Responsible youth entrepreneurship module by Natasha Petkova

Responsible youth entrepreneurship:

CREATING A CULTURE OF ANTI-CORRUPTION IN THE PRIVATE SECTOR

but WE can! Corruption you can’t stop it,

www.beresponsible.biz

SUMMARY

Corruption is now recognized to be one of the worldâ&#x20AC;&#x2122;s greatest challenges. It is a major hindrance to sustainable development, with a disproportionate impact on poor communities and is corrosive on the very fabric of society. The impact on the private sector is also considerable - it impedes economic growth, distorts competition and represents serious legal and reputational risks. High levels of corruption are widely spread in developing economies rather than developed economies because the conditions are conducive for it. The public sector is vulnerable to corruption and miss-managed. Bureaucracy and complex administrative procedures affect day-to-day activities in business. Growing disagreement between the demands of people to get proper utility services and resistance of institutions to the accountability brings rise to corruption. Eventually the credibility of the governmental bodies is lost and people make choices to deal with situations even if it means not to comply with the law. The effect of corruption not only affects a country on a national podium but also stops possible foreign investments in the country. Corruption is also very costly for business and its environment, with the extra financial burden estimated to add 10% or more to the costs for the business. Corruption occurs in all societies, but threatens the economic and political fortunes of developing countries the most. Bribery, conflicts of interest, and illegal deals impose heavy costs on the economy while distorting development policies and undermining confidence in public institutions. Although some companies may benefit in the short term from corrupt deals, corruption causes most companies to suffer in the long term from higher costs, greater insecurity, and an inhospitable business climate. Companies have good strategic reasons to join this fight and can tackle the supply-side of the problem in ways that governments cannot. Equally important, corruption must be treated as a product of institutional failures, not simply individual moral failings. Building a system of strong, balanced institutions is the best way to reduce corruption. This means creating a set of reliable incentive structures that reward professionalism, honesty and transparency and punish bribery and abuse of public office. The private sector can make extremely valuable contributions to reforming political and economic institutions. The effort against this damaging phenomenon should be with joined strength of the whole society. It requires working together to prevent its spread, isolate the sources and bring about critical determination to fight corruption. You canâ&#x20AC;&#x2122;t stop it yourself, but WE CAN!!!

Table of Contents 1. Corruption

2. Effects of corruption

1.2 Definition of corruption

2.1 Costs of Corruption

1.3 Who gets involved in corruption?

2.2 Causes of Corruption

3. Fighting corruption

4. The EC approach to anti-corruption

4.1 Principles underpinning the EC anti-corruption approach

3.1 Measures to fight corruption

4.2 Objectives of EC support

3.1.1 Demand-side measures (public sector)

4.3 EU Anti- corruption policy

3.1.2 Supply-side measures (private sector)

4.3.1 Actions undertaken by the EC

3.2 Stages in the Fight against Corruption

4.3.2 The 10 General Principles

3.2.1 Educate

4.4 Why is corruption a priority?

1. Corruption

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... a good business manager weighs his options, and chooses the most economical means of staying in business. But, what appears to be a quicker way to get the job done now (paying the bribe) overtime can become an expensive proposition with uncertain outcomes. The costs and risks of corruption are economically inefficient and thereby distort growth potential. The bribes he must pay are nothing but uneconomical transaction costs: they are rent payments that add nothing to his business. If he could instead invest those monies he could grow his business and create more jobs, produce more and better goods for his customers, generate higher incomes for himself and his employees, and generally contribute to a better standard of living for his community. Because so many businesses face the same problem the negative impacts on the local economy can be significant...

Let’s imagine for a moment two people, each running a different business. The first is a small shop owner who makes and sells pastries, cakes and other delectable treats to many satisfied customers, from local townsfolk to the many tourists that visit from spring to fall each year. He’s been in the business for five pretty good years, but he’s starting to worry about the future. He’s noticed that the health inspector is making more visits, unannounced, and asking the usual questions that lead up to the inevitable, subtle, and unspoken cash transaction, followed by a smile and topped off with a gratis espresso and slice of his renowned chocolate cake. Other officials were on the move too for some reason. The tax inspector had already made twice as many visits this year than last one. And, just the other day the director from the local business licensing office unexpectedly stopped by to introduce new “procedures that require more formalities”. After small talk, complimentary cakes and ice cream, he mentioned that, “oh by the way, ”our shop-owner-friend should stop by the licensing office soon to discuss some ‘irregularities’ in the licensing papers he’d filed this year. This of course could mean only one thing more: yet another payment to keep his business ‘legal’. His ‘unofficial payments’ to government officials this year would certainly mount at rate. Our second businessman manages a large holding company with several subsidiary interests in trade, telecommunications, print media, and light manufacturing exports. Right now he’s on his way to a cocktail reception where he hopes he’ll meet the Deputy Minister for Public Works and Communications. He’s already had two meetings with the deputy to discuss the government’s plan to privatize the largest TV broadcasting network in the country. The deputy knows of his company’s interest in winning the bid, but our business manager is becoming less certain of their success. He recently learned their major competitor was lining up a foreign joint-venture partner with the promise of additional financing and access to new technologies that could sweeten their position and give them an unbeatable edge. Unfortunately his company hadn’t been able to line up such partners. He was hoping that tonight the deputy would agree to have dinner with him next week. He’d for sure have to offer a substantial gift to win the deputy’s favour, particularly in light of his competitor’s growing advantage.

The involvement of a foreign investor did add another wrinkle that he might be able to work to his advantage, however. Several parliamentarians recently had introduced a draft bill to prohibit foreign investors from operating in certain “strategic sectors.” Broadcasting was on that list, but he’d heard from his friends in parliament that certain private interests were lobbying heavily to get it removed. Tomorrow he’d call his cousin who works in the Prime Minister’s office to find out which members of parliament were wavering on this issue, and then try to go meet with them. It could prove to be an expensive year for doing business, but he’d give it his best shot. Many factors affect corruption between the public and private sector. 1 In the case of our baker, he must pay bribes out of necessity. If he didn’t pay he’d faced several dangers. The paperwork might slow down to the point he has to spend more and more time chasing bureaucrats and less time running his business. Or, even worse, the corrupt officials could deny him a license and force him to shut down. Taxes present him with another problem. If, as in many early stage open-market economies, his taxes are high and the tax code frequently changes, then it’s probably cheaper (and quicker) to pay off the tax inspector than it is to put the time and money into following the letter of the tax laws, even though this is a short-run solution with dubious and unpredictable risks attached. Russ Webster, CORRUPTION AND THE PRIVATE SECTOR, November 2002

So, like a good business manager, our baker weighs his options, and chooses the most economical means of staying in business. But, what appears to be a quicker way to get the job done now (paying the bribe) overtime can become an expensive proposition with uncertain outcomes. The costs and risks of corruption are economically inefficient and thereby distort growth potential. The bribes he must pay are nothing but uneconomical transaction costs: they are rent payments that add nothing to his business. If he could instead invest those monies he could grow his business and create more jobs, produce more and better goods for his customers, generate higher incomes for himself and his employees, and generally contribute to a better standard of living for his community. Because so many businesses face the same problem the negative impacts on the local economy can be significant.1

1.2 Definition of corruption

Broadly defined, corruption is the abuse of entrusted power for personal gain. When a public or private sector position is abused for private benefit, this may involve bribery, nepotism, favoritism or other forms of corruption. However, three specific conditions must apply for an act to be considered corrupt: 1. The armâ&#x20AC;&#x2122;s-length principle is violated. The two parties in a transaction display bias for working with each other that is inconsistent with impartial treatment. 2. The bias, or conflict of interest, must be intentional. 3. There must be some advantage for both parties to commit this violation. This advantage need not be monetary in nature; it could involve favouritism or nonmonetary gift.

According to the Illustrative List of Corrupt Behaviors2 corruption represents: The design or selection of uneconomical projects because of opportunities for financial kickbacks and political patronage. Procurement fraud, including collusion, overcharging, or the selection of contractors, suppliers, and consultants on criteria other than the lowest evaluated substantially responsive bidder. Illicit payments of “speed money” to government officials to facilitate the timely delivery of goods and services to which the public is rightfully entitled, such as permits and licenses. Illicit payments to government officials to facilitate access to goods, services, and/or information to which the public is not entitled, or to deny the public access to goods and services to which it is legally entitled. Illicit payments to prevent the application of rules and regulations in a fair and consistent manner, particularly in areas concerning public safety, law enforcement, or revenue collection. Payments to government officials to foster or sustain monopolistic or oligopolistic access to markets in the absence of a compelling economic rationale for such restrictions. The misappropriation of confidential information for personal gain, such as using knowledge about public transportation routings to invest in real estate that is likely to appreciate. The deliberate disclosure of false or misleading information on the financial status of corporations that would prevent potential investors from accurately valuing their worth, such as the failure to disclose 2 http://www.adb.org/documents/policies/anticorruption/anticorrupt300.asp

large contingent liabilities or the undervaluing of assets in enterprises slated for privatization. The theft or embezzlement of public property and monies. The sale of official posts, positions, or promotions; nepotism; or other actions that undermine the creation of a professional, meritocratic civil service. Extortion and the abuse of public offices, such as using the threat of a tax audit or legal sanctions to extract personal favors. Obstruction of justice and interference in the duties of agencies tasked with detecting, investigating, and prosecuting illicit behavior. According to the Criminal Code of Republic of Macedonia (KCRM) corruption represents: Fraud in dealing with securities and shares Negligent operation of the service Damaging and unauthorised entrance in a computer system Computer fraud Abuse of the bankruptcy procedure Money laundry and other incomes emerged from crime Exposure and unauthorised obtaining business secrets Abuse of official position Illegal brokerage Exposure of business secret Embezzlement in the service Fraud in the service Forging of official documents and illegal collection and payment

1.3 Who gets involved in corruption? “...To be corrupt you need big money... and to be connected with the government...” Resent surveys were conducted among businessmen and young people for many issues related to corruption, including the question “who gets most involved in corruption” whereby who was meant as “what types of companies” or “what sectors” elicited very consistent and narrow - specific responses. . The major views are the following: a) big businesses or businesses in areas where there is a lot of money are most involved in corruption, b) businesses dealing with government and with public procurement c) construction companies d) other Even though some respondents were inclined to argue that small businesses are/can also be corrupt, most of them suggested that corruption is more typical of big businesses, or businesses working with large deals: “... I think it is mostly companies which are involved in large deals...” “...where there is more money there is more corruption...” “... big business which get involved with tenders are most in contact with corruption...” “... big businesses are more involved in corruption than small ones ...those businesses which deal with the government are more involved naturally...”

Another major response to the question of “who” was that this is primarily companies which have dealings with the government. The response was clear, specific, and frequent in all countries surveyed: “...businesses which work directly with the government, for example companies which build roads...” “... not just the big companies, the small companies are also involved in corruption, if they are connected with the government...” “...I think the most dangerous forms of corruption take place in public procurement, between the governments and companies which become huge over nights, exactly because of corruption...” Finally, the key word which definitely emerged from the responses to the question “who gets involved” was – construction. The construction sector was the most frequent response, accounting for huge share of all answers “... I think in some sectors there can be more corruption, such as in construction...” “... mostly construction companies.....I do not think small companies could get involved in corruption...” “...I hear that companies, for example which make roads; they are the ones which are most involved in corruption...” .

2. EFFECTS OF CORRUPTION

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“Corruption damages companies, resulting in tendering uncertainty, wasted tender expenses, increased project costs, financial loss… Corruption damages interpersonal relations, resulting in reduced ethics and less loyalty to the company, bad reputation, termination of employment, criminal prosecution… ”

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On organizational level: Corruption damages companies, resulting in tendering uncertainty, wasted tender expenses, increased project costs, financial loss… There are many reasons why it is in any company’s business interest to ensure that it does not engage in corrupt practices. All companies, large and small, are vulnerable and the potential for damage to them is considerable. The following are some of the key reasons for avoiding involvement in corrupt practices3: Legal risks Regardless of what form a corrupt transaction may take, there are obvious legal risks involved. Not only are most forms of corruption illegal where it occurs, but also it is increasingly becoming illegal in a company’s home country to engage in corrupt practices in another country. The principle that it is illegal to bribe foreign officials was first established in the US Foreign and Corrupt Practices Act of 1977 and since then, this principle has gained legal standing within the whole of the OECD and in a number of other countries. It is a principle that was universally recognized in 2003, through the adoption of the UN Convention against Corruption. The enforcement of anti-corruption legislation internationally has hitherto been relatively poor, but this is slowly changing. In developing countries and emerging markets, where the opportunity for corruption has been rife because of weak institutions and legislation, corruption has become an issue of significant political importance and there is growing determination to act and to take those accused of corrupt practices to court. There is also a growing number of examples where developing countries with limited capacity to handle such cases have obtained outside legal assistance. To this end the OECD is playing a critical role in ensuring that its member states are developing judicial capacity to enforce the prohibition against any

involvement in bribing foreign officials. This changing environment of law, regulation and enforcement makes it harder for business managers to assess and quantify the legal risks to which corruption exposes their operations. Change brings uncertainty. Of particular significance for many large companies is the degree to which they may be responsible for agents acting on its behalf in other countries. What may yesterday have been considered an independent agent - for whom the principal company carried no responsibilities - may today be someone whose actions the principal company indeed can be legally accountable for. Reputational risks Based on the experience of recent years, companies whose policies and practices fail to meet high ethical standards, or that take a relaxed attitude to compliance with laws, are exposed to serious reputational risks. Often it is enough to be accused of malpractice for a reputation to be damaged even if a court subsequently determines that they have not been involved in corrupt practices. It is of critical importance for a company to be able to quickly quash any unfounded allegations by demonstrating that it acts in a transparent manner and has in place policies and procedures designed to prevent corruption. The argument that although what they may have done may have been against the law or international standards, it was simply the way business was done in a particular country is not an acceptable excuse. Nor is it good enough to claim that other companies and competitors have engaged in similar practices. Financial costs There is now clear evidence that in many countries corruption adds upwards of 10 per cent to the cost of doing business and that corruption adds as much as 25 per cent to the cost of public procurement. This undermines business performance and diverts public resources from legitimate sustainable development.

3 http://www.unglobalcompact.org/aboutthegc/thetenprinciples/anti-corruption.html

‘Known as clean’ and repeat demands There is growing evidence that a company is less likely to be under pressure to pay bribes if it has not done so in the past. Once a bribe is paid, repeat demands are possible and the amounts demanded are likely to rise. Conversely a company which takes a firm and principled stand against all forms of corruption will become known for this and the risk of its employees being exposed to demands will lessen. For example, a business manager representing a large international company in China recently confirmed that despite pressures to do otherwise, his company did not accept any kinds of corruption: ‘Zero tolerance is the only practical solution’. Confidence of the consumer

It is from a key importance for a costumer to have a confidence with the company that sells goods and services. Bilateral trust can be acquired only if the reputation and the credibility of the company are widely known. Corruption harms the healthy relation with the consumer. Blackmail, no recourse and security risks By engaging in corrupt practices, company managers expose themselves to blackmail. Consequently the security of staff, plant and other assets are put at risk. ‘The one who cheats will be cheated against’ If a company engages in or tolerates corrupt practice, it will soon be widely known, both internally and externally. Unethical behavior erodes staff loyalty to the company and it

can be difficult for staff to see why high standards should be applied within a company when it does not apply in the company’s external relations. Internal trust and confidence is then eroded. Companies have a vested interest in sustainable social, economic and environmental development It is now clear that corruption has played a major part in undermining the world’s social, economic and environmental development. Resources have been diverted to improper use and the quality of services and materials used for development seriously compromised. The impact on poorer communities struggling to improve their lives has been devastating, in many cases undermining the very fabric of society. It has led to environmental mismanagement,

undermining labor standards and has restricted access to basic human rights. Business has a vested interest in social stability and in the economic growth of local communities. It has therefore suffered, albeit indirectly, from the impact of lost opportunities to extend markets and supply chains. The business community can and should play its part in rendering corruption as unacceptable. It is important to recognize that corruption diverts resources from their proper use. Financial resources that were intended for local development may, as a result of corruption, end up in foreign bank accounts instead of being used for local purchasing and the stimulation of local economies. At the same time it distorts competition and creates gross inefficiencies in both the public and private sectors. In most cases when corruption

occurs, the services or products being purchased are inferior to what had been expected or contracted for. A real and fair competition improves the quality of the offer. The longterm sustainability of business depends on free and fair competition. Corrupt practices also accompany and facilitate drug dealing and organized crime. Money laundering and illicit international money transfers are used as support mechanisms for international terrorism and organized crime. Global businesses have to be constantly vigilant to avoid being associated with these major international challenges.

payments themselves, the management cost of negotiating with officials, and the risk of breached agreements or detection, draining of qualified staff. Although some claim corruption reduces costs by cutting red tape, the availability of bribes can also induce officials to contrive new rules and delays. Openly removing costly and lengthy regulations are better than covertly allowing them to be bypassed by using bribes. Where corruption inflates the cost of business, it also distorts the playing field, shielding firms with connections from competition and thereby sustaining inefficient firms.

Corruption undermines economic development by generating considerable distortions and inefficiency. In the private sector, corruption increases the cost of business through the price of illicit

On personal level: Corruption damages inter-personal relations, resulting in reduced ethics and less loyalty to the company, bad reputation, termination of employment, criminal prosecutionâ&#x20AC;Ś

2.1 Costs of Corruption “...Corruption ends up in no real benefits: politically, economically, socially and environmentally... ” The cost of corruption is four-fold: political, economic, social, and environmental. On the political front, corruption constitutes a major obstacle to democracy and the rule of law. In a democratic system, offices and institutions lose their legitimacy when they are misused for private advantage. Though this is harmful in the established democracies, it is even more so in newly emerging ones. Accountable political leadership cannot develop in a corrupt climate. Thus corruption goes against democratization. Economically, corruption leads to the depletion of national wealth. It is often the reason for the funneling of scarce public resources to uneconomic high-profile projects, such as dams, power plants, pipelines and refineries, at the expense of less spectacular but more necessary infrastructure projects such as schools, hospitals and roads, or the supply of power and water to rural areas. Furthermore, it hinders the development of fair market structures and distorts competition, thereby deterring investment. The constant dilemma is always present, to pay or not to pay. There are different opinions about this: “...it is difficult to refuse to pay if you have to; no one would want to ruin their business just because they refused payment once...” “...the damage is even greater when you do not pay and you do not get things done...” “...it is better to pay and get things done, and keep your business and the jobs of your employees...” The effect of corruption on the social fabric of society is the most damaging of

all. It undermines people’s trust in the political system, in its institutions and its leadership. Frustration and general apathy among a disillusioned public result in a weak civil society. That in turn clears the way for despots as well as democratically elected yet unscrupulous leaders to turn national assets into personal wealth. Demanding and paying bribes becomes the norm. Those unwilling to comply often emigrate, leaving the country drained of its most able and most honest citizens. Environmental degradation is yet another consequence of corrupt systems. The lack of, or non-enforcement of, environmental regulations and legislation has historically allowed the North to export its polluting industry to the South. Environmentally devastating projects are given preference in funding, because they are easy targets for siphoning off public money into private pockets. Both business and society bear the costs of corruption: Resource misallocation. Resources that could be put to productive uses are instead devoted to corruption. Firms waste time and resources on rent-seeking – cultivating relationships with officials and spending on bribes. Officials make biased investment decisions that do not serve the public interest, and taxpayers swallow the cost. Lower investment. Foreign and domestic investors are scared off by unpredictable costs. Rampant corruption signals to potential investors that the rule of law, and thus property rights, are very weak in the country, making an investment there a risky proposition. Lower investment means lower growth. Reduction in competition, efficiency, and innovation. Rent seeking means that favoured companies do not compete on market signals alone, while new firms face high barriers to entry. Consumers end up paying in terms of higher prices, lower quality, and limited product offerings.

Unresponsive policies and poor administration. Law makers in corrupt systems use their powers to help rentseekers, not the citizenry as a whole. Bureaucrats are not held accountable for their performance and actually have incentives to delay services in order to extract bribes. Lower employment. By forcing businesses into the informal sector, creating barriers to entry, and increasing the costs of doing business, corruption essentially reduces private sector employment, because firms are less likely to grow. Small businesses are hit especially hard. Exacerbated poverty. Corruption lowers the income potential of the poor because there are fewer private sector opportunities. It also limits their access to quality public services such as healthcare and education.

2.1 Causes of Corruption “...Corruption derives from poverty, thereby proponing the argument that economic growth would in have itself help reduce corruption…” Corruption has multiple roots, but generally can be attributed to the poor design of institutions. Some of the deepest roots include: Unclear, complex, and frequently changing laws and regulations. When laws are contradictory or require heavy interpretation, the discretionary power of officials is amplified, increasing the risk that they will make arbitrary, self-serving decisions. When laws are unpredictable, entrepreneurs do not know their rights and obligations, so they cannot comply fully nor defend themselves against illegal inspections. Corruption then becomes a means to circumvent inefficiency and arbitrary official actions. Lack of institutional integrity Democracies are built usually on three branches of governance which check each-other under the principal of “checks and balances”. The failure of legislative, judiciary or executive to fulfil its duty paves the way to the misuse of power by the other. Lack of transparency and accountability. When deals are made behind closed doors, it becomes impossible to assess the criteria behind decisions, whether they serve the public interest and respect the law. If violators on both the public and private sides conceal their transactions, they escape being held accountable. Lack of competition. Companies producing in a monopolistic or cartel-dominated market have strong incentives to win government favor for their narrow interests, especially if the government mandates monopolies. Such an environment engenders rent-seeking behaviour and inefficiency. A lack of political competition

compounds the problem by eliminating accountability. Low public sector wages. When officials cannot meet what they perceive as their daily needs through their salaries, they resort to corruption to supplement their income. Simply raising the wages of officials, however, will not curb corruption so long as opportunities to abuse the system persist. Many young people and businessmen’s in the region think that roots of corruption are in poverty, thereby proponing the argument that economic growth would in of itself help reduce corruption: “...if people’s pockets would be full, there would be no corruption...” “... it is normal that there is a lot of corruption in the Balkans because we are poor...” “...the standard of living is low...corruption derives from poverty...” Inadequate, inconsistent, and unfair enforcement of laws and regulations. Even if laws to combat corruption are on the books, lax enforcement can invite abuse. A weak justice system, low penalties, and high costs of compliance will render laws ineffective. Another question answered from businessmen’s and young people in the survey was -Why Does Business Get Involved in Corruption, which lists many interesting answers. A frequently expressed view has been that corruption is systemic or endemic: “...it is systemic and cannot be changed...” “...it has become a new way of doing business; it has become pervasive; you are

confronted with the choice whether to resist it or adapt to it...” A clearly defined group of views related corruption primarily to government and institutional weakness, poor law enforcement, institutional ineffectiveness, thereby suggesting that improvement in the work of government is the way ahead in dealing with corruption: “...corruption exists because laws are not implemented properly...” “...you have laws but they are not implemented properly...” “...the reasons are more in the system than the culture of people or ethics ...if there is no law and no sanctions for disrespecting them, then... in Europe the system are much better and hence the corruption is much smaller...”

The view that businesses are forced to get involved in corruption if they want to survive has been the most frequently cited compared with all other positions. This view exonerates entrepreneurs from moral blame and indirectly points to the intentional abuse of government power as the core reason for corruption: “... it is not possible to be 100% legit; I have my own business and try to respect the rules, but I can tell you that you cannot survive without some bending of the rules...” “... businesses are not corrupt but they are involved into corruption by politics, businesses have no interest in corruption; they do not want to pay money...” “... when people get involved in corruption, they do it out of necessity... “... businesses get involved with corruption in order to survive...”

3. FIGHTING CORRUPTION “…Corruption can be prosecuted after the fact, but first and foremost, what is required is prevention…” 18

Corruption enriches the few, but weakens the social fabric, the economy and the state. Where corruption is rampant, it becomes a key obstacle to development. Corruption undermines the rule of law and democracy; it leads to the wasting of public funds; it distorts competition; it hampers trade and inhibits investments, it decreases the quality of services and goods harming on this way the living standard. Thus, there is a general agreement today that corruption is a major evil. However, corruption is not a necessary evil. For some time now, efforts to combat corruption have been stepped up internationally on all fronts.

3.1 Measures to fight corruption Effective ways to address the problem can be found on the demand side as well as the supply side. Measures on both sides aim at correcting institutional weaknesses and harmful incentives. Be sure to focus on the underlying causes.

3.1.1 Demand-side measures (public sector) â&#x20AC;&#x153;...Make sure everybody understands what is allowed and what not... â&#x20AC;? Simplified laws and regulations. Eliminate or reconcile duplicative and conflicting commercial laws in order to reduce barriers to doing business along with incentives to pay bribes. One method is to grant independent commissions of judges the authority to reconcile or strike down inconsistencies. Business associations and think tanks, too, can create inventories of legal barriers and duplicative regulations that need to be changed on a priority basis. Establish sound procurement codes. For the sake of integrity in public contracting and fair competition, transparency must be built into procurement. Procurement codes should embody legal guarantees that ensure open bidding and tenders. Bids should be open to public scrutiny, and civil society should participate in monitoring procurement processes. In order for a bid to be open and competitive it needs to have clear criteria published on a reasonable time. Integrate the informal sector into the mainstream economy. Large informal economies emerge when conflicting laws and regulations make compliance impossible, particularly for small firms. Informal firms can be brought into the mainstream by lowering the barriers to starting and operating a formal business, for instance, by streamlining business registration procedures. Another approach is to exempt small firms from certain regulatory requirements.

Simplify tax codes. Simplifying tax codes reduces corruption in two ways: by limiting the ability of officials to use discretion in applying tax regulations, and by reducing tax evasion (increasing tax compliance) through lowering taxes. This is also a good route to reducing the shadow economy. Introduce civil service reforms. A living wage for civil servants that is competitive with private sector salaries reduces the demand for extra payments. At the same time, professional standards, training, and performance monitoring should be implemented. The authority of inspectors should be carefully defined and the supervising independent bodies with leverage of the public should be established so that inspectors do not overstep their bounds. Promote clear rules on conflict of interest for the public sector. In many countries, it is still possible for government officials to hold additional paying positions in private or state firms, or to accept consulting fees from private firms. At a minimum, such relationships should be disclosed and the officials barred from making decisions affecting those firms. In addition, officials should be restricted from moving into positions in firms doing business with the ministries or agencies with which the officials serve.

3.1.2 Supply-side measures (private sector) “...Improving business access to regulatory information and educating entrepreneurs on their responsibilities and rights can help entrepreneurs comply with the law and say “no” to extortionate demands from bureaucrats...” Institute better standards for corporate transparency and accountability. By making companies transparent and holding corporate decision-makers accountable for their actions, corporate governance makes it hard for companies to furnish bribes. The practice of good corporate governance ensures that managers act in the interest of a company, board members exercise

good judgment, investors receive timely and relevant information, and decisions are made in consultation with stakeholders. It also breaks the hold of vested interests that inhibit the proper functioning of markets and democratic political institutions. Standardize accounting and auditing standards. Internationally accepted accounting standards facilitate comparisons by investors, thus increasing transparency and confidence. Auditing standards should call for internal company audit functions and the inclusion of outside directors on audit committees. Engage civil society. Involving think tanks, business associations, and other nongovernmental organizations in the reform process is vital to spreading understanding of the costs of corruption and building demand for change. These are key players in promoting accountability in both the public and private sectors. Expand access to information. Frequent changes in regulation and procedures often force business owners to resort to corruption as a survival strategy. Improving business access to regulatory information and educating entrepreneurs on their responsibilities and rights can help entrepreneurs comply with the law and say “no” to extortionate demands from bureaucrats. Promote independent media. Economic journalism training equips journalists with tools of analysis to detect fraud and corruption. Journalists can be a major deterrent to corruption, especially in privatization programs and in government procurement. Freedom of information laws should be strengthened to help the media in their watchdog role. Adopt voluntary standards. Voluntary standards are an excellent means to communicate appropriate practices throughout the private sector and coordinate the private sector response to corruption. The Business Principles for Countering Bribery are a leading standard developed by Transparency International and Social Accountability International with the support of CIPE.

3.2 Stages in the Fight against Corruption “... In order to reduce corruption you need to setup mechanisms ...businessmen cannot do much about it. If they want to get a share of the market, they need to play by the rules, whatever those rules are...” Successful anti-corruption efforts are undertaken with a comprehensive strategy. The strategy must reflect a country’s own circumstances. In general, here are the steps that must be taken: Break the taboo against discussing corruption. Dispel the myths that sustain corruption, such as the myth that corruption is inseparable from tradition and culture. Explain the corruption’s negative effects on business performance and society. Demonstrate how corruption occurs. Identify the root sources, the points where corruption is most likely to occur, and the mechanisms by which it occurs. Mobilize key constituencies and build anti-corruption coalitions. Promote a healthy dialogue between the private sector and government to ensure that policies designed to curb corruption address the real needs of the business community. Prepare action plans with specific anti- corruption policies. Focus on a well-defined area to concentrate public attention and demonstrate the possibility of success. Implement anti-corruption policies. Business should lead by example in promoting transparent relationships with authorities and adopting internal controls in operations. Voluntary standards are a means to disseminate good practice. On the other side of the balance, the government should be monitored and held accountable for policy implementation and enforcement. How should corruption be fought and how should take the lead in fighting it? was also one of the questions for business managers and young people from the region. The two most dominant clusters of views were: a) that the government or political leadership should have the key role, and b) that effective law enforcement was the critical factor.

Respondents who suggested an accent on government and political leadership produced some of the following lines of argumentation:

Further, a minority view identified as a priority the reform of public administration and in particular the reduction of bureaucracy:

“...fight against corruption should start from the government and people in power; this is the level to start at...”

“... we need more transparency... less bureaucracy, corruption comes from huge bureaucracy...”

“... motivated political leadership could help...” “... it is up to the government to fight it primarily; when politics reaches the level of the EU, so will corruption...” In addition to the view stressing the moment of institutional and political leadership, the view which underlines the need of effective rule of law was strongly represented in managers’ responses: “... rules should be enforced; businesses which sell products have to issue fiscal receipts, the work of the control bodies should not be discussed...” “... in order to reduce corruption you need to setup mechanisms ...businessmen cannot do much about it. If they want to get a share of the market, they need to play by the rules, whatever those rules are...” A group of views particularly emphasized the critical role of the judiciary in the fight against corruption: “...I feel that with the judiciary improving there could be less corruption...” “...in order to fight corruption, we should import judges, for example from the UK...”

Another group of responses argued that the fight against corruption is a common obligation and a shared responsibility: “... I think that no one should be excused from the fight against corruption; that everyone should be included; individuals, political parties, NGOs, the private sector...” “...everyone should be involved; the government, companies, individuals; transparency can help, and I think it is essentially about raising the awareness...” Finally, there is the view which has stressed the role of education awareness raising work, and transforming culture: “... it should start in the elementary school; young kids need to be educated against it; then through high schools and universities...” “... schools should also be involved in teaching that it is wrong...” “...I have some hope that the younger generations could make changes, especially raise the awareness of the people; I think that the people should say stop to corruption...” “..we also need education and campaigns...” “...people’s attitudes need to be changed, that is the core issue...”

3.2.1 Educate “...Anti-corruption education is not an agenda on its own, but should be regarded as part of broader approaches to ethics and citizenship...” Many young businessmen’s think that “...corruption is harmful, but not necessarily, and it can also be useful, where there is corruption there is also development, because wealthy people can invest their money, without it, there would be in investment...” or that ….“...some small level can be useful; things are done more quickly...” Anti-corruption education is a vital component of any anti-corruption strategy. Informed citizens are probably more effective in preventing corrupt and unethical behaviour of public servants than the most sophisticated codes of conduct, laws and regulations. Anti-corruption laws and institutions need people who do not tolerate corruption and who actively act against it: Without reports of corruption, corrupt acts cannot be sanctioned, ombudsmen cannot follow up on complaints, and the judiciary cannot prosecute. The goal of anti-corruption education is to made responsibility. Anticorruption education promotes values, attitudes and expectations that condemn corruption, and skills to resist it. Anti-corruption education develops people’s understanding of their rights and responsibilities for preserving the public good. It highlights the damage done by minor acts of corruption: The traffic officer who lets a drunk driver go in exchange for a small bribe, the nurse who denies patients treatment if they are unable to pay ‘an additional fee’, the customs officer who extorts payments from small traders and enterprise: These acts potentially kill, ruin small enterprises, and deprive people of their human rights to health, education and security.

Anti-corruption education impacts at two levels: First, it aims at strengthening individuals in their ethical decisionmaking. Value conflicts and ethical dilemmas frequently arise in the daily lives of people, for example when family values, such as loyalty, clash with work ethics, such as impartiality. Ethics education should provide the skill to identify such conflicts, and to give the motivation for solving them in the best interest. Second, it aims at building a culture of zero-tolerance for corruption, through strengthening public awareness and participation in political life, and through mobilizing the public to stand up against corruption. Citizenship and democracy education aims at strengthening democratic processes and participation in politics, and promotes values such as representation, solidarity, participation, responsibility and pluralism. Human rights education promotes inherent human dignity, enshrined in the equal and inalienable rights to for example take part in government, fair employment, adequate standard of living and many others, as stated in the Universal Declaration of Human Rights (1948). Voter education, in that it builds citizens’ awareness of electoral processes, should also be considered anti-corruption education. A corruption-resistant culture needs political commitment from the top, as well as an appropriate legal framework. It can develop in an environment where people have the skills and social power to stand up against corruption. It will be difficult to credibly promote anti-corruption in a culture of impunity, or in a situation of extremely low salaries and in absence of other incentives for ethical behaviour. Can anti-corruption education in such an environment still be credible? Yes, if it addresses ethics and corruption honestly, and if it comes from people who transcend integrity and high ethical standards.

C E E H T 4. H C A O R APP I T N A TO N O I T P U CORR

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“...Corruption and lack of transparency impede effective resource mobilization and allocation, and divert resources away from activities that are vital for poverty reduction and sustainable economic development. Where corruption exists, it inhibits donors from relying on partner country systems...”

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The fight against corruption is a key element contributing to better democratic governance and to achieve the Millennium Development Goals. Corruption is not confined to a limited number of sectors, where bribes are paid and/or solicited (public works, infrastructures, tenders, customs, and access to public basic services). It is a complex issue affecting public institutions and citizens as well as different processes in a society and is a major obstacle to achieve development objectives. It covers abuses by government officials such as embezzlement and nepotism, as well as abuses linking public and private actors such as bribery, extortion, influence peddling, and fraud. As an abuse of entrusted power for private gain, corruption arises not only in political and bureaucratic spheres, but also in the private sector, and can be petty or grand, organized or unorganized. Corruption poses several distinct types of risk. The combination of fiduciary risks (misuse of funds), with an undermining impact on development, and the risks to their reputations for donor countries (citizen support to aid) of humanitarian and development assistance to countries with corrupt leaders, has focused attention on corruption as a core concern. The Paris declaration on aid effectiveness points out that “corruption and lack of transparency impede effective resource mobilization and allocation, and divert resources away from activities that are vital for poverty reduction and sustainable economic development. Where corruption exists, it inhibits donors from relying on partner country systems.” There is a growing recognition that joint donor responses to stagnating or deteriorating corruption situations are necessary. “…the Community will promote democracy, human rights, good governance and respect for international law, with special attention given to transparency and anticorruption.” “The Community will actively promote a participatory in-country dialogue on governance, in areas such as anti-corruption, public sector reform, access to justice and reform of the judicial system.” “Particular emphasis will also be placed on improvements in public finance management, as fundamental to combating corruption and promoting efficient public spending.” (European Consensus on Development, 2006)

4.1 Principles underpinning the EC anti-corruption approach “...Combating corruption should be done within the framework of broader support to strengthen good governance and democratization processes...” The EC communication on Governance in the European consensus on development (2006) sees corruption “as a symptom of poor governance and of a lack of transparent, accountable management and control systems” and stresses the fact that “tackling corruption must not be addressed in isolation but integrated into development and poverty reduction strategies and into support for the processes of democratic governance”. The EC communication on a comprehensive EU policy against corruption (2003) highlights the importance to encourage anti-corruption policies in the acceding, candidate and other third countries. The Communication calls for the detection and punishment of all acts of corruption, the confiscation of illicit proceeds and a reduction of the opportunities for corrupt practices through the establishment of transparent and accountable public administration standards. Furthermore, it provides for anti-corruption clauses into cooperation agreements and external aid programmes, against the background of guiding principles of improving the fight against corruption ranking from the implementation of dedicated strategies to effective prevention measures and efficient law enforcement. The 2003 United Nations Convention Against Corruption (UNCAC) provides concrete area of interventions that may be considered as entry points for EC assistance. The EC is encouraging UNCAC signature and ratification by third countries, as well as the adoption of an efficient mechanism of the review of implementation that may accurately define the technical assistance needs of the concerned countries.

4.2 Objectives of EC support As corruption is a symptom of the failure of the broader system of governance, it cannot be addressed in isolation, but rather as part of the overall support to democratic governance reform processes. Fight against corruption therefore has to be carried out through the consolidation of State capacities to assume its full functions, as well as through the strengthening of other governance actors both from the public sphere and from Civil Society to ensure better accountability and transparency.

4.3 EU Anticorruption policy “…It is the Commission’s firm intention to reduce corruption at all levels in a coherent way within the EU institutions, in EU Member States and outside the EU that is political corruption, corrupt activities committed by and collusively with organized crime groups, privateto-private and so-called petty corruption...” Turning our attention now to the European Union itself, Article 29 of the Treaty on European Union lists the prevention and combating of corruption, whether arising from organized crime or otherwise, as one of the objectives which support the creation and protection of a European area of freedom, security and justice. There is a positive opinion about the impact EU makes to the countries in the region. So among entrepreneurs there are beliefs that positive changes are made:

“... as we move towards the EU I think that corruption is declining...” or “... I think it is decreasing because of our EU aspirations...even though at the same time there is the impression that there is more talk about it....now we also have institutions in charge of it which did not exist until recently, ..I think it is decreasing...” The European Union’s policy in relation to corruption has been brought up to date in the Communication on Corruption which was published in May 2003 by the European Commission. In the Communication, the Commission set out its proposals for the way forward in reducing and preventing corruption within the institutions of the European Union, within Member States and with regard to third countries. In order to become European Union policy, the text of the Communication was then submitted for discussion by the European Parliament and the Council. Both institutions responded very positively to it and have given it the “green light” – by the European Parliament in December 2003 and the Justice and Home Affairs Council in Luxembourg on 14 April 2005. The purpose of the 2003 Communication was to set out an overview of what has been achieved at EU level, secondly to identify areas where a fresh impetus was needed, and thirdly to identify possible areas where the EU might be an appropriate actor to take future initiatives in the fight against corruption. The Commission states unequivocally that “It is the Commission’s firm intention to reduce corruption at all levels in a coherent way within the EU institutions, in EU Member States and outside the EU that is political corruption, corrupt activities committed by and collusively with organized crime groups, private-to-private and so-called petty corruption.” (page 5 of the Communication). The Communication calls for the detection and punishment

of all acts of corruption, confiscation of illegal proceeds and reductions of the opportunities for corrupt practices through the establishment of transparent and accountable public administration standards. It appeals to Member States to enact swiftly all relevant supranational and international anticorruption instruments. The Communication emphasises the crucial role of monitoring and peer review evaluation between countries participating in these initiatives. In January 2004 Turkey joined the Council of Europe’s group, GRECO, which monitors and evaluates compliance with the Council of Europe’s Criminal and Civil Law Conventions on Corruption. The Commission recommends a multidisciplinary approach to integrityenhancing strategies for both the public and the private sector. It draws particular attention to the need for transparency in the financing of social partners, pressure and interest groups.

4.3.1 Actions undertaken by the EC “...When the level of awareness is low, specific emphasis on information and support to civil society and national media to alert citizens and politics has generally and initially been used by the EC as an entry point for addressing corruption...” EC geographical and thematic programmes strive to support among others rule of law (incl. law enforcement and security sector reforms), democratisation (elections, parliaments, media, etc.), public administration reform, public finance management, decentralisation, and participation and reinforcement of civil society. Balanced support to improve “checks and balances” and transparency in the beneficiary country, either via state or non state actors’ support, can contribute to sustainable governance improvement and, therefore, create a “playing field” for an effective anti-corruption policy. The EC has significantly supported programmes in the field of internal and external control mechanisms and standard oversight functions (public expenditures management, internal and external control,

national assemblies). Those institutional supports (either in the form of specific programmes and / or within the context of general budget support programmes) contribute to reduce administrative dysfunctions which leave significant room for corruption. The EC has generally prioritized this approach, notably in the context of eligibility criteria (in particular, a credible and relevant Public Finance Management system has to be in place) to EC budget support programmes. This is complemented by EC institutional support, such as EC support to the Supreme Audit Institution in Ghana and Burkina Faso, to the Ombudsman in South Africa, or to the fight against money laundering in the Philippines, Russia and Moldova. When the level of awareness is low, specific emphasis on information and support to civil society (through support both to international and national civil society organisations) and national media to alert citizens and politics has generally and initially been used by the EC as an entry point for addressing corruption. The EC has also financed and is funding some limited support exclusively dedicated to national anti-corruption commissions/specialized agencies. PFM reforms represent an opportunity to strengthen systems and thereby reduce the potential for corruption. Procurement is a particularly sensitive area that requires attention and due regards to all linkages in the PFM system. The existence of a Supreme Audit Institution and its effectiveness as well as legislative oversight through the budgetary committee of the parliament are essential elements of a well-functioning PFM system. Furthermore, failure to take corrective measures and cases of a criminal nature should ideally be prosecuted through the judicial system. This, in a nutshell, shows the span of the action required.

4.3.2 The 10 General Principles The “Ten principles for improving the fight against corruption in acceding, candidate and other third countries” have the intention to inform the EU’s discussions with all third countries, and hence they are applicable in a range of situations. The Commission takes the view that it is reasonable to expect that each candidate country or co-operation partner should ideally subscribe to these principles, and integrate them into their national political, legal and administrative systems. The 10 General Principles address issues within both the public and private sectors, like: 1. the need for strong, political support to address corruption 2. becoming fully aligned with the relevant international instruments 3. implementation of legislation in an effective manner 4. safeguards in relation to recruitment etc of civil and public servants 5. the integrity, accountability and transparency of all sections of the public administration 6. development of codes of conduct for all sections of the public administration 7. protection for whistle-blowers in both the public and private sector 8. encouraging the general public to recognize the impact of corruption 9. ensuring that particular entities do not have undue influence over the policy-making process 10. supporting the private sector in recognizing and combating corruption

4.4 Why is corruption a priority? The combating and prevention of corruption is an integral part of the European Union’s internal and external policies. Internal, in that it is a priority in respect of the existing Member States and has also formed a key aspect of the acquits for the accession countries; external, in that it is a priority in respect of the European Union’s approach to international relations, whether in the context of the wider Europe initiative, development policies, the negotiation of international instruments and so on.

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