65.
Globalisation Of Corruption
Further Case Studies
Today, often on a daily basis, television and newspaper headlines are filled with corporate corruption scandals that range, from minor cases of individual corruption to multi-billion dollar corporate collapses that shock the conscience of society.
Corruption is a corrosive drain on public trust and on the legitimacy of public and private sector institutions. Its toll can be devastating to a national economy, particularly at a time when open global markets can rapidly reverse investment and capital flows if confidence and trust are compromised by revelations of systemic corruption.
According to a report Sue Hawley and published by the NGO, The Corner House, the growth of corruption across the globe is largely the result of rapid privatization of public enterprises, along with ‘reforms’ to downsize and undervalue civil services, pushed on developing countries by the World Bank, the IMF and western governments supporting their transnational corporations.
The report estimates that western businesses pay bribes to the tune of $80 billion a year - roughly the amount that the United Nations believes is needed to eradicate global poverty.
Corruption is a corrosive drain on public trust and on the legitimacy of public and private sector institutions. Its toll can be devastating to a national economy, particularly at a time when open global markets can rapidly reverse investment and capital flows if confidence and trust are compromised by revelations of systemic corruption.
According to a report Sue Hawley and published by the NGO, The Corner House, the growth of corruption across the globe is largely the result of rapid privatization of public enterprises, along with ‘reforms’ to downsize and undervalue civil services, pushed on developing countries by the World Bank, the IMF and western governments supporting their transnational corporations.
The report estimates that western businesses pay bribes to the tune of $80 billion a year - roughly the amount that the United Nations believes is needed to eradicate global poverty.
“There is seldom just one cockroach in the kitchen”
~Warren Buffet (Stanford Business Magazine, August 2008)
SGS And Hubco, Pakistan
In April 1999, Benazir Bhutto and her husband were found guilty of accepting bribes worth US$ 9m from SGS, were sentenced to five years in prison, and banned from holding seats in parliament for seven years (the defendants appealed against this judgement) (Australian Business Intelligence, 26 April 1999). However, the multinational escaped with no punishment. A group in Pakistan had to apply to the Lahore High Court complaining that SGS ‘was still operating in the country despite the fact that the court had convicted one party as being the guilty of the corruption’; and obtained a ruling barring the government from ‘allocating any business to SGS’ (Business Recorder, 17 May 1999 and 30 May 1999).
Hubco Case
The government of Pakistan has been pursuing cases of alleged bribery of members of the previous regime, especially in energy. Two contracts - one involving Southern Company (USA) (reported in the South China Morning Post, 7 July 1997), and one involving National Grid (UK) (Financial Times, 24 April 1997) were cancelled on the grounds that they had been improperly obtained. The government also took proceedings against existing contracts, investigating alleged corruption, and stating that it would cut the price of electricity agreed under these contracts. The main target of these investigations was Hubco, the largest stock exchange quoted company in Pakistan, which is 26 per cent owned by National Power, a UK energy multinational.
World Bank: No Loan Unless Contracts Left Alone
When the Pakistan government insisted that power tariffs should be reduced because of the evidence that corruption had led to inflated prices, this ‘drew anxious reactions’ from many, including the World Bank. Senior government officials say the Bank has urged Pakistan to keep its so-called investigations into alleged corruption in Hubco’s contract separate from the future of the company’s tariff. The future of an International Monetary Fund agreement, currently under negotiation in Islamabad, is also partly tied to the extent to which Pakistan resolves its dispute with the power companies’ (Financial Times, 18 November 1998).
Hubco Case
The government of Pakistan has been pursuing cases of alleged bribery of members of the previous regime, especially in energy. Two contracts - one involving Southern Company (USA) (reported in the South China Morning Post, 7 July 1997), and one involving National Grid (UK) (Financial Times, 24 April 1997) were cancelled on the grounds that they had been improperly obtained. The government also took proceedings against existing contracts, investigating alleged corruption, and stating that it would cut the price of electricity agreed under these contracts. The main target of these investigations was Hubco, the largest stock exchange quoted company in Pakistan, which is 26 per cent owned by National Power, a UK energy multinational.
World Bank: No Loan Unless Contracts Left Alone
When the Pakistan government insisted that power tariffs should be reduced because of the evidence that corruption had led to inflated prices, this ‘drew anxious reactions’ from many, including the World Bank. Senior government officials say the Bank has urged Pakistan to keep its so-called investigations into alleged corruption in Hubco’s contract separate from the future of the company’s tariff. The future of an International Monetary Fund agreement, currently under negotiation in Islamabad, is also partly tied to the extent to which Pakistan resolves its dispute with the power companies’ (Financial Times, 18 November 1998).
Under the spell of ignorance, one cannot understand a thing as it is. For example, everyone can see that his grandfather has died and therefore he will also die; man is mortal. The children that he conceives will also die. So death is sure. Still, people are madly accumulating money and working very hard all day and night, not caring for the eternal spirit. This is madness. In their madness, they are very reluctant to make advancement in spiritual understanding.
~ Srila Prabhupada (Bhagavad Gita 14.8)
At the end of 1998, the Bank authorised the IMF to proceed with a US$1.3 billion bailout package for Pakistan, ‘as it was satisfied with the government assurances for out of court settlement of two-year long row with the Independent Power Producers’ (The Nation, 31 December 1998).
At no stage did the UK government appear to have supported the Pakistan government’s decision to prosecute Hubco for corruption. The company’s chief executive is now living in the ‘safe haven’ of Cheshire, having ‘fled Pakistan following threats that he might be arrested’ (Financial Times, 27 October 1998).
The British and other governments actively supported the World Bank’s position that Pakistan had to resolve Hubco impasse before it can expect any financial help. (The Nation, 30 December 1998).
In February 1999, a UK government minister emphasised that the action against Hubco was a step backwards for ‘investor confidence’, rather than a step forward in the fight against corruption:
‘Minister of State for Foreign and Commonwealth Affairs Derek Fatchett told a news conference in Karachi that the longer the row continued the more it would damage Pakistan’s prospects for attracting foreign investment. “Let me say this is an issue in my opinion that has gone on for much too long. It is an issue that needs to be resolved. It is an issue that is damaging investor confidence in Pakistan,” he said at the end of a three-day trip’ (Reuters, 10 February 1999).
At no stage did the UK government appear to have supported the Pakistan government’s decision to prosecute Hubco for corruption. The company’s chief executive is now living in the ‘safe haven’ of Cheshire, having ‘fled Pakistan following threats that he might be arrested’ (Financial Times, 27 October 1998).
The British and other governments actively supported the World Bank’s position that Pakistan had to resolve Hubco impasse before it can expect any financial help. (The Nation, 30 December 1998).
In February 1999, a UK government minister emphasised that the action against Hubco was a step backwards for ‘investor confidence’, rather than a step forward in the fight against corruption:
‘Minister of State for Foreign and Commonwealth Affairs Derek Fatchett told a news conference in Karachi that the longer the row continued the more it would damage Pakistan’s prospects for attracting foreign investment. “Let me say this is an issue in my opinion that has gone on for much too long. It is an issue that needs to be resolved. It is an issue that is damaging investor confidence in Pakistan,” he said at the end of a three-day trip’ (Reuters, 10 February 1999).
Indian officials have raided the offices of Vodafone India, a subsidiary of Vodafone Plc of the U.K., in connection with the massive irregularities in 2G spectrum allocation and following close on the heels of a renewed US$2.54 billion tax demand on the company.
French-Canadian Consortium, Mexico
The 1997 local elections in Mexico City resulted in a landslide victory for the opposition, which had campaigned on an anti-corruption platform. The party promised to review all contracts awarded by the outgoing administration, and cancel those in which irregularities were detected.
One casualty was a US$400m contract for rolling stock for the Mexico City metro, which had been awarded to a French-Canadian consortium. The response of the French and Canadian governments, at the highest possible level, showed little interest in the question of corruption:
President Jacques Chirac of France and Jean Chretien, the Canadian prime minister, have sent strongly worded letters to Ernesto Zedillo, the Mexican president, protesting at the way a French-Canadian consortium was disqualified from a US$400m tender to provide rolling stock for the Mexico City metro. A new tender for the metro rolling stock is expected only after Cuauhtémoc Cardenas, the mayor-elect, takes office in December and appoints a new management for the Mexico City metro. In his letter to President Zedillo, Mr Chretien lamented Mexico’s inadequate legal safeguards for foreign investors’. (Financial Times, 3 October 1997)
One casualty was a US$400m contract for rolling stock for the Mexico City metro, which had been awarded to a French-Canadian consortium. The response of the French and Canadian governments, at the highest possible level, showed little interest in the question of corruption:
President Jacques Chirac of France and Jean Chretien, the Canadian prime minister, have sent strongly worded letters to Ernesto Zedillo, the Mexican president, protesting at the way a French-Canadian consortium was disqualified from a US$400m tender to provide rolling stock for the Mexico City metro. A new tender for the metro rolling stock is expected only after Cuauhtémoc Cardenas, the mayor-elect, takes office in December and appoints a new management for the Mexico City metro. In his letter to President Zedillo, Mr Chretien lamented Mexico’s inadequate legal safeguards for foreign investors’. (Financial Times, 3 October 1997)
One of the most scandalous cases was in the 1980s where the US chemical business Union Carbide tolerated very poor safety standards at a factory in Bhopal, India. The result was an explosion which released clouds of toxic gas and killed thousands. Many more thousands are still alive and very ill because of this. What was particularly irresponsible was the long years it took to force Union Carbide to accept responsibility and pay compensation.
EDS In Czech Republic
In the Czech Republic in 1998, in the case of a US computer firm EDS, the US embassy responded to public accusations of corruption not with encouragement to investigate but with a bland statement:
The US embassy told CTK today that it had no information to suggest that the US computer firm EDS had bribed the former Christian Democrat (KDU-CSL) government in order to win lucrative defence contracts for the new army command information system. The embassy also said that it could not confirm claims that EDS had been warned on at least two occasions by embassy officials that it was under suspicion of corruption. (Czech News Agency, 24 July 1998)
Indeed, the embassy invoked the existence of the FCPA (Foreign Corrupt Practices Act) as evidence that a US company would not be corrupt:
The embassy added that US firms operating abroad were bound by the 1977 Foreign Corrupt Practices Act, which clearly bans offering of bribes in order to win contracts. If an American firm was found guilty of offering bribes in the Czech Republic it would also have to face responsibility back home in the US, and would at least lose the right to compete for US government orders, it went on. (ibid.)
The US embassy told CTK today that it had no information to suggest that the US computer firm EDS had bribed the former Christian Democrat (KDU-CSL) government in order to win lucrative defence contracts for the new army command information system. The embassy also said that it could not confirm claims that EDS had been warned on at least two occasions by embassy officials that it was under suspicion of corruption. (Czech News Agency, 24 July 1998)
Indeed, the embassy invoked the existence of the FCPA (Foreign Corrupt Practices Act) as evidence that a US company would not be corrupt:
The embassy added that US firms operating abroad were bound by the 1977 Foreign Corrupt Practices Act, which clearly bans offering of bribes in order to win contracts. If an American firm was found guilty of offering bribes in the Czech Republic it would also have to face responsibility back home in the US, and would at least lose the right to compete for US government orders, it went on. (ibid.)
AES, Norpak Hydroelectric Schemes, Uganda
There were two proposals to build private hydroelectric power schemes in Uganda - one at Bugali Falls, by a consortium led by US multinational AES - and one at Owen Falls to be built by the Norwegian company Norpak. Corruption allegations arose in respect to both.
Ugandan MPs repeatedly refused to authorise the schemes because they believed them to be against Uganda’s interests; but the World Bank’s intervention focused on providing financial support and guarantees to AES, while insisting on yet more privatisation.
In April 1999, six MPs were allegedly compromised by accepting a week’s trip to Norway, arranged by Norpak. The politicians denied that they had been compromised:
‘Six MPs who have just returned from a one-week trip to Norway to inspect Norpak projects yesterday said they have no apologies to offer over the trip. They defended their trip saying, “We were duly nominated by Parliament Speaker, Mr. Francis Ayume, following an invitation by Norpak”’ (New Vision, 28 April 1999).
The cost of the trip was reportedly not paid by the company, but by the Norwegian state:
‘The bills, that include: first class accommodation, air tickets and shopping in Norway, were reportedly paid by the Norwegian embassy’ (New Vision, 21 April 1998).
Ugandan MPs repeatedly refused to authorise the schemes because they believed them to be against Uganda’s interests; but the World Bank’s intervention focused on providing financial support and guarantees to AES, while insisting on yet more privatisation.
In April 1999, six MPs were allegedly compromised by accepting a week’s trip to Norway, arranged by Norpak. The politicians denied that they had been compromised:
‘Six MPs who have just returned from a one-week trip to Norway to inspect Norpak projects yesterday said they have no apologies to offer over the trip. They defended their trip saying, “We were duly nominated by Parliament Speaker, Mr. Francis Ayume, following an invitation by Norpak”’ (New Vision, 28 April 1999).
The cost of the trip was reportedly not paid by the company, but by the Norwegian state:
‘The bills, that include: first class accommodation, air tickets and shopping in Norway, were reportedly paid by the Norwegian embassy’ (New Vision, 21 April 1998).
The failure of the global economy and the existing aid and development programs to address poverty and inequality is apparent. At the heart of this failure is the competitive, profit driven, self interest of economically dominant nations. Modern, multinational corporations are the embodiments of these traits, and they play a key role in sustaining the status quo through their economic and political influence.
Undermining The Judicial Authority
The lack of enthusiasm for anti-corruption investigations echoes the readiness of the multinationals and their business associations to undermine the authority of judicial institutions when they rule against the companies’ interests.
Walmart has been in the news in India because it was perceived as one of the principal beneficiaries of the contentious new foreign direct investment (FDI) policy in multi-brand retail. Then the company revealed that its joint venture in India -- Bharti Walmart -- had suspended its chief financial officer and some members of its legal team after an anti-corruption probe.
The scrutiny facing Walmart intensified when newspapers claimed that the company had been lobbying in India to woo Members of Parliament to its side in the FDI vote. The Lok Sabha (the lower house of Parliament) was totally paralyzed for a couple of days and, on January 24, 2013, the government appointed a one-man panel to probe the charges. Walmart says the lobbying was done in Washington, where it is legal, and not in New Delhi, where it is not.
The Walmart inquiry started from a New York Times report about bribery by the retail giant in Mexico. Further investigation uncovered that the corruption charges spread to India, China and Brazil.
Early in 1997, for example, trade unionists and environmentalists in the Philippines brought court cases against the proposed water privatisation in Manila. Formal protests by the entire business community of OECD countries were used to insist that the courts should not rule against western business interests.
The courts had already displeased the government with rulings which went against their privatisation policies. The reported reaction of the multinationals and their governments showed little respect for the due process of law:
‘Loud complaints about “terrorists in robes” have resonated in government and business circles in the past month as the courts delivered a series of blows to investor confidence with controversial rulings against the state’s privatisation programme.’ (Bangkok Post,
14 February 1997)
This is part of a general unwillingness by multinationals to accept the authority of courts in developing countries. When the government of Maharashtra in India decided to end or renegotiate an energy deal with Enron, the company sought arbitration in London; when the province of Tucuman in Argentina terminated the water concession that had been awarded to Générale des Eaux, the company referred its dispute to the World Bank for arbitration.
In some cases, governments of OECD countries act as ‘official channels’ for payments which could be considered corrupt.
The courts had already displeased the government with rulings which went against their privatisation policies. The reported reaction of the multinationals and their governments showed little respect for the due process of law:
‘Loud complaints about “terrorists in robes” have resonated in government and business circles in the past month as the courts delivered a series of blows to investor confidence with controversial rulings against the state’s privatisation programme.’ (Bangkok Post,
14 February 1997)
This is part of a general unwillingness by multinationals to accept the authority of courts in developing countries. When the government of Maharashtra in India decided to end or renegotiate an energy deal with Enron, the company sought arbitration in London; when the province of Tucuman in Argentina terminated the water concession that had been awarded to Générale des Eaux, the company referred its dispute to the World Bank for arbitration.
In some cases, governments of OECD countries act as ‘official channels’ for payments which could be considered corrupt.
Corruption like other forms of entrepreneurship has evolved considerably. A few years after liberalization, Enron admitted to a U.S. Congressional committee that it had spent US$20 million to "educate Indians" on the benefits of its power project in Maharashtra. Today, the money moves more subtly. In telecommunications, for instance, Indian companies acquired licenses at a knock-down price from the government with the aid of corrupt ministers. They then sold stakes in the companies that held these licenses to foreign telecom majors seeking an entry into India. The foreign companies paid several times what the Indian entities had shelled out for the licenses. On paper, they look foolish, but not criminal. All the players would have been happy if the Supreme Court hadn't stepped in and cancelled the process. The art of graft has advanced fast.
With new scams and scandals vying for attention, the older ones often fall by the wayside. The politicians shrug off the allegations and are back in positions of power in no time.
~S. Raghunath, Professor Of Corporate Strategy And Policy, Indian Institute Of Management, Bangalore
Water Privatisation, Indonesia
In 1997, while Jakarta was still under the control of president Suharto, its water supply was privatised, under the auspices of the World Bank. One concession went to a consortium led by Thames Water (UK), another to a consortium led by Lyonnaise des Eaux (France). Both consortia included partners which were owned by friends of the president. After Suharto’s fall, even the consortia accepted that these concessions were no longer defensible.
The multinationals moved rapidly with new ‘clean’ companies to negotiate new contracts with Jakarta City Council, to run from February 1999.
But these contracts have been subject to bitter criticism on the grounds that they were never properly advertised, that the prices contained in them are excessive, and that Suharto’s son continued to hold five per cent equity in the new Thames Water venture. Court action has been taken to have the contracts declared void, and a trade union of water workers has demanded that the contracts be rescinded (Asia Pulse, 29 April 1999).
The original concession awards under the Suharto regime had been made under the auspices of a World Bank-supported tendering procedure, yet the Bank made no public statement calling for investigation of the alleged corruption. On the contrary, three weeks before the June 1999 general election, it announced new loans of US$400m-US$300m for the water sector.
The multinationals moved rapidly with new ‘clean’ companies to negotiate new contracts with Jakarta City Council, to run from February 1999.
But these contracts have been subject to bitter criticism on the grounds that they were never properly advertised, that the prices contained in them are excessive, and that Suharto’s son continued to hold five per cent equity in the new Thames Water venture. Court action has been taken to have the contracts declared void, and a trade union of water workers has demanded that the contracts be rescinded (Asia Pulse, 29 April 1999).
The original concession awards under the Suharto regime had been made under the auspices of a World Bank-supported tendering procedure, yet the Bank made no public statement calling for investigation of the alleged corruption. On the contrary, three weeks before the June 1999 general election, it announced new loans of US$400m-US$300m for the water sector.
If all else fails, financial accounts can be adjusted to create the impression of profit and growth. This was the case in numerous corporate scandals and the collapse of corporations such as Enron. Its case simultaneously implicated many other sectors of the accounting and banking industry, such as Arthur Andersen and the National Westminster Bank, who were taken in by and facilitated Enron's false accounting, financing and fraudulent activities. Of course the big losers were the 21,000 employees who not only lost their jobs, but their pension plans and savings which were all tied to Enron stock.
~ Rajesh Makwana
