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FCPA Blog Daily News

Entries in United Nations (73)

Wednesday
Jun022010

The Obama Doctrine

In a policy shift that could lead to the international arrest and trial of kleptocrats, the White House last week said it views widespread corruption as a violation of basic human rights and is working to advance that view globally.

According to the administration's May 2010 National Security Strategy, the U.S. will "promote the recognition that pervasive corruption is a violation of basic human rights and a severe impediment to development and global security." Although the prior administration linked corruption to global and national security, viewing graft as a human-rights violation is a new position.

The administration said:

Strengthening International Norms Against Corruption: We are working within the broader international system, including the U.N., G-20, Organization for Economic Cooperation and Development (OECD), and the international financial institutions, to promote the recognition that pervasive corruption is a violation of basic human rights and a severe impediment to development and global security. We will work with governments and civil society organizations to bring greater transparency and accountability to government budgets, expenditures, and the assets of public officials. And we will institutionalize transparent practices in international aid flows, international banking and tax policy, and private sector engagement around natural resources to make it harder for officials to steal and to strengthen the efforts of citizens to hold their governments accountable.

The International Criminal Court in the Hague hasn't been used against kleptocrats. The Rome Statute that created the court extends to "crimes against humanity" but no one knows if that includes graft. Commentators, academics and activists have been pressing the case that grand corruption should be internationally outlawed. This is the first formal indication that President Obama, who may be frustrated that the FCPA doesn't reach corrupt foreign officials, could be putting his weight behind the idea as well.

There's a catch. As of today, the United States isn't one of the 108 State Parties to the Rome Statute. Under the Clinton administration, the U.S. joined the 60 countries that supported the founding of the International Criminal Court. But the Bush administration reversed that policy, citing risks to national sovereignty, and never signed the Rome Statute.

Download the May 2010 National Security Strategy here.

Special thanks to an astute reader in Washington for help with this post.

Friday
Jan222010

Another Military Equipment Exec Charged In Bribe Case

Representatives of the United Nations are "foreign officials" under the Foreign Corrupt Practices Act. The key intermediary identified as “Individual 1” in this week's historic bribery indictment of 22 people from the military and police-equipment industry has been charged with conspiracy (18 U.S.C. § 371).

In a one-count criminal information filed in federal court in the District of Columbia, the DOJ accused Richard T. Bistrong of conspiring with others to violate the Foreign Corrupt Practices Act's antibribery provisions, 15 U.S.C. §78dd-1, its books and records provisions, 15 U.S.C. §§ 78m(b)(2)(A), 78m(b)(5) and 78ff(a), and the Commerce Department's export license rules, 50 U.S.C. §§ 1701-1706 and 15 C.F.R. §§ 736.2, 764.2, and 774. The information was released on Friday.

Bistrong was a vice president for international sales at Armor Holdings, a former publicly traded military equipment manufacturer in Jacksonville, Florida. Amor became a subsidiary of BAE Systems after the British firm acquired it in 2007.

According to a report in the New York Times Friday by Diana Henriques, John Suttle, senior vice president for corporate communications at BAE's U.S. unit, confirmed that Bistrong had worked at Armor Holdings but was fired before BAE's acquisition. He said Armor had self-disclosed to the DOJ and SEC and that "all of these events occurred before BAE bought the company."

The New York Times also said sources confirmed that Bistrong -- or “Individual 1” as he's referred to in the earlier indictments -- introduced undercover FBI agents to senior executives in the arms and security-equipment business.

Tuesday's indictment of 22 people, including four Israelis and three Britons, was the first big undercover sting used in connection with alleged violations of the Foreign Corrupt Practices Act. It was also the biggest mass indictment in FCPA history. An FBI undercover agent posed as a military-equipment buyer for an African country. He told the sellers they would have to pay 20% commissions to an African government official for the sales. "Individual 1," according to the indictments, played a key role by introducing the undercover FBI agent to the various sellers.

In its charges against Bistrong, the DOJ alleged that from 2001 through 2006, he and others concealed about $4.4 million in payments to agents and other intermediaries who helped Armor Products obtain business from "foreign government customers" in Nigeria and the Netherlands. Payments for sales to the United Nations for its mission in Iraq were also involved.

The DOJ said in the information that an official of a "public international organization" is a "foreign official" under the FCPA. 15 U.S.C. §§ 78dd-l(f)(l)(A) and 78dd-l(f)(I)(B). The United Nations is a "public international organization;" therefore its offcials are "foreign officials" under the FCPA. 22 U.S.C. § 288; Exec. Order No. 9698, 11 Fed. Reg. 1809 (Feb. 20,1946).

The information also alleged that in March 2004, Bistrong and another employee authorized the export from the U.S. to the United Arab Emirates for further shipping to Iraq of vests and helmets "without obtaining a required license from the Commerce Department to do so."

Download a copy of the information in U.S. v. Richard T. Bistrong here.

Special thanks to Marc Bohn in the District of Columbia for help with this post.

Thursday
Dec102009

The Real Price Of Petty Graft

Corruption may have been a cause of the night club fire last week in the Russian city of Perm that killed 113 people. Alexander Fridman, an entertainment producer there, told the Christian Science Monitor, “Fire inspectors found violations of the regulations a year ago, yet they didn’t come back to check whether corrections were made. Why was that? There were hundreds of people gathering at that club every night, yet they never closed it down. The basic lesson is that fire inspectors should not take bribes.”

Russia's red tape is terrible. The country ranked 182 out of 183 on the World Bank's 2010 Doing Business Index in the category of "Dealing with Construction Permits." It takes an average of 704 days to obtain the permits needed to build a warehouse in Russia; the OECD average is 157 days. Such extreme bureaucratic delays mean petty corruption is the only way to keep things moving.

The Christian Science Monitor said, "Amid Russia’s decaying infrastructure and often jury-rigged new construction, the potential for accidents [such as the nightclub fire] abound because laws are not enforced, experts say." A professor at Moscow's Institute of Architecture said most public buildings are hazards. “As long as we have this practice of paying bribes rather than making the needed improvements," he said, "nothing will change."

The story said 18,000 Russians die each year in fires, several times the rate in most developed countries. The U.S., with twice Russia's population, had 3,500 fire fatalities in 2008.

*   *   *

More on the indictment of Joel Esquenazi and Carlos Rodriguez (reported here). The two Florida residents were identified by the DOJ as the president and a former vice president respectively of "Company X." The company is Terra Telecommunications Corp., formed in Nevada on July 1, 1996 and domesticated in Florida in 2002. A copy of its Florida business registration can be downloaded here. Thanks to the U.S. readers who provided this information.

*   *   *

Women in Kabul marched against corruption. As reported by the LA Times and others, hundreds of women on Wednesday held a peaceful but noisy street protest. They want President Karzai to remove from his government anyone connected to corruption and the drug trade. "These women are being very brave," said the protest leader, her face hidden by a burka. "To be a woman in Afghanistan and an activist can mean death. We want justice for our loved ones!" The protest group called itself the Social Association of Afghan Justice Seekers. A spokesperson said "our people have gone into a nightmare of unbelieving" because of the disputed election and the fact that "the culture of impunity" still exists despite Karzai's vow to eliminate it.

Tuesday
Dec082009

The Vulnerable Suffer First And Worst

December 9 is the U.N.'s International Anti-Corruption Day. The theme of this year's observance is "don't let corruption kill development." Secretary-General Ban Ki-moon said, "When public money is stolen for private gain, it means fewer resources to build schools, hospitals, roads and water treatment facilities. When foreign aid is diverted into private bank accounts, major infrastructure projects come to a halt. Corruption enables fake or substandard medicines to be dumped on the market, and hazardous waste to be dumped in landfill sites and in oceans. . . . Corruption steals elections. It undermines the rule of law. And it can jeopardize security. As we have seen over the last year, it can also have a serious impact on the international financial system."

*   *   *

Targeting the weak. Jennifer Hunt of McGill University published a paper in 2006 called, "How Corruption Hits People When They Are Down" (here). Based on research in Peru, she said victims of misfortune, particularly crime, are much more likely than non–victims to bribe public officials and be extorted by corrupt police and judges. When people are desperate, vulnerable, and most in need of public services, she said, corruption increases, compounding the victim's misfortune. Here's how she explained it:

For example, victims of crime will want to report the crime to the police, an act that may require a bribe to ensure police cooperation. An illness, accident or assault may lead the victim to use public hospitals, which could involve a bribe to jump a queue or see a doctor. If a household member dies, his or her death must be registered, for which a bribe might be extorted. Burglary, robbery, fraud, job loss, fire, natural disasters, the death of an earner and the bankruptcy of a shop involve the loss of possessions or income, which may impoverish the affected individual or household and lead them to apply for unemployment insurance or welfare. The desertion of the household head can lead to legal issues concerning alimony or child custody, while the creditors of a bankrupt shopkeeper may appeal to a judge. Involvement with the courts may be associated with bribery. . . .

Measuring petty corruption isn't easy. And pinpointing the impact of graft on victims of misfortune is even harder. But Hunt's thesis makes sense and her numbers, though limited, back her idea.

Monday
Oct052009

Grease For Oil

Larry Buterman (left) from Chadbourne & Parke's New York office sent us an article he published in the Bloomberg Law Reports. It explains why the Justice Department's enforcement actions in the U.N. oil for food cases don't allege antibribery offenses under the Foreign Corrupt Practices Act. The reason: the kickbacks typically went directly to the Iraqi government and not to foreign officials. "[B]y their express terms," he says, "the FCPA's antibribery provisions apply only to payments made to those connected to the government. Payments to a government itself, in contrast, are not covered by the FCPA." (Also see our post here.)

The oil for food program probably helped a lot of average Iraqis. But it also funded the pre-war regime in a systematic, unaccountable and illegal way. Buterman says, "According to a United Nations' Independent Inquiry Committee, between 1999 and 2003, over 2,200 separate companies abused the [program] by making improper payments, totaling over $1.5 billion, to the Iraqi government in order to obtain goods contracts." The entities charged with violations have settled, taken deferred prosecution agreements, and paid about $170 million in fines, penalties and disgorgements. "And," he says, "given the DOJ's July 31, 2009 announcement that it plans to seek extradition of Ousama Naaman—a Canadian national charged with violating the FCPA in connection with the OFFP—it appears the government's vigorous enforcement efforts in the area are continuing."

We turned to footnote 3 in the article for the following list of OFFP-related enforcement actions by the DOJ and SEC (we've added last week's case involving AGCO Corporation). The Netherlands, Denmark, and the U.K have also punished companies for violating the U.N. Iraqi sanctions.

Here's the DOJ / SEC list (with related cases grouped together and linked to our original posts):

U.S. v. AGCO Limited, No. 09-cr-00249 (D.D.C. 2009); U.S. Sec. & Exch. Comm'n v. AGCO Corporation, No. 09-cv-01865 (D.D.C. 2009) (here)

U.S. v. Novo Nordisk A/S, No. 09-cr-00126 (D.D.C. 2009); U.S. Sec. & Exch. Comm'n v. Novo Nordisk A/S, No. 09-cv-00862 (D.D.C. 2009) (here)

U.S. v. Naaman, No. 08-cr-00246 (D.D.C. 2008); U.S. v. CNH Frances S.A., No. 08-cr-00379 (D.D.C. 2008) (here)

U.S. v. CNH Italia S.p.A., No. 08-cr-00378 (D.D.C. 2008); U.S. v. Iveco S.p.A., No. 08-cr-00377 (D.D.C. 2008); U.S. Sec. & Exch. Comm'n v. Fiat S.p.A., No. 08-cv-02211 (D.D.C. 2008) (here)

U.S. v. Volvo Constr. Equip., AB, No. 08-cr-00069 (D.D.C. 2008); U.S. v. Renault Trucks SAS, No. 08-cr-00068 (D.D.C. 2008); U.S. Sec. & Exch. Comm'n v. AB Volvo, No. 08-cv-00473 (D.D.C. 2008) (here)

U.S. Sec. & Exch. Comm'n v. Flowserve Corp., No. 08-cv-00294 (D.D.C. 2008) (here)

U.S. Sec. & Exch. Comm'n v. Akzo Nobel, N.V., No. 07-cv-02293 (D.D.C. 2007) (here)

U.S. Sec. & Exch. Comm'n v. Chevron Corp., No. 07-cv-10299 (S.D.N.Y 2007) (here)

U.S. v. Ingersoll-Rand Italiana S.p.A., No. 07-cr-00294 (D.D.C. 2007); U.S. Sec. & Exch. Comm'n v. Ingersoll-Rand Co. Ltd., No. 07-cv-01955 (D.D.C. 2007) (here)

U.S. v. York Int'l Corp., No. 07-cr-00253 (D.D.C. 2007); U.S. Sec. & Exch. Comm'n v. York Int'l Corp., No. 07-cv-01750 (D.D.C. 2007) (here)

U.S. Sec. & Exch. Comm'n v. El Paso Corp., 07-cv-00899 (S.D.N.Y. 2007) (here)

U.S. Sec. & Exch. Comm'n v. Textron Inc., No. 07-cv-01505 (D.D.C. 2007) (here)

A copy of "Enforcement Without a Violation: FCPA Lessons From the Government's Investigation Into the Oil for Food Program," by Lawrence E. Buterman, originally published in the Vol. 1, No. 3 edition of the Bloomberg Law Reports—White Collar Crime, can be downloaded here.
_______________

RIP Craig Johnson. A founder of both Venture Law Group and, more recently, Virtual Law Partners, Craig was an inspirational figure in Silicon Valley and far beyond. He was many things -- great lawyer, venture capitalist and entrepreneur. With Guy Kawasaki and Rich Karlgaard he co-founded the influential Garage Technology Ventures. We knew him as a warm and engaging colleague, a man with the courage to think for himself; to many others he was a generous, good-humored mentor, unstinting with his encouragement. Our sympathies to his wife, RoseAnn Rotandaro, and his entire family.
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Tuesday
Jun092009

Liberia's Graft-Busting Leader

We've never heard of an African head of state asking the U.S. to deny visas to individuals suspected of corruption. Until now, that is. It happened on Friday when Liberia's president, Ellen Johnson Sirleaf (left), "pleaded with the Government of the United States of America not to give U.S. visas or provide safe havens for Liberians who commit fraud and other acts of corruption in Liberia." Her request came during the groundbreaking for the new U.S. embassy in Monrovia.

There's a report from AllAfrica.com here and another on the president's own snazzy website here. For the record, the U.S. State Department is authorized to deny visas to foreign kleptocrats and their families through Presidential Proclamation 7750. See our post Proclamation 7750 Unwrapped.

President Johnson Sirleaf -- or "Ellen," as the African headline writers like to call her -- probably angered a lot of corrupt officials in Liberia and across the African continent with her remarks. She does that a lot. Which is why she went to jail once and was forced into exile several times. But as a champion of the rule of law and an anti-corruption crusader, she's never wavered.

Now 71, the one-time Citibanker became Liberia's minister of finance in 1979. After a military coup in 1980, she served as president of the Liberian Bank for Development and Investment and was an initial member of the World Bank's Council of African Advisors.

In 1985, her bio says, she ran for the Liberian senate. But speaking out against the Samuel Doe regime resulted first in house arrest and eventually in a ten-year jail sentence. After a few months in prison she managed to flee to the U.S. She was then appointed to the U.N. as an Assistant Secretary General. In 1997, she returned to Liberia to run for president, finishing second in a field of thirteen.

In 2003, after Charles Taylor was sent into exile, the transitional government appointed Johnson Sirleaf to chair the country's anti-corruption agency. Then in 2005, she won the presidency. Since her inaguration in January 2006, she's been working to restore the rule of law and rebuild confidence at home and abroad. America's decision to build a new embassy there is one sign she's succeeding.

Johnson Sirleaf holds a masters in public administration from Harvard's Kennedy School. Two years ago in Washington, after she spoke to a joint session of Congress, she was awarded the Presidential Medal of Freedom "in recognition for her tireless efforts to make Liberia a post-conflict success story."

* * *
From Frederic Bourke's Trial. The Litigation Daily's Andrew Longstreth dropped by the federal courthouse in Manhattan this week. His report is here. He heard some cross-examination on Monday of the government's key witness, Thomas Farrell, who worked for Viktor Kozeny in Azerbaijan. Farrell had testified on direct that he and Bourke talked about Kozeny's plan to bribe Azeri officials. Longstreth said:

Farrell, who sports a handlebar mustache and goatee, has some major credibility issues. For one, in 2003 he pled guilty to one count of violating the FCPA and to another count of conspiring to violate the FCPA. . . . But Farrell stood up to the pressure [of cross examination] pretty well. He seemed to connect with the jury, often looking directly at jurors. "Sir, I went into the discussions with the government knowing that I had to tell the truth about what happened," Farrell said at one point. "I didn't think I had to point fingers."
Farrell is facing a maximum of ten years in prison but said he's hoping for probation. "I have absolutely no control of that nor does the government," he testified.

Read all our posts about U.S. v. Kozeny and the prosecution of Frederic Bourke here.
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Thursday
May072009

C'est Magnifique!

Francophile kleptocrats everywhere must be shaking in their Yves Saint Laurent double monk-strap black boots today, thanks to a Paris magistrate's ruling. He accepted a case brought by Transparency International that requires French authorities to investigate how three African rulers, their family members and friends managed to acquire numerous luxury homes, cars and other assets in France.

It's unusual to hear positive news from France about fighting graft. A few months ago, for example, the government decided French law prevents the prosecution of overseas bribery (Paris Pulls The Plug On Enforcement). So this marks a dramatic turnaround. There's one problem, though -- it might end soon.

The magistrate who made the ruling, Francoise Desset, is an independent investigator. But the justice ministry, through the public prosecutor's office, is already trying to quash his decision. There's concern the case and others that could follow would upset France's foreign policy.

The rulers named in the suit are Denis Sassou Nguesso of the Congo Republic, Omar Bongo-Ondimba of Gabon, and Teodoro Obiang Nguema Mbasogo of Equatorial Guinea. Gabon and the Congo Republic are former French colonies still close to Paris, while Equatorial Guinea is becoming an important oil exporter. The French oil and gas group Total SA, according to Reuters, is "the leading producer in Gabon and Congo Republic and many other French firms, public and private, have long-term contracts there."

Gabon's President Bongo has run the country since 1967 and thinks of France as his second home, according to Reuters. The BBC said "a 2007 French police investigation found the leaders of the three countries and their relatives owned homes in upmarket areas of Paris and on the Riviera along with luxury cars, including Bugattis, Ferraris and Maseratis."

If the investigation is allowed to proceed, Transparency International says the scope will be wide:

This judge will have to determine how the assets owned in France were acquired, and where the funds in the many bank accounts uncovered during a preliminary police investigation came from. The investigation will also throw light on the various intermediaries involved in the transactions under scrutiny, namely the banks identified by the police investigation whose compliance with anti-money laundering regulations is in question.
TI said it hopes the case will eventually lead to the right of restitution for the people of the three countries under the United Nations Convention Against Corruption, ratified by France in 2005.

Our thanks to Pete from DC for sending us a link to this story.

Read Transparency International's May 6, 2009 release here.
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Monday
Dec152008

Final Settlements For Siemens

As expected, Siemens AG pleaded guilty Monday to violating the internal controls and books and records provisions of the Foreign Corrupt Practices Act, reaching settlements with the U.S. Department of Justice and the Securities and Exchange Commission. Also on Monday, Siemens resolved charges by the Munich Public Prosecutor’s Office based on its corporate failure to supervise its officers and employees.

It will pay a criminal fine of $450 million in the DOJ settlement and $350 million in disgorgement of profits under its agreement with the SEC. In the German case, it will pay €395 million (about $569 million), on top of the €201 million it paid in October 2007 to settle a related action brought by the Munich Public Prosecutor.

In Monday's hearing in Washington, D.C. before U.S. District Judge Richard J. Leon, the German industrial giant pleaded guilty to one count each of violating the FCPA's internal controls and books and records provisions. Its Argentina subsidiary also pleaded guilty to conspiracy to violate the books and records provisions of the FCPA, and its Bangladesh and Venezuela subsidiaries pleaded guilty to conspiracy to violate the anti-bribery and books and records provisions.

The U.S. dispositions require appointment of a compliance monitor for four years. Siemens has already named Theo Weigel, a lawyer who served in the German Parliament and as the country's finance minister.

In a sign that U.S. prosecutions of individuals tied to the case may follow, the DOJ said Siemens "also agreed to continue fully cooperating with the Department in ongoing investigations of corrupt payments by company employees and agents."

At a press conference after Monday's hearing, Matthew Friedrich, the Acting Assistant Attorney General at the DOJ's Criminal Division, said the Justice Department "in recent years significantly increased its FCPA enforcement. From 2001 to 2004, the Department resolved or charged 17 FCPA cases. For the period of 2005 to 2008, that number is 42 resolutions, representing an increase of more than 200 percent within these four years as compared to the prior four-year period."

What's potentially even more significant, he said, is that fighting public corruption has gone global:

Through international instruments like the OECD convention and the U.N. convention against corruption, we have seen our international partners significantly step up their anti-corruption efforts. Everything we're seeing suggests that this trend will continue. South Africa, for example, became the 37th country and the first African nation to become a party to the OECD convention in 2007. Israel followed suit in September of this year, becoming the 38th signatory.
And on the nature of graft and why the fight against it is important, he said:
For let there be no doubt that corruption is not a victimless offense. Corruption is not a gentlemen's agreement where no one gets hurt. People do get hurt. And the people who are hurt the worst are often residents of the poorest countries on the face of the earth, especially where it occurs in the context of government infrastructure projects, contracts in which crucial development decisions are made, in which a country will live by those decisions for good or for bad for years down the road, and where those decisions are made using precious and scarce national resources.
_____________

View a copy of the DOJ's Dec. 15, 2008 release here.

Download a copy of the DOJ's Dec. 15, 2008 plea offer here.

View a transcript of the DOJ's Dec. 15, 2008 press conference here.

Download the DOJ's charging documents, sentencing memo and joint statement at the bottom of our prior post here.

View the SEC's Litigation Release No. 20829 (December 15, 2008) and Accounting and Auditing Enforcement Release No. 2911 (December 15, 2008) in Securities and Exchange Commission v. Siemens Aktiengesellschaft, Civil Action No. 08 CV 02167 (D.D.C.) here.

Download the SEC's complaint against Siemens here.

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Thursday
Aug072008

Global Compliance Resources

U.K.-based Ethical Corporation magazine's 2008 anti-corruption special report (available for download here) includes a table we've found useful. It lists many currently active multilateral anti-corruption agreements and describes how they work. Some of the conventions and voluntary agreements will be familiar to most readers, while others will be new. Included are:

OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions

United Nations Convention against Corruption (UNCAC)

Council of Europe Criminal Law Convention on Corruption

Extractive Industries Transparency Initiative (EITI)

Kimberley Process Certification Scheme

World Economic Forum Partnering Against Corruption Initiative (PACI)

United Nations Global Compact: Principle 10

International Chamber of Commerce Rules of Conduct to Combat Extortion and Bribery

As the commentary about the table says, "Most companies know that it is illegal to bribe public officials either at home or abroad, as international conventions from the Organisation for Economic Co-operation and Development and the Council of Europe, for example, make clear. But if there is one thing that these diverse antibribery mechanisms have in common, it is a shared weakness in policing. Beyond voicing their disapproval, there is little that international bodies such as the OECD or United Nations can do to make countries enforce bribery laws. . . But for companies seeking practical, hands-on advice about how to combat corruption, voluntary initiatives are good place to turn."

Thanks to Ethical Corporation for making this resource available to all.

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Wednesday
Jul092008

Heads I'm Corrupt, Tails You're Poor

The FCPA matters because public corruption and poverty walk hand-in-hand. The point is illustrated too well by conditions in Bangladesh, a perennial basket case in the world economy. Here are some facts:

  • Bangladesh ranked 162nd on Transparency International's 2007 Corruption Perception Index. It was tied with Cambodia, the Central African Republic, Papua New Guinea, Turkmenistan and Venezuela.
  • This week the country's Anti-Corruption Commission said several of its own members have been taking bribes. "We have decided to take action against 28 of our officials after an internal monitoring and surveillance has found them seeking or taking bribes and breaking service rules such as secretly buying properties," a spokesman said.
  • With more than 150,000,000 people, Bangladesh is the world's seventh most populous country. Yet its per capita GDP of just $1,374 ranks 148th, with about half the population living below the poverty line.
  • A World Bank Country Director in Bangladesh, Frederick T. Temple, described the impact of public corruption this way: The poor suffer from corruption in many ways. Their access to services, such as public health and education, is reduced when drugs and textbooks are stolen from public facilities and sold privately and when doctors and teachers have high rates of absenteeism from their public jobs and sell their services privately. Corruption invariably channels public resources to the rich – the poor lack the funds to bribe or pay for the private provision of services that are supposed to be provided for free as public services. Almost everybody suffers from corruption, but the poor suffer more.
  • Transparency International's 2005 household survey found that in public hospitals, 26.4% of patients had to pay bribes to doctors for receiving medical treatment; 37.5% who had surgery and 57% who had an X-ray had to pay bribes.
  • Dealing with the police was worse. More than 90% of households who lodged police reports had to pay bribes and 80% who needed any type of clearance certificate had to pay bribes. Things weren't much better in court, where 71% of the accused and 66% of plaintiffs had to pay bribes.
  • Of the households who took a loan from a public bank, the average waiting time was 108 days. For their loans, 61% had to pay bribes.
  • A report from Bangladesh cited by the U.N. found that a cattle trader had to pay extortion money at eight different places along the way to the market, both to the police and organized criminals - which added as much as 20% to the selling price.
  • Red tape -- public corruption's awful twin -- is legendary. The Bangladesh News recently reported that despite enormous demand, there's gridlock in the development of compressed natural gas delivery. "It often takes several years to launch a CNG refueling station as the government offices concerned miserably lack coordination," the report said. Over 100 applications are tied up. Approval is needed from at least nine departments and agencies, and aggrieved entrepreneurs said within one agency alone a file has "to pass through 64 tables," providing lots of opportunities for bureaucrats to extract bribes.

Sunday
Jul062008

Shock And Awe In U.S. Federal Court

The government of Iraq filed a civil suit in late June in federal district court in New York City against two individuals and about 50 companies and some of their related firms for bribery that allegedly occurred under the United Nations oil-for-food program. Referring to the U.N. program as "the largest financial fraud in human history," the 47-page complaint seeks more than $10 billion in damages.

Many of the defendants named in the complaint -- which relies heavily on the U.N.'s October 2005 internal report by former Federal Reserve Chairman Paul Volcker -- have already faced enforcement action for violating U.N. regulations or U.S. law, including the Foreign Corrupt Practices Act. Among those discussed in our prior posts are ABB, AB Volvo, Flowserve, Akzo Nobel, Chevron, Siemens, Ingersoll-Rand, York International, Oscar Wyatt, El Paso (successor to Coastal Corp.) and Textron. Others named in the complaint include Air Liquide, Atlas Copco, Boston Scientific, BNP Paribas, Buhler, Daewoo, Daimler-Chrysler, Dow, Eastman, Glaxo, Dresser, Kia Motors, Novo Nordisk and Vitol.

The complaint describes how kickbacks paid to representatives of Saddam Hussein were funded through illegal and undisclosed transportation and port fees, bogus after-sales service fees and overpricing of goods and services.

Although there is no private right of action under the Foreign Corrupt Practices Act, this is the third civil suit filed this year in U.S. federal court by alleged victims of overseas public corruption. In March, Bahrain-owned Alba sued Alcoa and its agent in Pittsburgh for allegedly inflating prices and using the money to bribe Bahraini officials. Then in April, Denver-based oilman Jack Grynberg and his company brought a suit in the District Of Columbia against their former consortium partners BP and Statoil, and their top executives, for allegedly using some of Grynberg's money to bribe government officials in Kazakhstan.

Similar to the Alba and Grynberg complaints, the Iraqi government's claims are based on the Racketeer Influenced and Corrupt Organizations Act (RICO), common-law fraud and breach of fiduciary duty. Iraq also alleges illegal price discrimination under the Robinson Patman Act ("It shall be unlawful for any person engaged in commerce, in the course of such commerce, knowingly to induce or receive a discrimination in price which is prohibited by this section.").

The complaint says the federal court in New York should hear the case because the oil-for-food program was administered at the United Nations' headquarters there, all funds related to the program "were supposed to pass through an escrow account in New York," and all oil-for-food contracts were "approved in New York."

View Iraq's complaint here (courtesy of The AmLaw Daily).

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Monday
Jun162008

Tackling Corruption, Transforming Lives, Part II

The report published by the United Nations Development Program about public bribery in Asia that we talked about yesterday, Tackling Corruption, Transforming Lives, examines corruption in utilities, the courts, police departments, land offices and hospitals, among others. The impact of graft on the development and delivery of water supplies, for example, is astounding. The U.N. believes that eliminating corruption would help conserve as much as 70% of the world's water resources. The World Bank says that globally up to 40% of water-sector finances are lost through "leakage" -- by dishonest and corrupt practices.

The U.N.'s research into water supplies revealed the following areas of risk and damage:

Inefficiency. Corruption seriously undermines the performance and effectiveness of both public and private sectors, discouraging the investment urgently needed to improve supplies. In one major city in Asia the public utility allegedly held back on improving water supplies in the areas supplied through kiosks or hydrants, for fear of losing the side payments that the hydrant operators paid to utility officials. The operators of water tankers are often controlled by powerful mafias that capitalize on inept water distribution systems and have effectively privatized the supply: after paying corrupt officials to turn a blind eye, they sell the water to hotels and other businesses.

Warped distribution. Corruption skews decisions on who is likely to get services. Residential suburbs, for example, can be left without water because the supply has been siphoned off to service the farm of a prominent politician.

Capital-intensive investment. Corruption also biases investment towards large new infrastructure projects and away from smaller scale but less lucrative investment in the rehabilitation of systems or in improving operation and maintenance.

Weak finances. Corruption undermines the long-term financial stability of utilities and thus their ability to offer reliable services to a wider population, while also diverting government revenues that could be used to improve water supply and other services.

Environmental damage. Corruption constrains overall water-resource management by encouraging inefficient use of freshwater or over-extraction of ground and surface water.

Public health. Reducing supplies of drinking water directly undermines public health, and more so for the poor. Corruption in utility services can also undermine standards of health. In the Republic of Korea, for example, in order to avoid paying the costs of reconstruction of underground water sites, water quality testers were bribed to provide fake test results. Subsequently 1,753 water sites were found to have contaminated water, with high levels of nitrates, which can cause a condition known as methemoglobinemia or ‘blue baby’ disease.

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It's not all doom and gloom though. The U.N. report notes that the antidote to a lot of public corruption, petty and grand, is simple: cut the red tape and increase transparency.

That's what the Hyderabad Metropolitan Water Supply and Sewerage Board did in the 1990s. It consolidated applications for new connections – previously a major source of corruption. Rather than filing an application in their local district office, the report says, customers now go to the Board’s headquarters to a "Single Window Cell" which manages all the related activities, such as obtaining a road-cutting permit or land surveying. The Board publishes the fee schedule for various plot and connection sizes in its office and in the press, thus reducing the opportunities for staff to levy excess charges. The process, the report says, has been designed as a one-visit operation so the customer rarely leaves without an "application token number," the equivalent of a receipt for acceptance of the application.

In Korea, too, the Seoul Metropolitan Government is using transparency to fight corruption. A public, online application system for licenses and other permits was launched in 1999. Called OPEN -- the Online Procedure Enhancement for Civil Applications -- the system covers 54 common procedures. By March 2001, about 1.5 million people had visited the website and there had been 39,000 civil applications. The site now attracts some 2,500 visitors a day. The U.N. report says the OPEN system has made the administra­tion more transparent because officials responsible for corruption-prone areas, such as permit or approval procedures, now have to upload reports and documents to enable citizens to monitor the progress of their applications.

Support for similar programs around the world would be a nice adjunct to corporate compliance programs among the companies that set the standards for global best practices.

View Seoul's OPEN system here.
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