Business Magazine

Fighting Kleptocracy

Posted on the 24 November 2015 by Center For International Private Enterprise @CIPEglobal
The world -- including global financial centers -- needs to come together to fight kleptocracy. (Photo: Wikimedia Commons)

The world — including global financial centers — needs to come together to fight kleptocracy. (Photo: Wikimedia Commons)

Corruption is often thought of as an individual problem where a corrupt official abuses his or her government position for personal gain. But what happens when an entire government, or the ruling class of an entire country, is engaged in corruption? When corruption becomes systematic and institutionalized, the damage is much greater – and the tools to fight it increasingly require international cooperation.

Two weeks ago the World Movement for Democracy held its eighth international conference in Seoul, Korea. Discussions of the corrosive effect corruption have on democratic renewal abounded throughout the conference. However, a discussion on kleptocracy chaired by the National Endowment for Democracy’s Carl Gershman brought out the enormous scale of illicit cash flows from kleptocratic governments, and the direct influence they can have on enabling authoritarian push-back was made clear. Presenters on the panel highlighted the need for both international coordination on efforts to improve investigation, journalism, and the tracking of money flows, and also support for in-country efforts to strengthen local watchdogs and activists.

From the CIPE perspective, we offered a strategy based on the old adage “follow the money”: to contend with and reduce capital flows from illicit gains we need to understand how such funds are siphoned off, how they move around the world, and what institutional responses we can promote to slow and stop them. Kleptocrats often use a mixture of state and private institutions to steal money, and then establish complex networks of shell companies and other fronts to launder funds. They then use global financial institutions to move “clean” money into markets where it can be securely invested.  A comprehensive strategy is needed to combat this complex crime at all levels.

In regards to the source of funds, there seems to be three main avenues for theft of public resources: public procurement manipulation, abuse of state-owned enterprises, and outright theft from state budgets.

Manipulating the public procurement process is often the most common and lucrative form of corruption. Goods and services bought by governments from outside companies account for about a third of public spending, and up to half in developing countries. Corrupt officials (or their private-sector cronies) take advantage of the complexity of procurement rules to rig the bidding process, and after funds are paid the work is either left incomplete, done to substandard levels, or completed with huge cost overruns and time delays to allow for the maximum of capture.  The $51 billion spent on the Sochi Winter Olympics (eclipsing the $40 billion spent on the Beijing Summer Games) is often held up by Russian activists as an egregious example of public tenders gone awry.

Within state-owned enterprises, theft and graft become much more difficult to track given the often shoddy financial management and corporate governance practices employed by these entities.  Even in partially privatized firms, the use of poorly-tracked subsidiary activity, for instance in the case of Thai Airways or Russia’s Gazprom, keeps the flow of capital within the firm opaque, inflates the cost of contracts, and makes losses difficult to calculate.

Budget theft, especially in resource-rich economies, is another area for concern. While the Extractive Industries Transparency Initiative (EITI) provides activists a tool with which to measure cash inflows to governments, a lack of budget transparency on budget outflows can simply move public theft to a different side of the ledger. Crackdowns on civil society groups and their ability to monitor budget flows are creating new conditions for theft to occur. Azerbaijan, a founding member of EITI, recently had its status downgraded to “candidate country” as a result of its assault on civil society monitoring activities.

So, “what is to be done”?  There are many tools and practices at hand that can help address these problems, but at their root is the ability to inject transparency and accountability into government processes.  CIPE programs around the world have worked with civil society and government to promote practical reforms that help reduce the scope of corruption that allows kleptocracy.

In Kosovo, CIPE has worked with the Riinvest Institute to help improve public procurement legislation and regulation, train civil servants to comply with new procurement standards, and help businesses better understand the tender process, so insider bidding receives more competition from honest bidders and “fixed” awards become harder to make.  Several years ago, CIPE worked with Confecameras members in Colombia to establish probity pacts to monitor public tenders at the local level.

For state-owned enterprises, the solution lies in improved corporate governance and the reduction of government interference in the day to day management of the firm.  Boards of directors should be qualified for the jobs, with a high degree of independence where possible. They should held accountable for company performance, and have the ability to ask tough questions of managers with the ability to fire non-performers.  Within the firm, stricter accounting standards and greater disclosure should be required for all elements of the firm and its subsidiaries.

Government itself should also become a better owner: state-owned enterprises should have straight-line accountability to a single ownership body or ministry, reducing the scope for political interference in corporate day-to-day operations.  In Pakistan, CIPE has worked with the Securities and Exchange Commission of Pakistan and Ministry of Finance to improve listing requirements for partially privatized state-owned enterprises to bring standards of governance and accountability more into line with that of private firms listed on the stock exchange.

Budget transparency is a growing trend throughout the world, but it requires two sides to work: officials who can design and implement budget reform programs, and trained civil society and media activists to track expenditure. The challenge in this regard continues to grow as budgets are increasingly decentralized. With authority being signed over to local governments, a much larger community of trained watchdogs, activists, and journalists is required to monitor budget activity.  In Kenya, CIPE is working with a network of regional business leaders and NGO’s to train them in budget setting and monitoring so they can play a more active role in the citizen-supervised budget process as that country moves towards decentralization.

Supporters of transparency in government activity also point to international programs such as the Open Government Partnership (OGP) as harbingers for greater government and civil society collaboration on improving transparency and access to information and promoting greater corporate accountability.  OGP promotes the use of technology, coupled with greater political commitment to transparency, as one solution to countering the opacity that allows kleptocracy to thrive.

Within the OGP, the government of the United Kingdom has taken serious steps to battle the illicit flows of capital once these funds have escaped the borders of their source country.  By opening its corporate registry under the “know who you are doing business with” policy, the UK government is taking a leading role in combatting the web of shadow companies, offshore banks, and self-dealing that enable kleptocrats to launder their corruption proceeds into safe Western markets.  By disclosing ownership, international financial institutions can more easily track money laundering, and investigative journalists can more efficiently follow the flow of stolen funds.

It should be noted that such trends have the kleptocrats nervous. Citing criminal threats to private ownership, the Russian government recently announced that information on its business registries would henceforth be closed to the public, with only the security services allowed access (ironically the greatest perpetrators of corporate Russian fraud and theft are believed to be within the security services). Russian officials are now looking at closing off public access to other registries used by anti-graft campaigners such as property, automobile, and luxury yacht data.

To complement these efforts, global institutions should look to strengthening the web of international standards, such as the UN Anti-Bribery Convention and the OECD’s standards on corruption and corporate governance, as ways to delineate a clear culture of accountability among both public and private leadership. These standards not only set a clear global benchmark, but provide local activists the tools they can use to push for improved local practice.

The fight against kleptocracy is a multi-tiered battle, and in and of themselves the aforementioned strategies can only help reduce the ability for kleptocrats to steal.  These efforts must be complemented by greater political will to push for stronger standards and more accountability, as well as a willingness to punish kleptocrats and those that use illegal methods to assist them.

Public opinion must be attuned to the overall cost of kleptocracy on development, and stigma must be attached to those who befriend, aid, and abet kleptocrats. Kleptocracy has been with us a long time, and the battle against it must be joined.  International organizations, governments, the private sector, and civil society around the world have shown their resolve in taking on this battle, through coordinated effort this battle can be won over time.

Andrew Wilson is Deputy Director for Strategic Planning and Programs at CIPE.


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