December 13, 2000	atimes.com

Special Reports Corruption under the spotlight By Tony Allison 1. Corruption conference 2. OECD initiatives Credit transactions Bribery 3. World Bank's anti-corruption strategy 4. The case of Korea 1. Corruption conference Following the Asian economic crisis, which broke in mid-1997, the issue of corruption has attracted renewed interest from both academics and politicians. The issue is directly in the spotlight at the December 11-13 Annual Conference on Combating Corruption in the Asia-Pacific Region, being held in Seoul. The event, the second of its kind, is jointly organized by the Asian Development Bank (ADB) and the Organization for Economic Cooperation and Development (OECD), with the support of the office of the prime minister of Korea. Speaking at the opening, the vice president of the ADB, John Lintjer, said the region needed to build up credibility, with transparent and well-functioning institutions. He added that the ease with which investors and speculators could move money to and from countries in the region "entailed financial crisis situations of unprecedented proportions". However, some observers see such a crisis a better chance for controlling corruption as its role in misdirecting capital and masking the results has become increasingly clear. All agree that recovering Asian economies that need to reattract capital will have to offer more transparency and safeguards than previously. In global terms, Asian nations have a poor record of corruption. The authoratitive Transparency International in its 2000 rankings lists only three Asian countries in the top 30 clean governments world-wide. They are Singapore (6th), Japan (26th) and Taiwan (28th). Singapore is clearly an Asian exception as it is one of the most corruption-free countries. It has been consistently ranked by Transparency International among the 10 least corrupt countries in the world. The Political and Economic Risk Consultancy Ltd (Perc) of Hong Kong consistently rates Singapore as the least corrupt country in Asia. Chinese officials at the Seoul meeting disclosed that more than 500,000 cases of bribery and corruption have been investigated over the past decade. Presentations given by two top Chinese prosecution department officials shed new light on the extent of the corruption crisis that the ruling Communist Party has admitted corruption is a threat to its rule. The annual conference reviews the progress made in the fight against corruption based on the policy recommendations developed by participating countries and promotes regional cooperation. The initiative was launched in October 1999 at a workshop for countries of the Asia-Pacific region held in Manila under the auspices of the ADB and OECD and attended by 250 participants from over 35 ADB and OECD countries. Its objective is to put in place the framework conditions for effectively combating corruption by identifying appropriate political, institutional, and other reforms necessary for the various participating countries. The Seoul conference will report on progress achieved in the region in fighting corruption, focus on corruption prone areas, and lay the groundwork for further partnerships among all players in the region. The program includes presentations by senior government officials, civil society and media representatives and business people, case studies, focus groups and roundtables. Participants of the Seoul conference include representatives of the Asia-Pacific business community, the media and NGOs, as well as senior policy makers and officials from the ministries of justice, interior, finance and accountability institutions of each participating country. Countries present are ADB regional member countries and OECD member countries. International organizations and other institutions include the Asia Foundation, the Konrad Adenauer Stiftung, International Chamber of Commerce, the International Federation of Consulting Engineers, Pacific Basin Economic Council, Transparency International, the United States Agency for International Development, the United Nations, the World Bank Group, the World Trade Organization, and many local NGOs. 2. OECD initiatives Credit transactions: On December 6, OECD member states announced in Paris they had agreed on an action program to deter bribery in government-supported export credit transactions. The move was promptly hailed by Transparency International, a global anti-corruption organization. Transparency International has consistently called for an exclusion of corruption-tainted contracts from export credit guarantees. The export credit and export credit insurance agencies of OECD countries will in future also demand written statements from all companies applying for coverage, stating they have not, and will not, engage in bribery. If bribery is established, the agency will deny coverage or reject claims for indemnification and will refer the case to the judicial authorities. The agreement will end the contradiction between the policies of the OECD countries' export credit agencies and the 1997 OECD anti-bribery convention, which makes it a crime to make bribe payments to foreign public officials. In the past, many private sector companies became involved in corrupt projects in developing and transition countries because they enjoyed the full support of their countries' export credit agencies. Transparency International plans to actively monitoring the OECD countries to see if they put the agreement into action. Bribery: When the United States passed the Foreign Corrupt Practices Act in 1977 barring US firms from paying bribes overseas, it was widely feared that the law would provide an unfair advantage to many Asian and some European firms as they could steal contracts away from American firms by paying bribes. For example, business firms in France and many Asian countries are allowed to treat such overseas bribes as business expenses, thus tax-deductible. In November 1997, the 29 member countries of the OECD completed a treaty that will require all signatories to ban overseas bribery. The OECD Convention on Combating Bribery of Foreign Public Officials was also signed by five other non-OECD countries and it is hoped that more countries will sign. The anti-bribery treaty represents an acknowledgement that corruption is a growing problem and one that hurts almost everyone involved. Once it is fully in effect, every participating country will criminalize bribery of foreign officials. In some ways, however, the treaty does not go as far as the US Foreign Corrupt Practices Act. For example, a number of activities that the US law expressly prohibits are not covered. These include bribes to political parties, political party officials and candidates for office. They also include bribes to state-owned enterprises if the enterprise operates on a "normal commercial basis" without "preferential subsidies or other privileges". Furthermore, foreign corporations will be free from criminal prosecution if their home country does not provide for corporate criminal liability. Authorizing a bribe will not be a crime in countries in which authorization is not illegal, unless the bribe is actually carried out. Authorization of a bribe will be a crime, moreover, only if it is part of a conspiracy. Nevertheless, the treaty is a big first step, and other signatory countries have agreed to discuss extending its reach. 3. The World Bank's anti-corruption strategy The bank has adopted a four-part strategy for tackling corruption: Preventing fraud and corruption within bank-financed projects; Helping countries that request bank support in their efforts to reduce corruption; Taking corruption more explicitly into account in country assistance strategies, country lending considerations, the policy dialogue, analytical work, and the choice and design of projects, and; Adding voice and support to international efforts to reduce corruption. The ultimate goal of a bank strategy to help countries address corruption is not to eliminate corruption completely, which the bank considers is an unrealistic aim, but to help those countries move from systemic corruption to an environment of well-performing government that minimizes corruption's negative effect on development. Many countries are working with the World Bank on anti-corruption and governance measures. These countries participate at their own request - not the bank's. For the bank, helping countries address corruption entails different approaches in different settings. Some approaches specifically target anti-corruption while others deal more broadly with public sector institutional reform. The countries include: Sri Lanka, some states of India, Indonesia, Thailand, China, Vietnam, the Philippines and Korea. Critics criticized: The World Bank and International Monetary Fund (IMF) faced tough questions about their lending policies during their annual meetings in Prague early December. Critics are asking how the IMF allowed the disappearance of tens of millions of dollars loaned to Russia, and why the World Bank continues to issue loans in countries where corruption is rampant. US authorities are investigating allegations IMF loans to Russia were illegally funneled through the Bank of New York as part of a US$7 billion money laundering scandal. Indonesia, meanwhile, is studying an internal World Bank report alleging that over 20 percent of funds for bank projects in Indonesia had been lost to "some leakage" - that is, siphoned off by corrupt officials. A concern leveled against the institutions is that they are disbursing credits without sufficient loan conditions or monitoring programs to ensure the money goes to the intended projects. Finance ministers from the Group of Seven (G7) leading industrial nations earlier this year welcomed steps already taken by the IMF to foster improved accounting standards and legal codes in emerging markets. But the G7 communique also called for further steps - including more accountability and transparency within the IMF itself. 4. The case of Korea According to President Kim Dae-jung, eliminating corruption and reforming the political sector are prerequisites for sustainable economic growth in South Korea, A pay-for-favors system is endemic across Korea in areas ranging from politics, school teaching and journalism. Under this system, white envelopes containing money are dispersed in order to get preferential treatment. Transparency International ranks Korea the 48th most corrupt country in its overall list of 90 nations reviewed. Many observers have blamed the rampant corruption as one of the root causes of its economic woes and achievement of business transparency is considered an urgent task. In early 1998 Kim and the heads of the top 30 Korean chaebol reached a five-point accord to promote corporate restructuring and economic modernization. The accord included measures to improve the transparency of corporate management by adopting modern accounting standards and by holding corporate management accountable to shareholders by appointing independent outside directors to corporate boards and strengthening shareholder rights. Specifically, the IMF and the World Bank required the Korean government to upgrade accounting standards and disclosure rules to meet international practices as part of their loan requirements to the country. The IMF advanced a record $55 billion in 1997, while the World Bank supplied $2 billion. In 1998, the Financial Supervisory Commission (FSC) made a review of the existing accounting and auditing systems and, incorporating comments and suggestions of many foreign institutions with keen interests in the Korean economic modernization, adopted several reform measures to upgrade the financial accounting standards to the level of international standards. Accounting reform: The reform process focused on three specific areas: Revision of financial accounting standards that are primary components of generally accepted Korean accounting principles (GAAP); establishment of modern accounting standards for financial institutions, and establishment of accounting standards for combined financial statements. The primary goal of the reform was to enhance transparency, credibility and international comparability of Korean accounting standards, employing as benchmarks the International Accounting Standards (IAS) established by the International Accounting Standards Committee. Where the IAS do not exist or are not sufficient to address particular accounting issues of importance to Korean companies, the US accounting standards are used as an alternative benchmark. Employing the IAS or US standards as benchmarks made the revised Korean accounting standards consistent with international best practices. In addition to the corporate financial accounting standards, separate accounting standards for banking, securities and insurance industries in Korea have been adopted based on international best practices. However, adoption of the so-called combined financial statement standards was unique to Korea due to the special importance of chaebol in the Korean economy. As in other Western countries, the Korean accounting standards have required firms that have subsidiaries to prepare consolidated financial statements. However, because of the unique chaebol ownership structure, several consolidated financial statements are issued within the same chaebol. A parent-subsidiary relationship exists when a company as the largest shareholder directly or indirectly owns more than 30 percent of another company's voting interest. In contrast, an affiliate of a chaebol is any company that operates under the influence of the chaebol owner(s) regardless of the specific corporate ownership structure. Under the existing standards for the consolidated financial statements, an affiliate that is not a subsidiary of another affiliate is excluded from consolidation, even though it is under the common control of the chaebol. As a result, the typical consolidated financial statements are unable to present the whole financial condition of a chaebol in Korea, even though the chaebol play a dominant role in the economy. Taking advantage of this gap, Korean chaebol adopted many corrupt business practices through collusion with government and political elite rather than enhancing their genuine management effectiveness. In order to address these issues, the Korean Congress passed a bill that requires combined financial statements for chaebol for fiscal years starting January 1, 1999. The objective is to present financial positions, operating results and cash flows of chaebol as a whole under the assumption that chaebol-affiliated companies constitute a single economic entity. Under the new law, the 30 largest Korean chaebol designated by the Fair Trade Commission are required to issue the audited combined financial statements for all domestic and foreign affiliates that are under the effective control of an individual owner and his/her relatives. The concept of effective control is consistent with the IAS and other international best practices. The combined financial statements consist of the combined balance sheet, income statement and cash flow statement, prepared under the assumption that chaebol affiliates under the common control constitute a single economic entity. Thus, intra-group balances and intra-group transactions must be eliminated in the preparation of the combined financial statements. The standards also require disclosures of intra-group transactions, including intra-group ownership interests, cross guarantees, cross pledging, intra-group borrowings, and intra-group sales. Separate combined balance sheets and combined income statements need to be disclosed for financial affiliates and non-financial affiliates to enhance understandability of the combined financial statements. Further, segmental information by major industries and geographic regions has also to be declared. The introduction of these uniquely Korean combined financial statements is likely to further enhance the financial transparency of Korean firms. (Special to Asia Times Online)

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