1. Guidelines for Reducing Corruption in Developing Countries

Solutions for Donor Countries for Reducing Corruption in Developing Countries Like Iraq, Afghanistan and Pakistan

MORE recommendations added 11/24/2009

This is a living document and I keep adding issues here.

by Vance Jochim

www.FiscalRangers.com - "Corruption in Iraq & the World" blog

Below is a growing master list of most of the Iraq Corruption & Fiscal Oversight issues I have described in various posts on this blog, plus information and recommendations not posted before.  Hopefully it will serve as a "lessons learned" and planning document for anyone in a position to improve future fiscal and program oversight over anti-corruption programs and policy in foreign countries anywhere.  Several recommendations refer to "recipient" countries receiving foreign aid, and aggressive steps by donors to "encourage" expanded anti-corruption actions.

I will be adding documentation in no particular order, and revising it when needed. 
Vance Jochim ( FiscalRangers@Comcast.net ) - Created June 12, 2008 and revised periodically.

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Issues and Recommended Donor Practices to Reduce Corruption in Developing Countries Receiving Foreign Aid

1. Establishment of Independent Anti-Corruption Agency with Strong Prosecution Authority - Ensure that a completely independent anti-corruption commission ( aka Integrity Commission ) be established in the aid recipient country (i.e. Iraq, etc. ) which has full and independent authority to investigate and prosecute corruption cases.  They must be independent to avoid conflicts with existing Judicial systems that may be subject to bribery - this is done with background checks, etc.  Base the commission on the successful programs in Hong Kong & Singapore (developed by a UK consultant many years ago).  The Iraq Commission of Public Integrity (CPI) was based upon those programs and defined in Order 55 issued by the Coalition Provisional Authority in 2004, but then diluted by the current Iraqi leadership. I was on the US advisory team that established CPI in 2004-2006.  6/12/2008

2. Assignment of Anti-Corruption Policy & Implementation to Hard Nosed Government Agency not Affiliated with Diplomatic Agencies - Transfer complete US or donor country responsibility for implementation and success of anti-corruption programs from the State Dept. to a hard nosed authority such as SIGIR, the CIA or GAO.  The GAO would need most likely need expanded powers to operate in foreign countries.  The State Dept. are diplomats and focus on other priorities and seem to continually avoid responsibility for anti-corruption efforts.  For purposes of this document, I will label the new unit the ACU (Anti-Corruption Unit).  Also ensure that the State Dept. gives the ACU required living space, etc.  I say that because I sat in Iraq watching as the State Dept. fought continuous requests by the GAO to go to Iraq to review  reconstruction spending.  Remember,  the Iraq Reconstruction  Management Office was run by a State Dept. Diplomat.  Although they already had SIGIR there, SIGIR did not have authority to audit some spending (and balked at reviewing USAID reconstruction programs in 2004-2005), thus the GAO or a future ACU needs full authority to enter any aid recipient country when they deem it necessary.  The ACU also needs complete authority to audit USAID or other donor country spending programs based upon their own risk analysis.  (Note:  In mid-2009, SIGIR proposed such an agency.)  6/12/2008

3. Provide Foreign Aid Funding Veto Power to Anti-Corruption Policy Bureau - Provide the above new anti-corruption implementation  units with full authority to halt some or all foreign aid spending if the recipient country does not quickly implement and support required anti-corruption action plans and prosecute cases assembled by the ACU.    6/12/2008

4. With-hold Foreign Aid if Recipient Country Does not Emphasize Aggressive Anti-Corruption Prosecution and Punishment for Small and Large Corruption Cases - Ensure the aid recipient country passes and enforces laws to allow full prosecution, sentencing and imprisoning of corrupt officials at any level.   This week (6/12/2008) , at a Donor's Conference in Paris for Afghanistan Foreign Aid, many donor reps demanded that the AFG Prime Minister Karzai do something about corruption other than talk.  This Corruption issue was in many headlines from different news sources all over the world.  Donors need to actually go to the next step and actually stop payment on funding if anti-corruption progress is not clear and measurable. (Note:  Later we found a term for this:  "conditionality" - click HERE for more details on the concept of conditionality. ) 6/12/2008 - Updated 4/15/2009.

5. Ensure the aid recipient country approves, signs, enforces and uses the UN Convention on Corruption to Prosecute Corrupt Officials who Have Escaped to Other Countries - That action facilitates prosecution of a corrupt official in another country.  The recipient country should also show progress in using the Convention on Corruption to pursue prosecution of corrupt officials who have escaped to other countries.  This issue includes using the Convention's regulations to also retrieve the stolen funds discussed below. (Note: Iraq has recently started doing this regarding the Oil-for-Food program bribe payers. ) 6/12/2008

6. Aggressive Electronic Tracking and Retrieval of Funds Moved by Corrupters to Other Countries Should Be Initiated - The US should develop a hard nosed investigative program for the ACU as well as the recipient country to track wire transfers and foreign bank deposits of funds taken by the corrupt officials.  As they say, follow the money, and track down the perpetrators.  The US Treasury Dept. has a unit that focuses on those techniques to track money laundering and their expertise should be tapped.  Then a case against the corrupter shold be developed and UN Convention on Corruption laws should be used to pursue prosecution and recovery of stolen funds. 6/12/2008

7.  Fund and Require Recipient Countries to Implement International Accounting, Auditing, Procurement and Other Standards to Improve Controls and Transparency of Financial Transactions - Poor Accounting methods allow corruption to flourish.  Iraq still is using an old, communist based accounting system that is not credible.  Potential investors cannot rely on any Iraqi accounting reports for making investment decisions.  Thus, the US should demand that the aid recipient country adopt and implement a) International Accounting Standards (known as IFRS or International Financial Reporting Standards), b) International Audit standards, c) International procurement professional practice standards, and d) International cost and management accounting standards.  The country will not be able to attract many investors until that is done.  Banks won't guarantee loans, etc.  In early 2005, I provided a list of the needed international standards in these and other professional standards to US State Dept. personnel and they ignored the issue. 6/12/2008

8.  Foreign aid should be contingent on more rigorous documentation and work practices that emphasize a resistance to paying bribes.  For instance, I talked to construction managers in Iraq, and in the case of rebuilding Fire Stations, they paid an average $5,000 bribe to fire chiefs to complete the project.  However, construction managers for rebuilding schools told village elders and demanded the bribe requests cease, or no work would be done.  That practice resulted in no bribes being paid.  Thus US officials need to come up with a best practices guideline for all foreign aid program managers on how to handle bribe requests.  6/12/2008

9.  A formal process should exist for US and other donors to report any bribe requests from any party, whether foreign nationals or US citizens.  They should also be required to report all bribe requests to a central agency, such as www.Bribeline.org (in Annapolis). Funding for specialized anti-bribery investigators should be provided for both US and the recipient country to quickly react and investigate even small bribe requests. Prosecutions should be publicly announced to give the public a sense of improvement and reduction in bribe requests, whether for attendance at college classes, being released from a traffic stop, or requests to pay third parties for huge defense spending programs.  6/12/2008

10.  Specialized, fast acting investigators should be trained and ready to react to any threat to any anti-corruption staff. There was supposed to be one for the Iraq CPI, but it wasn't developed, and over 30 CPI investigators have been killed, including three I knew personally.  The plan for this type of program was based upon similar groups established in New Jersey to react to threats from mafia members being investigated by state prosecutors.  Establish a specific policy to cut US funding to any foreign agency Ministry by 10+% if any internal auditors or anti-corruption investigators are beaten or killed.  6/12/2008

11.  All employees in the aid recipient country's government agencies should be required to sign an ethics policy every year.   This was started in Iraq by the Commission on Public Integrity (CPI), but the Iraq Ministers didn't support it.  Thus, a law is needed also that removes any Minister or department head who does not enforce the requirement.  Any employee that does not sign the policy by a deadline should also lose their job.  The ethics policy should be professional and not weak.  This should be a mandatory requirement before giving ANY foreign aid or reconstruction funds to each Ministry.  6/12/2008

12.  All managers in the country should be required to fill out and sign a conflict of interest form, including a list of assets, financial disclosures, etc.   Any manager who does not enforce this requirement, or will not sign it should be fired.   This program was initiated in Iraq also by CPI, but Ministers ignored it, and the mass of paperwork overwhelmed CPI.  Instead, a large department like the Ministry of Finance should be required to implement the program, subject to audit by the anti-corruption commission.  This should be a mandatory requirement before giving ANY foreign aid or reconstruction funds to each Ministry.  6/12/2008

13. Require that the recipient country adopt, implement and enforce international best practices for procurement.  Don't give ANY funds to the country to spend until they adopt this recommendation.  Without it, funds can be siphoned off since there is no transparency or professional system of procurement controls.  A big problem in Iraq is they use outmoded, uncontrolled procurement systems where people in power can dictate who gets contracts, etc.   The procurement process needs to be professional, VERY transparent and contract details should be published on the internet in the local language (like www.FBO.gov )   Procurement decisions should be subject to public inspection and investigation when challenged by any non-winning party.  The Federal government uses such a system (ok, except for a few, like Halliburton...).   I don't believe any country should receive any foreign aid funds without using professional procurement systems and staff.  6/12/2008

14.  A Country ranking on the Transparency International Corruption Perception Index should be monitored for improvements and a TI Chapter should be established.  Transparency International ( aka TI at www.Transparency.org ) in Belgium tracks and ranks worldwide corruption ratings of over 170 countries, and provides lots of information on anti-corruption programs and best practices.  Iraq is in the bottom five most corrupt countries.  The ACU should post and watch the TI index, and implement an aggressive program to establish a TI chapter in the recipient country.  Such a program takes about three years, and requires that NGO's form the committee to create the chapter, and meet certain requirements.  Currently, there is no TI chapter in Iraq or Afghanistan.  The ACU should provide leadership to engage NGO's to get the program started.   Any US funds given to a country should be contingent on requiring them to aggressively support establishment of a TI chapter, AND to implement corrective actions specified by TI to achieve higher rankings in the TI Corruption Perception Index.  The US should seriously consider holding back 10% of ALL approved foreign aid to any country in the lower 50% of TI's Corruption index and using it to fund improved business controls and US controlled anti-corruption programs until they move up into the top 50% of the index.  6/12/2008

15.  A salary study should be conducted of government wages in developing countries to determine if the wages are an adequate living standard for middle class employees so they do not have to commit corruption to live.  Various research reports have indicated that a major reason why government employees practice corruption is that their pay is too low.  In Iraq, for instance, most government employees including doctors only worked from 9am to about 1pm , then left to work a second job to make enough money to survive.   Market rate for degreed accountants to work in local businesses was about $600-800, but government accountants were only paid about $200 per month.  A result is many employees only work a half day, then leave to work a second job if they are not in a bribe taking position.  Thus a major initiative in such countries should be to move employee pay up to allow a "decent"  middle income lifestyle.  Without it, they either commit corruption or work second jobs.  Part of the problem is hiring way too many non-working or employees or ghost employees which increases total wages while forcing average wage rates down. (When I find the research that supports this issue, I will add it here.) 6/14/2008

16.  Eliminate Extensive, Un-necessary Steps to Obtain Government Approvals Until Bribes are Paid - Another issue that enables corruption in developing countries is the proliferation of requirements for permits and steps to get government approval for any task.  That can include buying a house, entering college, or getting a business or construction permit.  Developing countries will usually have many more steps to jump through, and mostly manual steps where an official can extract a kickback. Each approval step is an opportunity for a government worker to demand a bribe.  While in Iraq, I saw a book an IRMO manager was researching which clearly laid out all the honorous, extra steps needed in some other developing countries (including India) where there were a horrendous number of steps to get an approval from government.  If the applicant for the approval refused to pay the bribe at each step, the request would sit for months until they broke down and paid it.   Thus providing advice and expecting more efficient government with fewer approval process steps will help reduce corruption.  (This concept was illustrated well in an internet article by a new Afghan anti-corruption chief HERE. )  6/14/2008

17.  Replace Human Collection Agents with Machines - This will reduce the use of humans who either demand a bribe or skim from cash collections.  In one country ( I think it was Malaysia) , they switched from people as ticket takers for trains to using all coin machines to issue tickets, and it reduced skimming of cash collections by quite a bit.  This is really a standard accounting control, and other such controls should also be used.  Increased use of automated payment, accounting and collection systems will reduce the opportunity for a corrupt human to demand bribes.  Update added 7/24/09:  Another example is a country with a ministry that collects airport landing fees or fees for buses and trucks to travel highways.  If this revenue source is not controlled well, lots of the funds (estimated $50-200 million) will be siphoned off through corruption (actually is happening in one country).  Original entry 6/14/2008

18.  Upgrade  Competencies of Foreign Aid Program Managers to be Subject Matter Experts in the Economic Sector Receiving Foreign Aid - While in Iraq, I worked in the Iraq Reconstruction Management Office (IRMO) which was created using recruited civilians who were subject matter experts. For instance, the Sr. Advisor for Agriculture was a scientist who really understood crop economics and food processing, and using his industry contacts he arranged an international group of crop sprayers to visit Iraq and spray crops with needed pesticides.   The Sr. advisor to the Water Ministry was an experienced manager from the Tennessee Valley Water Authority which managed many rivers, water systems and dams.  The Sr. Advisor to Telecommunications was a prior region vice president for a telecomm company who rolled out cell phone systems to two countries in the mid-east.  In my case, I was a corporate internal auditor for 18 years, and I designed a 7 topic training program in accounting, internal audit, and other subject areas that was taught in Baghdad IN ARABIC to over 300 Iraqi internal auditors in different agencies to get them current with international audit practices.  That is the type of senior advisor that USAID should be providing as a donor program manager providing services and funding for an economic sector in a developing country.  In contrast, the US uses USAID in many countries to "manage" foreign aid, and many of them are young, ex-Peace Corps workers.  They don't have subject matter experience, leading to lower quality service RFP's, and they lacked professional project management experience or training to aggressively monitor technical services and reconstruction.  As a result, the contractors could provide loose, non-technical rfps without specific measurable timelines to fit their expertise rather than providing the expertise a true subject matter expert would expect.  DON'T send amateurs with humanities degrees to manage reconstruction or technical programs.  Do like IRMO, and only send some subject matter experts.  They will develop more credibility with the related country Ministries and be more respected for their opinion.  Then let the subject matter experts develop the service and materials rfps.  IF you don't agree, go to the GAO  website and pull up audit reports on USAID projects and read what they say (you can't rely on USAID or State Dept. IG reports which are, in my opinion, not aggressive enough.)

19.  Implement this Sure Fire Method to Improve Documentation Supporting Billings from Contractors - Many audits from SIGIR, DoD IG's and headlines have  shouted about US Government or Iraqi Government payments being made when no documentation existed to support what they were for. Periodically, news articles appear about billions in payments made to KBR or other programs without enough documentation to justify the payment.  To solve this, the US Federal government needs to mandate these four standard, never waived requirements in all purchase contracts:   1)  Require a specific amendment or attachment be included in ALL contracts describing the specific documentation required to enable payments unless there is a signed waiver by specifically named people. 2)  Define the waiver process to ensure it is documented. Do not allow early payments because of the Prompt Pay act without signed receiving reports from the ordering agency. 3) Mandate, that even with a waiver, if the contractor invoices the government without the defined documentation, they are agreeing to accept a payment that is discounted by 20%.  4) In addition the Federal finance department making payments for invoices will be required by regulations to enforce this provision, and keep a database of all such "low documentation" invoices by contract and by contractor.  AND, each time a procurement official is about to award a contract, they are to consult the database and give lower priority to contractors who submit poor documentation.      This provision will put a dollar price on poor documentation, which will force contractor's to take it seriously.  (This recommendation was generated after reading a recent NY Times article where an Army procurement official tried to hold up payments to KBR in 2004 due to questionable documentation, and he was over-ruled by higher officials, but there was no apparent penalty to KBR for poor documentation.) Additionally, this recommendation solves the MAJOR problem where the Prompt Pay act was used as an excuse by the Defense Finance office to pay vendors for Iraq supplies when the ordering department had not received them yet (described in a recent DoD IG report, and also based upon my personal experience)..  - 6/17/2008

20.  The Effect of Free Market Economies on Ease of Corruption - We found a theory paper HERE that suggests that a free market economy makes it much harder to continue corrupt practices, because market forces will force elimination of some corrupt practices vs a centralized government (i.e. socialist or communist) where government controls too many activities, creating more opportunities for corrupt officials to get bribes, etc.   And, this is a separate issue from having a Democracy.  Iraq now has a Democracy, but plenty of corruption.  According to this theory, one reason is that the government controls too much, and Iraq is not a free market economy.   Added Jul 19, 2008

21. Foreign Aid agreements with foreign governments should include right to audit provisions - This is common in large businesses. For instance, Boeing may use sub-contractors and have a right to audit clause in their contracts, AND their internal audit department will actually visit and walk through the vendor systems to evaluate their quality and ability to prevent production and accounting mistakes, etc.  A GOOD internal audit department will conduct workflow and control reviews at the BEGINNING and DURING projects, and not just after the project is complete like financial auditors do.  I did this in several firms, and we reduced group insurance costs by 16% by identifying improvements needed in the systems of the health insurance company internal systems.  I also did that in a marketing services firm for Nissan Motor Corp., and identified lots of duplication, which when eliminated, reduced costs, and eliminated some duplicate invoice problems.  This same type of provision should exist in any foreign aid program so the receiving country is on notice that US auditors will have the right to walk through systems and inspect them, interview people, etc. to verify the quality of the accounting, purchasing and other systems that should exist to detect and prevent mistakes and corruption BEFORE the spending takes place.  Audit groups should be funded as part of the foreign aid program and be tasked to walk through systems BEFORE funding starts.  This is called pre-contract review, and is also common in some better run businesses, especially for new vendors.  Without doing this, the US Government is not following sound business practices and not expecting them of "foreign aid partners" or recipients.  (Added 7/30/08)

22. The international community sometimes contributes to corruption, and needs to ensure proper safeguards exist over foreign aid to prevent corruption.
Sometimes the international community can unwittingly contribute to
corruption. In order to achieve quick, visible results, there is often
pressure to spend reconstruction funds rapidly. The emphasis on speed
undermines attention to transparent procurement, quality control and
contract management. Paying attention in the early reconstruction period
to having a ‘good enough’ due process can establish new norms, helping
to increase confidence.  I got this from a DFID white paper - only the Brits would recognize and be up front that corruption can be enabled by poorly controlled foreign aid and reconstruction programs that allow fraud and corruption to take place.  For instance, if the US provided $50-million directly to a foreign ministry for construction (like they are doing now in 2009 for Afghanistan and Pakistan) and doesn't ensure proper internal controls exist to prevent corruption, then they are co-enablers of corruption growth).  (Added 7/24/2009)

23.  Prosecution of Suspected Corruption, Bribery and Fraud Cases Must be Monitored and Transparent and free from Delays-  Most of my experience with corruption cases was with the Iraq anti-corruption agency, which had legal authority to investigate, develop evidence, and provide cases for prosecution to a special Court established to act on corruption cases.  However, other countries may not have such streamlined laws, and Inspector General auditors or other auditors may provide evidence of corruption and hand it over to an Attorney General.  In some cases, the prosecution never happens if the Attorney General is susceptible to bribes or coercion.  Thus in some countries, the internal auditors develop bribery or corruption evidence and the AG never initiates prosecution.  This means a review of the status of all such cases handed to an AG would be needed as a condition to providing foreign aid.  Other solutions would be to require that ALL cases be filed and available to the press, and the status and resolution of all cases needs to be reported quarterly for the public and press to evaluate.  For instance, as soon as a case is filed in US courts, the press can find out about it and monitor its status.  That is not happening in some "developing countries".  (Added 7/24/2009)     

24.  Assess any existing censorship of "free press", including newspapers, radios, TV or the Internet - It usually starts with stated objectives of halting pornography, violence (as in terrorism) and prostitution, but could be expanded to restrict criticism of government and politicians which reduces transparency and disclosure of corruption.   Examples are Iraq, and recently Iraq started talking about limited censorship JUST before planned elections.  (Added 8/14/2009)

25.  Use Social Media like Twitter and Facebook to Report or Track Corruption - This was recommended by Hillary Clinton in a speech in the Phillipines in Nov., 2009, based upon the effect of Social Media in recording resistance to rigged elections in Iran.  Thus a country anti-corruption agency could set up specific Twitter, Facebook, etc accounts for youth to report corruption.  (Added 11/12/2009)

26.  Educate Leaders of Foreign Countries About New International Laws that can Result in Reduced Investment in their Country -  Up through 2006 or so, international companies had no problem paying bribes to country officials to get business.  Except for the US Foreign Corrupt Practices Act that affected US companies, most other international firms didn't face prosecution for paying bribes.  Now, however, there is the UN Convention on Corruption, and the IMF has some regulations, plus a number of developed foreign countries are passing their own version of the FCPA.  As a consequence, their is a growing list of large, international companies being prosecuted and fined (Siemens - $900-million fine) for paying bribes to foreign officials.  For instance, the government of Iraq is using the UN Convention on Corruption to sue many firms who paid bribes to Saddam Hussein to get business when he was in power.  Thus, if a developing country like Iraq or Afghanistan doesn't now crack down on corruption and bribery requests from officials, international firms will not invest in that country due to the higher legal liability they face if they are caught paying bribes before or during conduct of business.  (Added 11/24/2009) 

more later...

vj