Global Corruption: Money, Power and Ethics in the Modern World

Laurence Cockcroft is a Development Economist. He is a Founder of Transparency International, the global civil society organization against corruption, and was formerly Chairman of its UK chapter. Heis the author of Africa’s Way: A Journey from the Past (I.B.Tauris).

Cover photo: ‘Little Dancer, number twenty seven’©Garth Evans. Cover design: Ian Ross

is a key factor in sustaining appallingly high levels of poverty in many developing countries, particularly in relation to the poor provision of basic services such as education and health. It is also a major reason why growth-rate increases in Africa and South Asia have failed to benefit large segments of the population. Corruption drives the over-exploitation of natural resources, capturing their value for a small elite – whether timber from Indonesia or coltan from the Congo. In the developed world, corrupt party funding undermines political systems and lays policy opento heavy financial lobbying.

In this book Laurence Cockcroft shows how corruption has to be seen as the result of the interplay between elite ‘embedded networks’,greed and organized crime. The growth of corruption has been facilitated by globalization,the integration of new and expanding marketsinto the world economy, and the rapid expansionof ‘offshore’ financial facilities, which provide a home to largely unregulated pools of financederived from personal fortunes, organized crimeand pricing malpractice in international trade.

This book shows how the current international interest in corruption follows the fifty years of the Cold War in which corruption was regarded in international policy-making circles as off the table. Cockcroft describes the change of attitude from the 1990s onwards and the initiatives which have been designed to combat corruption over the last twenty years – from individual prosecutors, to governments, to civil society, and to progressive business – and assesses their impact to date. The modest and uneven progress made indicates that corruption is a continuing threat – and one which is likely to become one of the most serious problems of the twenty-first century.

Money, Power and Ethics in the Modern World

LaurenceCockcroft

Laurence Cockcroft

‘Corruption is a tax on development, whose main victims are the world’s poorest people. But wherever it grows, it hollows out governing institutions and undermines prosperity and stability. Laurence Cockcroft has written a brilliant analysis ofits scale and malign results. His book deserves a place on the library shelfof everyone committed to sustainable development in free and plural societies.’- Lord Patten, former European Commissioner and former Governor of Hong Kong

‘Laurence Cockcroft has built a formidable reputation as an anti-corruptioncrusader and co-founder of Transparency International. He deserves personalcredit for the development of anti-bribery legislation. His views on the wayforward deserve close attention.’ - Vince Cable

‘You can save a lot of money and time by reading this book in whichLaurence Cockcroft provides a candid narrative, distilling his experiencein countries all over the world on corruption and its possible solutions.This makes for fascinating reading; Cockcroft allows you to understandthat there is no chaos but only complexity.’ - Luis Moreno-Ocampo,former Prosecutor of the International Criminal Court

‘This thought-provoking book takes a wide sweep through the cause ofcorruption and its historical reality. It is a problem that will never disappearbut must be constantly challenged and contained. This book will assistthe struggle.’ - Clare Short, Chair of the Extractive Industries TransparencyInitiative (EITI) and former Secretary of State for International Development

9 781848 859876

ISBN 978-1-84885-987-6

www.ibtauris.com

Laurence Cockcroft is a Development Economist. He is aFounder of Transparency International, the global civil societyorganization against corruption, and was formerly Chairman ofits UK chapter. He is the author of Africa’s Way: A Journey fromthe Past (I.B.Tauris).

00c_Global Corruption-i-xviii 15/6/12 14:56 Page i

Money, Power and Ethics in the Modern World

Laurence Cockcroft

GlobalCorruption_TitlePage_AW.indd 1 23/07/2012 17:06

Copyright © 2012 Laurence Cockcroft

All rights reserved. Except for brief quotations used for purposes of review orscholarly citation, none of this book may be reproduced in any form by any meanswithout written permission from the publisher.

Published in the United Kingdom in 2012 byI.B.Tauris & Co. Ltd.6 Salem Road, LondonW2 4BUwww.ibtauris.com

Published simultaneously in the United States of America byUniversity of Pennsylvania PressPhiladelphia, Pennsylvania 19104-4112www.upenn.edu/pennpress

A catalogue record for this book is available from the Library of Congress

ISBN 978-0-8122-4502-8

Designed and typeset by 4word Ltd, Bristol, UKPrinted and bound in Sweden by ScandBook AB

Global Corruption-USA Prelims-i-iv 27/7/12 08:38 Page iv

Contents

List of Illustrations and Charts viiiPreface ixAcknowledgements xiiList of Abbreviations xv

1 What is Corruption? 12 The Corrosive Power of Corruption 113 Secret Trades 434 Victims of Corruption 575 Constant Values, Changing Standards 796 Why Now? 1037 What Drives Corruption Forward? 1158 The Long March: Is There Progress? 1399 Key Roadblocks 16510 Corruption and Global Warming 20111 The People’s Voice 20912 Shaping the Future 221

Notes 233A Note on Sources 249Bibliography 253Index 261

00c_Global Corruption-i-xviii 15/6/12 14:56 Page vii

Illustrations and Charts

Figure 1 Alberto Fujimori and Vladimiro Montesinos(Public domain)

Figure 2 Tweed’s ‘Ring’ (Cartoon by Thomas Nast, c.1870)Figure 3 Bobby Kennedy (Lyndon B. Johnson Library)Figure 4 Suharto (State Secretariat of the Republic of

Indonesia)Figure 5 Bob Hasan (FIRMAN/AFP/Getty Images)Figure 6 Chen Liangyu (China Photos/Getty Images)Figure 7 Zheng Xiaoyu (Imaginechina/Corbis)Figure 8 Eva Joly (Marie-Lan Nguyen/Jastrow)Figure 9 Dora Akunyili (PIUS UTOMI EKPEI/AFP/

Getty Images)Figure 10 Giovanni Falcone and Paolo Borsellino

(www.corriere.it)Figure 11 Anna Hazare (Rajvaddhan)Figure 12 Mobutu Sese Seko (Public domain)

Chart 1 Political finance: Mechanisms 119Chart 2 Informal to formal trade: Oil bunkering 170Chart 3 Formal to informal trade: Small arms 170

00c_Global Corruption-i-xviii 15/6/12 14:56 Page viii

1What is Corruption?

It is scarcely possible to look at a news website or pick up anewspaper anywhere in the world which does not carry a storyabout a corruption scandal. The news story will usually bewritten at face value, revealing what is often the tip of the icebergrather than exploring the dense mass below. When PrimeMinister Putin orders President Medvedev to step down, is thatreally a fight between two individuals, or between the interestgroups, primed by corruption, which support each of them?When the Liberal Democratic Party in Japan lost office in 2008after 60 years in power, was that because the yakuza mafia hadfinally decided that it could avoid criminal harassment bysupporting the Democratic Party of Japan which then tookoffice? When President Omar al-Bashir of Sudan agreed to thesecession of Southern Sudan, was that because he believed thatthe north could retain the income from the oil-rich enclave ofAbyei, straddling the border between north and south?Was thesupport which the media giant Rupert Murdoch gave to DavidCameron and his Conservative Party in the UK election of 2010the key to his later interest in enabling the company to gain fullcontrol of BSkyB, the country’s biggest satellite TV station (later

01c_Global Corruption-001-010 13/6/12 16:16 Page 1

undone by the ‘hacking’ scandal within his own organization)?When Zheng Xiaoyu, the secretary of the Chinese CommunistParty in Shanghai, was prosecuted for corruption in 2006, wasthat primarily a political struggle between Shanghai and Beijing,and less a part of the Party’s nominal ‘war on corruption’?

Corruption may not only underlie these events andsituations, but also be responsible for many of the world’s evendeeper sores, and particularly the poverty and inequality whichtypify somuch of the developing world. Its scale is huge, notablywhere political regimes are seeking to extend their tenure; or ina specific industry, such as defence and construction, wheremarket share can be won by bribes; or in the total breakdown ofhealth services where counterfeit drugs dominate a healthsystem. Sometimes this propensity has been checked by religion,or the power of justice, or widespread public revolt, as was thecase in Egypt and Tunisia in 2011. More often it has goneunchecked as vast fortunes have been accumulated illegally atthe expense of society as a whole, creating huge pools ofunregulatedmoney which cycle in and out of formal economies.In the second decade of the twenty-first century such networksare operating on an unprecedented scale, are taking fulladvantage of globalization, and are oftenmore resilient than theinstitutions, such as anti-corruption agencies, put in place tocurb them. Their interaction with organized criminal networks,such as those that control the international drugs trade, is asource of further strength.

Formal definitions of corruption range from the decay ofsociety to the single act of bribery. The corruption discussed inthis book always involves the acquisition of money, assets orpower in a way which escapes the public view; is usually illegal;and is at the expense of society as a whole either at a ‘grand’ oreveryday level. Personal enrichment is nearly always a keyobjective, although corruption may be engineered by a groupwith the intention of achieving or retaining political power, sothat these motives can become closely entwined.

2 Global Corruption


The consistency of these themes across countries is striking,although different institutional frameworks may disguise thereality. In Russia, the corruption associated with the oligarchsin the 1990s set the scene for widespread manipulation of thepolitical system to ensure that those in power could build uplarge personal fortunes. In Nigeria, the misuse of state funds forprivate gain has absorbed most of the growth of the economyover the last 30 years. In the USA, the corporate frauds thatcoincided with the bankruptcy of Enron and the acceleratedexpansion of the sub-prime mortgage market, includingextensive deception about the value of underlying assets, havebeen driven by personal greed. In China, the high-profile casesthat have exposed the corruption of very senior managers ofstate-controlled companies and Politburo members havesimilarly been driven by the accumulation of personal fortunes.

Since nearly all corruption is clandestine it easily escapesdetection by investigative agencies. Its ‘illegality’ is morecontroversial: the ‘mispricing’1 of exports and imports may notcontravene a specific law, though it will contravene formalaccounting standards, which require traded products to bevalued at world market prices. The risks taken in the bankingsector on Wall Street and elsewhere were not, in principle,illegal: they became so when risks were deliberatelymisrepresented by the originators of mortgage packages soldby one bank to another.2 So, while corruption is usually illegal,there are also forms of corruption which are technically ‘legal’,but which most of society regards as corrupt. The cost of thisfailure to curb corruption on a global basis is very high: itsimpact is profound at the level of individual livelihoods,national economic progress, the environment, and thecredibility of the political system.

Where corruption is endemic, it is the poorest that pay thehighest price. Corrupt behaviour at the top, which is oftenrecognized and identified by the public, is readily used to justifycorrupt behaviour at the lowest level. Without a bribe, a

What is Corruption? 3


policeman may hold a vehicle at a roadblock for half a day, anirrigation manager may deny water to a small farmer, or asecondary school headmaster may prevent entry to a promisingprimary school leaver. Whilst such behaviour is frequentlyexcused by reference to abjectly low incomes, it is in fact oftenthe outcome of elaborate scams, orchestrated at a higher level,where a condition of the job is the payment of a commission ata higher level. When governments change, such mutuallydependent relationships can easily survive under a new regime.

The UN General Assembly meeting in 2000 resolved tolaunch a series of measures designed to bring the poorest peopleof the world out of extreme poverty. They included a target ofhalving the number of people suffering from hunger, enablingall children to attend primary school, and halving the number ofpeople without access to drinking water or sanitation. Thesemeasures were christened the Millennium Development Goals(MDGs). Although progress has been made, corruption hasbeen a major impediment to their achievement. In India, thenational food distribution programme targeted at the rural pooris based on an entitlement certifying that citizens are below thepoverty line: such entitlements are themselves the subject ofbribery.3 Emergency food programmes, run by agencies such asthe World Food Programme of the UN, have been subject toseizure by governments such as those of Zimbabwe andMyanmar, or by warlords in countries with long-running civilwars such as Somalia and the Democratic Republic of the Congo(DRC). The construction and maintenance of primary schoolshas been the subject of a major diversion of funds at central andlocal level. Access to drinking water has been beset withproblems related to corruption. In cities such as Jakarta, Limaand Manila, the urban poor pay private water retailers betweenfive and ten times as much for their water as the rich pay forpiped water.4

In the many countries where corruption is a key ordetermining factor in the national economy, the costs to

4 Global Corruption


economic growth have also been high. In Nigeria, for example,corruption has condemned a majority of people to an incomeof less than US$2 per day in a country with an average incomeper year from oil of US$30 billion (one thousand million) since1970. In Peru, corruption in the 1990s under Alberto Fujimoridiverted resources to such an extent that only about half of theexpected revenue reached the government.5 In Kenya, the AngloLeasing scandal, although spread over several years, accountedfor about 12 per cent of annual government expenditure in asingle year. In the DRC, the pattern of gigantic corruptioninitiated by Mobutu from 1961 to 1997 was synonymous withthe diversion of resources away from the state to fund apatronage system, which eliminated any serious investment inhealth, education and basic infrastructure.

There are direct costs, too, to the corrupt management ofnatural resources such as timber,marine fisheries, and oil, whichhave implications well beyond the frontier of the country wherethey are found. In Indonesia, the value of timber cut illegally buttraded on the world market has been as high as US$5 billion peryear, or four and a half times the value of legally cut timber.6 InRussia, the export of gas at a fraction of the world price toan intermediate company, which resold it to neighbouringcountries at a higher price, deprived the Russian economy ofup to US$50 billion per year from 2000 to 2008.7 In the case ofthe ‘pirates’ operating from Somalia, it was the fact thatinternational commercial trawlers were taking advantage of theabsence of a marine control system which prompted the piratesto begin taxing and later taking hostage trawlers and eventuallylarger ships of diverse nationality. In China, the control, throughcorrupt means, of privatized small-scale coal mines by localCommunist Party elites has been characterized by the seriousnegligence of the control of carbon emissions, with negativeimplications for China’s total environmental programme.

However, the costs of corruption go beyond the individual,the coffers of the state, and the performance of the economy.



Raising funds for political parties in high-income countries haslong been permeated by corruption. Business leaders polledby the World Economic Forum in 20038 stated that illegaldonations were ‘rare’ in only 18 per cent of countries, and‘common’ in 40 per cent. In Germany, Helmut Kohl, who hadbeen the architect of the unification of Germany, ultimatelyretired in semi-disgrace as the result of party funding scandalsinvolving the Christian Democratic Union (CDU). Thisextended to a deal with President François Mitterrand of Franceto claw back commissions for his party from the sale of Leuna,the former East German oil-refining company. In Japan, thepolitical system developed afterWorldWar II has depended onthe expenditure of up to US$10 billion over the cycle betweengeneral elections. A significant part of this has been provided bythe yakuza, a mafia group who move in and out of the legaleconomy, buying protection from elected politicians throughmassive donations. In Italy, the ‘clean hands’ campaignlaunched by Milan’s magistrates in 1994 found that thousandsof municipal contracts were overpriced by as much as 50 percent, with most of the margin flowing to the coffers of politicalparties, including both the Christian Democrats and theSocialists. In Russia, post-Communist multiparty elections haveinvolved huge outlays by candidates and their backers. Between1997 and 2000, a regional election campaign could involveexpenditure on behalf of the candidate of US$2–5 million (andmuch more in an oil-rich region).9 In the 2003 election it isreported that Mikhail Khodorkovsky, in a move which triggeredhis jail sentence, put up US$100 million in support of 100 ofthe Duma’s 450 deputies – rivalled only by the similar sumspent by Gazprom in support of a different set of candidates. In2010 the US Supreme Court, as a result of intensive lobbying bythe pressure group Citizens United, lifted restrictions oncorporate donations to political parties, further increasing theleverage corporations could exercise in their own interests onthe legislative agenda.

6 Global Corruption


Yoweri Museveni has been the president of Uganda sincehe took power in 1986; a new-look constitution limited him totwo five-year terms in 1995. He succeeded in 2005 in having theconstitution changed to allow a third term. In 2010 his NationalResistance Movement (NRM) needed to secure a clear majorityin parliament and it proved expensive, with individual MPsreceiving up to US$10,000 each. In the presidential andparliamentary elections of 2011 at least 10 million votersreceived cash handouts which are reported to have totalledUS$200 million. This was not an easy sum to raise through thebudget.A convenient Russian arms deal solved the problem: twomonths after the election, Uganda’s Central Bank lent thegovernment US$750 million to buy 14 Sukhoi Su-30 fighterplanes from Russia. The real cost was reported to be US$330million, and the remainder was recycled to replenish the sourceswhich had been used to fund the election.10

The use of corruptly gained funds by political parties ismatched by broader forms of political finance, which aredesigned to buy support for the specific allocation of publicfunds, or a new piece of legislation. In the World EconomicForum survey of 2003, business leaders stated that in only27 per cent of countries could ‘bribery designed to influencepolicy’ be described as ‘rare’.

This book explores these issues in depth, particularlyasking: what drives the process of corruption, and howmight itbe rolled back? Chapter 2 examines the threads that are commonto large-scale corruption around the world, taking Nigeria, Peru,Indonesia, China, Russia andMexico as examples that reflect theproximity of the motives of political power and personal wealth.

Chapter 3 points out that ‘secret trades’ are often integral tothe process of corruption, and shows how the movement ofproducts from ‘illegal’ to ‘legal’ channels is orchestrated by bothtraders and organized crime groupswith strong links to politicians.

Chapter 4 captures the impact of corruption at three levels:the individual; the national economy; and the environment. It



shows how corruption prolongs widespread poverty in manylow-income countries, and how it can destroy nationaleconomic growth or distort its impact. It recognizes the factthat some fast-growing Asian economies have achieved rapidgrowth with corruption, but argues that they have paid a highpolitical price.

Chapter 5 shows how each of the major religioustraditions has recognized corruption as an issue and how therejection of corruption is widely recognized as an ethical goal,though one which is only seldom incorporated into the politicaland social standards of the day. It goes on to explore the waysin which attitudes to corruption change over time – both forbetter and worse – and asks why this happens.

Chapter 6 shows how the international policies of Westerngovernments during the Cold War tolerated corruption on ahuge scale, on the grounds that an anti-Communist positiontrumped all others. The legacy of this thinking continued up tothe 1990s, when the World Bank and other aid agenciesincreasingly came to regard corruption as an impediment togrowth, while more ‘realpolitik’ foreign policy expertscontinued to support regimes that were corrupt but had majorstrategic value.

Chapter 7 identifies the main drivers of corruption asbeing party political funding; the problem of survival for thoseon very low salaries; organized crime; and multinationalcompanies as they seek to expand market share in countrieswhere corruption is endemic.

Chapter 8 describes some of the courageous individualswho have fought corruption head on; civil society organizationsthat have set out to confront corruption; initiatives involvingcompanies and governments; international conventions; andanti-corruption systems at the company level, assessing howmuch they have achieved.

Chapter 9 identifies three crucial problems which arecritical to the resilience of corruption: the prevalence of

8 Global Corruption


‘shadow economies’ in which a third or even half oftransactions are unrecorded; the existence of ‘black holes’ in theform of secrecy jurisdictions in which corruptly gained fundscan hardly be traced; and ambiguity in the position ofgovernments of importing countries whose need for energysupplies may override any concern about corruption.

Chapter 10 addresses the specific issue of climate changeand the ways in which international strategies to address it arepremised on disbursements from a series of very large fundssusceptible to corruption, and through complex carbon tradingsystems which are susceptible to fraud.

Taking account of the roadblocks to reform, Chapter 11assesses the strength of popular reaction against corruption ina range of countries, and particularly the impact of the socialmedia as experienced in north Africa in 2011, and asks whetherthe public reaction against corruption will outweigh theintransigence of governments.

Summarizing the prospects for change, Chapter 12identifies four major reforms which are conditions for realprogress at both the international and national level ifcorruption is to be rolled back, and goes on to identify five morespecific steps which would be decisive in moving forward – andidentifies those individuals and organizations who can becritical to moving forward.

This book will show that, in spite of some progress, allforms of action in combating corruption have a long way to go.The international community needs to recognize that reformof corruption to date has been extremely limited, thatmomentum needs to be maintained, and that the challenges ofthis century can only be met successfully if the corruptiondimension is built into policy and action. Without this, actionto combat it at country level will be flawed, and progress on theissues of the twenty-first century will be hostage to the manyand burgeoning forces of corruption.



Global Corruption: Money, Power and Ethics in the Modern World

Documents

Transcript of Global Corruption: Money, Power and Ethics in the Modern World