CORRUPTION: IMF and World Bank Need To Lead

August 20, 2019. Decisions were taken 75 years ago at the Bretton Woods conference in New Hampshire to establish key multilateral economic institutions to ensure a stable and prosperous global world economy after World War Two — the International Monetary Fund, the World Bank and the GATT (later renamed the World Trade Organization) were conceived. Then, and for decades thereafter, corruption was never on the agendas of these organizations. Today, it is a stated priority of the IMF and World Bank, but both could do - and should do - far more.

Frank Vogl and William R. Rhodes have authored an article on the topic that has been published in a 75th anniversary compendium of essays edited and published by the Bretton Woods Committee. An excerpt of this essay appeared as an opinion article on August 20, 2019 in The Financial Times which started:

The Financial Times OPINION
August 20, 2019.

World Bank and IMF should be tougher on corruption

Frank Vogl

The IMF and the World Bank are tasked with strengthening economic stability and development in emerging market nations where corruption is a serious issue. Both institutions have anti-corruption policies in place, but it is urgent that they pursue a far more forceful and effective plan.

Anti-corruption was not on the agenda 75 years ago, when the Bretton Woods conference led to the establishment of the sister organisations. Now it needs to be front and centre. This is a particularly good time for a fresh approach as new leaders take charge….read the full opinion article at https://www.ft.com/content/db9f5d9c-c052-11e9-9381-78bab8a70848

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Bank-Fund: Facing the Rising Challenges of Corruption
Frank Vogl and William R. Rhodes

Bretton Woods@75 Compendium

To commemorate the 75th anniversary of the Bretton Woods Conference and chart a path forward for the World Bank, International Monetary Fund, and World Trade Organization, the Bretton Woods Committee is proud to announce the release of the Bretton Woods@75 Compendium: Revitalizing the Spirit of Bretton Woods: 50 Perspectives on the Future of the Global Economic System. https://view.flipdocs.com/?ID=10025597_349091#2

Corruption – the abuse of entrusted power for private gain – was not on the agenda at the birth of the Bretton Woods institutions, nor at their 50th anniversary. Today, it is a prime concern for all multilateral development and economic official organizations.

The scale and impact of corruption not only remain major challenges to the successful implementation of the missions of the Bretton Woods institutions, but represent increasing threats to security, the environment, and the world’s most vulnerable peoples. The 75th anniversary of the founding conference in Bretton Woods needs to be recalled a generation on from now as the time when the Bank and Fund committed to far more effective actions to confront corruption across all of their member countries.

Quantifying the costs of corruption is at best a matter of informed guesswork: the IMF estimates that it could be between an annual $1.5 and $2 trillion, or around two percent of global GDP . Approximately two- thirds of the 180 nations surveyed in the 2018 Transparency International Corruption Perceptions Index are seen as having high, to very high, levels of corruption.

The statistics and general surveys fail to adequately reflect the extent of the damage done by corruption. Corruption, to use the IMF’s jargon, is a major macro-prudential concern. More bluntly: government- promoted corruption in scores of countries is distorting economic progress, misallocating budgets, rendering public procurement inefficient, entrenching poverty, threatening financial crises, and adding to environmental destruction.

The extraordinary economic difficulties faced by such countries as Venezuela, Ukraine, Nigeria, Pakistan, and many others, are largely the result of high levels of kleptocracy – theft of government finances by senior pubic officials. In each of these cases, and many more, the World Bank and the IMF have critical roles in acting to reduce graft and to strengthen public transparency in all aspects of governmental activity.

Accepting the Corruption Priority

It is useful to recall that the core reason for the meeting at the Brookings Institution in January 1982, which was to lead to the establishment of the Bretton Woods Committee, was an IDA funding crisis. The development assistance needs of the poorest nations were formidable and, truth be told, one of the reasons was the extensive mismanagement and misuse of fiscal resources in these countries. While the word ‘corruption,’ was not used by the Bank at the time, securing efficient use of financial resources was a key component of the Bank’s then new sub-Saharan African adjustment programs.

It was at that conference that then World Bank President A.W. Clausen called on leaders of the private sector to come together to actively support the missions and goals of the Bretton Woods institutions. He not only stressed the core humanitarian challenges that IDA’s grants aimed to meet, but he argued that it was in the self-interest of the more prosperous nations of the world together with the Bank’s private sector partners that sustained economic success be attained by the poorer nations.

In 1988, when Barber Conable was the Bank’s President, an important Bank report on poverty in Africa explicitly noted the challenges that corruption posed to economic development. It stated, for example, that conditions in a number of African states were characterized by: “a high level of corruption, misuse of funds, side payments to political allies, deportation of opponents, or a high level of coercion.”iv

Interestingly, former World Bank President Robert S. McNamara traveled from Washington to Berlin in May 1993 to attend the launch conference of Transparency International, the first global anticorruption non-governmental organization. He stressed publicly at that time that one of his greatest regrets was that he did not make anticorruption a major Bank priority when he served as president.

Finally, in 1996, corruption entered the lexicon of the Bretton Woods institutions. In his first year as World Bank President, James D. Wolfensohn, concluded that the efficient uses of development assistance grants and credits demanded recognition of corruption risks and actions to mitigate those risks.v In 1997, under then IMF Managing Director Michel Camdessus, the Fund announced its commitment to anticorruption goals and this was swiftly seen as important as an important part of Fund conditionality in programs to countries embroiled in the 1997/’98 Asian financial crisis.

Under Jim Wolfensohn’s leadership, major diplomatic efforts were pursued in the latter part of the 1990s that elevated anticorruption policies from oblivion to center stage on the agendas of all of the major multilateral development banks, including the regional institutions for Africa, Latin America and Asia, as well as an increasing number of bilateral aid agencies.

Mandate for Action

Within both the Bank and the Fund there has been a broad recognition in recent years that there have been shortcomings in institutional anticorruption practices. For example, recognizing severe World Bank practical difficulties in investigating corruption in procurement contracting, the leadership of the Bank asked Paul A. Volcker to head a review committee.vi Mr. Volcker had earlier headed investigations into corruption at the United Nations and he drew on that experience to advocate tough new measures at the World Bank. His committee’s findings were to contribute, over time, to significant successes at the Bank’s Integrity Vice Presidency and to the setting of standards for investigations and corporate suspensions that have become the model for the major regional development banks: Asian Development Bank, African Development Bank, Inter-American Development Bank, European Bank for Reconstruction and Development, and the Asian Infrastructure and Investment Bank.

Then, a comprehensive review, for example, of the Fund’s anti-corruption framework was launched by Managing Director Christine Lagarde, which concluded in 2018 that the case is compelling for the IMF to deepen its work considerably.vii This comes at a time when both the IMF and the Bank are bound to adhere to the U.N.’s Strategic Development Goals (SDGs), which came into force in 2016 and include in Goal 16 the explicit calls for all governments to: “Substantially reduce corruption and bribery in all their forms.”

Meetings of global leaders at their annual Group of 20 summit conferences in recent years have repeatedly endorsed the importance for multilateral institutions to pursue anticorruption strategies. Unquestionably, the institutions have a gold-plated mandate, but will effective action follow fine rhetoric?

The record of their performance in recent years has been mixed. Both institutions need to find ways to ensure their approaches are more comprehensive and robust - in terms of implementation, monitoring and enforcement.

Illicit Finance

Illicit financial flows across national borders, including tax evasion, proceeds from organized crime, notably narcotics, and governmental corruption, now amount to hundreds of billions of dollars. The U.S. Treasury states that the U.S. alone probably receives an annual inflow of $300 billion in laundered cash.viii Excluding the proceeds of tax evasion, Global Financial Integrity estimates the annual volume of illicit cross- border financial flows at around $1 trillion.ix These funds rob national treasuries of crucial resources to support domestic development and thereby add to poverty; they undermine sound regulation of the international financial system and weaken institutions in the system; and, they distort investment markets.

The Fund has played important roles in recent years in providing technical assistance to central banks to guard against money laundering.x Given the scale of the problem, however, this needs to be an area where the Fund should expand its work and enhance its cooperation with other institutions, such as the OECD’s Financial Action Task Force (FATF). The challenge will be all the more complex in coming years as crypto-currencies will play a rising role in illicit finance.

Far more extensive cooperation between the world’s leading banks and the Fund on the stage of illicit finance is also warranted. While the banks have introduced increasingly sophisticated compliance systems to guard against suspicious transactions, the latest evidence, according to the U.S. Treasuryxi, suggests that substantial sums of money continue to be laundered through the banking system. The IMF might well take the lead in bringing together central banks and the commercial banks to forge better safeguards against all forms of illicit finance.

A number of major global banks have settled money-laundering cases brought by U.S. and European authorities, paying record-level fines. More such cases are now being pursued, for example, with regard to Danske Bank, Deutsche Bank and ING. Research, for example, by the Group of Thirty (“Banking Conduct and Culture: A Permanent Mindset Change”),xii shows that there are deficits at many major banks when it comes to ensuring culture and conduct assign the highest priority to integrity. The Fund needs to join with leading central banks in adding its voice in encouraging greater commitments to anti-money laundering by leading banks and stressing the dangers to the international financial system if this does not happen.

Importantly, Fund officials privately concede that they need to do more by explicitly raising issues of illicit finance with the governments of major Western developed economies, whose capital markets provide safe investment havens for so much of the cash. Laws, and enforcement of regulations, to reveal the true beneficial ownership of vast numbers of holdings companies registered in offshore havens remain weak. Insufficient effective action is seen in the U.S., U.K. and in numerous other countries, to require real estate brokers to pursue meaningful ‘know your customer’ due diligence on their clients. The Fund should use its Article IV consultations as the mechanism to raise such issues with its leading shareholder member countries.

Curbing money laundering is – and this needs to be underscored – an issue of international security. Illicit cash funds terrorism and the illegal export of weapons and weapons’ systems. Bribery and dirty cash are the enabling mechanisms for narcotics trade, ivory smuggling, vast product counterfeiting, and human trafficking that today enslaves a record of more than 26 million people. The imperative for the Fund, in particular, to work with many other players to find solutions and counter trans-border illicit financial flows, needs to be a central priority in coming years.

Law Enforcement

Laundered cash, of course, is the product of crime, including governmental corruption and the Bank and the Fund will need to push far harder and use their leverage to influence public policy and public accountability changes in many of their member countries. For the Bank, the challenge starts with law enforcement. It has worked constructively over the years to assist governments to improve their court systems, establish anti-corruption commissions and take other supportive measures.

But, surveys in many of the world’s poorest countries show that extortion by the police of small bribes from the poorest citizens is seen as the single greatest area of petty corruption. Why is this?

In part, the answer rests on the exceptionally low levels of pay to the police, which encourages them to supplement their incomes through extortion.xiii In part, the answer relates to systems in numerous countries where police corruption is institutionalized. For example, reports from one country show that policemen pay their senior officers high amounts on a regular basis to be placed on duty at airports, where they can engage with wealthy people; somewhat lesser amounts to be on duty on major highways where they can “inspect” middle-income travelers and truckers; and, by comparison, low amounts for securing assignments to poorer locations. And, these senior officers in turn, pay for their positions to top justice officials.

These entrenched systems prevail in part because public prosecutors and judges turn a blind eye – they are appointed to do so and are part of the corrupt systems. Ultimately, the Bank, for example, in seeking to introduce integrity into law enforcement in many countries faces a political, not a technical challenge. When top officials and lowly policemen all know that they will not be prosecuted for corruption, then they indulge.

When James Wolfensohn decided that the Bank must confront “the cancer of corruption” he challenged the Bank’s lawyers who argued that this was a political matter and thus in contradiction to the Bank’s Articles of Agreement. Wolfensohn prevailed and as we look ahead, so the Bank’s leaders need to assess how they best can engage with national authorities on the complex political issues that are key to building systems of law enforcement that are honest, win respect and serve as meaningful counters to grand and petty corruption.

Reconstruction

The International Bank for Reconstruction and Development (to use the Bank’s formal title) started its work over 70 years ago by supporting post-World War Two reconstruction. This mission continues to be important, as underscored by conditions, for example, in Afghanistan and Iraq, and the likely prospect in due course of massive reconstruction needs, to take further examples, in Syria, South Sudan and Yemen. These countries at war have seen the breakdown of law enforcement and the emergence of extraordinary levels of corruption. The Bank and its multilateral and bilateral aid partners will be tested as they develop programs to secure the institutional capacity necessary to reestablish justice and effective anticorruption enforcement.

In each of these country situations the Bretton Woods institutions not only have direct roles to play as lenders, but they are central to convening international long-term undertakings. They have, indeed, opportunities to ensure that all creditors – multilateral, bilateral and private sector – place anticorruption at the core of reconstruction and developments projects. Lessons from reconstruction and development programs in Afghanistan underscore that support for building institutions to ensure law enforcement are of paramount importance in reconstruction strategies. Reports by the U.S. Special Inspector-General for Afghanistan Reconstruction on both multilateral trust fund programs led by the World Bank and on the U.S.’s bilateral programs, which have involved outlays of over $10 billion and $125 billion respectively, stress that inadequate safeguards in this area can result in foreign aid inflows increasing, not reducing, corruption.

Natural Resources

Corruption at the highest levels of government and in partnership with organized crime and multinational corporations is doing enormous damage in many resource-rich countries, from Angola to Malaysia. The humanitarian consequences are severe, as is evident, for example, in the rising refugee problems from resource-rich countries – Venezuela is an outstanding and tragic case. The once enormous oil-related income to the country has failed to lift living standards, quite the contrary the failures of government have created an extraordinary humanitarian crisis. World Bank leadership in addressing such crises and their underlying causes needs to become a higher priority.

Research by the Natural Resources Governance Institute shows that about 80 percent of the resource-rich countries that it surveyed were weak, poor or failing in their governance of extractive industries. Programs that powerfully promote anticorruption provide clear paths out of abject poverty for most of the 1.8 billion people who live in these countries – ones that have been in many cases borrowers from the World Bank over several decades.

A study in 2013 by the African Progress Panel, then chaired by former U.N. Secretary-General Kofi Annan, provided compelling details on the degree to which massive poverty in some 20 natural resources-rich sub-Saharan African countries are the major cause of extraordinary income inequality with hundreds of millions of people trapped in humanitarian conditions that are among the world’s worst. Public housing, schools, sanitary systems and clinics, are not being built because the revenues from extractives that should be used for these purposes are being plundered by top government officials and their cronies and invested in the world’s leading capital markets instead.

The failure to counter corruption in these countries contributes to environmental destruction, to insecurity and destitution, which leads to a rising tide of migration as global refugee numbers reach record levels. The destabilization of these economies, due to a considerable degree to corruption, has led to the rise of terrorist organizations, such as Boko Harom and El Shabah, and contributed to the massive violence in, for example, South Sudan and the Democratic Republic of the Congo.xvii

And, with respect to the environment, consider illicit logging and the massive destruction of many rain forests, and the damage to indigenous peoples in lands by organized crime syndicates that bribe government officials. This activity may well account today for as much as 30 percent of total global sales of wood products, with annual revenues equal to those of the international narcotics trade.xviii

In sum, the plunder of royalties, license fees and profits from the extraction of oil, gas and minerals in many countries directly results in extraordinary avoidable poverty and the World Bank is better equipped than any other institution to launch a major multi-year campaign to address what is now an extraordinary crisis.

The Bank has extensive data on the prevailing conditions and the threats. Its leaders are likely to be judged in coming years by how effectively they address these issues. Without a far more effective set of tools and a much sharper focus, the Bank will fail to meet its own goal, and that of the SDGs, to see the eradication of absolute poverty by 2030.

Infrastructure Development and Finance

This is also the inevitable conclusion if the Bank and other multilateral development banks, including the new Asian Infrastructure and Investment Bank, fail to monitor and enforce anticorruption approaches in all aspects of their infrastructure lending. Infrastructure accounts for the largest share of approximately $9.5 trillion of worldwide annual public contracting. According to the Open Contracting Partnership, “57 percent of foreign bribery cases prosecuted under the OECD Anti-Bribery Convention involved bribes to obtain public contracts. According to a 2013 Eurobarometer survey, more than 30 percent of companies participating in EU public procurement say corruption prevented them from winning a contract.”xix

The Bank and other multilateral and bilateral lenders have accepted levels of opacity in some governments when it comes to public contracting and sub-contracting. In some countries, military establishments have wielded exceptional influence, controlling large parts of national budgets and asserting that many projects are subject to national security, so blocking public transparency. Neither the Bank or the IMF have publicly and explicitly challenged military establishments in their member countries over their extensive engagement in public contracting.

Many of the largest cases brought against multinational corporations under the OECD Anti-Bribery Convention and the U.S. Foreign Corrupt Practices Act have involved kick-backs to foreign government officials in return for large-scale infrastructure contracts. For example, joint U.S. and Brazilian investigations of Odebrecht, the largest construction company in Latin America, concluded that the firm made bribes to government officials in possibly as many as a dozen countries in the region.

Many of the largest infrastructure projects involve significant finance from banks and here too there is scope not only for opaque transactions, but also for the banks and project contractors to evade environmental norms and standards. The World Bank has diverse partnership channels with private finance, from its co-financing operations to the expanding portfolio of investments under the International Finance Corporation. The Bank needs to provide bolder leadership in its diverse ventures with private finance to emphasize transparency and ensure sound monitoring and enforcement of anticorruption standards.

Adding yet another level of complexity in public contracting is the fact that some of the largest corruption scandals, from South Africa to Brazil, have involved major state-owned-enterprises (SOEs), who are large-scale infrastructure developers. Neither the World Bank or the IMF have assigned noteworthy priority to monitoring for corruption in SOEs.

Recent internal research by the IMF on corruption and fiscal policy highlights this area, noting that allocations of funds by top government officials to SOEs may at times prove to be effective mechanisms for their own enrichment, but also that SOEs play important roles in providing corrupt associates of top politicians and officials with employment. In addition, for example, as the Petrobras scandal has revealed, SOEs are frequently used as prime sources of political party financing.

IMF research into fiscal affairs both highlights corruption in revenue collection (we have seen all too clearly in many countries, following one debt crisis after another, how governments have too often failed to collect tax revenues efficiently with bribes to tax collectors being part of the problem); and, corruption in the disbursement of tax revenues. Decisions by top officials to allocate resources in one area rather than another may be due to kick-backs and graft in general, just as decisions to allocate public contracts to one vendor rather than another may have similar causes and lead to over-paying and inefficient services.

Future Collaboration

So many of the particular aspects of corruption that emerge in areas of central importance to the Bank and the Fund come together to force the conclusion that coming years will test the institutions. As Managing Director Lagarde has recognized, anticorruption approaches need to be mainstreamed into the work of the Fund. The Bank needs to do the same – it cannot just view good governance as one of many areas of interest: it is integral to virtually all of the Bank’s activities.

The Bank and the Fund will need to forge effective mechanisms for joint anticorruption structural adjustment programs. Partial reforms will simply not be adequate. To address one area of anti- corruption and ignore others will be counter- productive. Moreover, as the institutions move more explicitly to the heart of national governance issues in the interests of the overwhelming majority of the citizens of their member countries, so they need to engage with citizens more directly.

The Fund in recent times has sought to do this in Ukraine, where it recognized that it needed to work with many others to convince the government to put in place essential law enforcement reforms. As the Fund has worked in Ukraine, so it has understood that overcoming political opposition demanded that it work closely in partnership with a range of governmental and non-governmental organizations in a continuing effort. The Fund is learning lessons from this experience that need to inform much of its work going forward in many countries and in cooperation with the Bank.

The IMF’s Christine Lagarde and the World Bank’s new president, David Malpass, will be challenged in coming years to mobilize the skills and resources of their institutions to formidably strengthen anticorruption programs. They have no choice: corruption is a rising threat to issues that are at the core of the mission of the Bretton Woods twins: the soundness of the global financial system, and the development of the human condition.

Mr. Rhodes is President and CEO, William R. Rhodes Global Advisors, LLC. He is the former Chairman, CEO and President of Citibank, and former Senior Vice Chairman of Citigroup. He is the author of: “BANKER TO THE WORLD: Leadership Lessons from the Front Lines of Global Finance.”

Frank Vogl is a co-founder and former vice chair of both Transparency International and the Partnership for Transparency Fund. He is an adjunct lecturer at Georgetown University and the author of: “Waging War on Corruption: Inside the Movement Fighting the Abuse of Power.”

The published essay by the Bretton Woods Committee contains endnotes for this essay. https://view.flipdocs.com/?ID=10025597_349091#2

The Financial Times OPINION August 20, 2019.