Transparency International Working Paper
February 26, 1999
Transparency International proposes a broad framework to encourage transparency in export credit agencies.
Transparency International (TI) is an international NGO dedicated to increasing government accountability and curbing corruption, in particular cross-border corruption. It is the only non-profit and politically non-partisan movement with an exclusive focus on corruption.
We fight corruption because it represents a major obstacle to development, undermines a society’s integrity and distorts trading conditions and fair competition on international markets.
TI does not investigate or expose individual cases of corruption, but is working towards changing the rules of the game which, until now, have tolerated and even encouraged international corruption.
During the last few years, the international agenda for tackling the problem of international corruption has been set to a large degree by OECD. In 1994 OECD-Ministers adopted a first set of recommendations, identifying the areas in which action should take place. On top of the agenda appeared criminal law, in view of making bribery of foreign officials a criminal offence. This led to the adoption, in December 1997, of a “Convention on combating bribery of foreign public officials in international business transactions”. This convention entered into force on 15 February 1999.
The political pressure built up by TI, including through the mobilisation of European business leaders supporting this move, as well as technical advise given to the OECD working group have contributed significantly to the results achieved until now. Credit has been given to TI by leading OECD officials for the role it has played.
It may also be recalled that TI submitted in May 1995 a memorandum to the EU-Institutions: “The fight against international corruption: what the EU can do”. We felt, indeed, that the EU had not sufficiently used the legal and political potential of the EU-Treaty; nor had it played a major role in the OECD proceedings.
Meanwhile major developments have taken place: in particular the Commission submitted in May 1997 to the Council of Ministers and the European Parliament a comprehensive policy document “A Union Policy Against Corruption” which became a major input to the implementation of the “Action Plan Against Organised Crime” endorsed by the Amsterdam European Council (June 1997). The Parliament expressed detailed views and pressed for concrete actions in the fight against corruption when adopting in October 1998 the “BONTEMPI-Report”. In December 1998 the Council adopted a Joint Action on corruption in the private sector.
On its part, the EU has adopted in May 1997 a Convention criminalising active and passive corruption within the EU-territory. This convention has not yet come into force.
Now that bribing foreign officials has become a criminal offence, a certain number of practices appear in a new light. For example tax deductibility of bribes – even if of doubtful morality and notoriously incoherent with the request for “good governance” – was legal in most industrial countries. It is now being abolished as a consequence of criminalisation.
A similar situation arises with Export Credit Insurance schemes where, however, no consequences seem to have been drawn from the new situation.
Bribing foreign officials in order to secure overseas contracts for their exports has become a widespread practice in industrial countries, particularly in certain sectors such as exports of military equipment and public works. Normally these contracts are guaranteed by government – owned or – supported Export Credit Insurance (ECI) schemes (HERMES in Germany, COFACE in France, DUCROIRE in Belgium, ECGD in the UK…). The value of the bribes, in general Presented as “commissions”, would normally be treated as part of the costs of supply and included in the total contract value covered by the guarantee. In case of the insurance coming to play, the indemnification of the exporter would include the amount of the bribe (which may represent 10 to 20% – sometimes even more – of the contract value).
It is obvious that this practice constitutes an indirect encouragement to bribe which, in future, brings it close to complicity with a criminal offence.
TI recognises the complexity of the problem. It is in particular not easy for an ECI-Agency to inquire closely and systematically into the makeup of contract prices and, if it discovers major “commissions”, to draw the dividing line between a commission which remunerates a genuine, regular service and an excessive commission which presumably contains a bribe.
It appears however that in the past, even when the Agencies knew or suspected that bribes were being paid to secure a contract, they deliberately did not probe further and saw no reason to act as the exporter, under the law of the exporting country, was not acting illegally.
Under the general conditions of certain Agencies the exporter is however committed not to infringe the laws of the importing country. As corruption is a criminal offence in practically all countries, a bribing exporter would then be in breach of one of the general conditions and loose the guarantee. So, in theory there exists the possibility of a sanction. In practice, this seems to have been without effect.
Instead of proposing systematic controls by the Agencies, TI suggests a different approach based on the following six elements:
The applicant for ECI must be expressly warned that business deals fostered by illegal payments are not covered by the scheme. This provision should be completed by a requirement that commissions, consultancy and other fees be checked for possible bribery payments.
The applicant for cover must state in writing that there are no illegal payments related to the deal. On request he must be ready to declare all relevant payments transparently.
Ministries and central banks in foreign countries that collaborate with the ECI-Agency are to be informed of these provisions and asked for support in acquiring information. They should communicate to the Agency any justified suspicion they have of illegal payments.
When illegal payments are suspected the obligation to pay out in a damage claim is suspended under the matter is definitively clarified.
In the event of a claim a more thorough check of the contract documentation should be carried out. The services of auditors can be brought in.
Any contravention of the ban on illegal payments should entail cancellation of the state’s obligation to pay up. In addition the beneficiary of cover should be excluded for a long period of time (for instance, 10 years) from eligibility for future ECI cover. This measure must also be extended to concessionaires, subsidiaries and consortia in which the company concerned has any holding of substance.
TI is aware that, as in the area of criminal law, tax deductibility of bribes… Etc., a re-examination of ECI – schemes in view of eliminating corruption – enhancing elements needs joint, if possible simultaneous action of the main exporting countries in order to avoid unfair competition between their respective companies.
OECD appears to be the best forum for such a joint effort, all the more so as already in 1994 the OECD recommendations ask for concrete steps in legislation, regulations and practices “insofar as they may indirectly favour bribery” (which is undoubtedly the case for ECI, as shown above) and as the subcommittee “ECI” of the OECD Trade Committee, whilst having recognised a possible problem flowing from the criminalisation of bribing foreign officials, seems to hesitate to take action.
As the present situation, where the different schemes operate without transparency and seem to cover bribing abroad at different degrees, entails serious distortions of fair competition in external markets and as it favours bribery of foreign officials which has become a criminal offence, TI calls on the EU-Institutions, and in particular on the Commission, to take the necessary initiatives in order to put this matter as a common EU concern on the relevant OECD agenda at the earliest opportunity (April 1999). TI suggests to concretise such an initiative with reference to the concrete steps indicated under point 5 above.