Democracy Lab

Seizing the Moment

The world’s leading nations are convening a meeting on the fight against corruption. Here’s what they ought to be discussing.

In 2010, the world's twenty most powerful nations formed an action plan to fight corruption. That was a welcome step, but it should be fairly obvious that just under three years later, the phenomenon of corruption remains alive and well. In mid-February the G20 Anti-Corruption Working Group (WG) will meet again under the co-chairmanship of Russia and Canada in Moscow. But can it make any significant progress?

The international community has already established some important measures against corruption, above all the Organization for Economic Co-operation and Development Anti-Bribery Convention and the United Nations Anti-Corruption Convention. Yet both have their limits. The former is too narrow (since it focuses only on the select club of the world's richest countries), while the latter is too broad (since it tries to include everyone, whether large or small).

The WG, by contrast, offers a potential Goldilocks configuration. By combining the established industrial powers of the OECD with the rising new economies of the BRICs, the G20 brings together an auspicious combination of states. But there's a problem here, too: A number of the key member countries of the WG are deeply implicated in the "secrecy jurisdictions" where a large part of the proceeds of corruption are held.

The United Kingdom is profoundly ambivalent about its dependencies in the Channel Islands and the Caribbean; Washington shows great indulgence toward the many U.S. corporations that park their funds offshore ( 19,000in the Cayman Islands alone); Russia's elites like to hold their funds in Cyprus; and China's newly-rich love to park their cash in the United States.

Yet there are grounds for hope. As a result of the financial crisis, finance ministries in the United States and Great Britain have noticed for the first time that there are huge revenue costs against the indirect advantage of soaking up the corrupt funds flooding into the financial markets of London and New York. In Russia, meanwhile, as Putin attempts to gain much greater control of Kremlin-licensed oligarchs, the mood is moving against the export of capital. In China, the exposure of Chongqing Party Secretary Bo Xilai and former PremierWen Jiabao as multi-millionaires has raised the nominal campaign against corruption to the front of the agenda promoted by new Communist Party chief Xi Jinping. He may mean business. So this might be the moment for the WG to get something done.

There are plenty of opportunities to be seized. First of all, the problem of political finance needs to be attacked boldly. Across the world, the raising of political funds for campaign-related purposes is probably the largest single source of corruption. The widespread recognition of the issue of political funding in the 2012 election in the United States has advanced the case for reform. But the problem may run even deeper elsewhere. (It costs $10 million to run a constituency-based campaign in India, for example.) Action has to be domestic, and Brazil has shown the way with the imprisonment of 29 congressmen for taking bribes under President Lula in 2005 and 2006. The minimal step would be to outlaw cross-border political funding, as has already been done in the United States, the United Kingdom, and several other countries. Here international collaboration is both practical and necessary.

Similarly critical is the behavior of international companies -- not just the usual suspects in the Fortune 500, but also thousands of other firms that affect the business culture in every country. That the problem remains entrenched is demonstrated not least by the recent scandal surrounding Walmart in Mexico. But there are some signs of progress. The OECD Anti-Bribery Convention has triggered some limited changes in corporate behavior, but actual prosecutions are few except in the most active seven countries. A number of countries (including China, India, Russia, and Indonesia) passed anti-foreign bribery legislation in 2011, but it remains to be seen how these new laws will be enforced. Outside the legal process, thousands of companies have committed in the last twenty years to a set of high ethical principles, including the rejection of corruption. The U.N. Global Compact and the World Economic Forum's Partnering Against Corruption Initiative offer leading examples of such standards. But their effective enforcement depends on a willingness by the participating companies to submit to an external review process by an independent assessor -- a notion so far seldom adopted.

The defense industry is a particular challenge. It's likely that the payment of major bribes by both American and European-based contractors has been limited by exposure from such recent cases as those involving BAE Systems and Siemens, and defense contractors now have their own business international ethics organization (the International Forum on Business Ethical Conduct). However, Russia and China, as key exporters of arms, remain outside this forum. The issue is at its most acute in the $8 billion per year small arms market, which thrives on corrupt payments and which fuels a range of conflicts around the world (from the Democratic Republic of Congo to Afghanistan). The trade in small arms is also the main reason that Washington (under pressure from the National Rifle Association) vetoed the proposed U.N. Arms Trade Treaty in mid-2012, in spite of its valuable draft clauses that targeted corruption in the trade.

Another huge source of corruption is mispricing. That's when goods that are undervalued in an exporting country are invoiced to a purchasing entity in a tax haven (usually a "secrecy jurisdiction") from which profits can eventually be transmitted to a company's main domicile. It remains a critical issue both for low-income exporting countries (which are deprived of due revenue) and importing countries (where revenue is diminished through the parking of revenues in tax havens). International accounting bodies and the OECD have rules about "arms-length trading" that are designed to eliminate this (by referencing world prices), but its members -- and the big four auditors -- fail to live up to the task. Passive collaboration in mispricing should become an actionable offense.

The banks remain a big challenge. Once regarded as "innocent until proven guilty," the industry now inspires universal distrust thanks to numerous court cases that have shown its members guilty of a wide range of criminal activities. Their offenses range from laundering the fruits of drug cartels to misrepresenting the creditworthiness of borrowers with sub-prime mortgages. Evidence of bankers' repentance is amazingly scarce. Constant surveillance by regulators and a willingness to prosecute or withdraw licenses is the only answer, but again one which requires government support across the G20.

Organized crime remains a major driver of corruption as mafia groups continue to control politicians in countries as different as Mexico, Italy, and India. The United Nation's Office for Drugs and Crime reports a steady increase over the last ten years in the value of illegal and counterfeit trade, necessarily abetted by political power. Yet the expansion of forms of international collaboration in response are regularly threatened by the behavior of individual countries, such as the United Kingdom, which incredibly enough is threatening to withdraw from 132 information-sharing arrangements for criminal offenses, including corruption, that it holds with its E.U. partners. The WG needs to ensure that governments adopt exactly the opposite response.

As the complex evidence for climate change builds in the public mind, the role of corruption as a driver of climate change -- for example by accelerating the destruction of forests -- needs to be recognized. Equally urgent is a recognition that several of the key tools for reducing carbon emissions -- such as carbon trading or the big development funds aimed at addressing the problem --may be undermined by corruption (as has already occurred with funds provided by the Clean Development Mechanism in Bangladesh and India, for example).

The Arab Spring created a surge of new publicity about the misdeeds of authoritarian rulers (such as Egypt's Hosni Mubarak, whose family fortune was a major source of discontent, or Tunisia's Ben Ali, who left behind $23 million in cash in his palace when he fled the country). Yet the public resentment against the malefactors who accumulate huge fortunes at public expense continues to be exacerbated by the reluctance of countries such as the United Kingdom and the United States to repatriate these ill-gotten gains. There are cases in Switzerland, France, and the U.K. that show how this logjam can be broken, particularly by resorting to civil rather than criminal law. But the question of how repatriated funds will be spent is a long-standing excuse for inaction. An international trust fund into which these funds could be placed as a first stage to repatriation would validate and expedite a contentious process.

Last but not least, there is the ubiquitous small-scale corruption that beggars the lives of at least two billion people across the globe, perfectly described by Katherine Boo in her book Behind The Beautiful Forevers, about a Mumbai slum. While this is driven by a myriad of local circumstances, every bribe paid by a western tourist or by a trading company to clear a container feeds into the slough of despair that dogs the lives of so many of the world's poorest. The U.S. Foreign Corrupt Practices Act (as well as many of the foreign bribery laws passed by OECD member states in the last few years) actually permits "grease payments" (small-scale bribes that expedite everyday life and business). It is time for all of that to go.

The G20 certainly has the capacity to make progress. The milestones identified here go well beyond the group's official agenda. If real progress is made on the official agenda, there will still be plenty left for Australia to do when it take up the G20 Chair in 2014.

Photo by YURI CORTEZ/AFP/GettyImages

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