Good Intentions, Bad Results

Does foreign aid cause corruption? Yes, mainly by helping corrupt regimes stay in power. And because corrupt regimes are the most unstable, aid also fuels civil unrest.

Here are the top ten U.S. foreign aid recipients as of a couple of years ago, followed by their rank now on the Corruption Perception Index:

1. Israel / 30
2. Egypt / 98
3. Pakistan / 143
4. Jordan / 50
5. Kenya / 154
6. South Africa / 54
7. Mexico / 98
8. Colombia / 78
9. Nigeria / 134
10. Sudan / 172

The top ten donor recipients have an average CPI ranking of about 100 out of 178 ranked countries. But the bottom five of those countries by CPI rank -- Egypt, Pakistan, Kenya, Nigeria, Sudan -- have an average CPI rank of 140. In other words, they're among the most corrupt countries on earth. Not coincidentially, they're also among the most unstable.

Four of those five countries are in Africa. Here's what Dambisa Moyo of the Wall Street Journal said in March 2009 about aid to countries there:

[E]vidence overwhelmingly demonstrates that aid to Africa has made the poor poorer, and the growth slower. The insidious aid culture has left African countries more debt-laden, more inflation-prone, more vulnerable to the vagaries of the currency markets and more unattractive to higher-quality investment. It's increased the risk of civil conflict and unrest (the fact that over 60% of sub-Saharan Africa's population is under the age of 24 with few economic prospects is a cause for worry). Aid is an unmitigated political, economic and humanitarian disaster.

And here's an excerpt (without footnotes) from a prescient U.S. Congressional report from 1999 that explored the link between aid, corruption, and instability:

Research relating to foreign aid shows that such aid is dispersed not on the basis of need, but on the basis of strategic and geo-political considerations. That is, aid tends to support existing recipients who generally are supportive of existing donors. Donors, after all, have incentives to provide aid to those forces, supporters, and organizations that will help them remain in power. In practice, these characteristics are more important to donors than forces of change. A World Bank survey of research on foreign aid, for example, indicates that "there is little relationship between changes in aid and policy reform."

Foreign aid, then, often has not worked to promote reform. Consequently, aid tends to subsidize -- and thereby strengthen -- existing government connections and structures since aid recipients also will distribute this aid so as to preserve their political positions. In short, political elites can benefit from aid. In practice, aid subsidizes and strengthens existing regimes so they become solidified and entrenched. When existing regimes are corrupt, such regimes can be strengthened by foreign aid. It has been shown, for example, that foreign aid seldom includes meaningful incentives to alter governmental behavior with regard to corruption. In sum, when existing regimes are corrupt, the result is that these corrupt political regimes can benefit from foreign aid and become more firmly entrenched.

No one wants to be stingy and hard-hearted toward people anywhere who need help finding food and water, shelter and medicine. But international aid, especially when used to help prop up friendly yet corrupt regimes, isn't part of the solution. It's part of the problem.

Comverse Earns Lenient Settlement

New York-based Comverse Technology Inc. today settled Foreign Corrupt Practices Act violations with the DOJ and SEC for $2.8 million.

In its plea deal with the DOJ, the billing-services provider will pay a criminal penalty of $1.2 million. And it will pay $1.6 million in disgorgement and pre-judgment interest to resolve the SEC's civil charges. Comverse also received a non-prosecution agreement from the DOJ that expires in two years.

Between 2003 and 2006, Comverse's Israeli subsidiary paid bribes of $536,000 to "individuals connected to OTE, a telecommunications provider based in Athens, Greece that is partially owned by the Greek Government." Because of the bribes, Comverse won contracts worth $10 million and made a profit of $1.2 million. It used a third-party agent to make the illegal payments, and recorded them as "agent's commission."

The SEC said Comverse had no "process, formal or otherwise, for conducting due diligence of sales agents or for the independent review of agent contracts outside the sales departments."

Comverse received a non-prosecution agreement from the DOJ for books and records offenses -- instead of a deferred prosecution agreement for substantive bribery charges --in recognition of its "thorough self-investigation and the results of its investigation, voluntary disclosure of the underlying conduct, and full cooperation," the DOJ said.

The company took "extensive remedial efforts and overhauled its overall compliance culture, including through the implementation of mandatory training programs focused on anti-corruption and the use of third-party agents and intermediaries, as well as more rigorous accounting controls for the approval of third-party payments," according to the DOJ's release.

Comverse Technology Inc. trades in the pink sheets under the symbol CMVT.PK.

View the DOJ's April 7, 2011 release here.

Download Comverse's non-prosecution agreement here.

View the SEC's Litigation Release No. 21920 in Securities and Exchange Commission v. Comverse Technology, Inc., Case No. 11-CV-1704-LDW (E.D.N.Y. filed April 7, 2011) here.

Download a copy of the SEC's civil complaint against Comverse here.

Wages And War

Corruption, of all things, may be the deciding factor in Washington's debate about troop deployment and military strategy in Afghanistan. The Christian Science Monitor said last week: "The concern is that the Afghan government has become so rotted with corruption that it cannot consolidate the gains the U.S. military makes. In other words, the U.S. will never be able to leave Afghanistan unless there’s at least a minimally effective government to help in the near term and then take over in the future."

The 77,000-member Afghan police force illustrates the problem. Writing in this month's Atlantic (here), Anup Kaphle said:

Talk with any taxi driver or farmer in Lashkar Gah, and you’ll hear stories about police shakedowns. One farmer from the nearby town of Gereshk, who was transporting his wheat harvest to Lashkar Gah, said that a police officer had taken 1,000 Afghanis ($20) from him the previous week. “They will search your pockets and take money and valuables from you,” he said, “and you can’t say anything because you know you will have to deal with them again the next day.”

Echoing Kaphle's reporting, the Christian Science Monitor said:

Law and order in the country has collapsed as many police use their posts primarily as a platform for bribe-taking. Even before the election, President Karzai had lost broad public support in Afghanistan because of his government’s inability – or unwillingness – to stifle corruption. Indeed, it is corruption, not insecurity, that most angers Afghans.

Kaphle cites low pay as a cause of police corruption. He says their monthly wages are about $110. That's a lot higher than the average Afghan income of $25. But it's also "nearly two and a half times less than that earned by the Afghan National Army."

Those looking at countries like Afghanistan often assume low pay equals more local graft. Conversely, people living, for example, in Hong Kong, Singapore and Israel, credit high civil-service pay with reducing corruption. It's simple, they say: government employees won't risk their cushy jobs and pensions by taking bribes.

Oddly, however, there's no consistent data linking low wages with increased corruption. Researchers have been frustrated for years by what one called "puzzling empirical evidence on the relationship between corruption and bureaucratic wages." That is, in countries with high corruption rates, paying bureaucrats more doesn't always reduce corruption. That means other factors must be at work -- tribal or ethnic alliances and rivalries, education, civil rights, press freedom, relationships between local and national leaders, and so on. But no one has found a dependable way to measure those ingredients or quantify how they influence corruption.

That knowledge gap can be a problem for policy-makers. G. Pascal Zachary, author of the memoir Married to Africa, made that point this summer in the Wilson Quarterly (here). He said:

Are nations poor because their governments are cor­rupt, or does a nation’s poverty corrupt its officials? Traditional scholars of econ­omic development hold that once a nation achieves a sufficient level of prosperity, corruption naturally withers as the incentives to cheat diminish. But in recent years, the continuing poverty in countries in Africa, Latin America, and the former Soviet bloc spurred revisions to that way of thinking . . . International donors, such as the World Bank, and activist groups, such as the ­corruption-­monitoring organization Transparency International, promote the idea that if only governments in poor coun­tries were honest, their citizens would be much ­wealthier.

But the debate, he said, suffers from "a paucity of data, especially case studies."

Ehud Olmert And The FCPA

Will the American businessman implicated in Israel's political corruption scandal be charged with violating the Foreign Corrupt Practices Act? Morris Talansky has said that over nearly a decade he gave Israel's former prime minister, Ehud Olmert (left), envelopes stuffed with cash that was used to fund political campaigns and pay for personal expenses. On Sunday, Olmert was indicted in Israel for fraud, breach of faith and deception. He had resigned last year because of the allegations.

One of the three cases against him, arising from the time he was mayor of Jerusalem and later a government minister, concerns the payments he received from Talansky.

The New York Times said,

The most sensational of the three cases involved Morris Talansky, a Long Island businessman, from whom Mr. Olmert is alleged to have received more than $600,000, partly in cash-stuffed envelopes, from 1997 to 2005. Prosecutors accuse Mr. Olmert of hiding the money and failing to report it to the authorities. Though Mr. Olmert has not been charged with taking bribes in the Talansky case, he is accused of abusing his position as a government minister to promote Mr. Talansky’s private business interests in Israel and abroad, constituting a major conflict of interest.

Talansky, 76, testified against Olmert in a deposition in Israel in May 2008. According to the Times, he provided details about "how he had transferred huge sums of cash to Mr. Olmert. Mr. Talansky said that much of the money was for election campaigns, but that some was for Mr. Olmert’s personal use." The deposition forced Olmert to resign a few months later.

The payments appear likely to have violated the antibribery provisions of the Foreign Corrupt Practices Act (corruptly giving anything of value to a foreign official for the purpose of obtaining or retaining business). Will Talansky be indicted?

In January, New York magazine said Talansky could face FCPA charges. “FBI agents are flying all over the place,” the magazine reported. "And U.S. investigators are now using the testimony he gave in Israel as a road map to a possible prosecution." A federal grand jury sitting in New York City was also reportedly looking into possible tax and money-laundering offenses.
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Help Wanted For Siemens Report

One of ProPublica's outstanding investigative reporters, T. Christian Miller, wrote the story below (which ProPublica co-published with MSN Money). We reprint it under ProPublica's generous license ("You can republish our articles for free, if you credit us, link to us, and don't edit our material or sell it separately.")

If you have trouble accessing the DOJ and SEC charging documents linked in the story (we did), you can also find them at the bottom of our earlier post here.
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Help Us Name Names in Siemens Corruption Scandal

by T. Christian Miller, ProPublica - December 22, 2008 1:05 pm EST

Get ready for the Siemens World Corruption Tour, 2001-2008. Siemens pleaded guilty last week to corruption across the globe, receiving a record-setting fine -- $1.6 billion (which sounds like a lot, but really, it's just 0.3 percent of their revenue during those years.)

In announcing the fine, the Justice Department and the Securities and Exchange Commission released formal complaints detailing how Siemens bribed government officials all around the world. (We published a story in Sunday's New York Times profiling the Siemens accountant at the center of the scandal.)

However -- and this is a big "however" if you're into accountability -- they released none of the names of the corrupt bureaucrats that took the cash or the Siemens officials who paid it.

This was done, Justice folks said, to protect the integrity of ongoing investigations and to comply with privacy laws in various countries.

At the hearing prosecutors seemed a bit wistful that they couldn't reveal the names, which were provided to Judge Richard Leon in a sealed file. Lori Weinstein, the dogged prosecutor who pursued the case, said the department could not provide exact names. But, she said, the documents were sprinkled with clues to provide "sufficient clarity" for the court to figure out who was who.

Some identifications are vague -- there are plenty of "government officials." But others are more specific. (Hello, "Wife of the former Nigerian Vice President, a dual U.S.-Nigerian citizen.") ProPublica figures that with the help of readers, we might be able to ID at least some of these folks. Below, you'll find descriptions of the bribees. Send us a name and a link sourcing the information.

To get things started, take the case of the Argentine identity card contract. The SEC's complaint said that Siemens paid bribes to a certain "president of Argentina" who left office in 1999. Not too hard to figure out that one -- Carlos Menem ran the country from 1989 to 1999. Looks like the buck really did stop there.

This is by no means an exhaustive list. As of last count, 16 countries had investigations ongoing into Siemens. Our list below includes only those bribery schemes detailed in the formal complaints by the Justice Department and the Securities and Exchange Commission.

E-mail us if you find clues to figure out the other grafters.

Argentina
Source: SEC Complaint, p. 21
National Identity Card contract (1998-2004)
Contract Amount: $1 billion
Bribe Amount: $40 million
Recipients:

• President of Argentina until 1999 (Carlos Menem)
• Minister of the Interior
• Head of Immigration Control
• Cabinet ministers

Bangladesh
Source: SEC Complaint, p. 19
Mobile Phone contract (2004-2006)
Contract Amount: $40.9 million
Bribe Amount: $5.3 million
Recipients:

• Son of then-Prime Minister
• Minister of Posts & Telecommunications
• Director of Procurement for the Bangladesh Telegraph & Telephone Board
• In addition, Siemens Ltd. Bangladesh hired relatives of two BTTB and Ministry of Posts and Telecom officials.

Venezuela
Source: SEC Complaint, p. 14
Metro contracts (2001-2007)
Valencia and Maracaibo metro systems
Contract Amounts: $642 million
Bribe Amount: $16.7 million
Recipients:

• A high-ranking member of the central Venezuela government
• Two prominent Venezuelan attorneys acting on behalf of government officials
• A former Venezuelan defense minister and diplomat

Israel
Source: SEC Complaint, p. 17
Power plants (2002-2005)
Contract Amount: $786 million
Bribe Amount: $20 million
Recipients:

• Former director of the Israel Electric Company
• Payments routed through brother-in-law of former CEO of Siemens Israel Ltd.

Nigeria
Source: SEC Complaint, p. 20
Telecommunications projects (2000-2001)
Contract Amount: $130 million
Bribe Amount: At least $4.5 million
Recipients:

• Wife of the former Nigerian Vice President, a dual U.S.-Nigerian citizen who lived in the U.S.
• "likely" the former President of Nigeria
• "likely" the former Vice President of Nigeria

Vietnam
Source: SEC Complaint, p. 22
Hospital equipment sales (2005-2006)
Contract Amount: $6 million
Bribe Amount: $383,000
Recipients:

• Government officials

Source: SEC Complaint, p. 27
Mobile network (2002)
Contract Amount: $35 million
Bribe Amount: $140,000
Note: Siemens did not win the project but agreed to pay 8 percent to 14 percent of project value to Vietnamese government officials
Recipients:

• "likely" Vietnamese Ministry of Defense officials
• Vietel, state-owned mobile phone network

China
Source: SEC Complaint, p.16
Metro trains and signaling devices contracts (2002-2007)
Contract Amount: $1 billion
Bribe Amount: $22 million
Recipients:

• Government officials

Source: SEC Complaint, p. 18
High voltage lines (2002-2003)
Contract Amount: $838 million
Bribe Amount: $25 million
Recipients:

• Government officials

Source: SEC Complaint, p. 23
Medical equipment sales (2003-2007)
Contract Amount: $295 million
Bribe Amount: $14.4 million
Recipients:

• Deputy Director, Songyuan City Central Hospital, convicted in China and sentenced to 14 years in prison

Source: SEC Complaint, p.24
Hospital equipment sales (1998-2004)
Contract Amount: Unknown
Bribe Amount: $650,000
Recipients:

• Chinese hospital officials

Russia
Source: SEC Complaint, p. 25
Traffic control system (2004-2006)
Contract Amount: $27 million
Bribe Amount: $741,419
Recipients:

• Government officials

Source: SEC Complaint, p. 27
Hospital equipment (2000-2007)
Contract Amount: Unknown
Bribe Amount: $55 million
Recipients:

• Russian state-owned hospital officials

Mexico
Source: SEC Complaint, p. 26
Refinery modernization (2004)
Contract Amount: Unknown
Bribe Amount: $2.6 million
Recipients:

• Senior official of Pemex, state-owned oil company

Iraq
Source: SEC Complaint, p. 28
Oil for Food program (2000-2003)
Contract Amount: $124 million
Bribe Amount: $1.7 million
Recipients:

• Iraqi Ministry of Electricity officials
• Iraqi Ministry of Oil official

So who are these folks? Send us a name and a link sourcing the information.
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Will readers of the FCPA Blog contribute to this story? Let's see.

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A Siemens / Jefferson Link? Meanwhile, a story in the Dec. 24 edition of Harper's Magazine by Ken Silverstein refers to the earlier joint ProPublica/New York Times story about Siemens, and then says: "Now ProPublica has asked for help identifying some of the alleged recipients of the bribes who are described but not named in the SEC complaint. One of those people appears to be Jennifer Atiku-Abubakar, who is tied to the scandal involving the former Louisiana congressman William Jefferson and is also a donor to the Republican Party. But I want to emphasize that I have no way of knowing whether the charges made in the complaint about her are accurate. . . . According to this Washington Post story, she is the wife of Atiku Abubakar, the very controversial former vice president of Nigeria from 1999 to 2007."
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