The costs of corruption
23 June 2009
Jack Straw has given a speech at the 5th European Forum on Anti-corruption about improving the legal framework relating to bribery and corruption.
[Check against delivery: this is the prepared text of the speech and may differ from the delivered version.]
The Right Honourable Jack Straw MP, Lord Chancellor and Secretary of State for Justice:
Introduction – the costs of corruption
Good morning. It is a pleasure to be here and to speak for the first time in my capacity as UK Anti-Corruption Champion. I was delighted to take up the post last October, having been the minister responsible for the UK’s ratification of the UN Convention against Corruption in 2006.
In his foreword to that Convention, [then UN General Secretary] Kofi Annan described corruption as ‘an insidious plague’: a metaphor which is as apt as it is ubiquitous. In both cases, what begins as a small, localised problem can spread to devastate an entire society.
In practical terms, corruption constitutes a threat to democracy and the rule of law; it causes state institutions to lose their legitimacy and public confidence in the political system to wane. It allows organised crime and terrorism to flourish. And it impedes development by discouraging foreign aid, feeding inequality and injustice, and diverting valuable funds away from basic public services. In the words of the economist Tim Harford:
‘… the web of corruption foils every effort to improve the infrastructure, attract investment and improve educational standards.’
While corruption today is a global phenomenon – transcending borders, regimes and jurisdictions, and affecting all sections of society – its impact is most acutely felt amongst the poorest of the developing world. As Transparency International’s Bribe Payers Index [2008] suggests, corruption creates ‘extreme inequity – both in markets and in societies’. Its effect is polarising; the rich get richer and the poor get poorer – and society as a whole is impoverished by the loss of trust.
Something which really came home to me from my experiences as Foreign Secretary is that the thing which most deprived a nation – and reduced its ability to cope in times of strain – was not a lack of natural resources, an inhospitable climate, or a [difficult] geography, it was the absence of the rule of law. The rule of law is the oxygen of a civilised society; remove it, and one creates a vacuum which is inevitably filled by corruption and exploitation.
The impact of corruption on business is equally damaging. Corrupt practices undercut honest companies, destroy professional reputations, distort competition and undermine the very basis of the free-market system.
There is clearly both a moral and a practical imperative for tackling corruption – whether it occurs at home or abroad. I want to spend the remainder of my time this morning looking at the part the UK government has to play – focusing on four main areas.
Legal reform
First, legal reform. As advances in technology and communication provide ever more sophisticated means of committing and concealing crime, and as the global economy becomes increasingly well-established, we must ensure that the law provides prosecutors with the tools they need to deal with corruption effectively.
Our particular focus at present is bribery. It is widely acknowledged that the UK’s statutory criminal law on bribery is old and anachronistic. It dates back to before the First World War – when Britain was one of the first countries to legislate against any form of corruption. It has never been consolidated, and contains inconsistencies of both language and concept. The exact scope of the common law offence is similarly unclear. The result is a bribery law which is difficult to understand for the public and difficult to apply for prosecutors and the courts.
From a purely legal perspective, the case for reform is a compelling one.
The UK government is therefore developing a strong, ambitious new Bribery Bill – modelled on the Law Commission’s proposals from November last year [‘Reforming Bribery’] – targeting those who offer or accept bribes in the business or public sectors, while encouraging transparency and accountability in international business transactions. We have already published a Draft Bribery Bill for pre-legislative scrutiny, and we hope this will form part of the legislative programme for the next parliamentary session.
Enforcement
A strong legal architecture is necessary in tackling corruption, but in and of itself it is not sufficient. Ultimately, our aim must be to bring about behavioural change within businesses themselves, creating corporate cultures in which no form of corruption is tolerated.
Our approach to enforcement can contribute to this.
Clearly, there needs to be a credible threat of successful investigations and prosecutions. To that end we have devoted £6 million to two anti-corruption teams in the Metropolitan Police, and have nearly doubled the size of the dedicated unit in the Serious Fraud Office. Just last week, the City of London Police Overseas Anti-Corruption Unit charged three men – two Dutch nationals and a UK national – with conspiracy to corrupt, conspiracy to money launder, and fraudulent trading, [following an investigation into the manipulation of contracts relating to Global Fund Aid money].
Our enforcement process must also be flexible – addressing the full range of criminal behaviour and encouraging businesses to report problems themselves, to pursue corporate reform, and to comply with the law in the future. Effective enforcement does not just equate to criminal convictions.
The recent landmark Balfour Beatty settlement is a case in point. In October last year, the company agreed to admit ‘payment irregularities’, accept a £2.25 million penalty [as part of a civil recovery order], and toughen its compliance measures, in exchange for the Serious Fraud Office bringing no criminal charges. The message – which has been publicly reinforced by Richard Alderman, Director of the Serious Fraud Office (‘Combating corruption and bribery: the SFO perspective’ – 18 November 2008) – is clear: companies can expect less severe treatment if they approach the authorities as soon as they discover corruption and if they put in place strong measures – such as training, restitution or external monitoring – to deter misconduct in the future.
This takes me onto the EU rules which require automatic exclusion from public procurement of suppliers convicted of specific corruption offences, even in cases of self-reporting and plea negotiation [EU Procurement Directive, article 45]. These rules are designed to send out a strong message, but I am also conscious that they can act as a disincentive for businesses to come clean and change their behaviour, and that they are not necessarily applied consistently across the EU. I have asked my officials to look into this further – in terms of the practice of other European countries and the implications of new plea negotiation guidelines issued earlier this year – and we will raise this with our European counterparts.
Of course there must be [a degree of] clarity and predictability as to how companies will be treated if they report offences voluntarily and cooperate with the authorities. The Serious Fraud Office is therefore producing a new code of conduct for businesses which explains the likely consequences of such disclosures [– and I have been assured that this will not be delayed by the ongoing legal reform].
Here, I think, a parallel can be drawn with the UK’s smoking ban. I was personally opposed to the ban at first because I believed we would face significant problems with compliance and I couldn’t see how a ban could be effectively enforced. In fact, the ban has been extraordinarily well self-enforced over the last two years. People no longer light up in pubs, not [just] through fear of the authorities, but because they are aware of the social reprobation which would result. In short, the ban has had a profound cultural change.
The UK’s approach to enforcement is designed to incentivise companies to report corruption and develop corporate cultures in which it is challenged and resisted.
Cultural change
Cultural change is ultimately in the interests of businesses themselves – and their long term sustainability and competitiveness. As the former head of the World Bank, Paul Wolfowitz, once said, ‘You can’t believe in markets and want corruption’. Price Waterhouse Coopers’ ‘Confronting Corruption’ report [2008] further explains – and I quote:
‘There is a strong business case for having an anti-corruption strategy that goes beyond avoiding potential enforcement penalties: almost 45% of respondents say they have not entered a specific market or pursued a particular opportunity because of corruption risks, 39% say their company has lost a bid because of corrupt officials … More than 70% believe that a better understanding of corruption will help them compete more effectively, make better decisions, improve corporate social responsibility and enter new markets.’
UK businesses already have a very strong reputation on anti-corruption, with many larger companies having developed their own codes of conduct and systems for compliance. Indeed, the UK has led the way in developing European Common Industry Standards across the defence trade sector as a whole – thanks, in particular, to the work of Lord Robertson and Transparency International UK – and we are now helping to extend those standards worldwide.
The presence of so many business leaders here today reflects the importance all of you place on protecting your employees from corruption and changing their attitudes towards it, but it also reflects also an understanding and appreciation of the risks you inevitably face competing in a globalised economy.
Your leadership in the private sector is vital, as is strong government support for businesses in establishing and upholding the highest ethical standards.
Smaller companies often struggle the most, feeling powerless to resist bribes and lacking the resources for formal anti-corruption policies and procedures. The government has sponsored a specialist website with advice and practical tools for managing risk, as part of its work to help small and medium enterprises (SMEs).
UK companies based overseas are obviously more likely to be exposed to corruption and exploitation, and find it more difficult to access advice and support. The government is therefore working to improve the expertise of UK missions abroad, through training for outgoing political and commercial officers on the risks of corruption, assistance for overseas companies, and the obligation to report allegations against UK companies and nationals.
Good governance overseas
As well as encouraging behavioural change, any successful anti-corruption strategy must work to address the underlying conditions which allow corruption to thrive – particularly in the most vulnerable developing countries.
This means working with those countries to promote good governance and the rule of law; to build strong and accountable public institutions [ – such as an independent judiciary, a free press, and a vibrant civil society]; and to manage public resources effectively so that they address the needs of society.
The government is therefore providing technical assistance to developing countries in implementing the UN Convention Against Corruption, and is financially supporting a new Governance and Transparency Fund, designed to help citizens hold their governments to account.
Transparency and accountability are critical components of good governance, and two of the strongest antidotes to corruption.
We have seen the remarkable power of transparency over recent months in the UK in the context of MPs’ expenses. I am currently leading cross-party talks to develop a mechanism for independent scrutiny and management of MPs’ expenses and peers’ allowances. But in some respects the most crucial change has already happened, with decision to publish all MPs’ expenses from now on.
Internationally, the government is working with companies in a range of sectors – including construction and health – to promote transparency in business transactions, building on the successful ‘Extractive Industries Transparency Initiative’. And we are leading efforts to improve the transparency of international aid flows, ensuring money gets to where it is needed most, and making it easier for citizens to track how aid is spent at local and national levels.
Conclusion
The United Kingdom is recognised as one of the least corrupt countries in the world. But this does not mean UK companies are immune from the pressures of corruption, particularly when they are operating in new and emerging markets.
A strong legal architecture and effective enforcement can help to alleviate these pressures, but as I hope I have emphasised, the primary defence lies in establishing the right kind of culture. Your very presence here signals your commitment to this process – a process which we, as a government, will do everything we can to support.