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OECD Adopts New Measures to Deter Bribery in Export Credits

In order to complement the Organization for Economic Co-Operation and Development’s (OECD) Anti-Bribery Convention, OECD countries have agreed to step up efforts to avoid giving official support to export contracts that are tainted by bribery. Government-backed export credit agencies provide about $US 60 billion in loans and loan guarantees annually to finance exports for projects around the world.

According to the OECD's press release, the new agreement calls for greater due diligence when an exporter appears on the debarment list of the World Bank or other major multilateral financial institutions or if an exporter or their agent is under charge in a national court or has been convicted for violation of laws against bribery of foreign public officials of any country within the last five years. When appropriate, this scrutiny may lead to the suspension of applications and/or denial of support/loss of cover.

Members of the OECD Working Party on Export Credits and Export Guarantees reached several agreements, including the following:

To take appropriate measures to deter bribery in international business transactions benefiting from official export credit support, in accordance with the legal system of each member country and the character of the export credit and not prejudicial to the rights of any parties not responsible for the illegal payments, including:

a) Informing exporters and, where appropriate, applicants, requesting support about the legal consequences of bribery in international business transactions under its national legal system including its national laws prohibiting such bribery and encouraging them to develop, apply and document appropriate management control systems that combat bribery.

b) Requiring exporters and, where appropriate, applicants, to provide an undertaking/ declaration that neither they, nor anyone acting on their behalf, such as agents, have been engaged or will engage in bribery in the transaction.

c) Verifying and noting whether exporters and, where appropriate, applicants, are listed on the publicly available debarment lists of the following international financial institutions: World Bank Group, African Development Bank, Asian Development Bank, European Bank for Reconstruction and Development and the Inter-American Development Bank.

d) Requiring exporters and, where appropriate, applicants, to disclose whether they or anyone acting on their behalf in connection with the transaction are currently under charge in a national court or, within a five-year period preceding the application, have been convicted in a national court or been subject to equivalent national administrative measures for violation of laws against bribery of foreign public officials of any country.

e) Requiring that exporters and, where appropriate, applicants, disclose, upon demand: (i) the identity of persons acting on their behalf in connection with the transaction, and (ii) the amount and purpose of commissions and fees paid, or agreed to be paid, to such persons.

f) Undertaking enhanced due diligence if: (i) the exporters and, where appropriate, applicants, appear on the publicly available debarment lists of one of the international financial institutions referred to in 2 c); or (ii) the Member becomes aware that exporters and, where appropriate, applicants or anyone acting on their behalf in connection with the transaction, are currently under charge in a national court, or, within a five-year period preceding the application, has been convicted in a national court or been subject to equivalent national administrative measures for violation of laws against bribery of foreign public officials of any country; or (iii) the Member has reason to believe that bribery may be involved in the transaction.

g) In case of a conviction in a national court or equivalent national administrative measures for violation of laws against bribery of foreign public officials of any country within a five-year period, verifying whether appropriate internal corrective and preventive measures (1) have been taken, maintained and documented.

h) Developing and implementing procedures to disclose to their law enforcement authorities instances of credible evidence (2) of bribery in the case that such procedures do not already exist.

i) If there is credible evidence at any time that bribery was involved in the award or execution of the export contract, informing their law enforcement authorities promptly.

j) If, before credit, cover or other support has been approved, there is credible evidence that bribery was involved in the award or execution of the export contract, suspending approval of the application during the enhanced due diligence process.  If the enhanced due diligence concludes that bribery was involved in the transaction, the Member shall refuse to approve credit, cover or other support.

k) If, after credit, cover or other support has been approved bribery has been proven, taking appropriate action, such as denial of payment, indemnification, or refund of sums provided.


1. Such measures could include: replacing individuals that have been involved in bribery, adopting an appropriate anti-bribery management control systems, submitting to an audit and making the results of such periodic audits available.

2. For the purpose of this instrument, credible evidence is evidence of a quality which, after critical analysis, a court would find to be reasonable and sufficient grounds upon which to base a decision on the issue if no contrary evidence were submitted.

To read the entire agreement please see the OECD's 2006 Action Statement on Bribery and Officially Supported Export Credits.

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Massive Loopholes in OECD Anti-Corruption Convention Give “Legal” Cover to Corrupt International Business, Say U.S. Scholars

Report From Seminar Organized by the Center for Global Development

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Two U.S. scholars, pursuing separate and independent research, have come to the same conclusions about practices in international investment that raise questions about the efficacy of the OECD Anti-Corruption Convention and the U.S. Foreign Corrupt Practices Act (FCPA).  They have documented cases in Indonesia’s electric power sector where multinational corporations have been instrumental in establishing special partnerships with shareholdings granted to local citizens with very close ties to top government officials. These partnerships, established with no risks to the local investors and often with loans arranged by the international investors, ensure that the citizens involved obtain large incomes. The partnerships have been depicted as being essential to enable the foreign investor to gain a substantial business foothold in Indonesia.

According to Theodore H. Moran (Marcus Wallenberg Professor of International Business and Finance School of Foreign Service, Georgetown University, Non-Resident Fellow, Center for Global Development) and Louis T. Wells (Herbert F. Johnson Professor of International Management, Harvard Business School), the existence of the partnerships has been well known to the World Bank and other international agencies, the American government and many of its agencies and the legal and auditing advisers to the U.S. multinational companies, such as Mission Energy and General Electric that have been operating in Indonesia. These companies, said the scholars at the seminar, have won legal opinions that their actions in establishing the partnerships were not in violation of the OECD Convention or the FCPA. “The view that these partnerships are legal is a startling new discovery and it suggests that the G8’s actions to counter international corruption are really a sham,” said Mr. Moran.
   
Detailed case studies of the partnerships in Indonesia, which involved close relatives of the countries former top politicians, are to be detailed in a book by Professor Wells that will be published in September by Oxford University Press. Mr. Moran’s research is being published by the Center for Global Development as “Working Paper Number 79” under the title “How Multinational Investors Evade Developed Country Laws.”

The Following is From an Abstract of Theodore Mann’s New Paper:

How effective are G-8 and OECD efforts to combat bribery and corrupt payments when multinational companies bid on concessions in the developing world?  Have the rich countries  – and the United States, in particular – done what is necessary to restrain multinational investors from paying off daughters of Presidents and cronies of Ministers to secure favors for their activities?

Recent evidence shows that the answer is no.  Multinational corporations from the US, Europe, and Japan have devised sophisticated payment mechanisms, as documented and described here, to evade home country anti-corruption laws, including the US Foreign Corrupt Practices Act, with impunity. Indeed, some US companies have laid these payment arrangements out before the US Department of Justice, the Securities and Exchange Commission, and other US agencies, without arousing any objection whatsoever.

Without reforms of the kind spelled out here, the OECD and G-8 campaign to prevent corrupt payments will turn out to be a sham.

New Evidence
The scope of the OECD Convention is quite narrow – requiring member states to pass domestic legislation that criminalizes a direct payment to a public official by an international company to secure a contract. New evidence that has emerged from the awarding of power projects to international companies in Indonesia, between 1995 and 2003, shows that multinational corporations have devised clever current-payoff-and-deferred-gift structures to relatives and friends of host country officials that do not technically put them at risk of OECD-consistent home country anti-bribery laws, or the US Foreign Corrupt Practices Act.

The basic structure has been for the multinational to approach a prominent family member or close friend of the host country leadership about forming a partnership to own the target investment project (or respond favorably when approached by a family member or close friend about forming a partnership), loan that family member or close friend the funds needed to take an equity stake in the project, and pay a dividend to the family member or close friend more than what was needed to service the original loan.  This arrangement functions as a deferred gift – the loan to fund the equity stake of the family member or close friend was paid off via the dividend over time.  The excess return above what was needed to service the loan was a current payoff. 

Unlike a genuine equity investor, the family-member-or-close-friend partner had no capital of his/her own at risk, nor any responsibility to repay the loan out of his/her own assets.  The equity stake came to the family member or close friend for free – the only “service” that was required was to ensure the foreign company was chosen to receive the infrastructure concession (in the Indonesian case discussed later, all but one of twenty-seven internationally-funded power projects were awarded without competitive bids).  In some cases, the family-member-or-close-friend partner began to receive “dividends” as soon as the concession was awarded, before the project was even in operation. Then, since the return to cover the loan payments and the current payoff depended upon the project remaining profitable, the family member or close friend had an on-going interest in ensuring that the project enjoy beneficial treatment.

Legal Cover
Particularly startling has been the discovery that some of these sophisticated payment mechanisms – as deployed by US investors to obtain infrastructure concessions – had been vetted by well-respected US law and accounting firms as part of the investors’ due diligence prior to committing funds, and reported to the US Securities and Exchange Commission, without objection. (Mr. Moran’s paper provides examples of how the partnerships were established and how they operate).

What Needs To Be Done?
To be effective, an authentic effort to combat bribery and corrupt payments in the awarding of investment concessions and the negotiation of investment agreements requires a new three-pronged attack.  First, the current scope of the 1999 OECD Convention Against Bribery is far too limited to be effective – requiring member states to pass domestic legislation that does no more than criminalize a straight payment to a public official by an international company to secure a contract.  The partnerships with family members and cronies sketched out here -- backed by sophisticated loans-to-purchase-equity-shares, overlapping payment arrangements, and deferred-gift mechanisms – would almost certainly not be caught or punished using legislation that merely met the OECD Convention standard.

In contrast to the 1999 Convention, the OECD’s informal “Guidelines for Multinational Enterprises” have what the OECD admits is much broader scope.  In defining bribery, the Guidelines state “Enterprises should not, directly or indirectly, offer, promise, give, or demand a bribe or other undue advantage to obtain or retain business or other improper advantage.”

“In particular, enterprises should ….not use sub-contracts, purchase orders or consulting agreements as means of channeling payments to public officials, to employees of business partners or to their relatives or business associates.”  To this last sentence should be added, “partnership arrangements”.

Second, parallel with strengthening the OECD Convention, there is a need to introduce anti-corruption provisions explicitly into multilateral investor-state dispute settlement mechanisms.  Oddly enough, the 2,300-plus bilateral investment treaties (BITs) make no mention of bribery or corruption, and recent tribunals that have heard states defend actions taken against foreign investors as justified because the latter engaged in corrupt practices have rejected this line of argument. 

To put teeth into anti-corruption efforts, a new balance must be struck.  Not only must international investors be protected against misbehavior on the part of host states, but host states must be better protected against misbehavior on the part of international investors.

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The UN Convention Against Corruption Has Entered in to Force

38 countries have ratified and 140 have signed. However, so far, only France of the leading industrial countries has ratified.

The United Nations noted that the Convention entered into force on 14 December 2005, in accordance with article 68 (1) which reads as follows: “This Convention shall enter into force on the ninetieth day after the date of deposit of the thirtieth instrument of ratification, acceptance, approval or accession.”  To be effective many countries need to pass enabling legislation that may well relate to many aspects of the Convention from freedom of information to corruption prosecution. The Convention is widely seen as offering the possibility of enhancing cooperation between authorities in efforts to enforce anti-corruption laws.

For example, The China Daily reported that Zhang Xuejun, procurator-general of South China's Guangdong Province, said the convention would provide a strong international legal basis for China to overcome its difficulties in investigating and extraditing criminals, however, the first step is to enact the necessary to enable this legislation, including statutes on money laundering to better adapt the Chinese legal system to the UN Anti-Corruption Convention.
(see additional UN stories below on this page).

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U.N. Treaty to Fight Corruption Begins
By Michelle Faul, Associated Press, September 15, 2005

A global treaty to fight corruption go into force in 90 days, empowering nations to prosecute officials accused of stealing public funds and to override bank secrecy laws to ensure stolen public money can be recovered. Ecuador on Thursday became the 30th country to notify the United Nations that it had ratified the U.N. Convention Against Corruption, the number needed to put the document into effect. The treaty has been signed by 128 nations.

The treaty covers a broad range of issues, including bribery by corporate bodies, embezzlement, fraud, theft and extortion. It also provides broader powers to fight money laundering. "This dream has become a reality," the executive director of the U.N. Office of Drugs and Crime, Antonio Maria Costa, said in inviting other countries to join the convention. "As of today, countries can no longer hide behind banking secrecy. Until yesterday, there was no obligation for a repatriation of (stolen) assets," he said at a news conference. Read the full story on the Washington Post website.

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UN Develops a Draft Legislative Guide to Promote the Implementation of the United Nations Convention Against Corruption (UNCAC)

 

The UNCAC was adopted by the General Assembly by resolution 58/4 of 31 October 2003. The objective of this legislative/practical Legislative Guide is to assist States seeking to ratify and implement the UNCAC by identifying legislative requirements, issues arising from those requirements and various options available to States as they develop and draft the necessary legislation. While the Guide has been drafted mainly for policy makers and legislators in countries preparing for the ratification and implementation of the Convention, it also aims at providing a helpful basis for bilateral technical assistance projects and other initiatives that will be undertaken as part of international efforts to promote the broad ratification and implementation of the UNCAC. View full draft of Legislative Guide to Promote the Implementation of the United Nations Convention Against Corruption. For general information, please visit the UNCAC website.

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Corruption and Latin America

A great deal of activity is being seen around the OAS Convention and with regard to anti-corruption programs involving the ORGANIZATION OF AMERICAN STATES. We are grateful to the General Secretariat, Department of International Legal Affairs, Office of Legal Cooperation for providing us with the following key links to information on this work:

Inter-American Convention against Corruption
http://www.oas.org/juridico/english/treaties/b-58.html

Office of Legal Cooperation of the OAS General Secretariat http://www.oas.org/juridico/english/

Anti-corruption
http://www.oas.org/juridico/english/FightCur.html

Follow-up Mechanism for the Implementation of the Inter-American Convention against Corruption (MESICIC)
http://www.oas.org/juridico/english/followup.htm

Report of Buenos Aires
http://www.oas.org/juridico/english/followup_corr_arg.htm

Conference of States Parties of the MESICIC
http://www.oas.org/juridico/english/mesicic_conf_states.htm

Rules of Procedure of the Conference of States Parties of the MESICIC  
http://www.oas.org/juridico/english/followup_conf_rules.htm

Conclusions and Recommendations on Concrete Measures to Strengthen MESICIC
http://www.oas.org/juridico/english/followup_conf_concl.htm

Committee of Experts of MESICIC
http://www.oas.org/juridico/english/mesicic_com_experts.htm

Rules of Procedure and Other Provisions of the Committee of Experts of MESICIC
http://www.oas.org/juridico/english/mesicic_rules.pdf

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