief in relation
to the due diligence required from ECGD
applicants, significantly weakening due
diligence requirements. Following a number
of meetings between the ECGD and these
parties, revised procedures became effective
in December 2004.
The OECD advised that the changes could
weaken the ECGDs ability to detect and
prevent foreign bribery.
5
A number of the
changes were criticised in the report on the
ECGD of the all-party House of Commons
Trade and Industry Committee, to which
TI (UK) made detailed submissions.
6
The
committee observed: Applicants for ECGD
support have no longer to give the depart-
ment information on the involvement of
agents in the project for which support is
requested; they will not be required to vouch
for the honesty of third parties to the project,
except for those employed directly by them;
and the ECGD no longer reserves the right
of audit of exporters documents as part of
the monitoring of projects.
A further change provides that agents
commissions do not have to be disclosed if
they are less than 5 per cent of the contract
price, and are not covered by the credit
to which the ECGDs guarantee applies.
In a large contract, 5 per cent of the price
could be a substantial sum, but such sums
can be, and often are, funded outside the
guaranteed credit. In April 2005, the chair
of the committee said: We are not at all
convinced that the changes [to ECGDs
anti-bribery rules] will not seriously weaken
the departments ability to contribute to
the governments policies against bribery.
We do not understand that, while some of
the ECGDs customers felt that they could
comply with the more stringent requirement,
others decided they could not.
7
TI (UK) and The Corner House, an NGO,
expressed strong opposition to the changes
in the media and in discussions with ECGD.
In December 2004, The Corner House
instituted legal proceedings for judicial
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271
TransparencyInternational(UK)
Further reading
Sue Hawley, Backgrounder to OECD Evaluation of UKs Record on Combating Bribery (Dorset,
UK: The Corner House, May 2005)
Robert Neild, PublicCorruptionTheDarkSideofSocialEvolution (London: Anthem Press, 2002)
Anthony Sampson, WhoRunsThisPlace?TheAnatomyofBritaininthe21stCentury (London:
John Murray, 2004)
Transparency International (UK), Corruption and Money Laundering in the UK One Problem,
Two Standards A Report on the Regulation of Trusts and Company Service Providers (London:
TI (UK), October 2004)
Transparency International (UK), Consultation on Changes to ECGDs Anti-Bribery and Corruption
Procedures Introduced in December 2004 (London: TI (UK), June 2005)
Transparency International (UK), Preventing Corruption on Construction Projects Risk
Assessment and Proposed Actions for Banks, Export Credit Agencies, Guarantors and Insurers
(London: TI (UK), 2005), www.transparency.org.uk/ECGD/TI.PREVENTING.CORRUPTION.
RISK.FUNDERS.pdf
TI (UK): www.transparency.org.uk
Notes
1. Guardian (UK), 16 August 2004.
2. Anti-Money-Laundering Strategy, HM Treasury, October 2004.
3. GlobalCorruptionReport2005.
4. UK Government White Paper, PartnershipforProgressandProsperity:BritainandtheOverseas
Territories (London: HMSO, March 1999).
5. OECD, United Kingdom: Phase 2 Report on the Application of the Convention on Combating
Bribery of Foreign Public Offcials in International Business Transactions and the 1997
review against the government, claiming
that ECGD had signifcantly weakened its
rules without consulting interested NGOs,
thereby breaching its own consultation
policy. In January 2005, the government
settled out of court. Although the changes
to the anti-bribery rules would remain in
effect, it agreed to institute a full public
consultation on them, pay The Corner
Houses legal costs and make public the
correspondence between ECGD, CBI and the
three companies that led the opposition to
the May 2004 changes, as well as records
of the meetings chaired by the Secretary
of State for Trade and Industry. The public
consultation will close in June 2005, and the
government intends to publish its response
three months later.
The weakening of the ECGDs anti-
bribery procedures contrasted with the
recommendation in the Report of the
Commission for Africa that developed
countries should ensure they do not
contribute to the problem of corruption by
encouraging their Export Credit Agencies to
be more transparent, and to require higher
standards of transparency in their support
for projects in developing countries.
8
On
the corruption issue, the commission also
recommended that: countries and territories
with signifcant fnancial centres should take,
as a matter of urgency, all necessary legal and
administrative measures to repatriate illicitly
acquired state funds and assets; and that all
states should ratify and implement the UN
Convention against Corruption during 2005.
If the United Kingdom is to be effective in
leading international action to reduce the
damage done by corruption to developing
countries in Africa and elsewhere, the
government must fnd the political will to
take stronger action at home.
GC2006 02 part2 271 8/11/05 17:54:25
Country reports 272
Recommendation on Combating Bribery in International Business Transactions, www.oecd.
org/dataoecd/62/32/34599062.pdf
6. House of Commons Trade and Industry Committees Ninth Report of Session 200405,
Implementation of ECGDs Business Principles, HC 3741, published 4 April 2005.
7. Trade and Industry Committee, Press Notice PN35 of Session 200405, 4 April 2005.
8. Commission for Africa, Our Common Interest Report of the Commission for Africa, March
2005, www.commissionforafrica.org/English/report/introduction.html
Conventions:
OAS Inter-American Convention against Corruption (ratifed September 2000)
ratifed)
In February 2005, Senators Trent Lott, John McCain and Russell Feingold, and
Representatives Christopher Shays and Martin Meehan, introduced the 527 Reform Act
in Congress. The proposed legislation would amend the Federal Election Campaign Act
of 1971 and its 1974 amendments, to require 527s, organisations created for explicit
political purposes but with no formal ties to parties or particular politicians, to comply
with campaign fnance laws, including provisions requiring them to register with the
Federal Election Commission (FEC), to improve their transparency and to comply with
stricter reporting requirements (see below on Transparency in campaign fnance).
In March 2005, Congressmen Mike Pence and Albert Wynn introduced the 527 Fairness
Act. Critics maintain it would do nothing to change the legal status of 527 groups,
and would set back campaign fnance reform by repealing limits on contributions to
political parties and federal candidates established by the Federal Election Campaign Act
of 1974.
United States of America
Legislative ethics
Throughout late 2004 and early 2005, media
reports alleging that some Congress members
had been involved in ethics breaches and
conflicts of interest affairs raised serious
questions about the effectiveness of
Congress current system of self-regulation.
The main focus was congressional travel
funded by lobbyists or registered foreign
agents in violation of ethics rules, and the
increasing amount of corporate-fnanced
congressional travel, which is permitted, but
which raises confict of interest concerns.
Attention also focused on pressure by House
and Senate leaders on trade associations and
other interest groups to hire members of the
Republican party in order to maintain their
access to legislative processes.
1
Both the Senate and the House of
Representatives have codes of ethics for
their members, which are enforced by
internal standing committees. Civil society
organisations and the media drew attention
to the systems weaknesses, including a
prohibition on outside groups from making
complaints. The House Committee on
Standards of Offcial Conduct (known as the
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273
ethics committee) adopted a rules change
in 1997 that prohibits outside groups or
individuals from fling complaints unless
accompanied by certifcation signed by a
House member. In January 2005, another
rule change made it harder to launch an
investigation by requiring a majority vote
of the committee, rather than a tie vote, as
previously required to trigger an automatic
investigation within 45 days. Because the
current committee is evenly divided between
Democrats and Republicans, there were
concerns that political considerations would
play an even larger role in decisions.
Also in January, after the ethics committee
reproached Tom DeLay, who heads the
Republican majority in the House, for
ethical misconduct, the Speaker replaced
the committees chairman and two other
members in what many considered to be
an attempt to stife criticism. The Speaker
also proposed (and the House approved)
additional reforms, including the automatic
dismissal of an ethics charge if the committee
did not take action within 45 days; the
change would have effectively allowed
either party to kill an investigation merely
by delaying action. Previously, charges could
only be dismissed by a majority vote of the
committee. A second rules change would
have hampered the panels ability to collect
evidence in support of an ethics investigation
by allowing only one lawyer to represent
the defendant and witnesses, potentially
inhibiting the fact-fnding process.
Objections to these reforms hindered
the committees operations, with some
committee members refusing to allow the
panel to meet.
2
Since the media was then
airing numerous ethics and conflict of
interest allegations, the ethics committee
stalemate effectively prevented any
investigations from taking place. Under
intense public and internal pressure, the
House majority repealed the new rules
in late April 2005. As public scrutiny of
congressional travel intensifed, the Speaker
proposed that any congressional trips
fnanced by companies or special interests
would require advance written approval
from the ethics committee.
While the attempts to weaken the
committee were ultimately defeated,
questions remained about how it would
function in the future. There was concern
that the majority party would try to
undermine the non-partisan nature of the
staff.
3
These recent events demonstrate
that the self-regulating system is inherently
vulnerable and creates unhealthy pressure
on the committee, especially when a case
concerns an infuential politician.
Given the inherent vulnerabilities of a
self-regulating system and the weak track
record in Congress, many believe that
the process should be administered by an
independent body of non-members with
the requisite expertise and authority to
investigate complaints and recommend
sanctions. In the House of Representatives,
the ethics rules should permit non-members,
including non-governmental organisations,
congressional staff and other employees, to
file complaints without the support of a
House member.
Consideration should be given to other
reforms, including the appointment of an
independent outside counsel with experience
in public corruption cases to conduct initial
investigations and make recommendations
to the ethics committee on whether further
action should be taken.
Sarbanes-oxley update
Following the 2001 and 2002 Enron and
WorldCom scandals, the US Congress
enacted the Sarbanes-Oxley Act of 2002
(SOX)
4
and the Securities and Exchange
Commission (SEC) issued rules to implement
it. Along with recent amendments to
the Federal Organizational Sentencing
Guidelines, these intensifed US corporate
efforts at enhancing corporate compliance
programmes, internal control mechanisms
and accounting systems.
Many large corporations have taken the
opportunity to tighten their operations and
internal fow of information, recognising
Country reports UNITED STATES oF AmERICA
GC2006 02 part2 273 8/11/05 17:54:26
Country reports 274
that enforcement of these controls can lead
to more effective corporate oversight and
management.
5
However, some corporations,
including foreign corporations listed in the
United States and smaller US companies,
have expressed concern that the costs of
complying with legislation related to main-
tenance, audit and reporting on internal
control systems are too high (US $7.8 billion
in 2004).
6
Concern has also been expressed
about the lack of guidance and resulting
rigidity or inconsistency of auditors in their
interpretations of what is required under the
SOX section 404 internal controls reporting
requirement.
In response, the Public Company
Accounting Oversight Board (PCAOB), a
private, non-profit corporation created
by SOX to oversee the auditors of public
companies, held public hearings in April.
Chairman William McDonough noted
that [I]t is clear to us that the internal
control assessment and audit process has
the potential to signifcantly improve the
quality and reliability of fnancial reporting.
At the same time, it is equally clear to us that
the frst round of internal control audits cost
too much.
7
In May 2005, the SEC and PCAOB
issued guidance on Implementation of
Internal Control Reporting, noting: Both
management and external auditors must
bring reasoned judgment and a top-down,
risk-based approach to the 404-compliance
process. A one-size-fts-all, bottom-up, check-
the-box approach that treats all controls
equally is less likely to improve internal
controls and financial reporting than a
reasoned, good faith exercise of professional
judgment focused on reasonable, as opposed
to absolute, assurance.
8
Acti on i n hi gh-profi l e corporate
governance cases also progressed this year.
Though the Justice Department case against
Enron executives has yet to come to trial,
a jury convicted former WorldCom CEO
Bernie Ebbers of fraud and conspiracy in
connection with the frms bankruptcy. He
was also found guilty of seven counts of
fling false documents. In sentencing Ebbers
to 25 years in prison, the jury rejected the
argument that the CEO, by being unfamiliar
with the details of company accounts, was
therefore not responsible for falsifcations
made by the company. This sets a strong
precedent for upcoming accountability
trials, involving executives from Enron,
HealthSouth, Tyco International and Qwest
Communications.
Transparency in campaign finance
Since coming into force in November 2002,
the Bipartisan Campaign Reform Act, also
known as the McCain-Feingold bill, has
outlawed soft money the unlimited,
mostly unregulated cash donations to
national party committees by individuals,
corporations and unions. An unintended
consequence of the legislation was the shift
of soft money to non-party political groups,
known as 527s (named after the section in
the Internal Revenue Services (IRS) tax code
that defnes their status). According to the
Center for Responsive Politics, 527s raised
and spent more than US $479 million on
activities to infuence voting in the 2004
presidential and congressional elections.
9
During the 2004 presidential election,
campaign fnance reform groups fled legal
complaints with the FEC against some
527s, alleging unlawful election campaign
spending and arguing that they were virtual
extensions of national parties, rather than
independent advocacy groups.
There was also concern that the publics
ability to monitor these organisations was
limited under existing law. Currently, 527s
are governed by the IRS and many are not
required to register with, or to disclose
expenditures to, the FEC. IRS registration
does not always reveal the organisations
underlying identity and, while the IRS
requires them to disclose contributions, it
does not require disclosure of contributions
of less than US $200, regardless of the
aggregate total raised. Moreover, some have
chosen to pay a penalty equivalent to 35 per
GC2006 02 part2 274 8/11/05 17:54:26
275
cent of a contribution, rather than reveal the
contributors identity.
In early 2005, legislation was introduced in
Congress that would bring such organisations
under the FECs authority. The 527 Reform
Act, introduced in both the House and
Senate, would oblige 527s to comply with
campaign fnance laws, including provisions
requiring them to register with the FEC and
to disclose contributions and sources.
However, the FEC needs to be strengthened
to make it more effective. It lacks real
enforcement authority; can only issue
fndings of violations in the area of campaign
finance reporting; cannot investigate
anonymous complaints; and can only seek
court injunctions when it has exhausted its
entire enforcement process. Investigations
are cumbersome processes that often take
years to complete and any penalties that
arise occur long after the election in which
the violation occurred.
Civil society organisations, including
Transparency International USA, have
called for the FEC to have greater political
independence, and adequate funding and
staff to review, investigate and hold offenders
accountable. Currently, the FECs six voting
members are evenly divided between the two
major parties and serve staggered six-year
terms. They are appointed by the president
and confrmed by the Senate. In practice,
however, the congressional party leadership
determines nominations to the FEC. This
could result in most FEC members being
party loyalists, or having some connection
to the political community that the FEC
regulates. Since four votes are needed to take
any action, the FEC often deadlocks along
partisan lines.
Public contracting
As reported in the Global Corruption Report
2005, the US bidding processes for contracts
in Iraq raised serious concerns. While the
US Federal Acquisition Regulation (FAR)
permits the use of sole-source or limited
competition processes, the US government
relied on them extensively in the early stages
of the reconstruction effort, undermining
public trust.
Under pressure from the public and
contractor agencies, Congress requested the
Government Accountability Offce (GAO) to
investigate procurement in Iraq. Its report,
issued in June 2004, reviewed 25 contract
actions accounting for around 97 per cent of
the total dollars allocated for reconstruction
as of 30 September 2003.
10
It found that 14
new contracts were awarded using other
than full and open competition and, out
of 11 task orders reviewed (framework
agreements in EU procurement parlance)
seven did not comply with the FAR. These
task orders were issued for work that went
beyond the scope of the contract and should
have been competitively bid for, or justifed
under regulations that allow for less than full
competition in specifc circumstances. The
GAO concluded that the failings stemmed in
part from inadequate staffng, lack of clearly
defned roles and responsibilities, changing
requirements and security constraints.
11
Under intense scrutiny from the media,
Congress and civil society, the agencies
responsible for post-war contracts have
become more responsive to requests for
information.
12
In June 2005, the leasing of 100 Boeing
KC-767A tankers to the US military entered
a new phase with the publication of the
Department of Defense Inspector Generals
(DOD IG) review of the case. The US $23.5
billion KC-767A tanker programme was
cancelled in 2004 after public concern
about its excessive cost and questionable
need. The review found that the Air Force
did not demonstrate best business practices
and prudent acquisition procedures in
developing this program, and did not comply
with statutory provisions for testing.
13
It
found that there was no urgent need for
the aircraft and that the Air Force failed to
conduct an analysis of the alternatives to the
purchasing which was required under best
business practices.
14
The review concluded:
Senior offcials of the Air Force acquisition
community and the Offce of the Secretary
of Defense were focused on supporting a
Country reports UNITED STATES oF AmERICA
GC2006 02 part2 275 8/11/05 17:54:26
Country reports 276
NancyIzzoJackson,withcontributionsfromMichaelJohnston,
MarkGlaze,HollyGregoryandChrisYukins
18
Further reading
Center for Public Integrity, McCain-Feingold Changes State Party Spending, 26 May 2005.
Available at www.publicintegrity.org/partylines/report.aspx?aid=690&sid=300
Corporate Governance-United States, Holly Gregory, Weil Gotshal and Manges, www.weil.com/
wgm/pages/Controller.jsp?z=r&sz=bl&db=wgm/cbyline.nsf&d=A9A1F3CA0B59731F85256F9
E00548990&v=0
Michael Johnston (ed.), CivilSocietyandCorruption:MobilizingforReform(Lanham, MD: University
Press of America, 2005)
Offce of the Inspector General of the Department of Defense, Management Accountability
Review of the Boeing KC-767A Tanker Program, June 2005. Available at www.dodig.osd.mil/
tanker.htm
Research and Policy Committee of the Committee for Economic Development, Building on
Reform: A Business Proposal to Strengthen Election Finance, Committee for Economic
Development, April 2005
United States General Accounting Offce, Rebuilding Iraq: Fiscal Year 2003: Contract Award
Procedures and Management Challenges, May 2004
TI USA: www.transparency-usa.org
Notes
1. www.bloomberg.com, 6 April 2005.
2. NewYorkTimes (USA), 18 April 2005.
3. The stalemate continued until late June 2005. NewYorkTimes (US), 1 July 2005.
4. The Public Company Accounting Reform and Investor Protection Act of 2002 (Sarbanes-Oxley
Act) was enacted in July 2002.
5. See, for example, the statement by Jeffrey Immelt, CEO in General Electrics 2004 Annual
Report. The internal control requirement is helpful because it takes the process control
discipline we use in our factories and applies it to our fnancial statements.
6. WallStreetJournal(US), 14 April 2005.
7. See PCAOB Issues Guidance on Audits of Internal Control, 16 May 2005, available at www.
pcaobus.org/News_and_Events/News/2005/05-16.aspx
8. www.sec.gov/news/press/2005-74.htm
decision to lease tanker aircraft from Boeing,
rather than developing objective acquisition
information that would have questioned,
as a matter of procedure, whether such a
decision was appropriate.
15
Both the Air
Force and Boeing offcials were sentenced
to prison in 2004 and 2005 for violating
the federal confict of interest law. Boeing
is taking further remedial steps, including
hiring a special compliance officer and,
under its new leadership, is working to
embed ethical behaviour into the companys
culture.
Beyond questions raised by such high-
profle scandals, other issues have caused
concern. The DOD has downsized its
civilian acquisition workforce by half,
16

resulting in fewer personnel who understand
procurement integrity. Furthermore,
contractors hired to replace some acquisition
personnel are not covered by offcial ethics
rules because they are not government
employees.
17
Congress is looking at how
to ensure that contractors are covered by
similar ethical structures as part of their
contractual arrangements.
GC2006 02 part2 276 8/11/05 17:54:26
277
9. The Committee for Economic Development estimates that by the end of November 2004,
69 of the 97 527 groups, whose activities focused on the November federal elections, were
formed after the adoption of the McCain-Feingold bill.
10. US General Accounting Offce, Rebuilding Iraq: Fiscal Year 2003 Contract Award Procedures
and Management Challenges, June 2004.
11. Ibid.
12. Daniel Politi, Winning Contractors An Update, Center for Public Integrity, 7 July 2004.
See www.publicintegrity.org/wow/report.aspx?aid=338
13. Offce of the Inspector General of the Department of Defense, Management Accountability
Review of the Boeing KC-767A Tanker Program, available at www.dodig.mil/tanker.htm
14. Department of Defense Directive 5000.1.
15. Ibid.
16. Christopher Yukins, Ethics in Procurement: New Challenges After a Decade of Reform, The
ProcurementLawyer 38(3), Spring 2003.
17. Ibid.
18. Michael Johnston contributed to the essay on campaign fnancing, Mark Glaze to the essay
on legislative ethics, Holly Gregory to the Sarbanes-Oxley update and Chris Yukins to the
piece on public contracting.
Conventions:
In November 2004, the government passed the Constitution (Fourth Amendment) Act
2004 which rules that MPs who cross the foor will lose their seats. In addition, there
can be no vote of no confdence within 12 months of a general election within 12
months of the formation of any government or within 12 months before the end of
the life of a parliament. The amendment could halt the instability that has dogged the
governments ability to implement reform or to enjoy political continuity. In 2004 alone,
there were three no-confdence motions and two cabinet reshuffes to ensure that parties
did not leave the ruling coalition. Instability has a fow-on effect on corruption in that
anti-corruption initiatives are not effectively carried forward from one government to the
next, and politicians, aware of the brevity of their tenure, are tempted to grab as much as
possible before losing power. However, there is concern that the 12-month grace period
may have the opposite effect by encouraging politicians to act corruptly with impunity
since they will be legally protected from removal (see below).
The Offce of the Public Prosecutor became the focus of a commission of inquiry after it
attempted to arrest the then prime minister, Serge Vohor, in mid-September. The offce is
responsible for handling prosecutions under the Leadership Code Act and Ombudsman
Act, so all anti-corruption cases were effectively suspended. This almost resulted in the
discharge of a high-profle case against the former minister for forestry, fsheries and
agriculture, Stephen Kalsakau, and a number of members of the Vanuatu Maritime
Authority. In May 2005, the former public prosecutor left Vanuatu and an acting public
prosecutor was appointed.
vanuatu
Country reports vANUATU
GC2006 02 part2 277 8/11/05 17:54:27
Country reports 278
Bribery and mPs
In April 2004, parliament was dissolved so
that then Prime Minister Edward Natapei
could avoid a vote of no confdence.
1
There
were rumours that candidates from various
parties had won votes through bribery
in the general election of 6 July. None
were substantiated, but the Offce of the
Ombudsman confrmed it was investigating
a number of bribery complaints. In May,
MPs funding allocations, which can be
distributed throughout their constituencies
as they see ft, were raised from 1.2 million
vatu (around US $11,000) to 2 million vatu
(around US $18,000). There is some control
on how this money is spent, as applications
must be submitted to the speaker of
parliament before the money is released.
However, the misuse of MPs allocations
has been the subject of more than one
ombudsmans report,
2
and current controls
could be strengthened. Payments from the
members allowances are perceived by some
as paybacks for votes, or a way of buying
votes.
3
The accuracy of this perception
has not been adequately investigated, but
raising allowances increased the scope for
parliamentary corruption.
No one party held a clear majority after
the election and it took until 29 July for
Serge Vohor to form a new government.
Vohor leads the predominantly francophone
Union of Moderate Parties (UMP) and had
been prime minister twice before. The new
government was immediately challenged
by a no-confdence motion. In mid-August,
the coalition changed its composition to
avert the no-confdence vote.
4
There were
rumours at the time that various parties
and politicians were bribing backbenchers
to cross the floor. Vohor publicly stated:
Any time that there is talk of motions of
no confdence in parliament, then there are
people in the background causing problems
with their money.
5
By the end of November, a motion of no
confdence in the prime minister was lodged.
The catalyst was Vohors decision to establish
diplomatic relations with Taiwan without
the consent of the Council of Ministers
and despite the governments support of a
one-China policy. Allegations were made by
the governing and opposition factions that
MPs had been bribed by Taiwan and China,
either to swing the vote or support the no-
confdence motion.
6
None of the allegations
was substantiated.
The no-confdence vote was successful
and in December Ham Lini, brother of the
founding prime minister, Father Walter Lini,
and leader of the National United Party,
became the new head of state. Vohor kept
the subject alive with media claims that the
opposition intended to take some embassies
to court to make them disclose payments to
MPs.
7
In late January, he said he had proof
of bribery and called for an inquiry into
the prime ministers actions. Lini, however,
shrugged off the need for an inquiry, stating
that the allegations were unfounded.
8
The sheer number of allegations of bribery
of, or by, MPs in the past 12 months is of
concern. Unlike other corruption-related
issues, there is no grey area in respect of
accepting a payment to cross the foor, or
paying a voter for support. The fact that
rumours to this effect circulate so freely,
and seem quite plausible, suggests there
is widespread belief that MPs are by and
large acting in their own interests. Of more
concern, perhaps, is the possibility that
voters are prepared to accept an environment
in which bribery fourishes in the hope they
will one day beneft themselves.
The Leadership Code Act was intended
to ensure greater transparency of MPs
income and expenditure by requiring them
to file annual returns, but this is clearly
inadequate. It was amended in 1999 to
make annual returns confidential unless
they were subject to an investigation or
prosecution. The Offce of the Ombudsman
is responsible for investigations into breaches
of the Leadership Code, but it can only do
so after receiving a complaint or if it has
formed the view on reasonable grounds that
a leader may have breached this Code.
9

Since returns are confdential, it is hard for
a member of the public to fle a complaint
on the basis of an inaccurate accounting, or
for the ombudsman to form a view that the
return contains incorrect information.
GC2006 02 part2 278 8/11/05 17:54:27
279
AnitaJowitt(UniversityoftheSouthPacifc)
In addition to their confdentiality, many
politicians simply do not even bother
to fle returns. This was the subject of an
ombudsmans report in 2000 though no
prosecutions resulted.
10
The failure of the
Offce of the Public Prosecutor to prosecute
in this matter, when the ombudsman had
provided clear evidence of breaches, suggests
that its discretion in deciding whether to go
forward may be another area of weakness
in the Leadership Code Act. Nor is there a
legal framework governing the disclosure of
donations to political parties, or how parties
spend those funds. This is an area that could
be usefully regulated.
Political interference in boards
A common source of corruption accusations
in Vanuatu is government interference in
the composition of boards of state-owned
enterprises. Nepotism, and the opportunities
for misappropriation of funds, are usually
the motivating factors. In 2005, allegations
surfaced of interference in the board of Air
Vanuatu, the islands international airline.
Numerous re-mergers and de-mergers of Air
Vanuatu and Vanair, the domestic airline,
have occurred in recent years. In 2004, the
two re-merged.
In early 2005, Air Vanuatus CEO, Jean
Paul Virelala, made comments in the media
about Air Vanuatu losses of 280 million vatu
(US $2.6 million) in 2004 due to competition
from Virgin Blue and political bickering
amongst its directors. Around the same
time the media became aware of plans by
the Minister for Public Utilities, Maxime
Carlot Korman, to increase the size of the Air
Vanuatu board from 17 to 28, apparently in
order to make more political appointees. Few
of the appointees had experience of airline
management.
In January, Virelala, who had been in
his post for almost 13 years, and marketing
manager Joseph Laloyer had their contracts
terminated. The board then launched an
inquiry in order to establish why losses had
been so high in 2004. Virelala and Laloyer
both maintained there were political moti-
vations behind their dismissal.
11
Virelala is a
supporter of the UMP, the party led by Serge
Vohor that was ousted in December 2004.
Virelala suggested that the dismissals were
aimed at making way for Kormans son, Manu
Carlot, to be appointed marketing manager.
In early February, the government
appointed a commission of inquiry to
look into Air Vanuatus affairs, but its work
was delayed after the Council of Ministers
decided that an internal review should
take priority. This effectively means that,
despite all the allegations of nepotism and
mismanagement, the airlines troubles will
be treated as a commercial, rather than a
political, matter. Nor is there any guarantee
that the findings of the internal inquiry
will be made public. Our politicians will
call it the Melanesian Way or kastom:
giving favours to their supporters or their
wantoks at the expense of the nation
and the grassroots ni-Vanuatu people,
observed Marie-Noelle Ferrieux, president of
Transparency International Vanuatu. This
type of irresponsible politics and selfsh and
self-centred leadership is one of the main
reasons why Vanuatu is one of the poorest
countries in the world.
12
For many, the Air Vanuatu saga is both
too complex and too familiar to be of
much concern. This apparent acceptance
of corruption is perhaps the most worrying
aspect of the situation. It is too simplistic to
claim that people accept political interference
in boards because they see it as a legitimate
use of the wantok system. Part of the problem
is the lack of timely and detailed information
and good investigative journalism. Rumours
of wrongdoing circulate constantly, but it
is diffcult, if not impossible, to form clear
opinions of whether a situation is corrupt
or not. In the event that an ombudsmans
report or prosecution does arise, it tends
to be so delayed that the original source of
the rumours has long passed from public
attention. Switching off is perhaps the only
logical response that people can have.
Country reports vANUATU
GC2006 02 part2 279 8/11/05 17:54:27
Country reports 280
Further reading
Edward R. Hill, OmbudsmanofVanuatuDigestofReports19962000(Vanuatu: University of the
South Pacifc School of Law, 2001), www.vanuatu.usp.ac.fj/ombudsman/Vanuatu/Digest/
digest_index.html
Edward R. Hill, A Structural Analysis of the Ombudsman of Vanuatu, Master of Laws thesis,
Vanuatu: University of the South Pacifc School of Law, 2004
Anita Jowitt, Vanuatu Political Review, ContemporaryPacifc:AJournalofIslandAffairs(Honolulu:
University of Hawaii, 2004)
Anita Jowitt and Tess Newton Cain, NationalIntegritySystems,TIInternationalCountryStudyReport:
Vanuatu2003 (Berlin: Transparency International, 2004), www.transparency.org.au/nispac/
vanuatu.pdf
Notes
1. The events surrounding the dissolution, and the general impact of instability on corruption,
were discussed in the GlobalCorruptionReport2005.
2. These reports are: Public Report on the Misuse of MP Allocation Fund, by MP Vincent
Boulekone, 19 February 2002, and Public Report on the Misuse of MP Allocation Fund, by
Stanley Reginald, former MP for Banks and Torres, 8 April 2003.
3. Boulekone, Public Report on the Misuse of MP Allocation Fund.
4. This is discussed further in Anita Jowitt, Review of Political Events in Vanuatu 2004,
ContemporaryPacifc:AJournalofIslandAffairs(Honolulu: University of Hawaii, 2005).
5. VanuatuDailyPost (Vanuatu), 10 August 2004.
6. Port Vila Presse online (Vanuatu), 25 January 2005, www.news.vu/en/news/politics/050125-
watch-out-for-bribery-vohor.shtml
7. Port Vila Presse on-line (Vanuatu), 9 January 2005, www.news.vu/en/news/politics/050109-
vanuatu-opposition-hunt-down-brib.shtml
8. Port Vila Presse on-line (Vanuatu), 25 January 2005, www.news.vu/en/news/politics/05/01/25-
watch-out-for-bribery-vohor.shtml
9. Leadership Code Act 1998, section 34(1)(b).
10. Vanuatu Offce of the Ombudsman, Public Report on Failure of Some Leaders to File Annual
Returns to the Clerk of Parliament, 29 February 2000.
11. www.news.vu/en/business/Airlines/050203-changes-in-airline-alarms-Virelala.shtml
12. www.news.vu/en/news/national/050222-drama-in-vanuatu-fag-carrier.shtml
Conventions:
UN Convention against Transnational Organized Crime (ratifed May 2002)
In July 2004, the legislature approved secondary legislation that expands the powers of
the post of ombudsman created in 1999. The new law specifes that scrutiny of abuse of
power and faws in the provision of services will henceforth be among the ombudsmans
responsibilities.
venezuela
GC2006 02 part2 280 8/11/05 17:54:27
281
The law to partially reform the penal code entered into force in March 2005. It fails to
eliminate a provision that criminalises offensive expressions directed at public offcials
which makes it diffcult for civil society organisations to denounce corruption. Indeed,
the reform raises sanctions on those accused of damaging the reputation of public offcials
from a previous maximum of 18 months in prison to three years. The Inter-American
Press Association says the law seriously limits press freedom. In February 2005, journalist
Ibyise Pacheco was sentenced to nine months in prison for defaming a colonel in the
army. The reform also penalises civil society organisations for giving or receiving national
or foreign resources of any kind, if they are aimed at conspiring against the integrity of
the territory of the republic, the institutions of state or destabilising social order. The
terms are very broad, which means that NGOs run the risk of being investigated for
receiving foreign funds for pro-democracy work. The old penal code, which is less broad,
was invoked against members of the NGO SUMATE, who were accused in November 2004
of betraying the country for using funds received from the US organisation National
Endowment for Democracy to encourage participation in the referendum on President
Hugo Chvezs mandate.
Nine new Supreme Court justice positions were created in December 2004 in a process
that has been criticised for political interference (see below).
Lack of independence of the
judicial system
An independent judiciary is vital in a
democratic state and crucial to the fight
against corruption. The independence of
Venezuelas judiciary has been called into
question since a law on the Supreme Court in
May 2004 replaced regulations that had been
in force since 1976. The law was approved by
a simple majority in the National Assembly,
rather than the two-thirds majority required
under the constitution. Deans of law faculties
in four of the countrys universities fled a
writ of unconstitutionality that sparked a
nationwide debate about the judiciarys
loss of autonomy.
1
One of the main
concerns was that the bill was promoted
by Congressman Luis Velsquez Alvaray,
a pro-government politician appointed to
the Supreme Court who is also president of
the commission responsible for naming or
removing judges.
The laws most important change was to
increase the number of judges from 20 to
32. The reason given was that the additional
manpower would clear the backlog of work
in the Supreme Court, although they were
largely up to date with their caseload,
according to the judicial authorities.
2
In
the event, 17 new judges were appointed
since 5 more vacancies had arisen through
retirement or dismissal. National and
international NGOs
3
and some sectors of
the opposition insisted that the real motive
behind the new law was the need to stuff
the judiciary with supporters of President
Chvez.
A nominations committee, composed
of various sectors of society, is supposed
to supervise the selection of Supreme
Court judges under the constitution. In
this case, the nomination committee was
made up of five Congressmen from pro-
government parliamentary groups and six
representatives of organisations known
to sympathise with the government. For
example, Juan Jos Molina Bermdez was
legal adviser for Podemos, a party that
supports the government, and had filed
successful writs with the Supreme Court
that made it diffcult for the opposition to
collect signatures for a referendum in August
2004 to revoke President Chvezs mandate.
Another member was Gustavo Hidalgo, who
was named director general of the executive
of the Supreme Court in February 2005. Civil
society organisations concerned with the
Country reports vENEzUELA
GC2006 02 part2 281 8/11/05 17:54:28
Country reports 282
administration of justice felt excluded from
the process, and said so publicly.
Omar Mora Daz, the new Supreme Court
president, defnes himself as revolutionary
(which tends to mean pro-Chvez) in
interviews. The day he assumed the post, he
announced a purge of judges including three
who had handed down sentences that were
deemed favourable to the opposition. The
new law relaxes procedures for removing
judges if the Moral Council of the Republic
(made up of the ombudsman, the prosecutor
general and auditor general) considers they
have committed grave errors.
This loss of independence does not only
affect high-level judges. According to the
Supreme Court, more than 70 per cent of
judges in March 2005 were provisional,
meaning they can be appointed and dismissed
without administrative proceedings. This
weakens the autonomy of the judiciary
because judges may favour the interests
of those who can help keep them in their
posts. The predicament became more acute
in early 2003 when competitions to enter
the judicial career path were suspended,
contrary to the constitution. A presidential
veto in November 2003 stopped the National
Assembly from adopting a code of ethics for
judges also a constitutional requirement. In
February 2005, Mora Daz presented a plan
for the revolutionary transformation of the
judiciary, which includes the widespread
removal of judges and their replacement
by new judges who would be intensively
trained for one month.
As well as concerns that the lack of
independence may make it diffcult to process
corruption cases affecting government
interests, there are more immediate
corruption concerns. In January, days after
taking up his post as head of the judiciary
directorate, Luis Velsquez Alvaray dismissed
all its coordinators and directors. Before
taking up the post, Velsquez Alvaray had
presided over a parliamentary commission
that investigated judicial corruption.
Since February, a number of complaints
fled by the former head of the executive
directorate, Yolanda Jaimes, to the auditor
general in November 2004 have been leaked
to the press. One called for an investigation
into overpriced training courses for judges
that had been organised by the executive
directorate. According to Jaimes, US $520
was paid per teaching hour, compared to
US $40 charged by the most expensive
company providing the same service.
Another complaint involved the investment
of judiciary employee pension funds in risky
fnancial instruments.
Audited reports for the second half of
2004, made public by the new administration
of the judicial directorate, indicated that
3,000 employees had been hired without
authorisation and others on the payroll did
not exist. There was no register of service
providers or purchases, including expensive
analyses by consultancy frms that were never
completed. Contracting regulations were
regularly breached and companies chosen
that did not comply with the technical
requirements for winning the contract.
Media coverage of these irregularities
coincided with the announcement of a new
strategic plan for the judiciary. The plan
requests an additional US $47 million for the
judiciary, but fails to include mechanisms to
ensure greater transparency of the judiciary
and of its use of funds.
Corruption at venezuelas state oil
company
The state oil company, Petrleos de Venezuela
(PDVSA), is the ffth largest oil producer in
the world, generating more than 40 per
cent of the countrys annual budget. In
the frst half of 2005, a series of complaints
have called into question the management
and transparency of the industry,as it is
known.
The company has not presented audited
fnancial statements since 2002, though the
law requires it to do so annually. Without
these fgures it is diffcult to monitor the
health of the company and scrutinise
how it uses its resources. According to
the Central Bank of Venezuela (CBV), it is
GC2006 02 part2 282 8/11/05 17:54:28
283
TransparenciaVenezuela
Further reading
Rafael Di Tella and William D. Savedoff, DiagnosisCorrupcin (Corruption Diagnosis) (Washington,
DC: Inter-American Development Bank, 2002)
possible to assert that, at the end of calendar
year 2004, there was a shortfall of US $3.5
billion between the money reportedly paid
by PDVSA and the amount that entered the
CBV. No one knows where the money went,
only that it was not registered by the CBV.
4
According to Jos Guerra, former manager
of CBVs investigations department, PDVSA
should have fled receipts for US $9.9 billion
in the frst quarter of 2005, but only fled
US $6.4 billion. Energy minister Rafael
Ramrez told a press conference in May
that PDVSA produced 3.3 million barrels
per day during the frst quarter of 2005, but
It is not known what PDVSA did with the
US $2.4 billion shortfall.
5
Domingo Maza
Zavala, a member of the CBVs board of
directors, said that the amount received by
the bank in the frst quarter was US $4.8
billion, which means the shortfall might be
as high as US $4.2 billion.
Since August 2003, moreover, the
Minister for Energy has failed to publish
the annual report Oil and Other Statistical
Figures, or PODE, which has provided vital
statistics related to the petroleum sector
and international companies operating in
Venezuela since 1956. Since oil production
was nationalised in 1976, PODE printed the
monthly, quarterly and annual information
supplied by PDVSA, including net receipts,
daily average production, daily amount
of crude processed in refineries, price of
royalties and the sales price of crude and
refined products. As well as violating
constitutional provisions on access to
information
6
and anti-corruption law,
7
these
omissions deprive the public of knowledge
of the real daily level of oil production (the
government says production is 3.3 million
barrels a day; industry sources put the fgure
at 2.6 million).
In terms of undue benefts, other
allegations have arisen involving multi-
million-dollar commissions illegally paid for
export sales.
8
Hydrocarbons are increasingly
sold through intermediaries who receive
commissions on each operation. One
example of this questionable practice is the
export of hydrocarbons with no registered
destination. Failure to specify where the oil
is going gives the administration enormous
scope to hide the real cost of transporting
the oil. Another issue recently in the news
was the mass dismissal of PDVSA offcials
for corruption, though the allegations
have not been detailed and the accused
not formally charged.
9
Minister Rafael
Ramrez has referred to administrative
irregularities, though not corruption, in
his explanation for the dismissal in early
2005 of 30 managers and the decision not
to renew the contracts of 8,000 employees
in PDVSA installations in the west.
10
The internal controls applied to the
complex processes of exploitation, process-
ing and exporting oil and its derivatives
have also been relaxed. Auditor general
Clodosbaldo Russin insists that since 2000
PDVSA has been externally supervised;
the auditor generals branch offce for the
PDVSA headquarters has been closed; and
auditors are only sent in when the case
requires it. In February, the Minister of
Energy and Mines was named president of
PDVSA, ending decades of formal separation
between the government and the manage-
ment of the oil industry. Julio Montoya,
vice-president of the Commission of Energy
and Mines of the National Assembly, which
is investigating the above allegations, said
in May 2005 that to date the company had
committed 226 illegal acts.
11
At the time of
writing the investigations were in full fow.
Country reports vENEzUELA
GC2006 02 part2 283 8/11/05 17:54:28
Country reports 284
Mara Mndez Pea, Estudios y textos acerca de la corrupcin. Un intento de sistematizacin
(Studies and Texts on Corruption: An Attempt at Systematisation), in RevistaFERMENTUM 40,
Universidad de los Andes, Mrida, Venezuela, 2004
Mirador Democrtico,IISeminariointernacionalJusticiayTransparencia:PerspectivasdelGobierno
JudicialylaSociedad(Second International Seminar on Justice and Transparency: Perspectives
from the Judicial Government and Society), conference report, Caracas: June 2003
Prez Perdomo Rogelio, CorrupcinyRevolucinenVenezuela(Corruption and Revolution in
Venezuela, 2004) available at www.apunto.com.ve/detalle_news.php?ID=665
Transparencia Venezuela (TI Venezuela): www.transparenciavenezuela.org
Notes
1. www.derechos.org.ve/publicaciones/infanual/2003_04/17justicia.pdf
2. www.tsj.gov.ve/gestion.asp
3. Including Human Rights Watch and Provea.
4. See www.descifrado.com/articulo.php?idart=10876&cat=Gobierno
5. ElNacional (Venezuela), 18 May 2005.
6. Constitution of Venezuela, article 28.
7. Law against corruption. Offcial gazette N 5.637, 7 April 2003.
8 ElNuevoHerald(Venezuela), 11 April 2005.
9. www.pequiven.pdv.com/noticias/2005/abril/050425_02a_es.htm
GC2006 02 part2 284 8/11/05 17:54:28
Part three
Research on corruption
GC2006 03 part3 285 9/11/05 10:41:31
GC2006 03 part3 286 9/11/05 10:41:32
Introduction 287
9 Introduction
RobinHodess
1
This years GlobalCorruptionReport once again presents a selection of important studies
on transparency and corruption covering a range of themes, from corruptions relation
to socio-economic phenomena, to the links between policy implementation and
change. Given the ever-growing number of studies and the breadth of approaches
used, there is little doubt that the empirical analysis of corruption has now gained a
foothold in a number of research disciplines. The challenge for policy-makers is to gain
access to this information, and then to interpret and incorporate these results in their
subsequent anti-corruption efforts. The research overview presented here provides a
shorthand guide to the fndings and how they ft into our broader understanding of
the feld of corruption.
Corruption trends
Although corruptions prominence on the international agenda is a relatively new
development, there has been increasing interest in understanding improvements and
setbacks in terms of corruption levels, since the fght against corruption began in
earnest a decade ago.
The frst two research pieces presented in this volume provide some initial answers
to the question: is corruption getting better or worse, and if so, where? Johann Graf
Lambsdorffs trend analysis of TIs Corruption Perceptions Index (CPI) now in its 11th
year is the frst rigorous effort to establish trends in the perceptions of corruption that
are based on real perceptions of change, and not on methodological adjustments to
the CPI itself. It fnds that robust trends do emerge in nearly 30 countries, of which
about half made real improvement, while the other half deteriorated over time.
These fndings overlap with the work of the World Bank Institute, which released
the latest of its Governance Matters results in the past year, presenting fndings on
governance indicators including control of corruption covering 209 countries over
the period 19962004. While there is little evidence that governance has improved in
global terms, there is proof that it has improved (or declined) dramatically in certain
countries. More important, though, is that the six governance indicators evaluated by
the World Bank point to a development dividend of good governance: improving
governance results in higher incomes. In light of recent debates about increasing donor
assistance, particularly to help achieve the Millennium Development Goals, this is a
GC2006 03 part3 287 9/11/05 10:41:32
Research on corruption 288
crucial fnding for all those who argue that better economic outcomes are possible
without improvements in governance.
Corruption trends can also be discerned at sub-national level. Using data on corruption
convictions by a single federal agency in the United States, Edward Glaeser and Raven
Saks show that certain characteristics within states (such as lower income and especially
education levels) predict corruption. Taking their analysis one step further, they fnd
that corruption has deterred economic growth in the worst affected states over the
past 20 years at least.
The importance of transparency
In this volume, the benefts of transparency are demonstrated in empirical terms.
Research undertaken by Saadia Zahidi of the World Economic Forum sheds new light
on the signifcant impact that lack of transparency has on the likelihood and severity of
banking crises, along with related phenomena, such as favouritism and lack of judicial
independence. The fndings support not only stronger fnancial sector transparency,
but also tighter regulation and adherence to principles for ensuring adequate banking
supervision.
Other research on transparency focuses on its prevalence in the budget process and
in the revenue payments that characterise the oil and gas sector. The Washington,
DC-based International Budget Project conducted a survey to evaluate public access
to budget information in a range of developing and transition countries. The main
fnding was that while executive budgets tended to be publicly available in most
countries, monitoring and evaluation was weak and there was little facilitation of
public understanding of the budget. This relatively poor performance in the realm of
budget transparency precludes public comprehension of policy priorities and reduces
the overall accountability of government.
Building on the successes of the Publish What You Pay Campaign, an international
campaign for increased transparency in the payment, receipt and management of oil,
gas and mining revenues in developing countries, Save the Children Fund UK undertook
an assessment of revenue transparency. The practices of major international oil and
gas companies in both their home countries, and within the companies themselves
were examined. In most cases, neither the countries involved nor the companies
themselves met commitments to disclose revenue payments. Canada, where there is
strong securities regulation, led the group in terms of commitment to disclosure, and
was the home country of some of the best corporate performers. As in the banking
sector, the core message was that regulation must be considered a policy option if
transparency is to be promoted effectively.
There are also clear links to transparency in TI Mexicos study on corporate reputation.
Through their research, TI Mexico sought to provide a positive incentive for companies
to improve performance, by publishing the names of top performers, in a ranking of
expert opinions on eight facets of good corporate practice.
GC2006 03 part3 288 9/11/05 10:41:32
Introduction 289
Anti-corruption policies: are they effective?
Another key question currently being asked by the policy community is the kind of
impact various standard anti-corruption policy remedies have on corruption levels.
Ranjana Mukherjee and Omer Gokcekus evaluate the extent to which asset declaration
by public offcials affects levels of corruption in countries around the world. They fnd
that the longer such laws have been in place, particularly where there is a credible threat
of prosecution for violating the law, and the more the information can be accessed
publicly, the greater the link between asset declaration and less corruption.
In the Inhambane province of Mozambique, where tax offcials suspect massive
tax evasion by business and have implemented a programme of strict fnes for minor
transgressions, Ralf Lanwehr explores the implications of this climate of distrust.
Lanwehr fnds that local and foreign investors are infuenced by different factors in
their investment choices.
Other research has assessed the strength of public institutions based on their
commitment, capacities and performance in the fght against corruption. TI Czech
Republic created the V4 Index to assess the quality of public administration, as it
related to curbing corruption in four Visegrd capitals Bratislava, Budapest, Prague
and Warsaw, with Budapest emerging as the clear leader.
A study of the administration of transfers of elementary school teaching funds from
the federal to municipal level in Brazil reveals signifcant leakage. TI Brazil analysed the
irregularities uncovered by federal auditors and concluded that local authorities lack
the capacity to manage funds honestly and effectively, requiring stronger supervision
at state level.
Corruption and health making the empirical link
Many of the assumptions and recommendations on health presented in the thematic
section of this GlobalCorruptionReportare underpinned by research fndings showing
how much corruption in this sector costs health systems and individual patients.
TI Bangladesh uses a rich array of research tools, including household surveys, to
provide evidence of corruption in the health sector. Health is considered the fourth
most corrupt sector in Bangladesh, according to the national chapters most recent
poll. Of those Bangladeshis requiring hospital care, as many as 1 in 4 had to pay bribes
for these services; and 9 in 10 of those who needed medicines had to pay, despite
supposedly free provision.
TIs national chapter in Colombia also has a wealth of research experience to draw on
and has been at the forefront in developing assessment tools of public sector entities.
The results of its Integrity Index for Public Institutions refect the fndings relevant to
the health sector. Nearly two-thirds of the approximately 20 health-related institutions
included in the Integrity Index have high corruption risks.
In Bulgaria, Patrick Meagher led a research project that evaluated the process of
drug selection for the health system, and pharmaceutical procurement by hospitals
across the country. By ranking performance in these two areas, he shows that a focus
GC2006 03 part3 289 9/11/05 10:41:32
on institutional integrity can be useful for identifying weaknesses, but emphasises that
policy prescriptions need to be made in conjunction with a broader analysis that takes
the level of capacity and resources available for change into account.
Corruption the world over: a diversity of citizen views and experiences
Several researchers, including those from TI national chapters, explored the extent to
which average citizens pay bribes, particularly to public sector offcials, whether to
avoid problems or to receive a service they should be entitled to at no charge. While
corruption experience survey work is not new, some survey tools are beginning to
show trends over time, complementing the global trend analysis in international survey
work discussed above.
The United States Agency for International Development (USAID) recently carried out
almost a dozen surveys in Latin America on perceptions of, and behaviour regarding,
corruption, the latter from a corruption victimisation approach, with Bolivians ranking
as by far the most victimised. The study also located bribe demands by government
institutions, which showed considerable variation across the countries polled. The
results pointed to a relationship between experience of corruption and declining support
for democracy, a fnding that has signifcant implications for policies of democratic
consolidation in the region.
In the Palestinian territories, TI Palestine commissioned a public opinion survey
focusing on types, levels and location of corruption. The survey found that Palestinians
associate corruption most with wasta, a form of nepotism. Corruption was found to
be rife in employment bodies, such as job centres, and among the police. Signifcant
differences emerged for the West Bank and Gaza Strip; for instance, educational
institutions were seen as far more corrupt in the West Bank, making these fndings
relevant to the policy reform process.
Looking ahead
The studies selected for this volume demonstrate a number of advances in the scope
and methods used in corruption research. First, international survey analysis regarding
perceptions of corruption can now be extended to evaluate change over time, a much
welcome addition to this most valuable and comprehensive source of corruption data.
The research community will need to continue to innovate to supply evidence of wins
and losses in the battle against corruption, but this insight is crucial if momentum
against corruption is to be sustained, or indeed increased.
Recent research also demonstrates how important and how diffcult it is to achieve
transparency in both public and private sector institutional practice. Further work
will need to examine not only transparency commitments, but also performance. A
number of research efforts also assess the effectiveness of anti-corruption policies and
provisions within public institutions. This is essential as policy instruments are refned
and applied in the future. More research is still needed on the sequencing of reform,
and on which reform packages are most effective.
GC2006 03 part3 290 9/11/05 10:41:32
Introduction 291
Finally, empirical research on corruption continues to provide frst-hand feedback
from people about their views and experiences of corruption and bribery. Not only have
such surveys started to document changes in public opinion over time, but they have
also begun to locate corruption more accurately within particular institutions, providing
ample evidence on which in-country diagnoses and remedies can be developed. The
research challenge here is to better understand the gulfs that can emerge between
perceptions and experiences of corruption, and their consequences for disaffection
with democracy as a whole.
TI will continue to track and support this great variety of corruption research,
synthesising results and bringing them into our own advocacy efforts, but also publicising
fndings for use by all those engaged in anti-corruption work around the world.
Note
1. Robin Hodess is director of policy and research, Transparency International.
GC2006 03 part3 291 9/11/05 10:41:32
10 Ten years of the CPI: determining trends
JohannGrafLambsdorff
1
Transparency International (TI) has published its Corruption Perceptions Index (CPI)
annually since 1995. It is a composite index, using surveys of business people and
assessments by country analysts to provide an annual snapshot of corruption perceptions
in particular countries. Year-on-year changes in a countrys CPI score are the result not
only of changes in perceptions of a countrys performance, but of changes in survey
samples and methodology and alterations in the list of sources that constitute the index.
Changes in sources have made it diffcult to derive valid time-series information from
CPI results and therefore TI has only been able to draw limited conclusions regarding
progress or setbacks in the countries listed.
There is, nevertheless, a growing demand for trend data. The causes and consequences
of corruption, as well as the success of anti-corruption efforts, can be better addressed
and investigated when time-series information is available.
2
The following analysis of
the CPI and its component data provides initial fndings relating to country trends
over the period 19952004.
Data sources
Five sources used in the CPI contain suffcient data to be included in an assessment of
trends as they have been used on a continuous basis for at least seven years and the
methodology used to produce them has not changed signifcantly.
3
These are:
the Economist Intelligence Unit (EIU), 19962004
the Institute for Management Development, Lausanne (IMD), 19952004
the World Economic Forum (WEF), 19962004
the Political and Economic Risk Consultancy (PERC) in Hong Kong, 19952004
Freedom House Nations in Transit (FH). Data is available for 1998, 1999/2000,
200104.
Constructing time series
As with the CPI, all data must be placed in common units. Once this is achieved,
we must observe how the time-series information of individual sources interact with
each other. One source may be slow in responding to real changes; another might
GC2006 03 part3 292 9/11/05 10:41:32
Ten years of the CPI 293
be more topical. This can be determined by disregarding differences across countries
and analysing only time-series information. Simple (fxed effect) panel regressions
are used to observe whether delaying a time series improves its correlation with other
sources.
Taking EIU as the dependent variable, we observe that the time-series information
inherent in EIU data is well explained by IMD data, but less so by WEF data, for example.
The explanatory power of the variables increases when using one period lagged values.
This implies that EIU provides assessments of perceived levels of corruption with a
one-year time lag. This may be because the local business people surveyed by the IMD
and WEF gather topical information more quickly and are thus better placed to assess
the current state of affairs. The strength of EIU data, on the other hand, may relate to
its in-depth, but more time-consuming, country analysis.
When assessed against the other indices, the FH fgures did not provide signifcant
results, and so were left out of subsequent analyses. This may have been because of the
different method used by FH to defne and quantify corruption: FH tries to assess the
governments anti-corruption efforts, the success of which is diffcult to evaluate.
Constructing panel data
Based on the above fndings, the EIU data was entered in lagged form. A corruption
trend was determined for a country when the four data sources provide at least 15
observations. In order to avoid confusion with the original CPI data, all data for 2004
are set at zero. Table 10.1 shows the data for each year, ranked on a scale of 0 (very
corrupt) to 10 (very clean). Bulgaria, for example, obtains 1.4 in 1995, implying an
improvement to 0 in 2004. As revealed by the scores for 19962003, this was not an
even development, but involved an initial deterioration to 2.4 before improvements
were perceived.
Interpreting the data
Given the inherent imprecision of subjective indicators, how certain can we be that
a country improved or deteriorated? An improvement between 1995 and 2004 of 0.5
might be signifcant if observed similarly by all sources, while an improvement by 1 may
be insignifcant if only few and contradictory observations are available. To control for
this, a test for the signifcance of a simple linear trend was conducted.
4
The usefulness
of this test can be seen from Figure 10.1 for Argentina. The slope of this line is 0.16,
indicating that Argentina experienced an annual drop in the CPI by 0.16. Statistical
analysis allows us to determine the precision of the estimated slope. The standard
error for this coeffcient is 0.03, about a ffth of the slope. This factor (5 in the case of
Argentina) is known as the t-statistic and provides statistical confdence that the slope
is indeed positive (or negative).
Table 10.1 reports the annual change as determined by the test outlined above, the
corresponding standard error and t-statistic. In cases where there was a signifcant trend,
GC2006 03 part3 293 9/11/05 10:41:33
Table 10.1: Trends in perceived levels of corruption
T
r
e
n
d
s

1
9
9
5
2
0
0
4
O
b
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1
9
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1
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9
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2
0
0
0
2
0
0
1
2
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0
2
2
0
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i
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i
c
s
Argentina 28 0.7 0.6 0.6 0.4 0.4 0.4 0.1 0.6 0.4 0.0 0.16 0.03 4.6
Australia 28 0.7 0.8 1.0 0.6 0.7 0.6 0.5 1.1 0.1 0.0 0.05 0.02 2.4
Austria 27 0.4 0.5 0.6 0.5 0.3 0.8 0.7 0.4 0.2 0.0 0.08 0.05 1.8
Belgium 28 0.1 0.1 1.4 1.3 1.5 0.4 0.0 0.1 0.0 0.0 0.08 0.06 1.4
Brazil 28 0.2 0.2 0.2 0.2 0.0 0.1 0.1 0.3 0.3 0.0 0.02 0.03 0.7
Bulgaria 15 1.4 2.4 2.4 1.0 1.0 1.0 0.6 0.0 0.4 0.0 0.15 0.05 3.3
Canada 28 0.6 0.6 0.4 0.5 0.5 0.3 0.4 0.3 0.1 0.0 0.07 0.03 2.3
Chile 28 0.3 0.4 0.5 0.5 0.2 0.1 0.2 0.2 0.5 0.0 0.01 0.03 0.3
China 27 0.5 0.8 0.2 1.2 0.1 0.3 0.4 0.5 0.1 0.0 0.02 0.03 0.5
Colombia 27 0.2 0.0 1.3 0.9 0.4 0.2 0.3 0.0 0.1 0.0 0.11 0.04 2.9
Costa Rica 15 0.7 0.9 0.8 0.7 0.5 0.5 0.7 0.4 0.0 0.05 0.02 2.4
Czech
Republic
28 0.3 0.6 1.1 0.2 0.1 0.0 0.3 0.0 0.2 0.0 0.10 0.03 3.2
Denmark 28 0.1 0.0 0.2 0.1 0.1 0.2 0.2 0.2 0.0 0.0 0.01 0.01 0.8
Ecuador 15 1.5 0.5 0.5 0.5 0.5 0.2 0.2 0.2 0.2 0.0 0.08 0.03 2.7
Estonia 16 2.2 1.0 0.9 0.8 0.8 0.8 0.9 0.7 0.0 0.15 0.03 4.3
Finland 28 0.4 0.3 0.1 0.1 0.1 0.0 0.1 0.0 0.0 0.0 0.03 0.01 3.1
France 28 0.3 0.3 0.3 0.2 0.2 0.4 0.8 0.8 0.1 0.0 0.01 0.03 0.2
Germany 28 0.7 0.6 0.7 0.2 0.1 0.8 0.7 0.6 0.2 0.0 0.06 0.04 1.5
Greece 28 0.3 0.1 0.7 0.8 1.0 0.1 0.3 0.1 0.1 0.0 0.04 0.05 0.7
Hong Kong 28 1.4 1.4 0.3 0.1 0.2 0.7 0.3 0.6 0.6 0.0 0.12 0.04 3.2
Hungary 28 0.9 0.9 0.4 0.4 0.2 0.2 0.0 0.3 0.0 0.0 0.03 0.04 0.8
Iceland 19 0.8 0.8 2.9 1.4 1.5 0.7 0.0 0.3 0.1 0.0 0.22 0.10 2.3
India 28 0.5 1.1 0.0 0.9 0.3 0.1 0.3 0.2 0.0 0.0 0.00 0.02 0.2
Indonesia 28 1.0 1.5 0.1 0.1 0.2 0.1 0.6 0.4 0.2 0.0 0.07 0.03 2.7
Ireland 28 0.7 0.7 0.4 0.2 0.4 0.4 1.3 0.3 0.6 0.0 0.17 0.04 3.9
Israel 28 1.5 1.8 1.2 0.0 0.6 1.2 1.4 0.5 0.9 0.0 0.10 0.06 1.6
Italy 28 0.9 0.8 0.7 0.5 0.5 0.2 0.2 0.1 0.3 0.0 0.09 0.03 3.5
Japan 28 0.3 0.3 1.5 1.9 1.4 0.3 0.8 1.0 1.3 0.0 0.02 0.03 0.5
Jordan 19 0.1 1.4 1.1 0.7 0.8 1.0 1.1 0.1 0.0 0.03 0.07 0.5
Luxembourg 16 0.8 0.7 0.5 1.0 1.2 1.0 0.6 0.0 0.0 0.02 0.06 0.3
GC2006 03 part3 294 9/11/05 10:41:34
T
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9
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2
0
0
4
O
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s
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
A
n
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a
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c
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a
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S
t
a
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d
a
r
d

e
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s
t
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c
s
Malaysia 28 1.2 2.4 2.2 1.9 0.3 1.8 1.5 2.2 1.5 0.0 0.07 0.04 1.9
Mexico 28 0.2 0.2 0.3 0.1 0.3 0.3 0.3 0.4 0.5 0.0 0.06 0.02 3.3
Netherlands 28 0.3 0.6 0.6 0.4 0.7 0.7 0.7 0.6 0.4 0.0 0.02 0.02 1.0
New
Zealand
27 0.2 0.4 0.3 0.1 0.3 0.1 0.2 0.1 0.1 0.0 0.02 0.01 1.5
Norway 28 0.4 0.2 0.4 0.1 0.1 1.1 0.8 0.0 0.9 0.0 0.02 0.05 0.3
Peru 18 0.9 0.7 0.7 0.6 0.4 0.3 0.6 0.1 0.0 0.0 0.05 0.06 0.9
Philippines 28 1.1 1.0 1.7 1.3 3.2 1.2 0.7 0.7 1.0 0.0 0.06 0.03 2.2
Poland 27 1.3 1.5 1.4 1.1 1.3 1.7 1.1 0.9 0.5 0.0 0.12 0.03 3.4
Portugal 28 0.2 0.1 0.9 0.8 0.6 0.6 0.1 0.6 0.1 0.0 0.01 0.06 0.2
Romania 15 0.3 0.6 0.7 0.7 0.8 0.7 0.6 0.3 0.1 0.0 0.03 0.06 0.6
Russia 28 0.4 0.3 0.2 0.4 0.0 0.1 0.2 0.6 0.0 0.0 0.06 0.03 2.1
Singapore 27 0.1 0.1 0.2 0.3 0.1 0.2 0.3 0.1 0.1 0.0 0.00 0.01 0.4
Slovakia 21 0.7 0.7 0.5 0.1 1.2 0.8 0.3 0.8 0.2 0.0 0.03 0.05 0.6
Slovenia 18 0.4 0.2 0.4 0.3 0.5 0.8 0.4 0.3 0.0 0.14 0.07 2.0
South Africa 28 0.7 0.2 0.6 0.4 0.9 0.8 0.8 0.8 0.7 0.0 0.04 0.03 1.2
South Korea 28 1.0 0.3 1.9 1.5 1.8 1.5 1.1 0.1 0.9 0.0 0.01 0.04 0.3
Spain 28 2.4 2.2 0.3 0.4 0.4 0.7 0.1 0.3 0.8 0.0 0.25 0.06 3.9
Sweden 28 0.1 0.1 0.1 0.0 0.5 0.0 0.1 0.1 0.1 0.0 0.01 0.02 0.6
Switzerland 28 0.1 0.3 0.2 0.0 0.3 0.2 0.7 0.2 0.0 0.0 0.02 0.03 0.6
Taiwan 28 1.5 2.5 1.1 0.0 0.7 0.8 0.3 1.7 1.0 0.0 0.07 0.03 2.4
Thailand 27 0.1 0.2 0.5 1.3 0.3 0.2 0.3 1.3 0.9 0.0 0.02 0.03 0.7
Turkey 28 0.7 0.4 0.4 0.4 0.6 0.7 0.2 0.2 0.1 0.0 0.07 0.03 2.5
Ukraine 17 0.7 0.8 0.8 0.0 0.1 0.2 0.0 0.4 0.2 0.0 0.02 0.03 0.6
United
Kingdom
28 0.4 0.4 0.3 0.2 0.1 0.3 0.2 0.1 0.2 0.0 0.05 0.02 2.9
USA 27 0.5 0.5 0.4 0.5 0.8 0.3 0.2 0.4 0.3 0.0 0.00 0.02 0.2
Venezuela 28 0.6 0.1 0.4 0.2 0.5 0.4 0.1 0.3 0.2 0.0 0.03 0.02 1.5
Vietnam 17 0.9 0.6 1.3 0.9 1.3 1.1 0.1 1.2 1.0 0.0 0.03 0.04 0.7
Zimbabwe 16 1.6 0.2 0.2 0.2 0.3 0.8 0.4 0.8 0.0 0.17 0.06 3.0
GC2006 03 part3 295 9/11/05 10:41:35
the t-statistics reported are emphasised in bold in the case of decreasing corruption, or
italics in the case of increasing corruption.
The values for the annual change range between 0.25 and 0.17, which suggests
that lowering perceived levels of corruption achieving improvements in the CPI is
a long-term undertaking. A decade of substantial effort might improve the score by
1 point on a scale from 0 to 10. Only in rare instances will improvements be more
pronounced.
Overall, our fndings indicate that signifcant improvements between 1995 and
2004 occurred (in descending order of signifcance) in Estonia, Spain, Italy, Bulgaria,
Mexico, Hong Kong, Colombia, Costa Rica, Taiwan, Australia, Iceland and Russia. A
deterioration, on the other hand, was signifcant in Argentina, Ireland, Poland, Czech
Republic, Zimbabwe, United Kingdom, Ecuador, Indonesia, Turkey, Canada and the
Philippines.
This data mark a frst approach to determining composite time-series information
for a sample of 58 countries. Due to the short time horizon, the level of signifcance
is still limited. As data on levels of corruption become available for future periods, the
precision of the underlying measurement is likely to increase. The data presented here
may prove useful in determining the causes and consequences of corruption, where
research has until now been limited to cross-section analysis.
Notes
1. Johann Graf Lambsdorff is chair in economic theory at the University of Passau and a research
consultant to Transparency International, for whom he has coordinated and carried out the
CPI since 1995.
Figure 10.1: Levels of corruption, Argentina, individual data as reported by EIU, IMD and WEF
1.50
2.00
2.50
3.00
3.50
4.00
4.50
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
L
e
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s

o
f

c
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s
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a
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f
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C
P
I

GC2006 03 part3 296 9/11/05 10:41:35
2. Bjrnskov and Paldam determine time series by processing only the ordinal changes in the
data over time, that is, whether a country improves its rank relative to others. With this
approach, one-shot changes of a purely methodological nature play a minor role as compared
to actual trend information. They conclude that generalised trust is about the only explanatory
variable with signifcant impact. See C. Bjrnskov and M. Paldam, Corruption Trends in J.
Graf Lambsdorff, M. Schramm and M. Taube (eds) TheNewInstitutionalEconomicsofCorruption
Norms,Trust,andReciprocity (London: Routledge, 2004), pp 5975.
3. Minor variations in the phrasing of questions have taken place over time, however. For instance,
in 200204, IMD asked respondents to assess whether bribing and corruption prevail or do
not prevail in the economy. Previously, respondents had been asked whether bribing and
corruption prevail or do not prevail in the public sphere. This change seemed to have little
impact on the data, however, allowing inferences to be made over time.
4. Separately for each country, k, I seek to determine the coeffcient a
k
, which depicts the infuence
of a simple time trend (Trend
1995
= 1, Trend
1996
= 2 ) on the dependent variables, which are
our sources values for country k. The coeffcient a
k
thus resembles an estimate for the annual
change in the CPI. All four subsequent regressions were run simultaneously.
IMD
ik
= a
k
.
Trend
i
+ b
k,IMD
.
d
IMD
+ e
i
WEF
ik
= a
k
.
Trend
i
+b
k,WEF
.
d
WEF
+ e
i
PERC
ik
= a
k
.
Trend
i
+b
k,PERC
.
d
PERC
+ e
i
EIU
i+1,k
= a
k
.
Trend
i
+ b
k,EIU
.
d
EIU
+ e
i.
We allow for our sources to differ systematically and capture this difference with the help of
a dummy variable for each source, for example d
IMD
. Thus, if IMD is more favourable in its
assessment of country kas compared to WEF, this is captured by the dummy and its associated
coeffcient, b
k,IMD
. A random error term is added, e
i
.
The intention of this system of regressions

was to fnd a joint trend in each of the sources for a given country k. OLS was employed for
estimating the coeffcients.
GC2006 03 part3 297 9/11/05 10:41:35
11 Corruption Perceptions Index 2005
JohannGrafLambsdorff
1
The Corruption Perceptions Index, now in its eleventh year, aims to provide data
on extensive perceptions of corruption within countries. These perceptions enhance
our understanding of real levels of corruption from one country to another. The CPI
is a composite index, making use of surveys of business people and assessments by
country analysts.
Overall, 16 sources were included in the 2005 CPI, originating from 10 independent
institutions and using data compiled between 2003 and 2005. The sources used were:
(1) Columbia University; (2) the Economist Intelligence Unit; (3) Freedom House;
(4) Information International from Beirut (Lebanon); (5) the International Institute
for Management Development (in Lausanne); (6) the Merchant International Group
Limited (in London); (7) the Political and Economic Risk Consultancy (in Hong Kong);
(8) the United Nations Economic Commission for Africa; (9) the World Economic
Forum; (10) the World Markets Research Centre (in London). The number of countries
in the CPI 2005 increased to 159 from 146 in 2004.
For an analysis of the medium-term corruption trends that can be discerned from
the CPI data series, see Chapter 10 in this volume. A more detailed description of the
methodology is available at www.transparency.org/surveys/index.html#cpi or at www.
icgg.org.
Table 11.1: Corruption Perceptions Index 2005
Country
Rank
Country 2005 CPI
score
a
Surveys
used
b
Standard
deviation
c
Highlow
range
d
Confdence
range
e
1 Iceland 9.7 8 0.2 9.3 9.8 9.5 9.7
2 Finland 9.6 9 0.2 9.3 9.8 9.5 9.7
New Zealand 9.6 9 0.2 9.3 9.7 9.5 9.7
4 Denmark 9.5 10 0.3 8.7 9.8 9.3 9.6
5 Singapore 9.4 12 0.2 9.0 9.7 9.3 9.5
6 Sweden 9.2 10 0.3 8.7 9.6 9.0 9.3
7 Switzerland 9.1 9 0.3 8.5 9.4 8.9 9.2
8 Norway 8.9 9 0.6 7.9 9.5 8.5 9.1
9 Australia 8.8 13 0.8 6.7 9.5 8.4 9.1
GC2006 03 part3 298 9/11/05 10:41:36
Corruption Perceptions Index 2005 299
Country
Rank
Country 2005 CPI
score
a
Surveys
used
b
Standard
deviation
c
Highlow
range
d
Confdence
range
e
10 Austria 8.7 9 0.5 8.1 9.3 8.4 9.0
11 Netherlands 8.6 9 0.5 7.8 9.4 8.3 8.9
United Kingdom 8.6 11 0.5 7.7 9.3 8.3 8.8
13 Luxembourg 8.5 8 0.7 7.7 9.6 8.1 8.9
14 Canada 8.4 11 0.9 6.5 9.4 7.9 8.8
15 Hong Kong 8.3 12 1.1 5.5 9.4 7.7 8.7
16 Germany 8.2 10 0.6 7.5 9.2 7.9 8.5
17 USA 7.6 12 1.0 5.3 8.5 7.0 8.0
18 France 7.5 11 0.8 5.5 9.0 7.0 7.8
19 Belgium 7.4 9 0.9 5.6 9.0 6.9 7.9
Ireland 7.4 10 1.0 5.5 8.7 6.9 7.9
21 Chile 7.3 10 0.9 5.5 8.7 6.8 7.7
Japan 7.3 14 1.2 5.5 9.0 6.7 7.8
23 Spain 7.0 10 0.7 5.6 8.1 6.6 7.4
24 Barbados 6.9 3 1.2 5.7 8.1 5.7 7.3
25 Malta 6.6 5 1.6 5.1 9.0 5.4 7.7
26 Portugal 6.5 9 1.2 5.0 7.8 5.9 7.1
27 Estonia 6.4 11 1.1 5.1 9.0 6.0 7.0
28 Israel 6.3 10 1.2 4.2 8.5 5.7 6.9
Oman 6.3 5 1.5 4.2 8.0 5.2 7.3
30 United Arab Emirates 6.2 6 1.4 4.5 8.2 5.3 7.1
31 Slovenia 6.1 11 1.2 4.8 8.7 5.7 6.8
32 Botswana 5.9 8 1.4 4.4 8.1 5.1 6.7
Qatar 5.9 5 0.6 5.5 6.9 5.6 6.4
Taiwan 5.9 14 1.0 3.7 7.7 5.4 6.3
Uruguay 5.9 6 0.6 5.5 6.9 5.6 6.4
36 Bahrain 5.8 6 0.7 4.7 6.9 5.3 6.3
37 Cyprus 5.7 5 0.5 4.9 6.2 5.3 6.0
Jordan 5.7 10 1.0 3.4 6.9 5.1 6.1
39 Malaysia 5.1 14 1.2 3.4 8.0 4.6 5.6
40 Hungary 5.0 11 0.5 4.1 5.7 4.7 5.2
Italy 5.0 9 0.8 4.1 6.2 4.6 5.4
South Korea 5.0 12 0.7 3.8 5.8 4.6 5.3
43 Tunisia 4.9 7 1.1 3.7 6.9 4.4 5.6
44 Lithuania 4.8 8 0.6 4.0 5.5 4.5 5.1
45 Kuwait 4.7 6 1.0 3.4 5.7 4.0 5.2
46 South Africa 4.5 11 0.6 3.4 5.6 4.2 4.8
47 Czech Republic 4.3 10 1.4 2.7 7.7 3.7 5.1
Greece 4.3 9 0.8 3.7 5.7 3.9 4.7
Namibia 4.3 8 1.0 3.4 6.2 3.8 4.9
GC2006 03 part3 299 9/11/05 10:41:36
Country
Rank
Country 2005 CPI
score
a
Surveys
used
b
Standard
deviation
c
Highlow
range
d
Confdence
range
e
Slovakia 4.3 10 1.0 3.2 5.7 3.8 4.8
51 Costa Rica 4.2 7 0.9 3.4 5.5 3.7 4.7
El Salvador 4.2 6 1.1 2.6 5.5 3.5 4.8
Latvia 4.2 7 0.7 3.6 5.5 3.8 4.6
Mauritius 4.2 6 1.2 2.5 5.7 3.4 5.0
55 Bulgaria 4.0 8 1.1 2.7 5.6 3.4 4.6
Colombia 4.0 9 0.8 2.7 5.6 3.6 4.4
Fiji 4.0 3 1.0 3.4 5.1 3.4 4.6
Seychelles 4.0 3 0.4 3.5 4.2 3.5 4.2
59 Cuba 3.8 4 1.6 1.7 5.5 2.3 4.7
Thailand 3.8 13 0.6 2.6 4.7 3.5 4.1
Trinidad and Tobago 3.8 6 1.0 2.7 5.5 3.3 4.5
62 Belize 3.7 3 0.4 3.4 4.1 3.4 4.1
Brazil 3.7 10 0.5 2.7 4.4 3.5 3.9
64 Jamaica 3.6 6 0.3 3.4 4.1 3.4 3.8
65 Ghana 3.5 8 0.8 2.6 5.1 3.2 4.0
Mexico 3.5 10 0.5 2.7 4.5 3.3 3.7
Panama 3.5 7 0.8 2.6 5.1 3.1 4.1
Peru 3.5 7 0.6 2.6 4.1 3.1 3.8
Turkey 3.5 11 1.0 2.2 5.3 3.1 4.0
70 Burkina Faso 3.4 3 0.7 2.7 4.2 2.7 3.9
Croatia 3.4 7 0.4 3.0 4.2 3.2 3.7
Egypt 3.4 9 0.8 2.3 5.1 3.0 3.9
Lesotho 3.4 3 0.8 2.6 4.1 2.6 3.9
Poland 3.4 11 1.0 2.5 5.7 3.0 3.9
Saudi Arabia 3.4 5 1.0 2.0 4.5 2.7 4.1
Syria 3.4 5 1.1 2.2 5.1 2.8 4.2
77 Laos 3.3 3 2.0 2.1 5.5 2.1 4.4
78 China 3.2 14 0.6 2.2 4.1 2.9 3.5
Morocco 3.2 8 0.7 2.2 4.1 2.8 3.6
Senegal 3.2 6 0.6 2.5 4.2 2.8 3.6
Sri Lanka 3.2 7 0.7 2.2 4.1 2.7 3.6
Suriname 3.2 3 1.0 2.2 4.1 2.2 3.6
83 Lebanon 3.1 4 0.4 2.7 3.5 2.7 3.3
Rwanda 3.1 3 1.7 2.1 5.1 2.1 4.1
85 Dominican Republic 3.0 6 0.8 2.0 4.2 2.5 3.6
Mongolia 3.0 4 0.8 2.2 4.2 2.4 3.6
Romania 3.0 11 0.9 2.0 5.1 2.6 3.5
88 Armenia 2.9 4 0.5 2.4 3.4 2.5 3.2
Table 11.1: Corruption Perceptions Index 2005 continued
GC2006 03 part3 300 9/11/05 10:41:37
Country
Rank
Country 2005 CPI
score
a
Surveys
used
b
Standard
deviation
c
Highlow
range
d
Confdence
range
e
Benin 2.9 5 1.3 1.7 5.1 2.1 4.0
Bosnia and
Herzegovina 2.9 6 0.4 2.4 3.4 2.7 3.1
Gabon 2.9 4 1.0 2.1 4.1 2.1 3.6
India 2.9 14 0.5 2.1 3.5 2.7 3.1
Iran 2.9 5 0.8 1.7 3.5 2.3 3.3
Mali 2.9 8 1.2 1.5 5.1 2.3 3.6
Moldova 2.9 5 1.1 1.9 4.6 2.3 3.7
Tanzania 2.9 8 0.5 2.1 3.5 2.6 3.1
97 Algeria 2.8 7 0.7 2.0 4.2 2.5 3.3
Argentina 2.8 10 0.6 1.8 3.5 2.5 3.1
Madagascar 2.8 5 1.2 1.7 4.2 1.9 3.7
Malawi 2.8 7 0.9 2.0 4.6 2.3 3.4
Mozambique 2.8 8 0.6 2.1 3.5 2.4 3.1
Serbia and
Montenegro 2.8 7 0.7 2.2 4.1 2.5 3.3
103 Gambia 2.7 7 0.7 1.7 3.9 2.3 3.1
Macedonia 2.7 7 0.7 2.2 4.1 2.4 3.2
Swaziland 2.7 3 0.7 2.0 3.4 2.0 3.1
Yemen 2.7 5 0.5 2.2 3.6 2.4 3.2
107 Belarus 2.6 5 1.4 1.7 5.1 1.9 3.8
Eritrea 2.6 3 1.3 1.7 4.2 1.7 3.5
Honduras 2.6 7 0.6 1.6 3.5 2.2 3.0
Kazakhstan 2.6 6 0.8 1.8 4.1 2.2 3.2
Nicaragua 2.6 7 0.4 2.1 3.0 2.4 2.8
Palestine 2.6 3 0.5 2.1 3.1 2.1 2.8
Ukraine 2.6 8 0.3 2.2 3.0 2.4 2.8
Vietnam 2.6 10 0.6 1.7 3.5 2.3 2.9
Zambia 2.6 7 0.5 2.1 3.4 2.3 2.9
Zimbabwe 2.6 7 0.8 1.4 3.6 2.1 3.0
117 Afghanistan 2.5 3 1.1 1.6 3.7 1.6 3.2
Bolivia 2.5 6 0.5 2.0 3.5 2.3 2.9
Ecuador 2.5 6 0.6 1.9 3.5 2.2 2.9
Guatemala 2.5 7 0.6 1.7 3.5 2.1 2.8
Guyana 2.5 3 0.4 2.0 2.7 2.0 2.7
Libya 2.5 4 0.7 1.8 3.4 2.0 3.0
Nepal 2.5 4 0.7 1.7 3.4 1.9 3.0
Philippines 2.5 13 0.6 1.5 3.5 2.3 2.8
Uganda 2.5 8 0.5 2.0 3.5 2.2 2.8
126 Albania 2.4 3 0.4 2.1 2.8 2.1 2.7
Niger 2.4 4 0.3 2.1 2.7 2.2 2.6
GC2006 03 part3 301 9/11/05 10:41:38
Country
Rank
Country 2005 CPI
score
a
Surveys
used
b
Standard
deviation
c
Highlow
range
d
Confdence
range
e
Russia 2.4 12 0.3 1.9 3.0 2.3 2.6
Sierra Leone 2.4 3 0.5 2.1 3.0 2.1 2.7
130 Burundi 2.3 3 0.3 2.1 2.7 2.1 2.5
Cambodia 2.3 4 0.5 1.7 2.7 1.9 2.5
Congo, Republic 2.3 4 0.4 2.0 3.0 2.1 2.6
Georgia 2.3 6 0.5 1.7 2.7 2.0 2.6
Kyrgyzstan 2.3 5 0.4 1.9 2.7 2.1 2.5
Papua New Guinea 2.3 4 0.5 1.7 2.7 1.9 2.6
Venezuela 2.3 10 0.2 2.0 2.5 2.2 2.4
137 Azerbaijan 2.2 6 0.5 1.7 3.0 1.9 2.5
Cameroon 2.2 6 0.4 1.8 2.7 2.0 2.5
Ethiopia 2.2 8 0.4 1.7 2.8 2.0 2.5
Indonesia 2.2 13 0.4 1.7 3.3 2.1 2.5
Iraq 2.2 4 1.0 1.4 3.6 1.5 2.9
Liberia 2.2 3 0.1 2.1 2.4 2.1 2.3
Uzbekistan 2.2 5 0.2 2.0 2.5 2.1 2.4
144 Congo, Democratic
Republic 2.1 4 0.4 1.6 2.5 1.8 2.3
Kenya 2.1 8 0.5 1.4 3.0 1.8 2.4
Pakistan 2.1 7 0.7 1.3 3.4 1.7 2.6
Paraguay 2.1 7 0.4 1.6 2.7 1.9 2.3
Somalia 2.1 3 0.4 1.6 2.4 1.6 2.2
Sudan 2.1 5 0.2 1.7 2.3 1.9 2.2
Tajikistan 2.1 5 0.4 1.7 2.7 1.9 2.4
151 Angola 2.0 5 0.2 1.6 2.2 1.8 2.1
152 Cote dIvoire 1.9 4 0.3 1.6 2.2 1.7 2.1
Equatorial Guinea 1.9 3 0.3 1.6 2.2 1.6 2.1
Nigeria 1.9 9 0.3 1.4 2.2 1.7 2.0
155 Haiti 1.8 4 0.5 1.4 2.5 1.5 2.1
Myanmar 1.8 4 0.2 1.6 2.2 1.7 2.0
Turkmenistan 1.8 4 0.2 1.6 2.2 1.7 2.0
158 Bangladesh 1.7 7 0.5 1.0 2.4 1.4 2.0
Chad 1.7 6 0.6 1.0 2.7 1.3 2.1
a. 2005 CPI score relates to perceptions of the degree of corruption as seen by business people,
academics and risk analysts, and ranges between 10 (highly clean) and 0 (highly corrupt).
b. Surveys used refers to the number of surveys that assessed a countrys performance. A total
of 16 surveys were used from 10 independent institutions, and at least three surveys were
required for a country to be included in the CPI.
Table 11.1: Corruption Perceptions Index 2005 continued
GC2006 03 part3 302 9/11/05 10:41:38
c. Standard deviation indicates differences in the values given by the sources: the greater
the standard deviation, the greater the differences in perceptions of a country among the
sources.
d. Highlow range provides the highest and lowest values given by the different sources.
e. Confdence range provides a range of possible values of the CPI score. This refects how
a countrys score may vary, depending on measurement precision. Nominally, with 5 per
cent probability when few sources are available, an unbiased estimate of the mean coverage
probability is lower than the nominal value of 90 per cent. It is 65.3 per cent for 3 sources;
78.4 per cent for 5 sources; 80.2 per cent for 6 sources and 81.8 per cent for 7 sources.
Note
1. Johann Graf Lambsdorff is chair in economic theory at the University of Passau (Germany)
and a research consultant to Transparency International, for whom he has coordinated and
carried out the CPI since 1995.
GC2006 03 part3 303 9/11/05 10:41:38
12 Governance matters IV: new data, new challenges
DanielKaufmann,AartKraayandMassimoMastruzzi
1
In this new study, we present a set of governance indicators covering 209 countries over
the period 19962004. For 2004, these indicators are based on 352 different underlying
variables measuring perceptions of a wide range of governance issues.
2
The variables
are drawn from 32 separate data sources constructed by 30 different organisations
worldwide. The indicators that capture the six key dimensions of institutional quality
or governance are as follows: voice and accountability, political stability and lack
of violence, government effectiveness, regulatory quality, rule of law and control
of corruption.
The precision of the aggregate governance indicators in this updated analysis has
increased since we have substantially increased the number of sources and individual
variables used in the aggregate indices. We do stress, however, that comparisons across
countries and across time should be treated with caution since the margins of error are
not negligible. These margins of error are not unique to the perceptions-based measures
of governance we use, but are an important feature of any measure of governance,
objective or subjective.
3

Is there an economic development dividend for better governance, or are
governance improvements mostly a by-product of higher incomes?
There is by now a strong consensus among both academics and policy-makers that
good governance provides the fundamental basis for economic development. Academic
research has focused on the effects of institutional quality on growth in the long run,
noting that there is a strong causal impact of institutional quality on per capita incomes
worldwide. Figure 12.1 shows a representative set of estimates of this development
dividend of good governance. These estimates suggest that a realistic one-standard-
deviation improvement in governance would raise incomes in the long run by about
two- to threefold.
4
Of course, there is variation around these relationships, since
governance is not the only thing that matters for development but it certainly is a
very important factor deserving policy-makers attention.
Given the strong positive effect of governance on development, and its importance for
effective aid delivery, it is a matter of considerable concern that governance performance
in sub-Saharan Africa is on average quite weak. Altogether, 38 out of 46 countries in
the region lie in the bottom-left quadrant of the graph, meaning that they are both
GC2006 03 part3 304 9/11/05 10:41:38
Governance matters IV 305
poorer than the world average and also exhibit worse governance than the world
average. Some observers have argued that we should discount the poor governance
performance of the region based on the fact that these countries have very low income
levels arguing that good governance costs money to provide. Yet recent research
provides very little evidence in support of the proposition that poor governance in
Africa is attributable to poverty. Rather, most of the causality is in the opposite direction,
from better governance to better development outcomes.
Is governance in some countries improving and how do we know that a significant
change has actually taken place?
Reformers in many governments as well as civil society and investors increasingly view
governance as key for development and the investment climate, which in turn has
increased the demand for monitoring the quality of governance in a country over time.
Further, aid donors have also come to the view that aid fows have a stronger impact
on development in countries with good institutional quality.
In light of this, it is important to measure trends over time, as well as levels of
governance. Our new indicators now span an eight-year period from 1996 to 2004, which
is suffciently long to begin looking for meaningful trends in governance. Over the eight-
year period, we fnd that in about 10 per cent of countries we can be highly confdent
(at the 90 per cent signifcance level) that governance has changed substantially, while
at a lower 75 per cent signifcance level, roughly 20 per cent of all observed changes
3
2
1
0
1
2
3
3 2.5 2 1.5 1 0.5 0 0.5 1 1.5 2 2.5
Rule of Law 2004
log(Real GDP
Per Capita)
KaufmannKraay (2002)
AlcalaCiccone (2004)
RodrikSubramanianTrebbi (2004)
AcemogluJohnsonRobinson (2000)
Figure 12.1: Governance indicators, 19962004
GC2006 03 part3 305 9/11/05 10:41:40
stand out as signifcant.
5
Importantly, we show that there is a great deal of agreement
among our many data sources about the direction of change in governance in these
countries. Overall this reminds us that, while in general institutional quality changes
only gradually, there are also countries where one can point to sharp improvements
or deteriorations over an eight-year period. This fnding is of particular interest, given
the common perception that while deterioration in a particular country can take place
rather quickly, improvements are always very slow and incremental.
For instance, since 1996 there has been signifcant improvement in voice and
accountability in a number of countries, such as in Bosnia, Croatia, Serbia, Ghana,
Indonesia, Sierra Leone, Slovak Republic and Peru, while a signifcant deterioration has
taken place in countries such as the Ivory Coast, Zimbabwe, Kyrgyz Republic, Nepal,
Haiti and Israel. With these aggregate indicators it is also possible to ascertain that some
countries have experienced signifcant changes in briefer time spans, such as the case of
the major improvement in the voice variable for Senegal, Turkey and Nigeria during
19982004, or its deterioration in Pakistan, Belarus, Russia and Venezuela.
In general, it is of concern that there is little evidence of systematic improvements
in regional averages for governance in most regions, including Africa. However, new
governance indicators for trends in three dimensions of governance for the period
19962004 in Africa show that roughly as many countries show declines in governance
as show improvements. Focusing only on those changes that are suffciently large as to
suggest that there are signifcant trends in institutional quality, the story is much the
same: as many countries show signifcant improvements as declines.
Looking ahead
We argue that governance can be measured, using a variety of types of data, both the
subjective information on which we rely as well as more objective indicators. But it is
essential that indicators on governance and investment climate take margins of error
into account and are complemented with in-depth in-country governance diagnostics,
based on micro-surveys of households, frms, and public offcials within the country.
The lessons being drawn from these combined aggregate and micro datasets point to
the importance of moving concretely to the next stage of governance reforms.
Given the lack of worldwide progress on governance, coupled with its importance
for development, a case can be made for redoubling our analysis of this connection, as
well as for questioning the effectiveness of some traditional approaches to improving
governance, such as creating additional anti-corruption commissions and laws. In
particular, the importance of political factors (including state capture and political
commitment from the top) has been underplayed, as have many second generation
institutional reforms supporting political, economic and financial transparency.
Examples include natural resource revenue transparency mechanisms, disclosure of assets
by politicians, voting records of parliamentarians, political campaign contributions,
and fscal accounts.
GC2006 03 part3 306 9/11/05 10:41:40
Governance matters IV 307
Notes
1. Daniel Kaufmann is the director for global governance and regional learning at the World Bank
Institute, United States. Contact: [email protected]. Aart Kraay is a lead economist in
the development research group at the World Bank. Contact: [email protected]. Massimo
Mastruzzi is a research analyst at the World Bank. Contact: [email protected]. The
views expressed here are the authors and do not necessarily refect the offcial position of the
World Bank, its executive directors, or the countries they represent.
2. For the full paper, see www.worldbank.org/wbi/governance/pubs/govmatters4.html. The data
and a graphical interface are available at www.worldbank.org/wbi/governance/govdata/
3. For more in-depth discussions of the issues of margins of error and the usefulness of perceptions-
based measures, see our paper in the GlobalCorruptionReport2004, pp. 3026.
4. The estimates come from Alcala and Ciccone (2004), Acemoglu, Johnson and Robinson (2001),
Kaufmann and Kraay (2002), and Rodrik, Subramanian and Trebbi (2004). References available
in the full paper at: www.worldbank.org/wbi/governance/pubs/govmatters4.html
5. Nine statistically signifcant changes per indicator were found using a rule of thumb labelling
of those countries for which the change in estimated governance over the 19962004 period is
suffciently large that the 90 per cent confdence intervals for governance in the two periods do
not overlap. These were compared with a dynamic formal statistical model, which turned up
more or less the same set of signifcant changes in governance, although it is important to note
that the magnitude of these changes is substantially smaller in the formal dynamic model.
GC2006 03 part3 307 9/11/05 10:41:41
13 Corruption in the United States of America
EdwardGlaeserandRavenSaks
1
Corruption is not just something that happens to poor countries. Between 1990 and
2002, federal prosecutors in the United States convicted more than 10,000 government
offcials of acts of corruption including fraud, campaign-fnance violations, and
obstruction of justice. While corruption in the United States is bad news for the country,
it is a mixed blessing for researchers, whose analysis of corruption has been hampered
by lack of data. Most studies of corruption have relied on international opinion surveys
that ask private individuals about the level of corruption in a nation. While these
opinion surveys contain valuable information, they do not provide a full picture of
corruption in a country.
As a complement to the international evidence, recent research on corruption in
the United States examines the determinants of corruption using information on
the number of public offcials convicted for corruption in each of the 50 US states.
2

Because the individuals were all prosecuted by the same federal agency, the data can
be compared across states, in contrast to the available international survey data.
3

Measuring corruption as the number of federal corruption convictions per capita, this
research explores the state characteristics that predict corruption and the extent that
corruption deters economic growth at the state level. Although these conviction data
have been used in other contexts, prior research has not examined the effects of the
level of income or ethnic heterogeneity on corruption, nor has it discussed the effect
of corruption on economic growth.
4
Moreover, in contrast to earlier work, this research
explores alternative identifcation strategies by examining changes in corruption over
time and taking account of income and education using historical variables.
Table 13.1 lists the most and least corrupt states ranked by the average number
of convictions per capita from 1976 to 2002. The ranking lines up reasonably well
with general notions about the areas in the United States that are more corrupt, and
is positively correlated with a 1998 survey of congressional reporters perception of
public corruption.
5
The report fnds that states with higher incomes and a larger share of college-educated
population are less corrupt. In a simple OLS regression, the 1970 levels of education and
income in each state are negatively correlated with the average corruption rate from
1976 to 2002 (see Table 13.2).
6
The same negative correlations exist when estimating the
effect of the initial level of education and income on changes in corruption in each state
over the past 25 years. Thus, this relationship cannot be attributed to omitted variables
GC2006 03 part3 308 9/11/05 10:41:41
Corruption in the USA 309
that might lead to a spurious correlation among the levels of income, education and
corruption across states.
Table 13.1: US states with most and least convictions per capita, 19762002
Most convictions Least convictions
State Average annual
convictions
per 100,000 people
State Average annual
convictions
per 100,000 people
Alaska 0.643 Colorado 0.151
Mississippi 0.612 Wisconsin 0.150
Louisiana 0.513 Nebraska 0.133
South Dakota 0.472 Utah 0.130
Tennessee 0.464 Iowa 0.127
Illinois 0.458 New Hampshire 0.125
New York 0.439 Minnesota 0.121
Oklahoma 0.415 Vermont 0.115
Montana 0.414 Washington 0.104
North Dakota 0.398 Oregon 0.074
Table 13.2: Effect of income and education on average corruption rate, 19762002
OLS IV
(1) (2) (3) (4)
Ln (Income) .203 .470**
(.144) (.179)

Share with 4+ years of college 2.91** 5.03**
(1.18) (2.27)

Adj. R
2
.27 .34 .11 .16
No. Observations 50 50 48 45
Note: All regressions also control for the following state characteristics in 1970: the logarithm of
state population, the share of government employment, the share of urban population, dummy
variables for each census region, and a constant. The instruments used in column 3 are the
logarithm of median household income in 1940 and quadratic functions of longitude and latitude.
The instrument used in column 4 is the fraction of church members who are Congregationalist
from the 1890 census.
The magnitude of the coeffcients reported in Table 13.2 suggest that a one standard
deviation increase in income would lead to about one-sixth of a standard deviation
decrease in corruption. The effect of education is larger, as a one standard deviation
increase in the fraction of the population with a college degree would lead to a decrease
in the corruption rate of one-half of a standard deviation.
GC2006 03 part3 309 9/11/05 10:41:41
An alternative interpretation of these results is that high income and education levels
may be the result, rather than the cause, of lower corruption. To address this concern,
the third and fourth columns of Table 13.2 use historical data to predict the levels of
income and schooling in 1970. Income is predicted using a states geographic location
and income in 1940. The level of education in each state is predicted using the fraction
of Congregationalist church members in 1890.
7
These factors are all strong predictors
of income and education today, and yet are unlikely to have been infuenced by the
level of corruption at the end of the twentieth century. Using this method, the negative
effect of income and education on corruption becomes even stronger.
The report also investigates several other theories concerning the determinants of
corruption. Income inequality and racial heterogeneity are found to be associated
with higher corruption rates.
8
In contrast, there is only weak evidence that states with
larger local governments are more corrupt. Finally, the report examines the effect of
corruption in 19761980 on economic growth during the subsequent 20 years. States
with higher corruption rates have experienced lower income growth from 1980 to
2000, but there is no evidence that corruption has led to lower employment growth
or lower housing values.
In general, the patterns documented in the data for US states reveal the same basic
relationships that have been found using international evidence. This similarity is
particularly interesting given that, here, corruption is measured using federal conviction
data rather than the type of opinion survey that is the norm in the cross-country
literature. This suggests that both methods can provide useful information concerning
the amount of corruption in a particular location. A second important implication of
this research is that improving the education system in a state or country can help
reduce corruption in government.
Notes
1. Edward Glaeser is a professor of economics at Harvard University and Raven Saks is an economist
at the Federal Reserve Board of Governors. Contact information: [email protected] and
[email protected]. The views presented are solely those of the authors and do not necessarily
represent those of the Federal Reserve Board or its staff.
2. Edward Glaeser and Raven E. Saks, Corruption in America, National Bureau of Economic
Research Working Paper No. 10821, October 2004.
3. One disadvantage of using convictions to measure corruption is that the intensity of
investigation or prosecution might be lower in places that are more corrupt. This concern
is mitigated by the fact that these convictions are all prosecuted by the same federal agency.
Nonetheless, this data may still provide an inaccurate view of the degree of corruption, if the
Department of Justice (DOJ) treats richer or more corrupt states differently, or if the types of
corruption not covered by the DOJ are more prevalent in richer states.
4. Daniel Berkowitz and Karen Clay, Initial Conditions, Institutional Dynamics and Economic
Performance: Evidence from American States, William Davidson Institute Working Paper No.
615, 2003. Raymond Fisman and Robert Gatti, Decentralization and Corruption: Evidence
from U.S. Federal Transfer Programs, PublicChoice113(1), 2002. Rajeev K. Goel and Michael
A. Nelson, Corruption and Government Size: A Disaggregated Analysis, PublicChoice97(12),
1998.
5. Richard T. Boylan and Cheryl Long, A Survey of State House Reporters Perception of Public
Corruption, StatePoliticsandPolicyQuarterly, 2003.
GC2006 03 part3 310 9/11/05 10:41:41
Corruption in the USA 311
6. Each regression includes the following 1970 state characteristics as additional controls: the
logarithm of state population, the share of urban population, the fraction of employment in
the government sector, and dummy variables for the four census regions.
7. Congregationalism was almost never a dominant religion during this time period, but it is
generally associated with elites and their commitment to education. As a result, education
developed more quickly in states with more Congregationalists and those states remain more
educated today.
8. The hypothesis, associated with Paolo Mauro, Corruption and Growth, QuarterlyJournalof
Economics, MIT Press, vol. 110(3): 681712, 1995, and Alberto Alesina, Reza Baqir and William
Easterly, Redistributive Public Employment, JournalofUrbanEconomics 48: 21941, 2002, is
that ethnic heterogeneity increases corruption. As voters become more diverse along ethnic or
income lines, then voting will inevitably focus on redistribution rather than on the honesty
of government offcials.
GC2006 03 part3 311 9/11/05 10:41:41
14 Transparency and its impact on financial fragility
SaadiaZahidi
1
In recent decades, many countries have experienced some form of banking crisis,
either small borderline crises or systemic ones, typically involving widespread bank
insolvencies, liquidity squeezes and depositor withdrawals. The crises have been
expensive, not only through their effects on government budgets and taxes, but also
due to forgone economic output. The economic literature investigating the causes of
banking crises has focused mainly on macroeconomic factors, such as growth rates and
infation, fnancial factors, such as liquidity and credit growth, and only more recently
on the role of institutions. This work is an attempt to probe further into the role of
institutions by examining the empirical relationship between fnancial fragility and
the transparency of fnancial institutions.
While crises may erupt in a relatively short period of time, they are usually the
result of long-term fundamental problems in a countrys fnancial institutions. Weak,
ineffcient institutions lead to fragile fnancial systems, where a small event or trigger
may lead to a large effect (that is, a full-blown crisis). The mechanism of a banking crisis
becomes obvious if one recalls the fundamental characteristics of fnance: information
asymmetries, intertemporal trade and demandable debt. Providers of funds (lenders)
have diffculties monitoring intermediaries, who in turn face the same problem with
users of funds (borrowers). Those receiving funds know better how they will utilise
them than providers, and this is further complicated by the exchange of money today
for money in the future.
2

As a result, banking systems with poor transparency are particularly vulnerable.
Literature on the subject has shown that they can become increasingly fragile through
two ways: frst, investments (loans) are made on the basis of incorrect or misrepresented
information, and second, once bad loans are discovered, there is a strong incentive to
roll them over rather than to declare them as non-performing. Since banking crises
can erupt where there are bad investments and mismatched balance sheets, we would
predict that countries with poor transparency should be prone to a higher number of
banking crises.
Using a multivariate logit model, the hypothesis that high levels of transparency (that
is, high scores on the institutional variables) signifcantly decrease the probability of
a crisis when other factors are controlled for, was tested. The dependent variable, the
banking crisis dummy, is equal to zero if there is no banking crisis, and it is equal to
one if there is a crisis.
3
The set of control variables covers macroeconomic developments
GC2006 03 part3 312 9/11/05 10:41:41
Transparency and its impact on financial fragility 313
that affect bank performance (the rate of growth of real GDP, the external terms of
trade, the rate of infation and the real short-term interest rate); characteristics of the
banking system (vulnerability to sudden capital outfows, liquidity, exposure to the
private sector and credit growth); and other relevant factors (fnancial liberalisation and
GDP per capita).
4
Unique qualitative perceptions data
5
for 41 countries across a period
of 11 years is used as a proxy for the transparency of institutions (see Table 14.1).
Table 14.1: Perceptions data on the transparency of institutions
Variable name Question detail
Corruption Improper practices (such as bribing, corruption, and
irregular payments): (1 = prevail in the public sphere; 7 =
do not prevail in the public sphere)
Favouritism When deciding upon policies and contracts, government
offcials (1 = usually favour well connected frms and
individuals, 7 = are neutral among frms and individuals)
Independence of the judiciary The judiciary in your country is independent from
infuences of members of government, citizens, or frms (1
= no, heavily infuenced, 7 = yes, entirely independent)
Insider trading Insider trading is not common in the domestic stock
market (1 = strongly disagree; 7 = strongly agree)
Regulation of the fnancial
system
Regulation and supervision of fnancial institutions in
your country is among the worlds most stringent (1 =
strongly disagree; 7 = strongly agree)
Transparency variables are indeed signifcant in explaining the probability and
severity of banking crises, perhaps more so than several traditional explanatory variables.
The clearly negative and signifcant relationship between transparency variables and
banking crises remains robust to several specifcation changes. Some cautious but
interesting insights can be obtained from the analysis undertaken in this research.
Transparency variables consistently display far better signifcance levels than several
of the control variables.
6
Second, we fnd that a one-unit increase in the scores for
corruption, favouritism, judicial independence, insider trading and regulation decreases
the odds in favour of a country having a banking crisis by 74 per cent, 86 per cent,
89 per cent, 69 per cent and 76 per cent respectively; whereas one-unit increases in
infation, credit ratio and the real interest rate increase the odds in favour of crises by
411 per cent, 24 per cent and 35 per cent, and one-unit increases in credit growth
and GDP growth decrease the odds by 69 per cent and 1226 per cent respectively (see
Table 14.2). Clearly, transparency is important in preventing fnancial crises and the
role of the judiciary appears to be particularly important. This is not surprising given
the inherent need for contract enforcement in all areas of fnance.
These results have substantial policy implications, providing support for strong
national fnancial sector regulation, as well as global, standardised frameworks, such
as those developed by the Bank of International Settlements.
7
Transparency in general
GC2006 03 part3 313 9/11/05 10:41:42
is indispensable to the fnancial sector, providing access, timeliness, relevance and
quality, and developing institutional infrastructure, standards, auditing and accounting
practices that promote transparency, implementing incentives for disclosure and
installing countervailing regulations to minimise the perverse incentives generated
by safety-net arrangements, is absolutely imperative.
8
The challenge lies in creating the
type of publicprivate partnership and cooperation that are necessary for implementing
effective regulation.
Table 14.2: Transparency variables explaining probability of banking crises
Variable name Percentage effect on the odds in favour
of a crisis due to a one-unit increase in the variable
Corruption 74
Favouritism 86
Independence of the judiciary 89
Insider trading 69
Regulation of the fnancial system 76
Infation 4 to 11
Credit ratio 2 to 4
Real interest rate 3 to 5
Credit growth 6 to 9
GDP growth 12 to 26
Notes
1. Saadia Zahidi is an economist at the World Economic Forum. This research was carried out at
the Graduate Institute of International Studies in Geneva.
2. Charles Wyplosz, Globalized Financial Markets and Financial Crises, April 1998.
3. Gerard Caprio and Daniela Klingebiel, Database on Banking Crises, World Bank, October
2003. See: http://www1.worldbank.org/fnance/html/sfd_home.html
4. These are taken from a previous study with a similar focus. Asli Demirguc-Kunt and Enrica
Detragiache, The Determinants of Banking Crises in Developing and Developed Countries,
IMF Staff Papers 45(1), March 1998.
5. World Economic Forum, GlobalCompetitivenessReports19922002.
6. Having corrected for multicollinearity.
7. Core Principles for Effective Banking Supervision, developed by the Basel Committee on
Banking Supervision at the Bank of International Settlements.
8. Daniel Kaufmann and Tara Vishwanath, Toward Transparency: New Approaches and their
Application to Financial Markets, WorldBankObserver 16(1), Spring 2001.
GC2006 03 part3 314 9/11/05 10:41:42
Budget transparency survey 315
15 Budget transparency survey
PamelaGomez
1
As part of the global movement towards more open government, citizens around
the world have become increasingly concerned with obtaining access to accurate,
comprehensive, and timely information on the fnancial activities of their governments.
This is not surprising. Comprehensive fnancial information, which should be disclosed
in a countrys budget documents, allows the public to evaluate a governments policy
intentions, its policy priorities, and their implementation. Public access to such
documents is essential to ensure both that government is fnancially accountable and
that civil society can participate effectively in budget debates.
The International Budget Project (IBP) was established at the Washington, DC-based
Center on Budget and Policy Priorities in 1997 to assist non-governmental organisations
and researchers in developing and transitional countries in their efforts to analyse budget
policies, to open budget processes and to strengthen budget-related institutions.
In 2004, the IBP published the fndings of a pilot study to evaluate public access to
budget information in 36 countries. The IBP, along with several partner organisations
in developing countries, had designed a questionnaire, the Open Budget Questionnaire,
to evaluate the public availability of budget documents at the central government
level, the presentation of budget information in a manner suitable for policy analysis,
and the extent to which public and legislative involvement in the budget debate is
encouraged. The IBP expanded the project following the pilot in 2004, and will publish
results from 60 countries in September 2006.
During the pilot phase of the project, civil society researchers from 36 developing
and transitional countries completed the OpenBudgetQuestionnaire. The questionnaire
results were intended tooffer an independent, non-governmental view of the state of
budget transparency in the countries studied. All of the researchers who completed
the questionnaire were from academic or other non-governmental organisations.
One researcher (or one group of researchers within an organisation) from each of the
countries represented was responsible for submitting a single questionnaire with the
results for that country.
The questionnaire contained 122 questions. All of the questions were constructed with
the intention that they should capture easily observable and replicable phenomena.
2

The questionnaire drew on the efforts of multilateral organisations for many of the
criteria it used in evaluating best and good practice. Specifcally, it used criteria from the
Organisation for Economic Co-operation and Developments (OECD)BestPracticesfor
BudgetTransparency, the International Monetary Funds (IMF) CodeofGoodPracticeson
FiscalTransparency,and the International Organization of Supreme Auditing Institutions
(INTOSAI) LimaDeclarationofGuidelinesonAuditingPrecepts.
GC2006 03 part3 315 9/11/05 10:41:42
Findings from the questionnaire
Table 15.1 shows the questionnaire results. The researchers in the 36 countries studies
found that in all but one of the countries studied, governments made their main policy
document, the executives budget proposal, available to the public. But lack of public
access to other types of essential budget documents raised concerns. Nine of the 36
Executive
Country budget
documents (%)
Czech Republic 86
Slovenia 86
Botswana 84
South Africa 83
Poland 79
Peru 77
Kenya 72
Namibia 68
Jordan 68
Ghana 64
Azerbaijan 64
Russia 63
Mexico 62
Brazil 61
Argentina 61
Uganda 59
India 59
Bangladesh 58
El Salvador 58
Colombia 57
Costa Rica 56
Nepal 56
Burkina Faso 56
Malawi 52
Georgia 52
Romania 51
Kazakhstan 48
Indonesia 47
Bulgaria 45
Honduras 43
Zambia 35
Ecuador 31
Croatia 28
Bolivia 21
Nicaragua 19
Mongolia 0
Average 56
Monitoring
Country and evaluation
reports (%)
Slovenia 99
Poland 97
South Africa 82
Czech Republic 76
Russia 74
Mexico 70
Kenya 64
Peru 64
Bulgaria 57
Romania 55
Georgia 53
Croatia 51
Brazil 49
Uganda 48
Jordan 46
Indonesia 45
El Salvador 44
Burkina Faso 43
Argentina 42
Botswana 42
Bangladesh 40
Kazakhstan 36
Colombia 36
Nicaragua 34
Ghana 34
Nepal 32
Costa Rica 31
Zambia 31
India 30
Ecuador 25
Namibia 14
Bolivia 12
Azerbaijan 10
Honduras 7
Malawi 6
Mongolia 0
Average 44
Public and
Country legislative
involvement (%)
Slovenia 86
South Africa 77
Czech Republic 65
Poland 63
Brazil 57
Uganda 54
Indonesia 52
Romania 51
Peru 49
Argentina 49
Burkina Faso 48
Mexico 48
Kenya 46
Costa Rica 46
Russia 45
Bangladesh 40
Colombia 38
India 37
El Salvador 37
Croatia 36
Botswana 36
Bulgaria 34
Malawi 33
Namibia 33
Ghana 33
Jordan 31
Kazakhstan 28
Azerbaijan 27
Honduras 25
Georgia 24
Nicaragua 20
Zambia 19
Mongolia 19
Bolivia 18
Ecuador 14
Nepal 7
Average 40
Note: The shading groups countries according to their average score. Scores of 67 per cent or above
generally indicate positive practices, and scores of 5066 per cent refect mostly positive practices.
In contrast, scores of 3349 per cent indicate mostly negative practices, and scores of less than 33
per cent refect negative practices.
Table 15.1: Summary results by major category
GC2006 03 part3 316 9/11/05 10:41:42
Budget transparency survey 317
countries did not release routine reports during the year allowing for the monitoring of
expenditure, revenue collection and borrowing. At the same time, 12 of the 36 countries
did not make audit reports available to the public. (See Table 15.2.)
Table 15.2: Budget documents made available to the public
(out of 36 countries completing the questionnaire)
Number of countries Percent of total
Pre-budget statement 19 53
Executive budget proposal 35 97
Citizens budget 6 17
In-year monitoring reports 27 75
Mid-year review 17 47
Year-end evaluation reports 29 81
Audit reports 24 67
Signifcantly, the researchers found that many governments could substantially
improve budget transparency in their countries by taking the simple step of releasing
to the public documents they are already producing for internal use. The researchers
found that in all of the countries that did not release routine monitoring reports except
one Namibia these reports were in fact prepared, but only for internal use. Similarly,
in the 12 countries that did not make audit reports available to the public, all of the
countries except one Nicaragua were preparing the audits, but simply not releasing
them to the public.
In addition to examining the public availability of the documents as noted above,
the survey also evaluated the comprehensiveness of the content of the documents. Each
countrys performance for the executives budget proposal, and for its monitoring and
evaluation reports, are shown in the frst two columns in Table 15.1. The third column
shows the extent to which the countrys executive makes available information and
the legislature provides opportunities to facilitate public discourse and understanding
of the budget.
The results from the pilot project included the following:
3
The countries surveyed fare best in the frst of the three main areas examined:
the executives budget proposal. Documents related to the executives budget
are routinely released to the public and typically contain signifcant amounts of
information on at least the budget year and the year before it.
Far fewer countries report positive practices in the second area examined: issuing
public reports that monitor the budget while it is being implemented or evaluate
the budget once the fscal year has been completed. Governments typically fall
short of international best practices in this area. Without these documents, the
public and civil society cannot easily assess budgetary outcomes, including how
well public funds are being spent.
The weakest scores, in most of the countries surveyed, concern the fnal area
examined: efforts by the executive to facilitate public discourse and understanding
GC2006 03 part3 317 9/11/05 10:41:42
of the budget. Most executives fail to provide information to the public and to
legislatures that can help make the budget (and the policies it embodies) more
understandable. Without such information, a broad and informed debate on a
nations fscal priorities is impossible. In addition, offcial avenues for legislative
and public input, such as legislative hearings or public consultation periods, tend
to be lacking.
The IBP made these results from the pilot study available in October 2004 to promote
discussion of the studys methodology. Following the release, the IBP collected feedback
on the study from academics, non-governmental organisations, public expenditure
management experts, and international fnancial institutions and other organisations.
The IBP used the feedback to refne the questionnaire and the studys methodology,
and expects to have results from 60 countries available in September 2006.
Notes
1. Pamela Gomez is an international policy analyst at the International Budget Project at the
Center on Budget and Policy Priorities in Washington, DC.
2. Most of the questions on the questionnaire required the researcher to choose among fve
responses. Responses a and b refected best or good practice regarding the subject matter of
the question, c and d refected poor practices, and e refected notapplicable. For the purposes
of aggregating the responses in the three major categories, an a response was awarded a score
of 100 per cent, b was worth 67 per cent, c was worth 33 per cent, and d was marked as 0
per cent. Responses of e notapplicable were not considered in the scoring.
3. For full details of the study, please see the International Budget Projects website at http://www.
internationalbudget.org/openbudgets/index.htm
GC2006 03 part3 318 9/11/05 10:41:43
Measuring revenue transparency 319
16 Beyond the rhetoric: measuring revenue
transparency in the oil and gas industry
ElizabethLort-PhillipsandVanessaHerringshaw
1
There has been growing recognition that transparent disclosure of revenues from
extractive industries is vital for responsible use of oil and gas and the avoidance of
the resource curse. This insight has been strongly endorsed by those committing to
schemes such as the Extractive Industries Transparency Initiative (EITI).
2
But beyond
the rhetoric, what concrete action has been taken to improve transparency in the oil
and gas sectors?
Save the Children UK (SC UK) has been very proactive in tackling this question. In 2005,
it created a framework for measuring revenue transparency and developed a set of indices
to set transparency standards for key actors, to evaluate their current performance and
to track progress over time. The standards can be readily incorporated into regulations,
policies and guidelines relating to revenue transparency in the extractive industries,
such as for reporting requirements, investor guidelines or company policies.
SC UK published two reports in 2005 measuring revenue transparency in the oil and
gas sectors. The frst report ranked 25 companies in terms of their performance in the
disclosure of revenues paid to host governments by the oil and gas industries, based
on their company-wide policies, their management systems and their transparency
performance in six host countries Nigeria, Angola, Azerbaijan, Indonesia, Timor Leste
and Venezuela. The second report ranks 10 homecountries (that is, countries in which
companies are registered or raising fnance) the United Kingdom, the United States,
Canada, France, the Netherlands, Italy, Norway, Australia, South Africa and Russia
according to their measures to regulate and support company reporting of revenue
payments to host governments.
As the research relates to transparency and accountability, the methodology used to
carry out both of these reports consisted largely of surveying data available in the public
domain. This included websites, annual reports, statements of policy, press releases,
accounting standards and fnancial regulations. Company performance was assessed
in three categories: revenue payments transparency (disclosure of beneft streams from
companies to host governments); supportive disclosure (disclosure of other information
necessary to judge the accuracy of the revenue information and predict future revenues);
and anti-corruption and whistleblowing measures. Home government performance was
assessed in four categories: revenue payments transparency; supportive disclosure; access
to information (from public, parastatal and private bodies); and the broad governance
environment. The overall methodology was developed through consultation with a
reference group involving government, civil society, investors and industry experts.
GC2006 03 part3 319 9/11/05 10:41:43
The report on companies found that the majority of companies were not disclosing
revenue payments to host governments. More than half the companies scored zero on
this category. Existing disclosure was mostly made known by geographic segment (such
as a region, or rest of the world category), which is of little use to citizens wishing to
fnd out information on company payments to their governments. However, systematic
disclosure across countries was shown to be possible, as Talisman disclosed royalties,
taxes and bonuses paid in all countries of operation.
Some companies are disclosing some information in a few countries but this is
usually limited and variable. For example, Shell had the highest country score for its
progressive disclosure practices in Nigeria (82 per cent), yet its overall performance (29
per cent) was weakened by its lack of disclosure practices in Venezuela. Performance
also varied within single countries between different companies. In Azerbaijan, only
BP disclosed any payments to the government; eight other companies operating there
have yet to do so. There was great variation between companies disclosing in Nigeria
and Indonesia. This clearly shows that companies can do more in particular countries
and that there is a need for them to take a globally systematic approach to improving
their transparency. (See Figure 16.1.)
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GC2006 03 part3 320 9/11/05 10:41:43
Measuring revenue transparency 321
Companies based in home countries with mandatory disclosure requirements lead in
performance results on transparency. Canadian government disclosure requirements are
stronger than the nine other governments assessed, and three of the top fve companies
were Canadian (Talisman, Nexen and TransAtlantic). Perhaps surprisingly, there was
uneven transparency performance by the voluntary EITI signatories. Of the seven
companies listed as EITI participants, only four publicly disclosed any payments to the
governments. Total, Exxon and Repsol did not disclose in any of the countries researched.
This poor performance illustrates the limitations of the voluntary process.
The assessment of home government action in supporting transparency in the oil and
gas industries revealed disappointing performance, despite their stated commitments to
transparency. Almost no home country had any requirement that companies disclose
their revenues on a host country-by-country basis in their regulations on corporate
reporting. (See Figure 16.2.)
As indicated above, overall leadership is shown by Canada, a non-EITI country, which
is the only country with any requirement for disclosure of royalty payments at a host
country level through its securities legislation. Leadership on access to information
also came from a non-EITI country, South Africa, which had the most progressive
law allowing access to private sector information where access is necessary for the
protection or exercise of another right. Furthermore, the research indicated that there
was a distinct lack of joined-up policies. Many countries reported a lack of coordination
between different government departments about disclosure commitments in the
extractive sector.
Figure 16.2: Overall home government performance
0
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CAN UK USA NE NOR FR IT AUS SA RU
Dbroad governance environment
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Arevenue payments
GC2006 03 part3 321 9/11/05 10:41:44
The fndings of these reports produced some key policy recommendations. Home
governments must require companies to publish what they pay to governments wherever
they operate, commit to global standards for disclosure in the extractive industry and
actively engage the EITI in the implementation of those standards. Companies too
must move beyond the rhetoric and publish what they pay to governments wherever
they operate on a country-by-country basis in a systematic way. Companies must lobby
home governments to mainstream disclosure requirements into accounting and listing
standards, actively participate in the EITI and work collaboratively with other actors to
build disclosure agreements. This is important and advantageous, as such regulation
would afford investment protection and ensure a more level playing feld in the oil
and gas markets.
For the full text of the reports, including key recommendations and standards
for inclusion in policies and guidelines, see www.savethechildren.org.uk/measuring
transparency.
Notes
1. Elizabeth Lort-Phillips is a consultant with Save the Children UK. Vanessa Herringshaw is head
of economic policy with Save the Children UK.
2. The EITI supports improved governance in resource-rich countries through the full publication
and verifcation of company payments and government revenues from oil, gas and mining.
Many countries are rich in oil, gas, and minerals and studies have shown that when governance
is good, these can generate large revenues to foster economic growth and reduce poverty.
However when governance is weak, they may instead cause poverty, corruption, and confict
the so called resource curse. The EITI aims to defeat this curse by improving transparency
and accountability. www.eitransparency.org
GC2006 03 part3 322 9/11/05 10:41:44
Benchmarking corporate reputation 323
17 Benchmarking corporate reputation:
an incentive for good anti-corruption practice
TransparenciaMexicana
The reputation of private companies is highly sensitive to news or suspicion of corrupt
behaviour. The fnancial collapses of powerful corporations such as Enron and Parmalat
are examples of the dire consequences companies face when their reputation is damaged
by actions that are corrupt or that unfairly damage the interests of competitors or
shareholders. Conversely, corporations that demonstrate positive good business practices
and values in their relationships with their community and stakeholders can boast of a
commitment to a less corrupt society. With this in mind, Transparencia Mexicana, the
Mexican chapter of Transparency International, in collaboration with market research
company Consulta-Mitofsky, developed a tool, the Mexican Corporate Reputation Index
(MECRI), to highlight companies good practices. The aim is to provide corporations
with a positive incentive to enhance their reputation as well as information about
which areas to improve, at the same time as generating public awareness about the
reputations of major corporations operating in the country.
The MECRI is based on the opinions of a total of 32 managers and executives from
the following professions: stockbrokers, publicists, economics analysts, fnancial risk
analysts, external auditors, certifers, civil servants, corporate lawyers and entrepreneurs.
1

Participants were required to be very well acquainted with the sectors and corporations
under investigation, but were precluded from assessing corporations they had any kind
of relationship with.
Respondents were asked which factors determine whether a company has a good or a
bad reputation. Eight factors were selected on the basis of these responses: concern for
the shareholders, investors, and partners; compliance with current laws and standards;
service to customers and suppliers; environmental responsibility; respect for workers
rights; involvement with the community; nature and quality of relationships with
competitors; and commitment to the development of Mexico. A closed question was
asked about each of the areas of concern. For example: How well do you think the
following companies treat their clients and providers? Very well (1)/ Well (2)/ Average
(3)/ Badly (4)/ Very badly (5). The MECRI has a scale of values between one and zero:
the higher the value, the better the standing of a frms reputation.
The MECRI evaluated 108 corporations, which were selected on the basis of total
revenues declared by the corporation. The companies are amongst the 500 largest
Mexican corporations, as listed in Expansin magazine, and operate in one of the
GC2006 03 part3 323 9/11/05 10:41:44
following 12 industries: food and non-alcoholic beverages; higher education; automotive;
pharmaceutical; alcohol and tobacco; self-service and department stores; public works
and construction; fnancial services; information technology and telecommunications;
mass media; tourism and transportation; and energy resources. (See Table 17.1.)
Table 17.1: Best-standing corporations according to the MECRI 2004
Ranking Corporation MECRI 2004
1 Grupo Industrial Bimbo 0.90
2 Instituto Tecnolgico y de Estudios Superiores de Monterrey 0.88
3 PEMEX 0.86
4 Nestl 0.85
5 Universidad Iberoamericana 0.84
6 Grupo Modelo 0.83
6 Instituto Tecnolgico Autnomo de Mxico 0.83
6 Universidad de las Amricas, Puebla 0.83
9 Vitro 0.81
9 Coca-Cola FEMSA 0.81
9 Cervecera Cuauhtmoc Moctezuma 0.81
Transparencia Mexicana decided to provide a positive incentive to corporations
to improve by publicly acknowledging the good standing of the 10 frms with the
strongest reputation, rather than publishing the names of the worst performers or
measuring perceived corruption levels. Companies with the best reputation in each
of the 12 sectors under examination and those with the highest index for each of the
eight variables measured were also publicly acknowledged. Information about all of
the 108 corporations is open to the governing bodies and high-level executives of each
corporation concerned in order to help them identify areas for improvement. The
information is not available to the general public, since the idea behind the exercise
is to provide positive incentives for companies to improve by striving to be included
on the list of top-performing companies.
For more information see: www.transparenciamexicana.org.mx
Note
1. The MECRI 2004 survey interviews were conducted between 15 November and 7 December
2003.
GC2006 03 part3 324 9/11/05 10:41:44
Officials asset declaration laws 325
18 Officials asset declaration laws:
do they prevent corruption?
RanjanaMukherjeeandOmerGokcekus
1
Requiring public offcials to declare their wealth and assets is widely considered an
effective measure to prevent corruption. It has been included as an article of agreement
in the United Nations, the African Union, and the Inter-American conventions against
corruption. But how effectively can offcials asset declaration laws reduce corruption?
Are there any features in the laws design and implementation that act as stronger
antidotes to corruption than others?
To address these questions, we examined various countries asset declaration laws to
fnd common aspects within such laws. Using a method similar to that of Transparency
Internationals National Integrity Systems Survey, we then constructed a list of seven
different aspects of such laws: (1) the date of implementation and whether there is a
constitutional mandate; (2) the coverage, or who must fle a declaration (for example,
only the highest level offcials, or both high- and low-level offcials); (3) the fling
frequency; (4) the specifcity of the declarations content (for example, must the
declaration include the value of the assets, assets held outside the country?); (5) the
details of the declarations processing (for example, is there a separate body which
receives and verifes the declarations contents; does the law describe the verifcation
process?); (6) the punishment for breach; and (7) whether or not there is public access to
declarations. Next, we collected the laws from 16 different countries and systematically
analysed the laws according to the seven common aspects listed above.
This project was initiated both to evaluate current laws designed to reduce corruption,
and as a tool for governments designing or improving their own laws. In order to
facilitate this process, the World Bank has created a website which contains a database
of the laws used in this study and tools for comparing the different aspects of these
countries laws.
2
To highlight the most signifcant aspects of these laws and their
effectiveness in reducing corruption, we performed a series of statistical tests to measure
the association between the possession of these countries laws and their perceived level
of corruption. These results are presented below. In all cases, Transparency Internationals
2004 Corruption Perceptions Index (CPI) was used as the measure of corruption inside
each country. To perform the statistical tests, we divided the countries into quartiles
based on their CPI scores. Accordingly, countries with the highest scores are in the least
corruptquartile and countries with the lowest scores are in the mostcorruptquartile.
GC2006 03 part3 325 9/11/05 10:41:44
Findings
1. Isthereanassociationbetweentheinclusionofassetdeclarationlawswithintheconstitution
andreducedcorruption? No. In six of the examined countries, offcials asset declarations
followed from constitutional directives. But these countries had lower average CPI
scores, implying higher perceived corruption, than countries that did not have asset
declaration within their constitutions (2.69 versus 3.39). Additionally, four of those six
countries laws did not require full transparency concerning offcials wealth, as they
did not include directions on how the public could access offcials asset statements.
Thus, although a constitutional provision is intended to signal the high value placed
by a nation on its offcials integrity, our analysis fnds that this intention does not
necessarily translate into reduced corruption.
2. Isthereanassociationbetweenthelevelofcorruptionandtheamountoftimethatthe
lawhasbeenineffect? Yes. Countries with a longer tradition of offcials asset declaration
laws had signifcantly lower corruption than countries with newer laws. Among the
countries examined, the quartile with the oldest laws (where the average age of the
law was 17 years) had average CPI scores of 5.2, which was nearly three times higher
than the average CPI (1.8) of the quartile of countries with newest laws (where the age
was 1.7 years). (See Figure 18.1.)
3.Isthereanassociationbetweenthelevelofcorruptionandwhichlevelofoffcialsmust
declaretheirassets? No. In 7 of the 16 countries examined, asset disclosure was required of
all public offcials. The average CPI scores for this group of countries was not signifcantly
20.0
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
CPI = 1.83
Most corrupt quartile
CPI = 2.22
2nd most corrupt quartile
CPI = 4.04
3rd most corrupt quartile
CPI = 5.20
Least corrupt quartile
1.67
7.67
12.50
17.25
Average age of law (years)
Figure 18.1: It takes time for offcials wealth declaration law to demonstrate results
GC2006 03 part3 326 9/11/05 10:41:44
Officials asset declaration laws 327
lower than countries that had adopted a more top-down approach. In the latter group
of countries, the list of offcials that are required to submit asset statements started
at the very top of the executive pyramid, and extended downwards to the senior or
middle level. This could imply that corruption reduction at top executive levels has a
powerful demonstrative effect on other offcials and that transparent behaviour at the
top can deter administrative corruption. Additionally or alternatively, it could imply
that petty administrative corruption affects CPI ratings less than grand corruption. Thus
our fndings suggest that instead of simply requiring all offcials to submit declarations,
a pragmatic recognition of internal enforcement capacity and the selection of who
should declare wealth could be more useful.
4.Isthereanassociationbetweenthelevelofcorruptionandthethreatofprosecutionfor
thosewhodonotfollowthelaws? Yes. Perceived corruption was lower in countries whose
declaration laws also permitted the government or anti-corruption body to prosecute the
offending offcial. In the least corrupt quartile, all countries asset declaration laws also
provided for prosecution for offenders. In the second lowest quartile, three-quarters of
the countries laws had prosecution provisions. Only half the countries in the bottom
two quartiles had prosecution provisions in their asset declaration laws.
5.Isthereanassociationbetweenlowercorruptionlevelsandverifcationmechanismswithin
thevariouslaws? Yes. In this respect, two practices were observed. In some countries, every
offcials submission was verifed by the recipient body; in others, the declaration was
stored untouched, to be retrieved only if corruption allegations were received against the
offcial. Countries that verifed offcials statements have signifcantly lower corruption
than countries that do not verify declaration content. The average CPI of the verifers
(3.72) was higher than that of the do-nothings (2.48).
6.Isthereanassociationbetweenlowercorruptionandpublicaccesstoassetdisclosurelaws?
Yes. Some countries laws required that asset disclosures be placed in the public domain,
either through website posting, or by informing where and when these documents were
available for public inspection. In others, only a designated organisation of government
could view the offcials declarations. Countries that gave public access to offcials asset
declaration had signifcantly lower corruption (average CPI = 3.61) than the other group
that restricted public access (average CPI = 2.46).
Our analysis further demonstrated that the combination of content verifcation and
public access to the declarations demonstrated an even greater association of reduced
corruption. Where full verifcation and public access to declarations is allowed, the
average CPI score (4.13) is double that of countries that neither verify statements
contents nor allow public access to them (2.07). Countries that either verify or allow
public access have perceived corruption levels in between these two extremes (with
average CPI scores of 3.4 and 2.5 respectively). (See Figure 18.2.)
Conclusion
These preliminary results were supported by regression analyses with the variables
described above, along with other country characteristics. Since the conclusion of
these preliminary analyses, we have expanded our dataset to include 42 countries. Our
GC2006 03 part3 327 9/11/05 10:41:45
initial analysis of this expanded dataset corroborates our fndings from the original
dataset. In addition, we are currently examining the different aspects of confict of
interest laws and their ability to reduce corruption. The expanded database for asset
declaration laws and a new database for confict of interest laws will be available at the
above-mentioned World Bank website.
Notes
1. Ranjana Mukherjee is senior public sector specialist in the South Asia Region of Poverty
Reduction and Economic Management Network at the World Bank (contact: rmukherjee@
worldbank.org). Omer Gokcekus is an associate professor at the John C. Whitehead School
of Diplomacy and International Relations, Seton Hall University, United States (contact:
[email protected]).
2. See http://www1.worldbank.org/publicsector/civilservice/assets.htm
4.5
2.07
2.50
3.40
4.13
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0
No access,
not verified
Public access,
not verified
No access,
content verified
Public access,
content verified
Average CPI in this group
Figure 18.2: Effectiveness of content verifcation and public access in offcials asset
declaration laws
GC2006 03 part3 328 9/11/05 10:41:45
Corruption in Mozambique 329
19 Tax evasion, fines and corruption in Mozambique
RalfLanwehr
1
A survey on the investment climate in the Mozambican province of Inhambane was
conducted in March 2004.
2
Its aim was to describe and explain cooperation problems
between the public and private sectors, and it unveiled a systemic network of major
tax evasion, compensatory fning and fne-related bribery.
Although Inhambane has great economic potential, investors are currently hesitant
regarding further investment and are dissatisfed with the status quo, because of serious
disruptions in cooperation between the private and public sector. These disruptions
hamper the climate for new investment and thereby threaten the provinces economic
development.
To describe, explain and quantify problem areas of investorgovernment relations,
a survey on the provincial investment climate was conducted. In order to establish an
initial understanding of the situation and to construct a survey, 25 key investors and
their public counterparts were interviewed utilising the critical incident technique.
3
The
sample of the main survey was drawn on the basis of a nationwide business census of
the National Institute of Statistics Mozambique.
4
The sample size was set to 100 frms
in the formal sector.
5

Public officials suspect massive tax evasion
The preliminary interviews revealed that the primary source for disruptions in
cooperation between the public and private sector are systemic. Public offcials claim
that the vast majority of provincial frms illegally evade tax payments by not declaring
their full revenues. The applied government strategy to counter perceived tax evasion
is heightened vigilance in the auditing of more easily identifable and/or minor
transgressions. When such transgressions are exposed, the maximum force of the law
is imposed on the individual frm, with the aim of balancing out suspected tax evasion.
The result is often disproportionately harsh fnes for nearly all provincial frms.
The business community feels misjudged
What might be called heightened vigilance from public offcials is not well received
by the provincial business community. The latter claims that many fnes are exorbitant,
arbitrary and counterproductive to economic development. Also, investors strongly
GC2006 03 part3 329 9/11/05 10:41:45
defend themselves against being prejudged for tax fraud. They state that many provincial
frms are not underreporting their gross revenues, but that they are nonetheless heavily
targeted by government.
Many business operators strongly emphasise that they are willing to contribute
their tax share in accordance with Mozambican law, but feel that the current practice
of exaggerated, non-selective fning actually rewards cheaters among the business
community. From a rational point of view, they argue, it would be wiser to underreport
gross revenues because, regardless of the correctness and honesty of their accounting,
their frm will be heavily fned in any case.
It is interesting to note that the preliminary interviews showed surprising accuracy
and unanimity in the perception of the situation between the public and the private
sector. The decisive difference is quantitative rather than qualitative, with respect to
the proportion of the overall value of fnes issued in relation to the amount of tax
debts evaded.
Sixty-four per cent of taxes evaded on average in the tourism sector
One of the main disruptions in Inhambane, as seen by both business and government,
is in the area of taxation. Unfortunately, it is quite diffcult to confrm, let alone quantify,
the amount of tax evasion by frms there. In the tourism sector, though, reliable fgures
on the maximum capacity of accommodation do exist from the provincial delegation
of the National Institute of Statistics. At the same time, it is well known that the
occupation rate during the last two weeks of December is nearly 100 per cent. Based
on this information, estimation of the amount of tax evasion can be attempted by
comparing the reported reality of room nights spent with the real reality of available
hotel beds during the last two weeks of December.
The reported reality was an occupation rate of 18 per cent for December.
6
If we
assume that the low number of tourists in the frst half of December is made up for
by almost full occupancy in the second half of the month, and if we factor in the
suboptimal use of space, we might expect an occupation rate of approximately 50 per
cent for December. The difference between the reported and the probable reality is
therefore 32 per cent unreported occupation.
Only fgures for room nights have been included in this calculation. Additional
potential income from restaurants or diving schools, as well as systematic underreporting
of accommodation costs is not addressed. Thus the estimate for tax evasion based on
underreporting of occupation should be considered to be at the lower boundary of
real tax evasion. In summary, the overall amount of underreported gross revenue of
the provinces frms is 64 per cent,
7
thereby lending credence to the claim by public
offcials of massive tax evasion.
Besides negatively infuencing the quality of interprovincial cooperation and seriously
hampering provincial tax income, the current practice of fning to balance out tax
evasion facilitates corruption on a massive scale. This is demonstrated by the fact that
a public offcial encouraged to issue heavy fnes might be tempted to cancel these fnes,
or turn a blind eye to exposed transgressions, in exchange for a bribe.
GC2006 03 part3 330 9/11/05 10:41:45
Corruption in Mozambique 331
Corruption is the biggest obstacle to business development
The results of the survey show that frms spend a total of about 10 per cent of their gross
revenue on corruption, and 64 per cent reported being subjected to corrupt actions by
public offcials (82 per cent in the tourism centre of Vilanculo). Corruption is perceived
as the biggest obstacle for business development, followed by government bureaucracy
and insuffcient infrastructure.
Figure 19.1: Perceived obstacles to business development for national and international
investors on a scale ranging from 1 (No obstacle) to 7 (Extreme obstacle)
Differences between national and international investors
On a closer look, a principal component analysis
8
revealed a latent pattern in the data.
Four factors underlying obstacles to business development were identifed as:
1. corruption, bureaucracy and an unreliable judicial system
2. business environment (containing worker skills, labour laws, unpredictable rules
and inadequate infrastructure)
3. government procedures (procurement procedures, tax collection procedures and
customs procedures)
4. criminality and violence.
There are remarkable differences between national and international investors. Business
environment is a far greater obstacle for international than for national investors.
9

One interpretation of this fnding might be that foreign investors often originate from
developed countries and thus have more diffculty adapting to developing country
conditions. Criminality and violence, however, are greater obstacles for national
investors.
10

3.5 4.0 4.5 5.0 5.5 6.0
Worker skills/cost
Labour laws
Procurement procedures
Tax procedures/rates
Unpredictable rules
Customs procedures
Criminality and violence
Judicial system
Infrastructure
Government bureaucracy
Corruption
International Investors National Investors
GC2006 03 part3 331 9/11/05 10:41:46
Outlook
It is diffcult to assess and quantify the origins and causal relationships in the vicious
circle of tax evasion, fning and bribery in Inhambane. The system is, however, clearly
self-supporting. As long as frms keep underreporting their revenues and the government
continues its harsh fning strategy, no changes in current practice can be expected,
resulting in a loss of the majority of the provinces tax income and severely reduced
future investments.
Notes
1. Ralf Lanwehr is a research associate at the Berlin University of Technology (contact: lanwehr@
epix.de). He would like to thank Mike MacDonald and Ulrike Beuing for their advice and
support in the course of the project as well as Marie Wolkers and Robin Hodess from TI for
their valuable suggestions.
2. The survey was fnanced by the German Technical Cooperation Agency (GTZ).
3. J. C. Flanagan, The Critical Incident Technique, PsychologicalBulletin 51(28), 1954.
4. Instituto Nacional de Estatstica, CensodeEmpresas (Survey of Businesses) (Maputo, 2003).
5. To analyse the fact that future business development in the province will depend heavily on
investment in the tourism sector, 50 frms from that area were randomly drawn, alongside
50 frms from the commercial and industrial sectors. Two versions of the questionnaire were
used, with the order of the questions altered.
6. The 15 tourism companies offer a combined total of 1,252 beds.
7. 100 per cent reported reality of 18 per cent/expected reality of 50 per cent = 64 per cent
underreported gross revenue.
8. Principal component analysis (PCA) is a standard procedure of data reduction. Its aim is to
reduce the dimensionality of a given set of data and to clarify the correct classifcation of
the items to their underlying factors.
9. F = 11.1; df = 1/48; p = 0.002.
10. F = 7.7; df = 1/49; p = 0.008.
GC2006 03 part3 332 9/11/05 10:41:46
The V4 Index 333
20 The V4 index: corruption propensity in four
Visegrd capitals
Michalticka
1
The V4 Index is a Transparency International Czech Republic research project that was
completed in the frst half of 2004. The goals of the project were to design a survey
methodology that would establish the existence and evaluate the functionality of
anti-corruption institutions (corruption propensity) in the public administration at
local/regional levels. That is, in the public administrations of the four Visegrd (V4)
capitals: Bratislava, Budapest, Prague and Warsaw. A major outcome of the project was
to rank the capitals administrations according to the quality of their anti-corruption
institutions. By doing this, the index raised public awareness with respect to the problem
of corruption in the public administrations of V4 capitals.
The research project focused on anti-corruption tools and mechanisms in fve areas:
public procurement tenders, internal audit and control mechanisms, codes of ethical
behaviour, conficts of interest, and public administration information policies/public
accessibility of information.
The survey was conducted in two stages. The frst stage involved gathering objective,
hard data on the existing anti-corruption tools and mechanisms in the public
administration of each of the V4 capitals. The data were gathered through interviews
with the representatives of the municipal councils of each capital and through content
analysis of relevant documents. For the interviews, the head of the offce and head
of the legal department (or head of the internal audit department) were asked yes/no
questions concerning the existence of anti-corruption mechanisms. For the content
analysis, the relevant laws, ordinances and instructions (internal norms effective in
the offces) were examined, if interviewees were unable to provide the requested data.
The objective data were aggregated to form the V4 Objective Index.
In the second, subjective stage of the survey, perceptions of the effciency of anti-
corruption tools and mechanisms in each of the fve above-mentioned areas of the
public administration were studied, from the perspective of selected and well informed
members of the public. Interviews were conducted among employees and elected
members of the municipal councils of the V4 capitals, journalists, businessmen and NGO
representatives. In each of the cities, a minimum of 100 respondents were interviewed.
The subjective data were aggregated to form the V4 Subjective Index.
The scale of the Objective V4 Index ranges from 0 to 1, where 0 indicates the absence
of anti-corruption tools and measures in the public administration and 1 indicates
GC2006 03 part3 333 9/11/05 10:41:46
that all the elements measured exist. The results of the objective part of the V4 Index
show that most anti-corruption tools in the examined felds are present in Budapest,
with a score of 0.87. (See Table 20.1.)
Table 20.1: Objective V4 Index
Bratislava Prague Warsaw Budapest
Overall index 0.55 0.60 0.64 0.87
Public procurement tenders 0.36 0.61 0.90 0.96
Internal audit and control mechanisms 0.93 0.73 0.62 0.76
Codes of ethical conduct 0.22 0.80 0.00 0.93
Conficts of interest 0.64 0.37 0.86 0.79
Open information policies 0.61 0.50 0.83 0.90
(Range from 0 to 1)
Note: Zero in the intersection of Warsaw and Codes of ethical conduct is due to the fact that none
of the examined anti-corruption tools in the feld of codes of conduct were in place in Warsaw.
The results of the second stage of the research project, based on the subjective
perceptions of the respondents, showed that the operation and functionality of
anti-corruption tools used in the public administration of individual capitals were
less positive than in the objective part of the survey. This difference, however, met
expectations: similar research results comparing reality with perception have shown
that public opinion is more critical than the objective situation.
On a scale of 0 to 1 (where 0 indicates very bad; 0.33 indicates somewhat bad; 0.66
indicates somewhat good; and 1 indicates very good), Budapest retained its position
from the objective part of the survey, and fnished in frst position, with a score of
0.49 (See Table 20.2). In Budapest, respondents rated public procurement tenders and
information accessibility, such as the open information policies of municipal authorities,
highest. These results correlated fully with the data generated by the objective part of the
survey, which indicated that Budapest had most anti-corruption tools in these areas.
Table 20.2: Subjective V4 Index
Prague Bratislava Warsaw Budapest
Overall index 0.40 0.44 0.44 0.49
Public procurement tenders 0.40 0.46 0.47 0.55
Internal audit and control mechanisms 0.38 0.40 0.39 0.46
Codes of ethical conduct 0.47 0.51 0.51 0.50
Conficts of interest 0.29 0.32 0.40 0.42
Open information policies 0.46 0.51 0.43 0.52
(Range from 0 to 1)
GC2006 03 part3 334 9/11/05 10:41:46
The V4 Index 335
Despite scoring lowest in terms of objective anti-corruption tools and mechanisms,
Bratislava came second according to respondents opinions, with a score of 0.44. It is
striking that Bratislava achieved above average results in terms of its codes of ethical
conduct. In fact, most of the individuals interviewed consider the environment in
Bratislavas public administration to be ethical, despite the fact that the citys executive
authority had not implemented any code of ethical conduct. The greatest need for
improvement in Bratislava, in the view of respondents, was in the area of preventing
conficts of interest.
In Warsaw, which came third of the V4 capitals (also at 0.44, but just behind Bratislava),
respondents rated the area of codes of ethical conduct highest, although, in objective
terms, there are no such codes in the Warsaw public administration. Compared to the
other cities, Warsaw respondents perceived public procurement tenders quite positively.
Internal audits and the operation of control mechanisms, however, were considered
to be rather dysfunctional.
Prague was placed fourth out of the cities studied, with a score of 0.40. If the partial
indices between the different capitals were compared, Prague did not exceed the average
in any of the areas under consideration. The respondents who had dealings with the
public administration did not believe that anti-corruption tools were implemented
with much effciency. The best results in Prague were achieved in the area of codes of
ethical conduct, where more than half of the respondents considered the environment
in the Czech capitals public administration to be ethical. As in the case of Bratislava,
Prague residents were most critical of the way in which confict of interest provisions
were implemented.
Note
1. Michal ticka is project manager, Transparency International Czech Republic.
GC2006 03 part3 335 9/11/05 10:41:46
21 Efficiency of federal transfers to municipalities in
Brazil
MarcosJoseMendes
1
This study aims to analyse irregularities uncovered by the Offce of the Inspector General
(Controladoria Geral da Unio, CGU) in the administration of the Fund for Development
and Maintenance of Elementary Teaching and for Professional Improvement of Teachers
(FUNDEF). In order to inspect FUNDEF and other federal transfers, the CGU has
maintained, since 2003, a systematic programme for conducting random audits in
municipalities across the country. For the purposes of this work, only federal transfers
are analysed, since CGU does not audit the use of state and municipal funds.
Federal funds are an important part of municipal budgets representing 62 per cent
of municipal revenue. Municipal accounts are regularly audited by state audit courts,
but these are reputed to provide only weak supervision by municipal citizen councils,
which also have a poor reputation since they are often controlled by the local authorities
they are supposed to audit; and by federal agencies that supervise the use of federal
funds transferred to municipalities, which tend to conduct more effcient audits. One
of those federal agencies is the CGU, which randomly chooses municipalities to audit.
These audits cover all of the federal programmes fnanced by the federal government
in the chosen municipality.
By looking in depth at one instrument of public education funding, the FUNDEF,
we aim to identify weaknesses in the management of municipal funds. The analysis
covers 67 municipalities of the states of Bahia (22), Maranho (14), Par (15) and Piau
(16) that received federal subsidies to fnance their local educational system. These
municipalities are among the poorest in the country and were randomly chosen by
CGU, the agency which sent the auditors to the cities. The auditors analysed fnancial
records, but also visited schools, interviewing teachers, public workers and students, and
compared prices paid by the government for goods and services with those in effect in
local markets. The auditors reports were used to classify the most common irregularities
found in the municipalities. Table 21.1 shows the most common irregularities and the
percentage of municipalities in which those irregularities were observed.
The many irregularities identifed appear to seriously harm the quality and effciency
of the programme. Furthermore, irregularities are spread across almost all of the
municipalities in the sample. Only 1 per cent of this sample does not present any
irregularity. This diagnosis is confrmed when we analyse the amount of money involved
in the irregularities, as shown in Table 21.2. The total amount of FUNDEF allocations
GC2006 03 part3 336 9/11/05 10:41:46
Federal transfers to municipalities in Brazil 337
audited was 161.4 million reais (US $54 million). The various irregularities listed in the
table were responsible for total losses equivalent to 13 per cent of the budget. Fraud in
public procurement was the most costly type of irregularity.
Table 21.1: Main irregularities in terms of the number of municipalities where they were
observed
Irregularities Municipalities %
where irregularity
observed
The community council created to supervise funds does not work
properly or is in practice controlled by the mayor (the authority that
should be inspected by the council)
73
Embezzlement (or evidence of embezzlement) of resources by means of
fraud (false fscal documents, goods bought but not received by schools,
purchases at prices above the market, etc.)
63
Use of funds in expenditures not characterised as fundamental to
education
60
Low quality and organisation of the fnancial resources management
(poor accounting; emission of cheques with no funds; cash withdrawals
from bank accounts, which makes it diffcult for auditors to check how
the money was used, etc.)
52
Evidence of fraud in public procurement (mainly through the creation
of ghost competitor companies to create the illusion of a competitive
bidding process; or through the division of a single contract into a
number of smaller contracts that are below the threshold to hold a
competitive contracting process)
43
Table 21.2: Percentage of the total amount of funds received by the municipality from
FUNDEF that was embezzled, according to type of irregularity
Irregularity Mean % Max. %
Evidence of fraud in procurement 13 55
Embezzlement (or evidence of embezzlement) of resources by means of
fraud (false fscal documents; goods bought but not received by schools;
purchases at above-market prices, etc.)
12 45
Embezzlement of funds earmarked to pay teachers (money received by
persons other than teachers; fraud and illegal practices in the hiring of
teachers, etc.)
11 42
Illegal payment of teachers and other workers (ghost teachers; illegal
bonuses, etc.)
3 6
Use of funds on expenditures not characterised as fundamental to
education
3 12
GC2006 03 part3 337 9/11/05 10:41:47
The high level of irregularities in the management of FUNDEF funds indicates
that community councils lack the power and resources necessary to ensure that local
authorities manage FUNDEF funds honestly and effectively. It is necessary to create
another body of supervision or to create sanctions for those members of community
councils who fail to carry out their duty. In order to remedy the lack of staff capable of
managing procurement, distribution and bookkeeping tasks in poorer municipalities,
state governments should be required to provide municipal governments with an
electronic procurement system for services and goods.
Note
1. Marcos Jose Mendes is a consultant at the Brazilian senate.
GC2006 03 part3 338 9/11/05 10:41:47
Evaluating Colombias health sector 339
22 Integrity Index for Public Institutions:
evaluating Colombias health sector
TransparenciaporColombia
1
Since 2002, Transparencia por Colombia, the Colombian chapter of Transparency
International, has produced an annual Integrity Index for Public Institutions, comparing
levels of corruption risks in the countrys public institutions. The aim of the index is
to provide a tool for civil society to monitor transparency, integrity and effciency of
public institutions. Since institutions are individually evaluated, it is possible to use
the index to assess vulnerabilities to corruption of a particular sector. Here we provide
an overview of the index and examples of how it can be used to assess corruption risks
in the health sector.
The index ranks public institutions according to 20 indicators, all of which are
objective measures.
2
The indicators fall into three groups:
Transparency. This measures visibility of the organisation to the general public,
assessed using the following indicators: information found on the institutions
web page; mechanisms for filing complaints; transparency of contracting
processes; compliance with the national contracting information system (SICE);
accountability mechanisms; transparency, accessibility and clarity of bureaucratic
processes; anti-corruption efforts and access to information.
Controlandpunishment. This measures the level of sanctions or decisions taken
by control bodies against offcials of public bodies by looking at sanctions for
fscal irregularities; disciplinary sanctions; and value of decisions signalling fscal
irregularities as a proportion of the organisations budget. The underlying premise
is that a higher number of dishonest practices is associated with institutional
scenarios where preventative mechanisms are defcient or non-existent.
Effciencyandinstitutionality. This measures effcient compliance with the objectives
and missions of the body. The indicators look closely at simplicity of organisational
processes, and clarity and knowledge of rules and controls, as these factors limit
the margin for discretion by personnel and therefore risk of corruption. The
indicators include: number of complaints presented and investigations opened
by public auditor and public prosecutor as a proportion of the number of offcials
employed; procedures for hiring staff; incentives for employees; performance of
the internal control function; and evaluation of management.
GC2006 03 part3 339 9/11/05 10:41:47
Each of the three components is made up of a simple average of the indicators in the
category, and the index is an average of the three, weighted against the number of
indicators that make up each component.
The 2004 index evaluates 80 per cent of public entities at central government level
(182 central government bodies are assessed). For the frst time state government bodies
are also evaluated.
3

Risks of corruption in the health sector
Some 12 per cent of the public institutions assessed in the National Index correspond
to the health sector. The risk of corruption is considered high in 59 per cent of these.
Of particular concern are the results of health delivery bodies such as the Social
State Enterprises (ESE), which were recently created in an attempt to overcome the
ineffciencies and poor quality services offered by the centralised Social Security Institute
(ISS). While the results for the health sector are slightly better than recorded by the 2003
index, they are poor in two of the three categories: transparency (45 on a scale of 1 to
100, where 100 indicates a low risk of corruption) and effciency and institutionality
(55 out of 100). (See Figure 22.1.)
Figure 22.1: National public health institutions
At the state level a number of problems were also identifed: the average score of health
agencies responsible for directing, coordinating and monitoring the health and social
security services in each jurisdiction is 49.2 out of 100, which is lower than the average
score per sector. More than 35 per cent of these health agencies are considered to face a
high or very high risk of corruption, while only 12.5 per cent show a moderate risk.
A comparison of data on risks of corruption in state health authorities and infant
mortality rates
4
suggests a correlation between corruption and health outcomes,
5
as
Policy-making bodies
Supervisory bodies
Service-providing bodies
0 10 20 30 40 50 60 70 80 90 100
Very high risk High
risk
Medium
risk
Moderate
risk
Low
risk
64.00
66.85
66.50
68.47
51.75
51.38
20032004 Index 20022003 Index
GC2006 03 part3 340 9/11/05 10:41:47
Evaluating Colombias health sector 341
Figure 22.2 suggests. The data is by no means conclusive: we cannot omit the possibility
of reverse causality (that is, that poor health leads to higher levels of corruption), or that
a third variable, such as low income per head, might be driving both infant mortality
and corruption.
Figure 22.2: Comparison of data on corruption risks and infant mortality rates at state level
Conclusions
The simple exercise above shows how the index can be used to explore costs of corruption
in specifc sectors and to identify vulnerabilities to corruption that should be taken
into account when formulating public policies. The results on health authorities alerted
Transparencia por Colombia to the need to develop new indicators to measure the
performance of the authorities responsible for coordinating, regulating and operating
health systems.
After three editions of the index, it is possible to draw preliminary conclusions
about its impact. The 2004 index refects an improvement in the response by public
offcials to requests for information. Public institutions are interested in the index as
a benchmarking tool that can help identify institutional weaknesses: more than 600
public employees representing more than 40 per cent of the national institutions
evaluated have used the index to identify and rectify weaknesses. The demand for
detailed and accurate information on corruption risks has grown at state level, too:
half of the 32 states have organised forums to debate the results.
5.0
4.5
4.0
3.5
3.0
2.5
4.5 4.0 3.5 3.0 2.5
Risk: Not high
Mortality: High
Risk: High
Mortality: High
Risk: High
Mortality: Not high
Risk: Not high
Mortality: Not high
Logarithm
for
infant
mortality
Logarithm for risks
GC2006 03 part3 341 9/11/05 10:41:47
Notes
1. The principal researcher at Transparencia por Colombia is Martha Badel. Contact:
[email protected]
2. For details of the frst edition, released in 2002, see GlobalCorruptionReport2004. The frst
index used 16 indicators, most of which were objective, with the others refecting the opinions
of a sample of public offcials from each institution. The opinion survey data was published
separately in 2004.
3. Colombia has three levels of government: central, state (known as departments in Colombia)
and municipal.
4. National Department of Statistics, Departmental Estimates of Infant Mortality 19851993: Mid-
term Perspectives 19952005, in EstudiosCensalesNo.5 (Bogota: DANE, 1998). The estimates
are per 1,000 live births.
5. Infant mortality is one of the best measures of infuence of social factors on health, according
to Michael Grossman in The Human Capital Model of the Demand for Health, National
Bureau of Economic Research Working Papers No. 7078, 1999.
GC2006 03 part3 342 9/11/05 10:41:48
Corruption in the public health service in Bangladesh 343
23 Corruption in the public health service in
Bangladesh
IftekharZamanandAlimAbdul
1
Health is a priority sector in the allocation of public funds in Bangladesh. In line with
the Health for All policy, frst adopted in 2000, the government allocated 9 per cent
of its development budget for the 200405 fscal year to health, which was the ffth
largest category of its public expenditure. The government formed a Health Watch
Committee in 1998 under the ministry of health, which was aimed at making doctors
and other health offcials more accountable for public funds and to their patients. The
new government disbanded the programme when it came to power in 2001, however. The
Corruption Database created by Transparency International Bangladesh (TIB) on the basis
of corruption reports in the print media, highlights a need for renewed anti-corruption
efforts in the sector: the database has consistently identifed health as the fourth most
corrupt sector in Bangladesh since 2000.
2
TIBs 2002 and 2005 Household Corruption
Surveys also found that health is considered to be the fourth most corrupt sector in the
country.
3
Corruption in the health sector results in ordinary people, and especially the
disadvantaged, being deprived of the benefts of basic health facilities and services.
According to the Household Corruption Survey of 2002,
4
which is based on interviews
with 3,030 households, 61 per cent sought services from government hospitals, of which
47 per cent failed to gain admittance into hospitals through the prescribed procedure
and instead were forced to seek alternative ways of obtaining health services. In 56
per cent of these cases, a bribe was paid for health care, while in the remaining cases
patients obtained the health service thanks to the assistance of infuential relatives
or of doctors involved in private practice. The 2005 Household Corruption Survey
revealed that 60 per cent of households interviewed received services as out-patients of
government hospitals, of which 29 per cent had to pay bribes to doctors worth 60 takas
(US $1) on average. Some 21 per cent of households interviewed had a member who
was admitted to hospital, of whom 20 per cent had paid a bribe to a public hospital
doctor for medical advice. In these cases, the bribes were worth on average 478 takas
(US $8). The survey also revealed that 94 per cent of patients had paid for medicines
that should have been provided for free.
5
The 2005 Household Corruption Survey also revealed that 3 per cent of households
interviewed had a family member who had undergone surgery, of whom 37 per cent
were asked for bribes worth on average 1,420 takas (US $24). Of the 4.5 per cent of
households interviewed with a family member who needed an X-ray, 56 per cent
GC2006 03 part3 343 9/11/05 10:41:48
had to pay 516 takas (US $9) on average as a bribe. Furthermore, of the 9 per cent of
interviewed households that had required pathology tests, 60 per cent had paid a bribe
worth on average 410 takas (US $7). In an earlier study, the bribe amount paid for
delivery of newborn babies was generally reported to be between 1,000 and 5,000 takas
(US $1576).
6
(See Figures 23.1 and 23.2.)
Figure 23.1: Percentage of patients forced to pay a bribe to obtain selected health services
Figure 23.2: Average size of bribe paid for health services (in taka)
0
10
20
30
40
50
60
70
%
29%
20%
37%
56%
60%
Out-patient
services
In-patient
services
Surgery X-rays Pathology
tests
0
250
500
750
1,000
1,250
1,500
taka
60
478
1,420
516
410
Out-patient
services
In-patient
services
Surgery X-rays Pathology
tests
GC2006 03 part3 344 9/11/05 10:41:48
Corruption in the public health service in Bangladesh 345
The 2002 TIB Report Card Survey revealed that half of the patients polled felt that
doctors did not pay due attention to patients, while only 34 per cent of patients were
satisfed with the service they received from doctors. Only 1 per cent of patients were
satisfed with the degree of cleanliness of government hospitals.
7
Among respondents who had paid bribes in hospitals or experienced poor service
due to mismanagement, unavailability of staff, negligence or an unhelpful attitude
towards patients, 56 per cent blamed doctors, 36 per cent blamed hospital staff and 5
per cent blamed nurses. Some 61 per cent of respondents who received hospital services
complained that corruption in hospitals was carried out directly by service providers,
while 17 per cent said corruption was practised indirectly through a third party. Some
3 per cent of respondents had offered money directly to service providers.
8
All patients complained that they had to wait for long periods in hospitals. One
reason for this was that doctors failed to arrive on time. According to a study by TIB of
health services in the Nalitabari Upazilla Health Complex, the main reason for irregular
attendance by hospital doctors is that they are busy with their private sector work.
9

In TIBs 2002 survey, 67 per cent of respondents cited a lack of accountability as the
major cause of corruption in hospitals that are fully or partially government owned.
Discretionary power without accountability was identifed as the second major cause
(50 per cent), followed by lack of transparency (45 per cent), prevalence of monopoly
power (28 per cent), infuence of powerful people (13 per cent), and red tape (7 per
cent). Corruption was considered to have the worst effects for the poor.
10

The 2002 survey also revealed that households with members who received a service
in a government hospital and became victims of corruption spent about 1,847 takas (US
$28) annually on corruption. The sum was greater in urban areas (an average of 2,256
takas, over US $36) than in rural areas (an average of 1,711 takas, US $26). Extrapolating
from the survey data, the amount of bribes annually paid by patients for services in
public hospitals is estimated at 12,500 million takas a year (US $190 million).
Notes
1. Iftekhar Zaman is the executive director and Alim Abdul is a researcher at Transparency
International Bangladesh.
2. Corruption Database, (Transparency International Bangladesh (TIB), 2000, 2001, 2002, 2003),
see: www.ti-bangladesh.org
3. CorruptioninBangladesh:AHouseholdSurvey (TIB, 2002), CorruptioninBangladesh: AHousehold
Survey (TIB, 2005).
4. In 2004, the sectors covered in the survey were: education, health, land administration,
power, taxation, police, judiciary, local government, banking and pensions. The respondents
were selected randomly from across Bangladesh. Additional conclusions about this data are
drawn from TIBs Corruption Database; a household survey conducted in 2002, a Report
Card Survey on Health conducted in 2002 by TIBs Committees of Concerned Citizens; and
focus group discussions with patients who sought or received services in Nalitabari Health
Complex.
5. CorruptioninBangladesh: AHouseholdSurvey, 2005.
6. TheQualityofHealthServicesinNalitabariUpazillaHealthComplex (TIB, 2003).
7. ReportCardSurveyonHealth (TIB, 2002).
8. CorruptioninBangladesh:AHouseholdSurvey, 2002.
9. TheQualityofHealthServicesinNalitabariUpazillaHealthComplex, 2003.
10. Ibid.
GC2006 03 part3 345 9/11/05 10:41:48
24 Governance in Bulgarias pharmaceutical
selection and procurement systems
PatrickMeagher
1
The selection and procurement of pharmaceuticals in health care systems presents a
host of governance challenges. Technically sound decisions about the cost-effectiveness
of drugs, and objective evaluations of bids, must be made in a political environment
fraught with contending pressures from domestic and foreign companies, patients and
physicians lobbies, and policy-makers with strong views. In this feld, both politics and
profts create strong pressures towards rent-seeking and corrupt behaviour.
This research has two components, the frst concerning the central processes of
drug selection for the health system, and the second focusing on procurement of
pharmaceuticals by hospitals throughout Bulgaria. The drug selection component
focuses primarily on the two major selection processes: the Positive Drug List (PDL)
and the National Health Insurance Fund (NHIF) Reimbursement List. The procurement
component deals with medicines that are chosen from the PDL for hospital formularies
and purchased from suppliers.
Findings
The government pays for the bulk of health care through direct Ministry of Health
spending and, increasingly, the National Health Insurance Fund (NHIF). The
government was estimated to have covered about three-quarters of (formal) medicinal
drug expenditures in 2002, about US $375 million. Gaining access to this market for
their products requires drug producers to pass through a series of regulatory hurdles
from market authorisation to price regulation and selection for the central drug lists
before they can bid for sales to government, hospitals or pharmacies. The system of
drug selection, reimbursement and procurement has undergone major change since
2000, with a raft of reforms implemented for the frst time in 2004.
Our research indicates a struggle by international and local drug producers to exert
infuence at several levels of the system, from policy-makers at the Ministry of Health
and NHIF to parliamentarians, associations and parties, hospitals and physicians.
Regarding the selection processes, we found ample if indirect evidence of
procedural irregularity, including corruption. This evidence comes from interviews,
offcial flings and hearings, and a comprehensive review of media reports (some 5,000
items) for the period from mid-2003 to the end of 2004. Several scandals involving
GC2006 03 part3 346 9/11/05 10:41:48
Governance in Bulgarias pharmaceutical systems 347
shell companies and conficts of interest were reported, in addition to more mundane
allegations of bribery.
Furthermore, we asked pharmacy experts to evaluate the Positive List and NHIF
Reimbursement List against international benchmarks. A comparison of drug choices
against World Health Organization Essential Drugs criteria showed a number of cases
of under-inclusion, where older drugs with proven benefts were excluded in favour
of newer, more expensive ones. Several cases were also found of over-inclusion, where
a high number of alternative name brands were selected, some of them redundant,
others of questionable effcacy. Price comparisons with neighbouring countries also
suggest that Bulgaria may not be getting the best value for its drug expenditure. These
outcomes show weak implementation of essential drugs policy, consistent with (but
not proof of) perceptions that corruption plays a role.
Regarding drug procurements by hospitals, we carried out a survey of supplier frms
and persons knowledgeable about drug tenders in 148 hospitals, and looked at hospital
records. Some evidence was found of incorrect procedure in such areas as bid-ranking,
discretionary exemptions of bidders from documentation requirements (which were in
any case excessive), and the frequent granting of price adjustments in post-procurement
contract amendments. Ethical lapses were also reported, including the use of drug
donations by supplier frms to infuence subsequent procurements (see Table 24.1,
showing perceptions of knowledgeable hospital personnel).
Table 24.1: Infuence of drug donations on procurement
Amount of infuence (%) None A little Some A lot Enormous
Doctors 21.2 36.8 29.2 9.5 3.3
Nurses 26.8 30.3 28.9 10.7 3.3
Pharmacists 59.4 26.1 11.6 0.0 2.9
Institutional integrity
Here, we investigated the following attributes: transparency, accountability, prevention,
enforcement and education (that is, on ethics and integrity standards). In the research
on selection processes, we gave rankings to these processes with respect to each factor.
The information came from responses given in structured interviews, our examination
of offcial documents and records, and direct testing by means of some 15 information
requests that our researchers fled under the Bulgarian Access to Public Information Act
(APIA). Using international (not regional) best practice benchmarks, we assessed each
factor and gave a ranking most of these rankings for Bulgaria were poor.
The integrity fndings broadly matched up with our information on corruption and
procedural regularity in the different selection processes. In particular, selection criteria
were found to be broad and sometimes quite vague, and there were needless constraints
on the openness of selection processes and information access. There appeared to be
little rigour or accountability in selection, since multiple name-brands could be listed
and it was acknowledged that independent clinical trials and pharmaco-economic
studies were rarely done in Bulgaria. Also, there was little effective oversight of selection
GC2006 03 part3 347 9/11/05 10:41:49
and very limited public input. Rules and implementation mechanisms concerning
appointments, ethics standards and conficts of interest appear insuffciently robust
to constrain abuses. The extent of integrity (and conversely, vulnerability) varied
across selection processes. Bulgaria has taken several important steps to strengthen
selection processes, such as defning the Positive List procedure and imposing some
level of transparency. Unfortunately, the pressures on the selection system as a whole
are considerable, and reforms in particular areas cannot constrain potential abuses in
others.
In the procurement component, we found signifcant variation across hospitals on
most factors but there were no detectable patterns of co-variance (for example, high
transparency correlating with high accountability). While respondents tended to give
the correct (high integrity) response, we did fnd patterns such as a paucity of ethics
training, along with generally low expectations about whistleblowing or punishment
in cases of corruption (see Table 24.2, showing what respondents expected that actual
sanctions would be for taking an informal payment).
Table 24.2: Likely punishment for taking an informal payment (% of respondents)
Possible punishments in decreasing Evaluation Pharmacist Hospital
order of punishment committee director
Arrest 2.8 0.0 2.4
Dismissal 24.8 27.3 40.0
Suspension 4.3 9.1 7.1
Demotion 2.8 3.6 7.1
Fined 7.5 7.3 5.9
Warning 18.5 32.7 7.1
Dropped from next years committee 23.2 9.1 24.7
No punishment 5.1 5.5 1.2
Conclusion
This study, using combined methods to examine governance at two levels in
Bulgarias pharmaceutical system, offers a potential model for corruption assessment.
In particular, the study shows that a focus on institutional integrity is helpful but
requires complementary analysis of social and political-economic factors. The
recommendations that fow from these fndings point to a range of needed steps in
such areas as transparency and oversight, process streamlining, moving parts of the
process to independent commissions (or outsourcing), making international standards
mandatory in selection processes, and improving corporate governance of hospitals.
Note
1. Patrick Meagher is associate director of the IRIS Center, University of Maryland, United
States. The research was sponsored by the US Agency for International Development. The
authors views expressed in this publication do not necessarily refect the views of USAID or
GC2006 03 part3 348 9/11/05 10:41:49
Governance in Bulgarias pharmaceutical systems 349
the US government. This summary draws on the authors collaboration with, and on analysis
done by, Omar Azfar and Diana Rutherford of IRIS. This work also includes expert background
analysis by Jillian Clare Cohen and Judith Fisher of the University of Toronto; and research
and survey implementation by Denitsa Sacheva, Roza Evtimova and Mina Popova of the
International Healthcare and Health Insurance Institute, Sofa, and its survey affliate, FACT
Marketing.
GC2006 03 part3 349 9/11/05 10:41:49
25 Survey research sheds light on Latin Americans
experience with corruption
EricKiteandMargaretSarles
1
The United States Agency for International Development (USAID) is increasingly using
citizen surveys to improve its democracy and governance programmes and measure their
impact. In Latin America, USAID completed 11 surveys in 2004, comprising Bolivia,
Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala,
Honduras, Mexico, Nicaragua and Panama.
2
The surveys probe perceptions of corruption
behaviour, and corruption victimisation, all of which can be disaggregated by personal
attributes (gender, region, age, ethnicity, income, and so on) and cross-tabulated with
political behaviour.
The survey results enable analysis of the depth and effects of corruption, determining
the corruption problems most important to particular kinds of citizens, identifying
potential constituencies for reform, and suggesting promising approaches for anti-
corruption reform. In some countries, these surveys have by now been conducted
two or three times, allowing study of corruption and democracy trends. Comparison
over time also provides a tool to assist in better matching USAID programmes to the
evolving nature of the problem.
The surveys provide compelling quantitative evidence of the corroding effect of
corruption on citizens support for democracy and democratic institutions. Among
all of the factors examined, corruption,alongwithcitizensecurityconcerns,hasthemost
detrimentalimpactoncitizensconfdenceindemocracyanddemocraticinstitutions.There
is a strong negative correlation between the number of times one is victimised by
corruption and ones level of support for democratic institutions (see Figure 25.1).
Only crime has a similar impact.
In Nicaragua, for example, system support for democracy falls almost by half for a
citizen who has frequently (four times or more) been pressed to pay a bribe. In these cases,
citizens are willing to consider abandoning democracy as a political system in favour
of more authoritarian options. The implication of these fndings for governments and
those supporting democratic reform is that serious and carefully targeted anti-corruption
reforms should play a critical role in the strategy for democratic consolidation.
A second general fnding relates to the overall level of bribery in each country, here
assessed by corruption victimisation. In general, in Central America and Colombia
the fgure was around 15 per cent (see Figure 25.2). In contrast, the citizens of Bolivia,
Mexico and Ecuador reported experiencing bribery far more frequently.
GC2006 03 part3 350 9/11/05 10:41:49
Latin Americans experience with corruption 351
Figure 25.2: Total index of corruption victimisation
70.0
80.0
60.0
50.0
40.0
30.0
20.0
0.0 1.0 2.0 3.0 4.0
M
e
a
n

s
y
s
t
e
m

s
u
p
p
o
r
t

(
%
)
Total number of times victimised by corruption in last year
Guatemala
El Salvador
Nicaragua
Costa Rica
Panama
Colombia
Figure 25.1: Impact of corruption victimisation on system support
50
60
40
30
20
10
0
P
e
r
c
e
n
t
a
g
e

o
f

r
e
s
p
o
n
d
e
n
t
s

v
i
c
t
i
m
i
s
e
d
C
o
l
o
m
b
i
a
C
o
s
t
a

R
i
c
a
E
l

S
a
l
v
a
d
o
r
N
i
c
a
r
a
g
u
a
P
a
n
a
m
a
G
u
a
t
e
m
a
l
a
H
i
n
d
u
r
a
s
E
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u
a
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o
r
M
e
x
i
c
o
B
o
l
i
v
i
a
12.8
13.6
15.7
16.3 16.5
16.9
17.5
25.7
32
50
GC2006 03 part3 351 9/11/05 10:41:49
The surveys also asked citizens what specifc governmental institutions demanded
bribes from them. The results varied widely across countries and institutions, and
provide rich data for anyone trying to target anti-corruption programmes effectively.
Table 25.1 looks at nine countries, summarising citizen responses on whether they
faced demands for bribes in different institutional settings: to avoid a false accusation
by police; other demands by police, public employees, municipal employees, courts,
health services, schools or employers.
Table 25.1: Percentage of respondents who were victimised by bribery, by source of request
Accused Police Public Municipal Bribe at Courts Health School
by demanded employee bribe work service bribe
police bribe bribe bribe
Mexico 9.4 18.0 12.9 20.7 10.3 13.5 9.5 12.7
Guatemala 4.2 6.9 3.3 8.2 6.5 5.0 6.7 8.7
El Salvador 4.7 5.5 4.3 5.3 5.4 4.0 6.6 7.3
Honduras 3.7 5.3 2.7 10.2 9.9 6.6 7.2 11.3
Nicaragua 3.5 3.7 3.4 12.9 12.6 15.5 10.7 9.5
Costa Rica 3.1 3.5 3.2 5.6 4.2 2.7 3.8 8.6
Panama 4.5 6.9 6.0 9.3 6.2 6.5 5.7 6.7
Colombia 4.8 3.8 2.7 5.3 5.6 5.1 7.7 5.5
Ecuador 4.6 9.7 14.8 15.0 11.3 20.5 12.8 23.8
In Ecuador, for example, citizens reported twice the level of demands for bribes
from the education sector than in any other country. In Mexico, the police were a
greater source of bribery demands than in other countries. Perhaps not too surprising,
municipal governments, as the level of government most directly and most frequently
in contact with citizens, appeared to be a major locus of demands for bribes.
Some results vary from the results of Transparency Internationals Corruption
Perceptions Index, probably refecting the purposes and methodology of each of these
tools. Indices such as TIs CPI capture perceptions and attitudes related to grand or
systematic corruption among high-level public offcials, but do not capture the vast
majority of citizens experience in their daily lives. In contrast, the USAID surveys
capture some attitudes and perceptions at the national level, but are more squarely
focused on the views and experiences of all citizens. Both types of measures have their
place, and can be used by policy-makers and researchers to complement each other in
examining the phenomenon of corruption in a given country.
Experience with these surveys has been very positive. Citizens have been open to
answering very detailed questions about the sources of corruption they experience
in their daily lives. USAID plans to provide this survey data to the widest possible
community of reformers, policy-makers and researchers for further analysis, by posting
it on the Internet in both Spanish and English. Making this publicly funded survey
data openly available allows anyone to scrutinise the survey methods and results and,
GC2006 03 part3 352 9/11/05 10:41:50
Latin Americans experience with corruption 353
more importantly, to use the data to improve public policy, better target reform efforts
and accurately measure progress.
Notes
1. Eric Kite is a democracy offcer for USAID in Kabul, Afghanistan and Margaret Sarles is based
at the Offce of Democracy and Governance, USAID. Contact details: [email protected] and
[email protected]
2. The 2004 surveys were undertaken by Latin American survey frms and research institutions
under the technical supervision of Dr Mitchell Seligson of Vanderbilt University. See his paper
The University of Pittsburgh Latin American Public Opinion Projects Corruption Victimisation
Scale in the GlobalCorruptionReport2004. Seligsons defnition of corruption victimisation
refers to citizens actual experience with public sector corruption.
GC2006 03 part3 353 9/11/05 10:41:50
26 Corruption in Palestinian society
TIPalestine/theCoalitionforAccountabilityandIntegrity(AMAN)
In late 2004, TI Palestine/the Coalition for Accountability and Integrity (AMAN)
commissioned the Palestinian Centre for Political Studies and Surveys to conduct an
opinion poll focusing on levels and forms of corruption in the Palestinian Territories of
the West Bank and the Gaza Strip. Questions assessed the extent of wasta, the practice
of people making inappropriate interventions on behalf of individuals, who do not
possess the requisite qualifcations or demonstrated work ethics, often resulting in
appointments being made on the basis of family connections or party affliation. Wasta,
usually translated as nepotism,is viewed as a signifcant source of corruption in the
Middle East. The survey was conducted in December 2004, among a random sample of
1,319 adults in 120 residential areas. The statistical margin of error was 3 per cent.
Wasta considered most blatant form of corruption
According to the survey, wasta was perceived to be the most common form of corruption
in Palestinian society today. Consensus on this point crossed gender, age, education
and socio-economic lines. Wasta was followed by bribery and personal use of public
resources as common forms of corruption. There was a general impression that bribery
was more common in the Gaza Strip than in the West Bank.
1
(See Table 26.1.) Nepotism
was viewed to be higher in the West Bank than in Gaza.
Nearly a quarter of those surveyed indicated that they, one of their family members,
or friends had been asked to intervene by exerting infuence over a public offcial in
the Palestinian Authority in order to secure provision of a required public service.
From among those surveyed, approximately two-thirds of those working in the public
sector indicated that they were asked to intervene, compared with about 46 per cent
of those employed in the private sector. Among supporters of Fatah, the ruling party,
the fgure was 46 per cent, compared with 35 per cent of Hamas supporters who were
asked to intervene.
The purpose of nearly one-third of all interventions was to acquire a job. A similar
amount of interventions dealt with the police or the security establishment. The rate
of interventions related to job-seeking was higher in the districts of Deir Al-Balah,
Nablus and the refugee camps, and lower in Tulkarem and Jerusalem. The rate of
intervention was higher in the Gaza Strip than in the West Bank for job-seeking
(37 per cent compared with 28 per cent) and in relation to the police or one of the
GC2006 03 part3 354 9/11/05 10:41:50
Corruption in Palestinian society 355
security establishments (37 per cent compared with 19 per cent). In the education
sector, however, the rate of intervention was much higher in the West Bank (18 per
cent) than in Gaza (5 per cent).
Table 26.1: Locating corruption
Ifyou,afamilymemberorafriendintervenedwithapublicoffcialorapersonresponsibleinthe
PalestinianAuthoritytohaveapublicservicedelivered,inwhatorganisation/sectororfelddidthis
interventiontakeplace?(Choosethemostsuitableanswer).
Total % West Bank % Gaza Strip %
1. Regulatory offces for business and workplaces 3.7 5.5 1.6
2. Law courts 2.0 1.8 2.3
3. Customs 1.0 1.2 0.8
4. Education (government and private schools,
universities, colleges) 12.6 18.2 5.4
5. Public utilities 1.0 0.6 1.6
6. Medical services 4.8 3.6 6.2
7. Passports, IDs and immigration 5.8 7.3 3.9
8. Police or security forces 26.9 18.8 37.2
9. Political party, elected representatives 1.0 1.8 0.0
10. Private sector 1.0 1.2 0.8
11. Social services 6.1 9.1 2.3
12. Tax revenue 0.3 0.6 0.0
13. Employment-seeking 32.0 27.9 37.2
14. No opinion/do not know 1.7 2.4 0.8
Of those who intervened, 52 per cent of men requested a personal favour from a
government employee (a public offcial), compared with only 19 per cent of women.
Women more frequently relied on family members to request a personal favour from a
public offcial rather than asking directly: 55 per cent of women surveyed asked family
members to seek the personal favour, compared with 28 per cent of men.
A majority of people surveyed 63 per cent of men and 46 per cent of women
believes wastawill become less prevalent in the next few years. Of those who believe
that corruption will increase, more live in the West Bank (47 per cent) than in the
Gaza Strip (33 per cent).
Locating corruption employment and the police are most corrupt
Most people surveyed (82 per cent) believe that corruption is most prevalent in the
public sector. Only 6 per cent believe corruption is most prevalent in the private sector,
while 5 per cent singled out civil society as the most corrupt sector. Gender differences
were signifcant, however, with 75 per cent of women compared with 87 per cent of
men indicating that they believe there is corruption in public sector institutions.
When asked from which public institution or sector they would most like intervention
to be removed, the top choices of those surveyed were job-seeking and the police/
GC2006 03 part3 355 9/11/05 10:41:50
security sectors, followed by education the same areas identifed as most riddled
by wasta. More men would like to see wasta eliminated from the police and security
services than from any other feld, while more women would like to see it eliminated
from the employment feld.
The response to the survey data from public offcials was initially negative, on the
grounds that the results were not convincing. A number of ministries responded more
positively. The Ministry of Health and Higher Education has formed special committees
to propose ways of combating wasta and has encouraged AMAN to carry out similar
surveys on an annual basis.
Note
1. Previous surveys conducted for AMAN revealed that bribery is believed to be concentrated
in the higher levels of the Palestinian National Authority. See the fndings of the national
chapters report on the Coalition for Accountability and Integrity (AMAN), Opinion Poll on
Corruption in the Palestinian Society; http://www.transparency.org/surveys/#palestine
GC2006 03 part3 356 9/11/05 10:41:50

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e Gardaevi, RegulationofFreeAccesstoInformation(Zagreb: TI Croatia,

In February 2005, a new act on political

The intention of this system of regressions

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