Monday, September 22, 2008

Transparency International divided on corruption?

It's almost a year since Transparency International published their famous Corruption Perceptions Index, which, followers or our blog will know, does not please us (if you aren't aware of our overall critique, which ultimately hinges on our shifting the focus of enquiry from individual countries up to a global level, click here, or look under "corruption" in our A-Z index here.)

It has been suggested to us that there is currently a fierce debate going on inside TI about the forthcoming index, and the debate hinges on our analysis. We understand that insiders are furious that their veteran methodology for calculating their index has produced a draft table that records Singapore as the fourth "cleanest" country in the world, when many of us know all too well that Singapore is one of the world's most toxic, and fast-growing, tax havens, hoovering up dirty money from all around the world. (This is by no means the only problem jurisdiction: in the last table, noxious tax haven states such as Switzerland, Luxembourg, Hong Kong, the United Kingdom, and others, also crowd right up there as "clean" states.)

In fairness to TI, they have recognised clearly and explicitly that they have a major problem with their CPI, and with the fact that their table analyses individual countries, but not the global picture. A statement accompanying the last CPI says:

"Corruption by high-level public officials in poor countries has an international dimension that implicates the CPI’s top scorers. . . . global financial centres play a pivotal role in allowing corrupt officials to move, hide and invest their illicitly gained wealth. Offshore financing, for example, played a crucial role in the looting of millions from developing countries such as Nigeria and the Philippines, facilitating the misdeeds of corrupt leaders and impoverishing those they governed."

Absolutely spot on. And they quote Akere Muna, Vice Chair of Transparency International:

“Criticism by rich countries of corruption in poor ones has little credibility while their financial institutions sit on wealth stolen from the world’s poorest people.”

Well said. But the problem is that journalists and many others are busy people, and they so often simply do not have the time or inclination to read through the blurb accompanying the index. What they want is something that handily enables them to say "Transparency International ranks X as the world's tenth most corrupt country" and then move on. So this ranking, by giving many extremely dirty countries a clean bill of health, does not please us.

There is clearly a big problem here. As our recent article in The American Interest explains, the world is now gearing up for Phase Two in the fight against corruption. And we are pleased that TI is working with us on creating a new Financial Transparency Index. It will take quite a long time to crunch the data to produce this, so it won't be available soon. Click here for more details.


Anonymous Anonymous said...

I have read the findings of the last CPI that was published this week by Transparency International.

As far as Luxembourg is concerned, I do not think that the CPI is realistic: the result does not comply with TI Barometer for Luxembourg, were 6% of respondents admitted they pay a bride to obtain a service (5% Western Europe average).

Furthermore for anyone who observes carefully Luxembourg, there are recent corruption cases, but because of the culture of lack of transparency, because of the will to hush up issues, and because of the role of “lapdog” instead of watchdog of the press that is not independent enough, issues were not taken into account by business people.

Hence a positive perception expressed by expert and business surveys while Luxembourg is not implementing GRECO and OECD (Working Group on Bribery) Recs and the number of cases coming before the courts appears to be very small because of: “Limited police access in law and/or practice to administrative and financial information at the preliminary inquiries stage, tax data base scattered over several local authorities, lack of staff in the investigating authorities, who concentrate on important and priority cases, no "whistle blowing" arrangements and in some cases reporting hindered by professional confidentiality, excessively strict rules on the burden of proof in criminal law, room for improvement in relations between the prosecution service and investigating judges, and so on (...) A prosecutor has stated that even though banking confidentiality has been relaxed in recent years, the non-banking financial sector and financial institutions such as trust funds were still very reluctant to impart information. Certain lawyers stressed the importance of relationships and networks of persons in Luxembourg society, the difficulties faced by the police in dealing with complex economic and financial crime, particularly because of lack of legal and other resources, and the ease with which companies can be established in Luxembourg.” (Cf. page 18 of the GRECO PHASE III Report "Criminalisation of corruption" [theme I]).

At the time of the “generous grant” to the FATF, that should have never taken places for reasons that I have already developed:
- The GRECO report (Phase II) dated May 12, 2006 stated that Luxembourg has implemented satisfactorily or satisfactorily dealt with less than one quarter of the recommendations: “GRECO notes a fairly significant shortfall in the implementation of the recommendations contained in the second-round evaluation report. It nonetheless expects the Luxembourg authorities to do everything necessary to bring to completion the numerous legislative initiatives referred to in this respect. It urges the authorities of Luxembourg to speed up the reform process so as to show tangible results in the effective implementation of the recommendations as soon as possible”.
- The OECD report dated August 2 2006 concludes with almost the same wording: “Noting a substantial shortfall in Luxembourg’s satisfactory handling of the recommendations given in the Phase 2 report, the Working Group urged the Luxembourg authorities to speed up the process of reforms in order to deliver tangible results with respect to the implementation of these recommendations as soon as possible“.

The convergence of the wording is remarquable : “fairly significant shortfall”, “urges the authorities of Luxembourg”, "speed up the reform process", “show tangible results”, "as soon as possible” for GRECO and “substantial shortfall”, “urged the Luxembourg authorities”, "speed up the process of reforms", “deliver tangible results, “as soon as possible” for OECD.

On 27 March 2008, the OECD published a severe report a couple of months ago following a special decision taken by the Group in June 2006 and stating that that Luxembourg should:
- introduce promptly liability of legal persons for foreign bribery. Currently, prosecution and thus conviction of companies that engage in bribery remains impossible because legal persons cannot be held liable for criminal offences,
- reinforce its mechanisms for combating bribery by making it easier for its judicial authorities to obtain information held by banking institutions in the Grand Duchy,
- introduce effective, dissuasive and proportionate sanctions for companies and guarantee the jurisdiction of the Luxembourg courts over acts of bribery committed abroad by Luxembourg companies,
- step up its efforts to make SMEs aware of the crime of bribing foreign public officials, and introduce a whistleblower protection system.

At its 38th Plenary Meeting (Strasbourg, 9 – 13 June 2008), GRECO adopted the Addendum to the Second Round Compliance Reports Luxembourg. For the first time Luxembourg did not authorised the publication of its report. Addendum to GRECO Report Phase II relating to Luxembourg still remains confidential.

TI reports are used by the FATF that states that “Perceptions surveys reach to subsets of the population to explore facets of crime, impacts of crime, or specific crime types. Of greater relevance to money laundering threat, however, is the work of Transparency International (TI) on corruption34. TI employs an indirect approach to measuring corruption, by drawing on primary sources that survey business people. TI forms a corruption perception index based on the input of these sources The benefit of using perception surveys is that corruption is a crime very likely to be under-represented in crime data; the perceptions of experts can overcome this undercounting. The downside, of course, is that the results are based on opinion alone. Perception surveys are also used to gauge foreign and domestic investors’ and CEOs’ perceptions of crime in certain jurisdictions.” (Cf. MONEY LAUNDERING & TERRORIST FINANCING RISK ASSESSMENT STRATEGIES, 18 June 2008, page 23)

Is there a cultural change in Luxembourg? Definitely not, as demonstrates a recent parliamentary question, dated 22 September 2008, from the former chairman of the Luxembourg Bankers’ Association whose statements are the “voice of business” in Luxembourg about the first report on implementation of savings taxation Directive: is the government willing to abide by the recommendations? The implicit state of mind behind the question is that professionals in Luxembourg do not care of the European Commission Recs. Otherwise the responsible question should have been “What is to be done to implement the recommendations and correct what definitely harms the reputation of the financial center in the international context against offshore jurisdictions?" In February the same Lucien Thiel had said in an interview that that “it is not our duty to control if the taxpayer was honest” a couple of days after the beginning of the Liechtenstein story (L’essentiel, 27/02/2008).

With such statements, once more Luxembourg officials demonstrate that the jurisdiction bets that there are no risks as there will be no sanctions because of the financial stakes, because of the use of Luxembourg by officials from other countries in corruption cases (Cf. recent DCNI-Eurolux case to bypass the OECD convention) and positive assessments provided by TI that reinforce the positive perception by the FATF.

Money over ethics: international institutions responsible for the fight against corruption and money laundering are definitely in question as they have the back to the wall.

3:26 am  

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