Fighting Corruption in Asia: Causes, Effects and Remedies

Fighting

Asia Causes, Effects and Remedies

Editors

John Kidd Frank-Jiirgen Richter

Fighting in A s i a Causes, Effects and Remedies

Fighting

CORRUPTION in A s i a Causes, Effects and Remedies

Editors

John Kidd Aston University, UK

Frank-Jurgen Richter World Economic Forum, Switzerland

V f e World Scientific I

Si New Jersey • London • Singapore • Hong Kong

Published by World Scientific Publishing Co. Pte. Ltd. 5 Toh Tuck Link, Singapore 596224 USA office: Suite 202, 1060 Main Street, River Edge, NJ 07661 UK office: 57 Shelton Street, Covent Garden, London WC2H 9HE

British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library.

FIGHTING CORRUPTION IN ASIA Causes, Effects and Remedies Copyright © 2003 by World Scientific Publishing Co. Pte. Ltd. All rights reserved. This book, or parts thereof, may not be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording or any information storage and retrieval system now known or to be invented, without written permission from the Publisher.

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V

Contents

Chapter 1

Introduction: Corruption a n d Its Measures John B Kidd and Frank-Jurgen Richter

Chapter 2

T h e OECD Convention a n d Asia Enery Quinones

27

Chapter 3

T h e Asian Money L a u n d e r i n g Explosion Peter Lilley

47

Chapter 4

Corruption in Context Leslie Palmier

73

Chapter 5

Is the 21st Century ' T h e Age of Asia-Pacific Region'? Hopes a n d Expectations as Viewed from East Russia Anatoly Korchagin and Alex Ivanov

Chapter 6

Chapter 7

Chapter 8

1

91

Monopoly Rights a n d Wrongs: Two Forms of Intellectual Property Rights Violations in Asia Hock-Beng Cheah

115

Corruption in Mainland China Today: Data a n d Law in a Dubious Battle Francois-Yves Damon

175

Culture a n d Level of Industrialization as Determinants of Corruption in Asia Domenic Sculli

203

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Chapter 9

Fighting Corruption in Asia

T h e Economy of Seepage a n d Leakage in Asia: T h e Most Dangerous Issue Gilbert Etienne

Chapter 10

Combating Corruption in Southeast Asia Clay Wescott

Chapter 11

T h e Institutional Economics of Legal Institutions, Guanxi, a n d Corruption in the PR China Matthias Schramm and Markus Taube

Chapter 12

Chapter 13

Chapter 14

Chapter 15

221

237

271

T h e Nature of Corruption H i d d e n Culture: T h e Case of Korea Yong-Lin Moon and Gary N McLean

297

Combating Corruption in Thailand: A Call to an E n d of the "White Buffet" Maneewan Chat-uthai and Gary N McLean

317

Comparitive Study of Anti-Corruption Systems, Efforts a n d Strategies in Asian Countries: Focusing on H o n g Kong, Singapore, Malaysia, a n d Korea Taek Kim An Exploration of the Dynamics of the 'Corrupter' a n d the 'Corrupted': Developing Cutting Edge Practices to Prevent Seduction Lionel Stapley

349

377

VII

List of Contributors

Maneewan Chat-uthai is an assistant professor in the graduate program in human resource development of the National Institute of Development Administration (NIDA), a public graduate university in Thailand. Maneewan received her B.A. from Thailand's Thammasat University and her M.A. from Northeast Missouri State University. She received a Japanese Government Scholarship to complete her Ph.D. at the University of Missouri-Columbia. Her work experience includes being chief researcher at the Business Information and Research Company, planning and policy analyst of King Mongkut's Institute of Technology, administrative secretary to the deputy permanent secretary for University affairs, and deputy and director of the NIDA-HRD Graduate Program. Maneewan is a frequent lecturer and guest speaker for staff development in public and private organizations. She has worked as a consultant for the United Nations Development Program and is currently seconded to join the UN International Labour Organization's International Program on the elimination of child labour, as the National Program Manager for Thailand. Hock-Beng Cheah researches and teaches at the School of Economics and Management, University College, University of New South Wales. In economics, his research interests are focused on economic development and political economy in the Asia-Pacific region. In the management field, his teaching and research interests include human resource management, organizational development, and entrepreneurship. He was a visiting Research Fellow at the Snider Entrepreneurial Center, University of Pennsylvania, where he proposed a new perspective of the entrepreneurial process. Since then,

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Fighting Corruption in Asia

h e has explored m o r e extensively the ramifications of this perspective of e n t r e p r e n e u r s h i p for organizations, m a n a g e m e n t a n d economic development. H e has also u n d e r t a k e n research at the Economics Research Center at Nagoya University, J a p a n , a n d the Institute of Southeast Asian Studies, Singapore. His work has b e e n published in a variety of m o n o g r a p h s a n d j o u r n a l s including: Creativity and Innovation Management, Journal of Business Venturing, Journal of Enterprising Culture, Manchester Papers on Development, a n d Labour & Industry. Francois-Yves Damon studied history at the S o r b o n n e , a n d Chinese in the Ecole des Langues Orientales, Paris, a n d Peking. Now is Maitre de conferences habilite a diriger des recherches, Universite Charles de Gaulle in Lille. H e is also C h e r c h e u r Associe at the Centre de recherches sociologiques sur le droit et les institutions penales, Ministere de la justice, Guyancourt. His thesis c o n c e r n e d the textile industry a n d trade in China, a n d since then h e has researched the economy, employment, a n d Law in China (e.g. Translation of the Law o n the deployment of the People's Army in H o n g Kong after the first of July 1997). H e is also a m e m b e r of the Association francaise de criminologie. H e has published widely, for instance o n criminality from various justice, police a n d Chinese reviews, in Perspectives Chinoises, a review of the French Center o n Contemporary China, H o n g Kong; o n illegal immigration, analysis of sociological a n d psychological conditions of six m u r d e r s by a lone m u r d e r e r in Fujian. A n d forthcoming is The Traffic of Women in Guangdong (women sold for domestic slavery, a n d pregnancy, t h e n re-sold); plus Transition and Corruption, (the three strata of corruption in China) ESSCA, Angers-France, 2001. His o t h e r work concerns ' t h e cultural revolution', a n d the statistical relationships between the Great Leap Forward a n d the constitution of the establishment of the provincial revolutionary committees. Gilbert Etienne is a professor emeritus of development economics at the Graduate Institutes of International Studies & Development

List of

Contributors

IX

Studies, Geneva. H e has spent many years in Asia since 1952, first as a student at the School of Oriental Civilisations & Languages, Paris; t h e n in business; a n d since 1959 for research or consultancy with the Swiss government. H e has published a n u m b e r of books o n development in South Asia, Afghanistan a n d China, the latest being: Rural Change in South Asia — India, Pakistan, Bangladesh. New Delhi, Vikas. Also Feeding Asia in the next Century. Macmillan, New Delhi; a n d Chine, Inde, le match du siecle. Presses de Sciences Po, Paris. This latter book has b e e n u p d a t e d a n d translated into Chinese a n d published by X i n h u a Press, Peking, 2000. H e has b e e n visiting professor at M.I.T., T h e Economic Developm e n t Institute of the World Bank, has often lectured in France, Pakistan, India a n d China. Alexander M Ivanov gained his Doctor of Laws after his activity as a state prosecutor being a lawyer for ten years. Now, he is a senior lecturer o n comparative law a n d criminology at law school of FESU, a n d as a fellow of Vladivostok centre for the study of organised crime a n d corruption. This centre was established by, a n d works u p o n the initiative of Professor Louise Shelly (American University, Washington). H e has a b o u t 50 papers, book chapters a n d books o n organised crime, economic crimes, corruption a n d comparative, criminal, constitutional a n d c h u r c h law. John Kidd was educated in the UK a n d worked for several major UK organizations before returning to University scholarship. In the Universities of Birmingham a n d now Aston Business School, his research focused on the development of IT use in SMEs; the m a n a g e m e n t of projects; a n d the softer m a n a g e m e n t issues that concern multinational j o i n t ventures. H e has held visiting professorships in several E u r o p e a n universities, a n d in the China E u r o p e International Business School, Shanghai. His recent books o n Asian matters, co-edited with Li X u e a n d Frank-Jurgen Richter, are Maximising Human Intelligence Deployment in Asia: The 6th Generation Project a n d also Advances in Human Resource Management in Asia. L o n d o n & New York, Palgrave (both 2001).

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Taek Kim is currently working as a special advisor to the Korea I n d e p e n d e n t Commission Against Corruption (KICAC) in Korea. Kim was a visiting scholar at the Transnational Crime a n d Corruption Center at the American University, Washington, D.C., USA t h r o u g h 2001-2002, t h o u g h h e r e m a i n e d attached to the SIT Institute of Seoul City G o v e r n m e n t (from 1999). T h e Ministry of Education in Korea awarded him a full scholarship to visit the US. H e majored in bureaucratic corruption a n d public administration, a n d in 1997 h e obtained his Ph.D. in Korea. Kim has worked at Soong Sil University, University of Seoul, Dan Kook University, Hallym University Broadcasting University a n d Kang Won National University as Adjunct Faculty (from Oct. 1992-Dec 2000). H e was also a policy consultant official in the presidential commission o n anti-corruption u n d e r the Korean President Kim Dae J u n g (20002001). H e is a distinguished corruption scholar a n d N G O researcher in Korea, a n d h e is well known for his research on bureaucratic corruption, writing a n d presenting many papers at world-class conferences. Recently, he has b e c o m e m o r e interested in global anti-corruption, crime a n d h u m a n rights. Anatoly G Korchagin after his Doctor of Laws, h e worked as a senior lecturer o n criminal law, correctional law, criminology at the law faculty a n d later at the Law School of the Far East State University (FESU), Vladivostok, Russia. Besides lecturing, h e is the Dean of the Law Faculty of FESU a n d a well-known scholar. H e has over 100 papers, book chapters a n d books o n economic crimes, corruption a n d comparative criminal law, a n d h e combines his scientific activity with his lawyer's practice consulting citizens a n d companies. Peter Lilley has b e e n involved in the prevention, detection a n d investigation of international fraud a n d money l a u n d e r i n g for the last seventeen years. H e spent 13 years with a large financial institution where h e created a n d h e a d e d their fraud a n d m o n e y laundering prevention department. H e has led n u m e r o u s successful projects worldwide a n d advised a wide range of organizations o n the prevention of m o n e y l a u n d e r i n g a n d organized crime.

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Contributors

XI

Peter Lilley holds an English degree from the University of East Anglia, is a fellow of the UK Chartered Institute of Banking, a certified fraud examiner, a fellow of the Royal Society of Arts a n d a m e m b e r of the Institute of Professional Investigators. H e has written n u m e r o u s articles together with two books, the latest being Dirty Dealing — The Untold Truth About Global Money Laundering, Kogan Page, 2001. H e now runs his own international m o n e y l a u n d e r i n g mitigation firm, Proximal Consulting. Gary N McLean is a professor a n d coordinator of h u m a n resource development a n d adult education at the University of Minnesota, St. Paul, where h e is also a Morse Alumni Distinguished Teaching Professor. H e is a frequent speaker a n d has written over 100 j o u r n a l articles a n d 20 textbooks. His c u r r e n t research a n d writing interests are almost entirely in international contexts. H e is ex-editor for the Human Resource Development Quarterly, ex-general editor for Human Resource Development International, North American editor for the Journal of Transnational Management Development, a n d consulting editor for the Journal of Education for Business. H e currently serves as president for the Academy of H u m a n Resource Development a n d previously served as president of the International M a n a g e m e n t Development Association. H e has b e e n an i n d e p e n d e n t consultant, primarily in training, organization development, a n d quality transformation, for over 30 years. His undergraduate degree was in Business Administration a n d Secretarial Studies at the University of Western Ontario, in L o n d o n , Ontario, a n d his masters a n d doctorate in Business Education are from Teachers College, Columbia University, in New York City. Yong-Lin Moon is a professor at Seoul National University, Seoul, Korea, a n d is o n e of Korea's foremost educators in educational psychology, moral d e v e l o p m e n t / e d u c a t i o n , a n d h u m a n resources development. H e is a B.A. a n d M.A. graduate of Seoul National University a n d a Ph.D. graduate of the University of Minnesota. Later, h e served as director of the Moral Education Bureau at the Korea Education Development Institute (KEDI), in which h e

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Fighting Corruption in Asia

directed the design of the nation-wide curriculum a n d textbook development for moral education in elementary a n d secondary education. H e also served as a standing m e m b e r to the Presidential Commission for education reform, in which h e led a strong task force for education reform research a n d p r o p o s e d an education reform agenda. H e led Korean education as Minister of Education in President Kim D a e j u n g ' s administration. During his visit to the University of Minnesota as a Fulbright visiting scholar, he focused o n education reform a n d corruption problems. Leslie Palmier was formerly reader in sociology at the University of Bath a n d associate fellow of St Antony's College, Oxford. H e was also founder-director of the center for development studies at the University of Bath. H e has b e e n c o n c e r n e d with Asian studies since 1951, w h e n h e u n d e r t o o k field research in Indonesia. His publications include State and Law in Eastern Asia (ed.) (Aldershot, D a r t m o u t h 1995; Detente in Asia (ed.) L o n d o n , Macmillan 1992; The Control of Bureaucratic Corruption: Case Studies in Asia. New Delhi, Allied, 1985. Enery Quinones is h e a d of the anti-corruption division of the departm e n t for financial, fiscal a n d enterprise affairs in the Organisation for Economic Co-operation a n d Development (OECD). As h e a d of the division she is responsible for overseeing enforcement of the OECD anti-bribery convention a n d o t h e r agreements b a n n i n g bribery a n d corruption. Thirty-five countries participate in these agreements putting the organisation a n d the anti-corruption division at the forefront of international efforts to stem corrupt payments in international business transactions. T h e division conducts regional activities covering the former Soviet U n i o n countries, Asia-Pacific, Latin America, a n d South East E u r o p e to encourage dialogue a n d co-operation between public authorities a n d business a n d civil society representatives. T h e OECD recently published No Longer Business As Usual: Fighting Bribery and Corruption u n d e r h e r m a n a g e m e n t a n d she has written articles for specialised anti-corruption publications, the most

List of

Contributors

XIII

recent for Transparency International's Global Corruption Report 2001. She is a United States national living in Paris since 1976. She received h e r University degree in Economics from New York University, a n d h e r Juris Doctor from Harvard Law School. Frank-Jiirgen Richter is the Director in charge of Asia at the World Economic Forum, Geneva. H e was educated in Germany, France, Mexico a n d J a p a n . At o n e time, h e was based in Beijing for several years where h e m a n a g e d the operations of a E u r o p e a n multinational enterprise: there h e developed naturally a keen interest in Asian business practices. As a scholar-practitioner, h e has written several books about Asian business, international m a n a g e m e n t a n d global competition. His most recent books include The East Asian Development Model (MacMillan, 2000). Domenic Sculli lives in H o n g Kong with his wife Oi-yin a n d daughter Pauline. H e has b e e n employed by the University of H o n g Kong since 1974, a n d is now a senior lecturer in the d e p a r t m e n t of industrial a n d manufacturing systems engineering. H e was b o r n in the small village of Ferruzzano in s o u t h e r n Italy a n d at the age of 10 h a d to follow his emigrating parents to Melbourne, Australia. Earlier, after a long exposure to Australian culture a n d education, h e graduated from the Royal M e l b o u r n e Institute of Technology in 1967 with a fellowship diploma in mathematics; h e is now a fellow of T h e Institute of Mathematics a n d Its Applications a n d a charted mathematician. H e was employed by Australian Consolidated Industries as an operational research analyst from 1968 to 1973, a n d was given leave for o n e year to complete the MSc (operational research) p r o g r a m m e at Birmingham University in 1 9 7 0 / 7 1 . His early research interests were mainly technical a n d resulted in quite a n u m b e r of publications in the O R / M S journals. In later years, h e c o n d u c t e d a n d published research in the cross-cultural aspects of m a n a g e m e n t . Matthias Schramm h e studied economics a n d Mandarin in Duisburg a n d W u h a n (PR China). As of April 2001 h e is an assistant at the faculty of economics, Institute for East Asian Studies a n d Chair for

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East Asian Economics (China) at the University of Duisburg: further h e is a Ph.D. student at the Institute for Marketing of Food a n d Agricultural Products at the University of Gottingen. His areas of research include — new institutional economics, the economics of transformation a n d institutions with a regional focus on China, game theoretic analysis of price formation with special focus on food industry a n d trade, philosophy of science. Lionel F Stapley is the Director of OPUS (an Organisation for Promoting Understanding of Society) a n d an organizational consultant. T h e work of OPUS is c o n c e r n e d with ' p r o m o t i n g a n d developing the study of conscious a n d unconscious organizational a n d societal dynamics t h r o u g h educational activities, research; consultancy a n d training; and, the publication a n d dissemination of these activities for the public benefit.' H e has worked as a staff m e m b e r of several international G r o u p Relations Conferences a n d his consultancy clients include a variety of organizations including the football industry. H e is the a u t h o r of The Personality of the Organisation: A Psychodynamic Explanation of Culture and Change (1996), Free Association; a n d co-editor with Larry Gould a n d Mark Stein of The Systems Psychodynamics of Organisations (Karnac, 2001). H e is a Fellow of the Chartered Institute of Personnel a n d Develo p m e n t (FCIPD), a Fellow of the Institute of M a n a g e m e n t (FIMgt); a n d a m e m b e r of the International Society for the Psychoanalytic Study of Organisations (ISPSO). Markus Taube born in 1965, studied sinology a n d economics in Trier a n d W u h a n (PR C h i n a ) , a n d holds a doctorate from the R u h r University, Bochum, in the faculty of the economics of East Asia. H e was the winner of the Walter-Eucken Price 1998 while a researcher at the Ifo Institute for Economic Research, Munich, from 1996 to 2000. As of April 2000, has b e c o m e the professor for the East Asian Economy a n d China at the University of Duisburg. H e researches u p o n the theory of economic o r d e r a n d new institutional economics, the economics of developing a n d transformation economies with a regional focus o n China a n d Southeast Asia.

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Clay G Wescott is a senior public administration specialist with the Asian Development Bank. Before that, as deputy director for UNDP's Management Development and Governance Division, he assisted 35 countries with public sector reforms in Asia and the Pacific, Africa, and the Caribbean. During several consulting positions through 1976-1989, he was director of the finance, management and economics, Division of Development Alternatives, Inc. in Washington, D.C. He also worked with PriceWaterhouse, Dames and Moore, and the Harvard Institute for International Development. Among many assignments, he advised the governments of Malawi and Kenya on financial management and decentralization reforms. He has degrees in government from Harvard College (A.B. 1968, Magna Cum Laude), and Boston University (Ph.D., 1980). He is the author of many published articles and book chapters, and is a certified management consultant.

1

Chapter 1

Introduction: Corruption and Its Measures

John B Kidd and Frank-Jurgen Richter

Introduction Let us take, just for the m o m e n t , take the viewpoint of o n e of us, J o h n Kidd... as I grew u p in rural England, I lived to play a mixture of cricket a n d rugby football. These seemed to m e to be natural simple pastimes. In a s u m m e r evening, I was able to go to the village cricket field to sit a n d watch the players battling to win, bowler against batsman, with the latter s u r r o u n d e d by fielders all of w h o m were intent o n intimidating that lone guy into making a mistake. Yet, after this period of palpable aggression all the guys congregated r o u n d sandwiches (often p r e p a r e d by their wives) a n d drank a b e e r (sometimes provided, as a loss leader by the local p u b landlord). T h e r e was a clear split between the activity of playing this skilful game a n d the social elements a p p a r e n t in the casual after-match de-briefing a n d subsequent camaraderie. I h a d the same feeling as I played a m a t e u r rugby: a game with 15 players — n o t the professional o n e with only 13 players (who are all paid a high salary, with even h i g h e r bonuses). Again I enjoyed the rivalry a n d the intensity of a powerful game (even if covered in chilly winter m u d ) , which was to be balanced against the friendly eating a n d

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John B Kidd & Frank-Jurgen Richter

drinking after the game when all on-field animosity was forgotten. It was playing the game that counted, not the result. At some point in my 'growing up', I met the beginnings of corruption in these simple games. The better amateur players were being offered 'boot money'. That was understandable to me and to many players, as those good players were called to practice long hours each week, to travel to country games and even to national games far away from our home ground. The rules of the amateur game forbade any payment to these important players — yet national honor had to be upheld by the young men — hence the practice of placing 'travel expenses' in their street shoes in the locker room became commonplace. There was much furor at the breakdown of their amateur status. Now of course I am gready perturbed by the widespread corruption in all sport; no game seems to be free of its effects, not even in the Olympic games. In the latter, maybe even more than in national games, there has been a rampant demand for [and use of] performance-enhancing drugs since the honor of individual countries depends on winning 'gold'. But change is afoot: Sir Paul Condon, one time head of Scotland Yard (the UK's police headquarters), is developing a dossier upon global corruption in the game of cricket. In his preliminary report, he says that corruption has been rife in cricket since the 1970's (Condon, 2001). Soccer too has its problems — also caused by the lure of money — either directly to individuals or associated with the concentration of a major set of games at one location: such as the World Cup. A decade ago, the Cup generated about $100 million, but the events in Korea and in Japan in 2002 are expected to generate over $1 billion in television and marketing rights alone. It is big business, and as such attracts many villains. Business Week documents some of the Federation of International Football Associations' (FIFA) problems, such as a missing $50 million transferred from the Brazilian TV group Globo, but not deposited in a designated bank account (Business Week, June 25 th , 2001). The other author, Frank-Jiirgen Richter, was raised in Germany — naturally he likes

Corruption

and Its Measures

3

soccer, a n d h e too is c o n c e r n e d about the scandals a n d corruption in that game. These are m o d e r n problems, a n d we will r e t u r n to these times in d u e course. First we have to note that corruption has b e e n with us from time immemorial. It is often said that prostitution is the world's oldest profession, a n d accounting came second. After all, s o m e o n e has to m a n a g e the monies gleaned by nefarious means, a n d most likely, as the monies would have b e e n obtained in ways outlawed by society there would also have b e e n corrupt accountants, advisors or extortionists. We may see this effect even a thousand years ago when the O r d e r of the Knights Templar was set u p to protect the pilgrims o n their passage to the Holy Land. These were warriors who should never retreat, who should be valiant a n d incorruptible. Yet d e e p in their own history is mystery — a n d if there is mystery t h e n there are stories that develop: b o t h correct a n d false. The Order of the Knights Templar, despite its relatively short life span, was a major instrument of change in medieval Europe. Within fifty years of their foundation in 1150 AD, they had become a commercial force equal in power to many states; within a hundred years they had developed into the medieval pre-cursors of multi-national conglomerates with interests in every form of commercial activity of that time and were far richer than any kingdom in Europe. Using their own commercial insights as well as techniques which they adopted from their Muslim opponents in the east, they developed the concept of financial transfer by 'note of hand' into something like its modern equivalent: they developed also the bankers cheque and the pre-cursor of the credit card (round about 1200 AD). From their amassed wealth they lent to bishops to finance church building programmes; and to princes, kings and emperors to finance their state works, building programmes, wars and crusades. Within the twin embrace of financial security and safe travel, Europe began to transform itself. Safe and effective trade over longer distances led to the general accumulation of capital and the emergence of a newly prosperous merchant class, the urban bourgeoisie. The newfound wealth of the city merchants changed the balance of power still further in favour of the towns and cities and thus their inhabitants. The Order was not

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John B Kidd & Frank-Jurgen Richter

merely the medieval pre-cursor of the m o d e r n multi-national conglomerate but was in many respects an early embryonic form of the European Union. However, success, wealth and power stimulated jealousy and resentment, especially from those who were heavily in debt to the order. We thus see the potential for corruption and strife arising between the 'haves and have nots' in mediaeval times (extracts from http://www.tylwythteg.com/templar.html — accessed July 3 rd , 2001). Readers might like to note a 'sister' book to this is focused o n 'Governance in Asia' (Kidd & Richter, 2002). In that book, we address issues arising from co-joining different models of corporate a n d national cultures in asian countries wherein some nations are j u s t b e c o m i n g e c o n o m i c a l l y viable yet have b e e n i n t i m a t e l y [economically] invaded by the major international corporations over the last 20 to 40 years, perhaps longer. In that book, we illustrate how m o d e l s of g o v e r n a n c e are d e p e n d a n t o n t h e d e g r e e of corruption prevalent in the local society (as seen in this book) — in many ways these two books c o m p l e m e n t each other.

The Measurement of Corruption We should now turn to the measurement of corruption — for without a base we c a n n o t make appropriate comparisons. To p u t this into a context, Peter Lilley wrote earlier a b o u t money l a u n d e r i n g in its various forms, n o t i n g that j u s t o n e form — illicit drugs dealing — was estimated to have a turnover of $400 billion p e r a n n u m ; a n d this turnover was larger t h a n the world's c o m b i n e d oil a n d gas industry (Lilley, 2000: 3). H e continued, saying that the whole of the laundering processes — which is n e e d e d to 'make clean' monies arising from drugs, prostitution, a n d c o r r u p t i o n in general — reaches a staggering $1.5 trillion, a n d it is about 5% of the world's Gross Domestic P r o d u c t (GDP). It is the m a g n i t u d e of this vice that makes it imperative to u n d e r s t a n d o u r base m e a s u r e m e n t s a n d thus be able to state what we have d o n e to ameliorate its effects. Although this book, t h r o u g h the efforts of all its authors, reviews corruption in Asia we all u n d e r s t a n d that this is a global issue.

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and Its Measures

5

Hardly a week passes without national press in some country, or international j o u r n a l s such as Time, BusinessWeek, Fortune, the Economist [and all serious reportage] making some reference to corruption in Asia, or E u r o p e or the Americas — a n d they refer to the very high profile trials therein involving senior ministers, or exministers of State. We find these people are n o t above the law, be they the one-time US President, or the senior ministers of Germany, France or Italy; or in o t h e r states in Africa or South America. T h e public is b e g i n n i n g to realise that their judiciary are i n d e p e n d e n t of the State a n d can enforce the law with the same 'sharp teeth' it uses o n us, the public. "One law for all" is u n d e r s t o o d in Western countries. It is seen to be m o r e or less working, since indictments a n d gaol sentences are being passed on senior figures that were once u n t o u c h a b l e a n d apparently above the law. Happily local television in China is now depicting corruption in its society in general, though in many cases it also shows the weak a n d oppressed d o n o t achieve the justice they deserve. Yet this is i n d e e d progress, as transparency b e c a m e the n o r m in the run-up to their W T O entry: thus ordinary people can be forewarned a b o u t the corrupt practices they knew took place, b u t could only refer to folk-tales. Even so, 'the public' remains confused: take two items in the (UK) Financial Times [Friday, J u n e 1 st , 2001: 12]. O n e item by Gord o n Cramb r e p o r t e d a ministerial m e e t i n g in T h e H a g u e wherein the delegates were hopeful a b o u t the setting u p of a United Nations legal instrument to fight corruption. In part, this would concern itself with 'off-shore' international financial operations a n d thus secure the r e t u r n of corruptly derived monies to their rightful countries. Yet, on the same page, an item by Edward Alden & Michael Peel r e p o r t e d that the Bush administration in the US is 'reconsidering the vices a n d virtues of financial privacy'. They wish to relax the disclosure rule o n cash deposits of $10,000 or m o r e — which, if carried t h r o u g h , would severely weaken the ability of US banks to control money laundering. In turn, as we u n d e r s t a n d from Lilley (ibid), there would be r a m p a n t abuse of this newly uncontrolled banking system to p r o m o t e the whole spectrum of illegal operations.

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John B Kidd & Frank-Jiirgen Richter

A few major groups have stood out against corruption: nong o v e r n m e n t o r g a n i s a t i o n s s u c h as t h e O E C D , T r a n s p a r e n c y International, a n d m o r e recently — we see consultants amassing data from their global outposts: firms such as PricewaterhouseCoopers. We will review their efforts.

The OECD Mission against Corruption We note the global pressure to have organisations conform to GAAP (Generally Acceptable Accounting Principles). This was driven first by United States accountants looking for easier-to-apply rules yielding g r e a t e r t r a n s p a r e n c y , w h i c h in t u r n , w o u l d p r o m o t e c l e a r e r comparability across firms in different States in the United States, a n d later between firms located in different countries. Accounting regulators in many countries have agreed their national m e t h o d s should incorporate GAAP. Even d u r i n g the S u m m e r of 1997 China publicly agreed to a d h e r e to GAAP, as h a d the J a p a n e s e by that time: b u t the Chinese authorities said they would 'do it their way'. It is p r u d e n t to t h i n k a b o u t t h e m e a n i n g of... 'generally acceptable' as it may apply in Asian countries since it has b e e n shown that accounting disclosure, at least historically, is strongly correlated with cultural measures (note later in this c h a p t e r ) , a n d t h a t o r i e n t a l c u l t u r e s a r e b i a s e d t o w a r d s secrecy a n d n o n transparency (Gray & Vint, 1995; Salter & Niswander, 1995; Zarzeski, 1996). Thus o n e may now ask if different regularity practices a n d the m o r e o p e n financial markets in these regions will force firms to be m o r e transparent (in a GAAP sense)? In fairness, we should note that opacity is not a unique East/West issue since the Channel Islands, Belgium, Spain a n d Switzerland all practice low levels of financial disclosure (Gray, 1996). A n d Austria has 'Sparbrucken' banks that are m o r e secretive t h a n one's traditional view of a Swiss bank; notwithstanding the former country is a signatory of the OECD Article against Corruption (Lilley, 2000). Research o n the Oriental concept of probability a n d risk has shown that asian persons may be 'fate-oriented' a n d less willing to take a probabilistic view of the world (Phillips & Wright, 1977).

Corruption

and Its Measures

1

This might suggest that sophisticated accounting is n o t n e e d e d in Asia since "what will b e — will b e " a n d ultimately n o subtle provisioning will hide p o o r p e r f o r m a n c e . O n the o t h e r h a n d the Asian collective spirit will carry an ailing firm so ameliorating any loss of face. In contrast, in the West, t h e rules a n d clarity of accounting might well r e p o r t a technical failure, a n d the firm be forced to liquidate, n o t withstanding any mitigating circumstances. T h e lack of disclosure in Asian accounting a n d the degree to which m a n a g e m e n t accounting is n o t u n d e r t a k e n in Asia are seen as quite d e e p research issues by Western academic accountants — even to the extent that some question if accounting practice might i n d e e d change Asian culture! (Baydoun et al, 1997: 422). T h e World Bank a n d the International Monetary F u n d (IMF) are now ready to 'be whistle blowers' when they detect funding diversions, a n d o t h e r organisations now m o r e publicly claim they resist bribery. T h e U n i t e d States has h a d laws from 1977, which criminalized commercial payoffs to public servants abroad if offered by US national personnel; a n d others follow similar reasoning — the Royal D u t c h / S h e l l G r o u p in its April 1998 a n n u a l r e p o r t said it fired 23 of its workers o n ethical grounds a n d terminated contracts with 95 firms, also o n ethical grounds (Walsh, 1998). It is now clear that J a p a n has b e e n paralyzed for years t h r o u g h being unable to disentangle its o p a q u e systems which are resting o n bribery a n d extortion. Similarly in China, there is a strong history of guandao (official corruption) that, according to Walsh, is m o r e pervasive than that in J a p a n . President J a i n g Zemin declared war o n this 'evil' once it became obvious that a $2.2 billion scandal h a d involved C h e n Xitong (who was a former Party chief a n d Politburo m e m b e r ) a n d his deputy Wang Baosen (who killed himself). Altogether some 500,000 persons in China in recent years have b e e n r e p r i m a n d e d or p u n i s h e d for taking kick-backs, b u t the use of extortion is still rife in China: Walsh (ibid). I n d e e d a cursory review of the Englishlanguage press reporting o n China (and m o r e widely o n Asia) raises these issues frequently. Thus we have to suppose the following r e c o m m e n d a t i o n of the OECD will prevail:

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John B Kidd & Frank-Jurgen Richter

In 1994, the OECD Council adopted the 'Recommendation on Bribery of Foreign Public Officials in International Business Transactions', which calls on Member countries to act to combat illicit payments in international trade and investment. As part of that Recommendation, reference was made to the need "to take concrete and meaningful steps including examining tax legislation, regulations, and practices insofar as they may indirectly favour bribery": C (94) 75. Following this, the OECD's Committee on Fiscal Affairs undertook an in-depth review of tax measures that may influence the willingness to make or accept bribes. The Committee concluded that bribes paid to foreign public officials should no longer be deductible for tax purposes, which will require many Member countries to change their current practices [emphasis by John Kidd] [The Recommendation was adopted by the Council of the OECD on 11 April 1996, and ratified by many of the OECD countries by 1997]. It is thus quite alarming, as we m e n t i o n e d above, to find the Bush administration is now inclined to relax their b a n k i n g rules that d e m a n d e d a careful investigation of persons who wished to deposit m o r e than $10,000 as cash. This base level ruling has evolved across the world to guard against the deposition of illicit payments, or ' h o t ' money, into an official b a n k i n g e n v i r o n m e n t where, once the money is deposited, the depositor has access to 'clean', or as o n e may say — ' l a u n d e r e d ' — money.

Corruption Perception Index Transparency International (TI), located in Berlin, was set u p in the early 1990s to help combat corruption a n d it now has National Chapters in 77 countries. Its website [http://www.transparency.org] declares: Transparency International is a non-governmental organisation dedicated to increasing government accountability and curbing both international and national corruption. Our movement has multiple concerns:

Corruption

and Its Measures

9

•

humanitarian, as corruption undermines and distorts development and leads to increasing levels of human rights abuse; • democratic, as corruption undermines democracies and in particular the achievements of many developing countries and countries in transition; • ethical, as corruption undermines a society's integrity; and practical, as corruption distorts the operations of markets and deprives ordinary people of the benefits which should flow from them. We will highlight o n e of their indices relating to the perception of corruption that they first began publishing in 1995. O n e should note that they, a n d we, have to accept these measurements as 'being in the eye of the b e h o l d e r ' — h e n c e their use of the word perception — since there are n o absolute measures. T h e OECD r e c o m m e n dation (above) is indicative of the same problem — decrying the official acceptance of bribery as a tax-deductible item of expenditure which a c c o u n t a n t s in many countries a r o u n d world h a d o n c e t h o u g h t quite acceptable. Transparency I n t e r n a t i o n a l has m o r e recently developed an Annual Global Corruption Report (GCR), which in 2001 is being funded by grants from the British, Dutch, G e r m a n , a n d Norwegian governments. TI produces statements essentially saying they wish to keep corruption a p r o m i n e n t item o n international policy agendas, a n d that the GCR will serve as a central e l e m e n t in TFs advocacy work. F u r t h e r m o r e , a n d I quote from their web site again, "The GCR will also contain a separate empirical section... TI will solicit contributions from leading scholars and institutions engaged in empirical research on corruption for this section... These contributions will enable this section of the GCR to reflect the "state of the art" in knowledge on corruption, as assessed from the perspective of various organisations - public sector, private sector, and academia". But what of their 2001 Corruption Perception I n d e x (CPI)? "This year's index, published by the world's leading non-governmental organisation fighting corruption, ranks 91 countries. Some of the richest countries in the world — Finland, Denmark, New Zealand, Iceland,

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John B Kidd & Frank-Jursen Richter

Singapore and Sweden — scored 9 or higher out of a clean score target of 10 in the new CPI, indicating their very low levels of perceived corruption. But 55 countries — many of which are among the world's poorest — scored less than 5, suggesting high levels of perceived corruption in government and public administration. The countries with a score of 2 or less are Azerbaijan, Bolivia, Cameroon, Kenya, Indonesia, Uganda, Nigeria and Bangladesh". Peter Eigen, the chair of TI, continues, "The new [CP] Index illustrates once more the vicious circle of poverty and corruption, where parents have to bribe underpaid teachers to secure an education for their children and under-resourced health services provide a breeding ground for corruption. The world's poorest are the greatest victims of corruption. Vast amounts of public funds are being wasted and stolen by corrupt officials." We will n o t r e p r o d u c e their index in its entirety, after all this book focuses o n corruption in Asia, b u t we will rearrange the data to be related to issues that might be relevant to the Ministers in Singapore (as p e r Figures 1 a n d 3). Some while ago a formula was derived (Kogut & Singh, 1988) which allowed o n e to create a simple comparison against a target — in fact they applied their formula to the data collected by Hofstede o n cultural differences (Hofstede, 1980 & 1991). They showed how to c o m b i n e the four original Hofstede measures into o n e index that would be suitable for ranking against a target profile — as we m e n t i o n e d above, we will take the profile of Singaporeans as the target to c o m p a r e with o t h e r countries. It is thus possible to plot the relative rankings with respect to cultural difference [from the zero base of Singapore] against cross-related national corruption figures. We d o this in Figure 1. Note that the clustering ellipses are only to draw attention to three groups of data points — they are n o t derived from a mathematical algorithm. It seems quite clear that Singaporeans would prefer to work with people from H o n g Kong, as they are close to Singapore o n the cultural difference scale, a n d n o t distant with r e s p e c t to corruptibility. O n the o t h e r h a n d , they may wish to work with those culturally close r a t h e r than with persons holding m o r e different views a n d or ethics. Yet, as the two larger clusters indicate, most of

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the asian countries (which we suggest might be culturally closer to the Singaporeans) are m u c h m o r e corrupt than the Singaporeans; b u t those countries which are similarly c o r r u p t (little distant from Singapore o n this measure) are rather far away w h e n considering cultural differences. Of course we may p r e s u m e for the Singaporean government these data raise problems for their future international relationships. They have said they wish to have bi-lateral trade agreements with many countries rather than follow the World Trade Organisation suggestion of having multi-lateral agreements. But which countries should be their targets?

Opacity Index Recently, PricewaterhouseCoopers (PWC) at the 2001 annual meeting of the World Economic F o r u m in Davos, Switzerland i n t r o d u c e d a new index of corruption. In fact, it is a broad measure covering five sectors d e e m e d to be i m p o r t a n t to businesses venturing across their national borders. T h e PWC Opacity m o d e l 'CLEAR' encompasses corruption, legal, economy, accounting a n d regularity opacity. In their 'Opacity I n d e x ' any increase above a nominal base in o n e or m o r e of the measures raises the opacity of doing business "over there", a n d thus raises the perceived difficulty of the venture. We illustrate their m o d e l in Figure 2, a n d note that greater detail may be obtained from their website [http://www.opacityindex.com/] where a full discussion is offered of how their data was elicited a n d compiled into a c o h e r e n t index. PricewaterhouseCoopers say in their 'opacity' web site: "Opacity a n d Transparency are the master terms in a truly i m p o r t a n t worldwide dialogue. This site is dedicated to presenting a n d hosting informed discussion of a new Opacity Index, which measures the opacity of a growing n u m b e r of countries in all parts of the world". They continue, "Opacity is said to a d d m o r e than $160 billion to countries' annual borrowing costs". It may seem clear t h a t the Opacity I n d e x (OI) is in many ways c o m p a t i b l e with t h e CPI of T r a n s p a r e n c y I n t e r n a t i o n a l .

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Indeed, Figure 3 shows the relationship between the OI a n d the CPI does have a good [statistical] correlation (R 2 = 0.62) — b u t n o t all data from b o t h sets can be correlated d u e to a lack of overlapping measures. It is clear that Singapore (if we continue to focus o n this country) scores relatively too low against the regression line — suggesting it is m o r e transparent t h a n might be expected. But o n the o t h e r h a n d , we may see that China (absolutely m u c h m o r e corrupt than Singapore) is seen also to b e m o r e o p a q u e t h a n the regression line would lead o n e to expect. E n t r e p r e n e u r s from Singapore might be a little shocked to find the reality (as expressed by this figure) is n o t as they might have h o p e d it to be as they attempt to create a j o i n t venture (Chan & Tong, 2000: 79). These remarks will be amplified slightly below.

The Business of Asian Business We have to u n d e r s t a n d guanxi, the Chinese word for 'networking' (Lou, 2000). We accept this concept pervades the whole of Asian business, as does the word itself having m i n o r changes to spelling a n d p r o n u n c i a t i o n as o n e passes t h r o u g h different Asian countries. Yet its m o d e of use should n o t be taken for granted — especially when focusing o n expatriates (Pyatt et al., 2001). In a study centred on the traditions of family business in Hong Kong and Thailand, these authors found that the firms they had studied had managed to disentangle cultural and relational components from the transactional and pragmatic (as noted in Donleavy, 1995). However they cautioned against exaggerating the scope and domain of these Chinese forms of organisational architectures. They further noted that the Chinese sojourners in the 'outposts' of Hong Kong and Thailand have no greater affinity with each other locally (as diaspora) than with their counterparts in Europe, America or other countries; or indeed as between the 'British' in the US or in Australia with those in the 'homeland'. On the other hand, they concluded, the elite in the major entrepreneurial firms have strong linkages that go beyond kinship to

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support their trade. Perhaps we may question if it is these forms of hidden links that may support corrupt practices as a way if tying-in senior managers into a wide web of intrigue? John Child and others further caution us, 'the outsiders', in a report to the Hong Kong Chamber of Commerce. They warn us, 'don't get into any relationship that depends on guanxi — you don't understand it' (Child et al, 2000). In other words with respect to guanxi, given that in its promotion many banquets are given, as well as many gifts exchanged (together with other giving of favours) it is very difficult for an outsider to understand the complex net of personal relationships. Thus staying outside is quite a positive policy — but if outside, one will suffer the fate of the outsider — one is starved of insider information. Finally, perhaps we have to accept the complex history that China has had. We note that the relatively recent Cultural Revolution left many without good education and which allowed a cadre to develop who were eventually seen to be corrupt and who condoned corrupt practice. We are reminded by Wu Wei-Ping of the film Farewell to My Concubine... in which two childhood friends were turned against each other (Wu, 2000). In the Cultural Revolution it was commonplace, and in that non-ideal world it was understandable that children turned against parents, spouse against spouse, and so on — simply to survive, to have a reward, or to be promoted. It is against this background we have to consider the wide spectrum of corruption, not just in China, but also across the whole of Asia. The Structure of the Book One of the strengths of this book is that it does not adhere to the sanctity of Western beliefs — of the firm, organization or institution — with respect to 'corruption'. Rather, it reviews the tenets underpinning this activity that ought to lead to a lessening of corruption however promoted in all nations; it then goes on to review specifically how this may take place in Asia from the viewpoint of specialists in Asian matters.

Corruption

and Its Measures

17

Many management theorists spend a great deal of time refining their analyses of trade effects, for instance, on how Foreign Direct Investment (FDI) and other financial support is helping a country or commercial sector to grow and reach out to the global trade that is apparent in several economic sectors. There are also many multinational enterprises which are studied, in depth, in order to ascertain how they modify regional and national economies through their involvement in local or national processes in developing countries. These investigations become well cited Case Studies. However these analyses often miss the [often] enormous cash flows predicated upon corrupt practices. We might say therefore that the analysis of the upperworld, in omitting the distortions arising from the underworld, yields a biased view of 'best practice' and/or exemplary performance. This book illustrates the breadth of these distortions, notwithstanding the frequent avowals of national leaders that they are stamping out black (or gray) practices in their countries. Part 1: An Introduction

Chapter 1 by John Kidd has noted that no country is free and blameless in this debate — developed countries' organizations and their managers are not exempt, but they are in general less corrupt than their counterparts in developing nations. However, as the developed world is looking to Asia as a vast marketplace in the near-term future, it is pertinent to review the interaction of Occidental and Oriental business methods, and take cognizance of their ethics and their corruption management practices. Very many governments have Charters and Ministries acting against corruption and many are signatories of the OECD charter against corruption. All have official statements to make on how they are combating corruption in their country... but observers say otherwise. Earlier, this very chapter by way of an introduction has noted that corruption is widespread and that there are several measures that may be employed to gain an appreciation of its magnitude before making an alliance contract in a target country.

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John B Kidd & Frank-Jurgen Richter

Part 2: Combating Corruption, Money Laundering and Crime In Chapter 2, Enery Q u i n o n n e s writes u p o n the development of the OECD studies o n corruption that led to the convention against c o r r u p t i o n . H e r e i n she begins by informing us of the core of countries, only 30 or so, which have signed the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. To get to this position she outlines the growing awareness by institutions, ministries, firms a n d individuals of the cost of corruption a n d its disrupting effects. T h a t these official activities have b e e n enacted only t h r o u g h the 1990s seems to be an indictment of m o d e r n society — b u t it is t h r o u g h these measures we h o p e we can make global progress. Peter Lilley in C h a p t e r 3 illustrates the vast reach of the money l a u n d e r i n g s c h e m e s globally a n d in p a r t i c u l a r in Asia, while elsewhere it is estimated by US law enforcement that West Africans a n d Southeast Asians using West African Couriers wash s o m e $500,000 on a weekly basis (Lilley, 2000). H e notes that in May 2001 the Malaysian Finance Minister, Daim Zainuddin c o m m e n t e d that the washing of dirty money gives "wicked legitimacy to proceeds acquired t h r o u g h d r u g trafficking, extortion a n d arms smuggling". Thus we n e e d to counter the ease by which this process is conducted, since corruption raises the costs of contracts whilst further debasing the poorest in our societies. H e also notes the corrupt e n v i r o n m e n t in Indonesia is immediately a p p a r e n t t h r o u g h its escalating moneyl a u n d e r i n g problem. Their general picture is saddeningly familiar, with o n e critical factor being that their national police lack sufficient resources, training or expertise to tackle the serious problems that they face. In Chapter 4 Leslie Palmier notes... 'the State, when weak, is perceived to be partial, so traditional loyalties are aroused, which f u r t h e r weaken t h e State'. It is c u s t o m a r y to invoke ' m a r k e t pressures' to explain western commercial behavior, while 'peer group pressures' are used to explain individual activity. Similarly, it would s e e m a p p r o p r i a t e to i n c l u d e ' t r a d i t i o n a l g r o u p p r e s s u r e s ' in

Corruption

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19

analyzing corruption in developing countries, in Asia as elsewhere. However, such pressures are perhaps best seen as permissive a n d supportive, n o t a determinant. More i m p o r t a n t is the presence of opportunities, which usually m e a n s the i n d u c e m e n t of money. T h e m o r e of it that passes t h r o u g h the h a n d s of State officers in a weak State, the m o r e will stick to their fingers. T h u s w h e n law a n d order break down and are not quickly restored, the State is perceived to be partial towards the lawbreakers. H e also presents the case of Indonesia. In Chapter 5 Anatoly Korchagin & Alex Ivanov offer us a view from Vladivostok in Eastern Russia — an i m p o r t a n t portal between Asia a n d E u r o p e (though i n d e e d far from Western E u r o p e ) . They suggest that Russia (the government) itself is gradually b e c o m i n g the fiction, because the people, out of their practical n e e d to survive, go over to an illegal way of life. This threat is so real that now the "Russian mafia" (to p u t it exactly — organized crime) is described as a serious actor in the reshaping of the world's economy a n d territories — in all countries, especially in the developing ones. Strictly speaking, there is n o t h i n g strange a n d unusual in this — it is simply the r i p e n i n g of the harvest that h a d b e e n planted d u r i n g the process of breaking down Russia. But even h e r e — in the Wild East, so to speak — they emphasis, as a conclusion, that it is possible to specify that the systemic character of corruption in a m o d e r n society should be opposed by a systemic counteraction — so with c o u n t e r m e a s u r e s in place we s h o u l d see a g r a d u a l r e t u r n to 'normality'. In Chapter 6 Hock-Beng C h e a h notes, from a quotation in 1999 by the US Customs: that IPR theft hurts n o t only o u r national economy, b u t o u r world economy as well. This crime is already costing industry approximately 200 billion [US] dollars... a year in lost revenue a n d nearly 750,000 j o b s . . . O u r investigations have shown that organized criminal groups are heavily involved in tradem a r k c o u n t e r f e i t i n g a n d copyright piracy. They often use t h e proceeds obtained from these illicit activities to finance other, m o r e violent crimes.

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C h e a h goes o n to state that TRIPs [the A g r e e m e n t o n TradeRelated Aspects of Intellectual Property Rights] is being used as a protectionist instrument allowing large corporations use intellectual property rights (IPR) to protect their markets, a n d to prevent c o m p e t i t i o n . An excessively high level of intellectual p r o p e r t y protection required by TRIPs has shifted the balance away from the public interest, towards the monopolistic privileges of IPR holders. This u n d e r m i n e s the sustainable development objectives that u n d e r p i n [the E u r o p e a n Union's] development policies that are being generally p r o m o t e d in Asia t h r o u g h the W T O . H e goes o n to discuss theft of software IPR noting the available evidence suggests that overall in 2000 approximately one-quarter of the total global revenue losses occurred in Asia. H e concludes, n o t i n g the progression from stage 1 to stage 2 of the IPR laws, that... even in the somewhat arcane a n d esoteric realm of IPR there are serious developments that have the potential to arouse grave concerns a n d resentments in Asia, in the USA a n d elsewhere. In Chapter 7 Francois-Yves D a m o n concentrates o n the legal aspects of corruption as n o t e d in official reports of convictions for corrupt practice. H e suggests that corruption is o n e of the biggest political a n d economic challenges that face China in the twentyfirst century. Conservatively it is estimated to cost some 13-16% of China's GDP — thus corruption is a h u g e economic loss a n d is a social pollution. It contributes to problems such as environmental d e g r a d a t i o n , social a n d political instability, a n d the decreased credibility of government officials. According to surveys c o n d u c t e d in 1998 a n d 1999, the Chinese people viewed corruption as the n u m b e r o n e factor contributing toward social instability. However, in 2000, fearful of the i m m i n e n t pains of economic reform, the Chinese people n a m e d u n e m p l o y m e n t a n d the fear of being laidoff, ahead of corruption, as the primary sources of social instability (Hu, 2001). It is h o p e d that this grass-roots fear does n o t detract from the higher officials search a n d reaction against corruption since the latter evil may well enforce the ill-rest due to unemployment.

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Part 3: National Comparisons throughout South and East Asia Dominic Sculli in Chapter 8 leads us immediately to a consideration of 'culture'. H e notes o n e should n o t b e looking for a single p o i n t in t h e m u l t i - d i m e n s i o n a l cultural space, b u t r a t h e r trying to eliminate certain aspects a n d thus h o p e that a small e n o u g h space remains in which the core of Asian cultural values abides. However, we have to recognize that the Asian continent takes in a large part of Russia a n d even in a sense, the Middle East, including Israel. Also included in the region there is the large a n d diverse Indian subcontinent a n d many Islamic countries, stretching as far southeast as Indonesia a n d the southern Philippines. Therefore, in the context of this chapter, 'culture' essentially refers to the culture of China a n d to that of some of its neighbors, particular those with some historical influence from China, such as J a p a n a n d Korea. Cross-cultural research into different m a n a g e m e n t styles attempts to d e t e r m i n e the effect of the level of industrialization a n d also the role that culture plays — the general finding is that the m a n a g e m e n t style is a function of t h e level of industrialization, b u t is also t e m p e r e d by cultural characteristics. T h e same question can b e posed c o n c e r n i n g corruption: to what extent is it d e p e n d e n t o n the level of industrialization a n d to what extent is it d e p e n d e n t o n culture? H e concludes that certain characteristics of Asian culture may give the impression that it is m o r e p r o n e to corruption, yet the proposition that a firm link exists between culture a n d corruption seems untenable. However, corruption will b e c o m e m o r e organized a n d possibly m o r e efficient w h e n a clear authority [governance] is established o r w h e n the rule of law is m o r e strongly enforced — which inevitably occurs as a nation state develops a n d b e c o m e m o r e sophisticated. Chapter 9 by Gilbert Etienne illustrates a wide view. H e has traveled extensively in Asia over a long period a n d thus has formed a distinct view u p o n the different reactions to corruption, country by country. In particular h e focuses u p o n the economy of seepage a n d leakage that goes beyond corruption. H e suggests the p r o b l e m seems to have three tiers: misallocation ( t h r o u g h weak administra-

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tions a n d infrastructures for instance), general loss of revenue (due to fraud), a n d simple corruption (including malpractice). Clay Wescott in Chapter 10 allows us to reflect o n modern-day corruption in Asia t h r o u g h the anti-corruption campaigns being enacted in four countries in South East Asia — h e examines the progress of the authorities in Cambodia, Laos, Thailand a n d Viet Nam as they set u p effective institutions to fight corruption in the public sector. H e makes comparisons by drawing o n governance assessments recently carried o u t by the Asian Development Bank. Anti-corruption efforts in these four countries reveal b o t h similarities a n d d i f f e r e n c e s , m a k i n g t h e s u b - r e g i o n i n t e r e s t i n g for comparative analysis of the causes a n d consequences of different approaches. Thus h e makes r e c o m m e n d a t i o n s b o t h for improving ongoing efforts at the country level, a n d for j o i n i n g forces at the regional level. In Chapter 11 by S c h r a m m & Taube we find a detailed study of guanxi. They examine the p h e n o m e n o n of corruption in China using the instrument of 'the new institutional economies'. Their goal is n o t to illuminate the relationship between the parties involved in corruption using a principal-agent analysis. Instead, their analysis focuses o n the institutional framework for corrupt transactions in China whose goal is to prevent opportunistic behavior of o n e of the involved parties. In this respect, they will examine especially the relationship between corruption a n d the guanxi networks; and, in addition, how they are affected by the (non-) existence of a functioning legal system. Moving o n we see in Chapter 12, by Moon & McLean, that Korea has h a d a positive stance against corruption from 1960 w h e n General J H Park seized power. Since that time, especially in recent years, they have realized that their rapid growth in their economy has rested u p o n u n s u r e foundations based o n corrupt practices. Corruption, they emphasis, is a multifaceted p h e n o m e n o n — it comprises many factors a n d c o m p o n e n t s : socio-economic, cultural, politico-systematic, bureaucratic-administrative, psychological, a n d so on. This multifaceted aspect of corruption must be taken into account if anticorruption efforts are to succeed. They conclude that

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it will require a gradual, evolutionary process of massive cultural change which must be widely supported by the populace a n d those in l e a d e r s h i p . W i t h o u t s u c h a c o m m i t m e n t , t h e n e g a t i v e consequences of corruption will continue to i m p e d e South Korea's economic, political, a n d moral development. C h a p t e r 13 by Chat-Uthai & Mclean presents details of the situation in Thailand. T h e 2000 Corruption Perception Index (see http://www.transparency.org) has given Thailand a trust status that has deteriorated from the 34 t h rank (of 41 countries) in 1995 to a tied-for 60 t h rank (of 90 countries) in 2000. T h e Thai views of corruption are reflected in neat phrases which are used to describe the act of consuming the public wealth: "hot tea fees," "eating along the river tide," "gifts of good will," a n d the famous "white buffet" cabinet. This chapter explores how historically the Thai public has a c c o m m o d a t e d corruption, a n d it examines the range of corruption that now exists. It also provides r e c o m m e n d a t i o n s for anticorruption activities.

Part 4: Ethical Futures T h e chapters in the earlier sectors may have painted too gloomy a picture, so we will now review, briefly, what might be d o n e to help corrupt nations. In passing it would be quite fair to point o u t how the less corrupt nations (generally the developed ones) might p u t in place better filters a n d practices — perhaps to lead by example? We would conclude that the western managers lead, n o t by shouting, "look how good we are" — b u t by employing a degree of modesty, which might be well appreciated by Asian managers. Taek Kim in Chapter 14 describes the techniques a n d instrumental mechanisms for the control of corruption, casting light o n c o r r u p t i o n from many different viewpoints. Focusing o n four countries in Asia — H o n g Kong, Singapore, Malaysia a n d Korea — he considers the anti-corruption infrastructures a n d the corruption prevention systems of the first three countries in o r d e r to c o m m e n t on the situation in Korea. To gather primary evidence, the a u t h o r visited the I n d e p e n d e n t Commission Against Corruption (ICAC) in

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H o n g Kong a n d the C o r r u p t Practices Investigation Bureau (CPIB) in Singapore wherein their legislative instruments a n d their research data were the main focus. Finally, Lionel Stapley in Chapter 15 says that his p u r p o s e is to explore in general terms the dynamics c o n c e r n i n g the relationship between the 'corrupter' a n d the 'corrupted', a n d to help in the development of cutting edge practices that will reduce the chances of seduction into bribery. N o matter which society we are referring to we can be sure that bribery is c o n d e m n e d because of its i n h e r e n t inequity: yet, when a bribe is expected as part of a transaction it still presents us with a considerable moral dilemma. What, then, we might ask is right a n d ethical a n d just? By taking action to change the Asian culture to o n e where c o r r u p t behavior is internalized as unacceptable, we can directly influence the corrupter. In addition, those in the West can develop strategies a n d practices to ensure that those from the West who are likely to be seduced into corruption are sufficiently aware of, a n d able to control a n d m a n a g e their emotions, so that they will n o t act in corrupt ways.

References Baydoun N, Nisimura A & Willed R (1997) Reflections on the relationship between culture and accounting in the Asia-Pacific region. In: Baydoun et al. Accounting in the Asia-Pacific Region. New York, Wiley: 400-426. Chan KB & Tong CK (2000) Singaporeans doing business in China. In: Chan KB (ed.), Chinese Business Networks: State, Economy and Culture. Singapore, Prentice Hall: 71-86. Child J, Chung L, Davis H & Ng SH (2000) Managing Business in Mainland China: A Guidebook. Hong Kong, Hong Kong Chamber of Commerce. Condon P (2001) Report on Corruption in International Cricket. London, Anti-Corruption Unit, International Cricket Council, April: 75. Donleavy G (1995) Feudalism, ethics and postmodern company life. In: Stewart S & Donleavy G (eds.), Whose Business Values? Some Asian and Cross-Cultural Perspectives. Hong Kong, Hong Kong University Press. Gray SJ & Vint HM (1995) The impact of culture on accounting disclosures: Some international evidence. Asia-Pacific Journal of Accounting, 2: 3 3 43.

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Gray SJ (1996) International comparisons of business performance: measurement and disclosure issues. International Review of Business, 1(1): 1-15. Hofstede G (1980) Culture's Consequences: International Differences in Workrelated Values. London, Sage Publications. Hofstede G (1991) Cultures and Organisations: Software of the Mind. London, McGraw-Hill. Hu A (2000) Corruption and anti-corruption strategies in China. Presentation to the Carnegie endowment for international peace symposium, Corruption in China, Centre for China Study, Chinese Academy of Sciences, Qinghua University, February 13 th (http://www.ceip.org/files/ events/AngangHuEvent.asp?p=l). Kidd JB & Richter F-J (2002) Governance in Asia. Forthcoming. Kogut B & Singh H (1988) The effect of national culture on choice of entry mode. Journal of International Business Studies 19 (3): 411-432. Lilley P (2000) Dirty Dealing: The Untold Truth about Global Money Laundering. London, Kogan-Page. Lou Y (2000) Guanxi and Business. Singapore, World Scientific. Phillips LD & Wright CN (1977) Cultural differences in viewing uncertainty and assessing probabilities. In: Jungermann H & de Zeeuw G (eds.), Decision Making and Change in Human Affairs. Dordrecht, D. Reidel Publishing. Pyatt R, Ashkanasy NM, Tamaschke R & Grigg T (2001) Transitions and Traditions in Chinese Family Businesses: Evidence from Hong Kong and Thailand. In: Kidd JB, Li X & Richter F-J (eds.), Advances in Human Resource Management in Asia. London and New York, Palgrave Press: 80-104. Salter SB & Niswander F (1995) Cultural influences on the development of accounting systems internationally./. Int. Business Studies, 26(2): 379398. Walsh J (1998) A World War on Bribery. Time, 22 nd June. Wu Wie-Ping (2000) Transaction cost, cultural values, and Chinese business networks: An integrated approach. In: Chan KB (ed.), Chinese Business Networks: State, Economy and Culture. Singapore, Prentice Hall. Zarzeski MT (1996). Spontaneous harmonisation effects of culture and market forces on accounting disclosure practices. Accounting Horizons, 10: 18-37.

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Chapter 2

The OECD Convention and Asia

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Introduction After years of discussing the pros a n d cons of various approaches to fight c o r r u p t i o n in business transactions, the world's largest exporting countries agreed on, 21 s t November 1997, the draft text of a legally binding convention b a n n i n g bribes to foreign public officials. With the participation of 30 OECD countries a n d 4 nonOECD countries, the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (generally known as the "Convention") laid the foundations for o n e of the first a n d most significant steps to combat international bribery. At present, all b u t o n e of the original 34 signatories have ratified the Convention, a n d 31 have national laws making it a crime to bribe a foreign public official in o r d e r to obtain or retain international business (see Table 1). Many c o m m e n t a t o r s welcomed the treaty as a l a n d m a r k in international co-operation; others have b e e n m o r e critical, noting its rather limited scope. As a so-called "supply-side" agreement, the Convention is aimed at the person who offers, promises, or pays a bribe, rather than the person who solicits or accepts the bribe.

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Country

1. Iceland

2. Japan 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34.

Germany Hungary United States Finland United Kingdom Canada Norway Bulgaria Korea Greece Austria Mexico Sweden Belgium Slovak Republic Australia Spain Czech Republic Switzerland Turkey* France Brazil* Denmark Poland Portugal Italy Netherlands Argentina Luxembourg Chile* New Zealand Ireland

Date of deposit of instrument of acceptance, approval or ratification

Date of examination by the working group

17 August 1998 13 October 1998 10 November 1998 4 December 1998 8 December 1998 10 December 1998 14 December 1998 17 December 1998 18 December 1998 22 December 1998 4 January 1999 5 February 1999 20 May 1999 27 May 1999 8 June 1999 27 July 1999 24 September 1999 18 October 1999 14 January 2000 21 January 2000 31 May 2000 26 July 2000 31 July 2000 24 August 2000 5 September 2000 8 September 2000 23 November 2000 15 December 2000 12 January 2001 8 February 2001 21 March 2001 18 April 2001 25 June 2001 Not Yet Deposited

October 1999 October 1999 April 1999 October 1999 April 1999 July 1999 December 1999 July 1999 April 1999 July 1999 July 1999 July 1999 December 1999 February 2000 October 1999 October 1999 February 2000 December 1999 March 2000 March 2000 February 2000 December 2000 December 2000 February 2001 April 2001 February 2001 April 2001 February 2001 June 2001

*As of 15 August 2001, these countries have not yet enacted implementing legislation.

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The "demand side" of bribery while not covered by the Convention, is addressed by other OECD initiatives that are described later in this article. As it stands, the countries bound by this Convention together account for 70% of world trade and 90% of foreign direct investment, and the reach of the Convention extends beyond the borders of these countries to the bribery of officials of nonparticipating countries. Most significantly, its landmark status is due, in large measure, to the multilateral process created by the Convention to control and monitor compliance. The Convention's rapid entry into force 1 and ratification by its members belies the long and difficult international discussions preceding its adoption. A failed attempt in the United Nations in the 1970's to negotiate an agreement against illicit payments did not auger well for international co-operation efforts in this area. However, the United States decided to take unilateral action when bribery scandals involving major American companies and officials from foreign countries revealed the extent of corruption in international business dealings. The United States' Congress adopted the Foreign Corrupt Practices Act (1977) that prohibited US companies and individuals from bribing foreign officials as well as foreign political parties or party officials to obtain or retain business. The US business community complained that the Act placed American companies at a substantial competitive disadvantage vis-a-vis companies from other countries that had no such restrictions. The OECD agreed to provide a forum where this debate among the US's major trading partners could take place and work began in 1989 with an inventory of country laws on corruption (Sacerdoti, 2000). Initially, many countries were reluctant to follow the US lead on the grounds that this might be perceived as unwarranted interference in the internal affairs of other countries. These, and other justifications for inaction, were swept away by the outcry caused by major corruption scandals in the early 1990s. Public awareness of corruption was also heightened by a growing body of economic 1

The Convention entered into force on 15 th February 1999.

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information revealing the consequences of corruption (Mauro, 1997), the causes of corruption (Cartier-Bresson, 1995), as well as the impact particularly o n p o o r a n d u n d e r d e v e l o p e d nations (Eigen, 1994). OECD countries began to accept responsibility for their part of the corruption, which even if taking place abroad, h a d negative impact on their own trading opportunities. It was clearly the time to abandon old double standards a n d find ways of co-operating o n multilateral actions to clean u p international business transactions. Reassessing the real cost of corruption has n o t b e e n limited to developed countries. T h e Asian financial crisis that began in July 1997 forced a r u d e awakening in many Asian-countries w h e r e complacency towards c o r r u p t i o n h a d b e e n sustained by strong economic growth a n d high levels of investment (Sullivan, 1999). T h e crisis revealed n o t only the structural weaknesses of some of these economies, but also the contributing role played by corruption, especially cronyism, in the crisis. This led several Asian countries to a d o p t anti-corruption reforms, including measures p r o m o t i n g accountability and transparency (Quah, 1999). Only two Asia countries take part in the Convention b u t several such as Singapore a n d H o n g Kong have b e e n signaled o u t as models for anti-corruption efforts in the region. Hopefully, the impact of the OECD anti-bribery instruments, the Convention a n d also the two related Recommendations 2 , will reduce the flow of corrupt payments worldwide by e n d i n g large corruption payments which occur in all countries (Pieth, 2000). T h e OECD action has, a n d should continue to catalyze anti-corruption efforts in o t h e r regions a n d organizations. T h e Organization of American States, the Council of E u r o p e , the E u r o p e a n Union, the United Nations, etc. are active a n d i m p o r t a n t players in the fight a n d their m e m b e r s are part of an ever-growing n u m b e r of c o u n t r i e s t h a t are striving to c o m e to grips with all types of corruption. While n o t h i n g can substitute for well-developed a n d

2

The 1996 OECD Recommendation on the Tax Deductability of Bribes to Foreign Public Officials and the 1997 Revised OECD Recommendation on Combating Bribery in International Business Transactions.

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implemented national programmes, joining forces through international or regional mechanisms such as that under consideration by the Asia-Pacific anti-corruption initiative described in Part 4 of this article, can be an effective way to support national reform and engage all segments of society. OECD Anti-Corruption Efforts The OECD has long held center stage in the battle against international bribery and corruption. Using its comparative advantage of building consensus on major issues, such as international corruption, through common interests and shared objectives, it helped forge one of the first international instruments to fight supply side bribery. The Convention represents the result of an ambitious undertaking that began with the development by the OECD of various instruments — the Recommendations of 1994, 1996 and 1997 — which culminated with the entry into force of the Convention in 1999. While the Convention focuses on the supply side of bribery, the demand side of the transaction is not neglected. It is recognized that well-functioning institutions and systems that promote ethical conduct in the public sector are needed to ensure integrity and fight corruption on the part of public officials. The OECD Public Management Committee has identified the institutions, systems, tools, and conditions that governments use to p r o m o t e ethics in the public sector — which are die necessary elements and functions of a sound ethics infrastructure. There is also a checklist and a set of principles to provide guidance for public managers on how to review their ethics management systems. The 1998 Recommendation on Improving Ethical Conduct in the Public Service builds on these ethics management principles (see www.oecd.org/puma/ gvrnance/ethics). Codes of conduct, across the board for all of the public sector, or by agency, can play a vital role in making clear the standards of behavior that are expected.

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The Anti-bribery Instruments

The overall purpose of these instruments is to prevent bribery in international business transactions by requiring countries to establish the criminal offence of 'bribing a foreign public official', and to have in place adequate sanctions and reliable means for detecting and enforcing the offence. They also include non-criminal rules for prevention, overall transparency and co-operation between countries. In addition, countries that join the Convention are also required to deny the tax deductibility of such bribes. This section looks at the main provisions of this treaty against bribery in international business transactions, as well as the accompanying non-binding recommendations. The Convention

The Convention is the principal tool for fighting bribery of foreign public officials. It requires that each party establish the criminal offence of bribery of foreign public officials. It further requires countries to establish the liability of enterprises ("legal persons") for the offence so that companies, and not just individuals, can be held accountable for bribery. The additional provisions in the Convention chiefly reinforce these requirements by provisions — to ensure its effective application and enforcement. The Convention is flexible in that parties may adapt the requirements according to their individual legal systems as long as the end result is the same (principle of functional equivalence). The offence of bribing a foreign public official must be established in the following manner: • It must apply to all persons, including enterprises and other legal entities. • It must apply to the offering, promising or giving of a bribe. It is an offence regardless if the offering, etc. is done through an intermediary and regardless if the advantage is for a foreign public official or a third party.

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• It must apply regardless of the form that the bribe takes. Thus the offering of an advantage that is tangible or intangible as well as pecuniary or non-pecuniary must be prohibited. • It must prohibit bribery for the purpose of obtaining or retaining "business or other improper advantage in the conduct of international business". This is not limited to the procurement of contracts, but also includes the obtaining of regulatory permits and preferential treatment in relation to taxation, customs and judicial and legislative proceedings. It is irrelevant that the person concerned was the best-qualified bidder or could properly have been awarded the business. And it is an offence irrespective of the value of the advantage, its results, perceptions of local custom, the tolerance of such payments by local authorities, or the alleged necessity of the payment. • A "foreign public official" must include any person holding a legislative, administrative or judicial office of a foreign country, whether appointed or elected; any person exercising a public function for a foreign country, including for a public agency or public enterprise; and any official or agent of a public international organization. This definition is part of the Convention and countries therefore need not look to the law of the country where the bribery took place to determine whether the person is a "public official" or not. Each Party must also satisfy the following requirements under the Convention: • Each party must establish effective, proportionate and dissuasive criminal penalties for the foreign bribery offence. Where a Party's legal system does not apply criminal responsibility to enterprises, they shall be subject to effective, proportionate and dissuasive non-criminal penalties for the offence. • Each party must establish its jurisdiction over the foreign bribery offence when the offence is committed in whole or in part in its territory. Where a Party has jurisdiction to prosecute its nationals for offences committed abroad, it shall establish such

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jurisdiction over the foreign bribery offence according to the same principles. • Where a party has established a money laundering offence in relation to the bribe and/or proceeds of domestic bribery, it shall do so on the same terms for foreign bribery. • Each party is required to prohibit certain accounting and auditing practices that facilitate the concealment of foreign bribery. • Each party is required to provide prompt and effective legal assistance to other Parties seeking assistance in the investigation and prosecution of foreign bribery offences. In addition, the bribery of a foreign public official shall be deemed to be an extraditable offence under the laws of the Parties and the extradition treaties between them. The Recommendations Reinforcing the Convention, the recommendations aim at increasing transparency and accountability and eliminating tax deductions for bribe payments. The 1997 Recommendation requires that countries introduce sound internal company controls, including standards of conduct and controls applicable down to the operational level. In the area of public procurement, companies responsible for bribing foreign public officials should be suspended from public contract bids. Countries undertake to include anti-corruption provisions in bilateral aid-funded procurement and to work closely with development partners to combat corruption in all development co-operation efforts. Until recently, many countries accepted the bribery of foreign public officials as a "normal" cost of doing business. Companies doing business with foreign countries claimed that bribe payments were necessary in order to be favorably considered for the awarding of contract — and so previously, by allowing tax deductions for such bribes, several governments were perceived as condoning this practice.

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Since agreeing to the 1996 Recommendation o n the Tax Deductibility of Bribes, almost all OECD countries now disallow such tax deductibility thus sending a strong signal that bribery is n o longer an acceptable business practice. Besides serving as a deterrent, nontax deductibility is a politically visible symbol of the c o m m o n international c o m m i t m e n t to combat bribery.

The Private Sector in Support of Anti-Corruption Efforts Reducing the supply of bribes requires m o r e than criminalizing the act of bribing a foreign public official. Businesses themselves must play a role a n d address the practice internally by changing the corporate culture that enables it to continue. To provide businesses with guidance in this regard, the OECD has revised the 1976 guidelines for multinational enterprises to include a new chapter on measures that enterprises should take to prevent the furnishing as well as the solicitation of bribes. In addition, the OECD principles of corporate governance that aim, in part, to improve disclosure a n d transparency in financial as well as o t h e r matters, can create an e n v i r o n m e n t that discourages bribery.

The OECD Guidelines for Multinational Enterprises T h e OECD's guidelines for multinational enterprises include rules for combating bribery that address the supply a n d d e m a n d sides of the bribery transaction (www.oecd.org/daf/investment/guidelines). They focus o n the bribery of public officials a n d the employees of business partners, as well as preventing the channeling of payments t h r o u g h the use of subcontracts, purchase orders a n d consulting agreements to public officials, employees of business partners, relatives a n d business associates. In addition, the guidelines address the issue of r e m u n e r a t i o n of agents. Further provisions require enterprises to a d o p t managem e n t control systems, including financial a n d tax a n d auditing practices, for discouraging bribery a n d corrupt practices, a n d

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requires them to promote public and employees' awareness of their programmes and policies in this regard. The guidelines also intend to prevent illegal contributions by companies to candidates for public office, political parties and other political organizations. Enterprises are urged to disclose political contributions. Some companies have established their own anti-corruption strategies, including the adoption of codes of ethical conduct that include provisions concerning bribery and extortion. These codes express the companies' serious commitment to comply with international obligations to combat corruption and are intended to modify the corporate culture and attitudes of its employees to reduce the risk of corrupt behavior. They are often accompanied by management systems for monitoring and reviewing compliance. Their success in changing behavior depends, to a great extent, on support by top company management. The OECD Principles for Corporate Governance The five chapters of the corporate governance principles addressing shareholders' rights, the equitable treatment of shareholders, the role of stakeholders, disclosure and transparency and the responsibilities of the board, comprise basic core principles that should be part of any good corporate governance system (www.oecd.org/ daf/governance/principles). An economy characterized by high standards of disclosure and one in which members of corporate management are accountable to their boards and the boards are accountable to their shareholders — including minority shareholders — will be one where financial fraud and other forms of financial crime will be less likely to flourish. The Principles are primarily intended to assist governments as they pursue their own efforts to evaluate and refine their national legal, institutional and regulatory frameworks. The OECD and the World Bank are now engaged in a co-operative worldwide effort, together with regional development banks and bilateral donor countries, as well as private sector participants, to encourage

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corporate governance reforms, using the principles as a starting point and c o m m o n language for policy-dialogue. Regional corporate governance roundtables have b e e n established in Asia, Latin America, Russia a n d Eurasia with the co-operation of regional partners. These Roundtables have b e c o m e natural reference points in their respective regions a n d "white papers" identifying policy objectives a n d reform priorities are being drafted in Asia, Latin America a n d Russia. This entirely voluntary process of implementation is h e l p e d by the high international standing of the principles a n d the considerable incentives provided by the market for international capital. T h e inclusion of the principles of corporate governance in the World Bank's a n d the International Monetary F u n d (IMF) assessment a n d surveillance of financial sectors is expected to give further impetus to reform efforts.

Enforcement through Monitoring By agreeing to a d o p t national laws making it a crime to bribe foreign public officials, the signatories of the Convention took a decisive step towards injecting, for the first time in international business transactions, a sense of morality a n d fairness. But signing the Convention a n d even making it part of national law, will n o t d o m u c h to change ingrained patterns of corrupt behavior unless t h e r e is a c r e d i b l e way to m o n i t o r w h e t h e r g o v e r n m e n t s are abiding by their obligations. Fortunately, the Convention contains an enforcement mechanism that makes it o n e of the most effective tools to combat international bribery a n d corruption. Thus, a country that joins the Convention a n d adopts i m p l e m e n t i n g legislation will be subject to a rigorous review of its efforts to enforce the Convention. It is the responsibility of the OECD working g r o u p on bribery in international business transactions (the "Working Group on Bribery"), to d e t e r m i n e , in a first phase, w h e t h e r the i m p l e m e n t i n g legislation meets the standards set by the Convention (Phase 1). As part of a later phase (Phase 2), it will assess how well the country in question is applying the Convention in practice.

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Findings Each year, the OECD reports to the ministers of m e m b e r countries o n the status of implementation of the Convention. So far, the working g r o u p o n bribery has reviewed the implementing legislation of twenty-nine countries 3 . In its latest report, the working g r o u p found that most countries have d o n e a satisfactory j o b of implem e n t i n g the requirements of the Convention (see www.oecd.org/ d a f / n o c o r r u p t i o n ) . Since Phase 1 aims to ensure that countries have correctly transcribed elements of the offence into national law, in certain cases Ministers have asked countries to take remedial action whenever significant deficiencies have b e e n found. Because the Convention works within a country's existing legal system, differences in the way countries have i m p l e m e n t e d the Convention are to be expected. Nevertheless, the Working Group's role is to ensure that there are n o t major discrepancies that would u n d e r m i n e the equal application of the Convention by all parties. It is particularly i m p o r t a n t that in their national laws, countries d o n o t create loopholes inadvertently or introduce provisions that might lead to inconsistent application. For this reason, whenever problems are identified, the Working G r o u p o n Bribery may r e c o m m e n d that countries consider changes in legislation to conform m o r e fully to the requirements of the Convention. Phase 2 will go even further to d e t e r m i n e how countries are applying the Convention in practice. To d o so, the Working G r o u p will look carefully at such issues as i m p e d i m e n t s to successful investigation, a n d the prosecution of foreign bribery cases a n d the adequacy of statutes of limitations. It will also d e t e r m i n e w h e t h e r political considerations have improperly influenced decisions to prosecute. Phase 2 will examine m o r e closely how countries are i m p l e m e n t i n g the non-criminal aspects of the Convention a n d the 3

Twenty-one countries were reviewed between April 1999 and May 2000, and an additional seven countries were reviewed May 2000 and May 2001. The individual country reports are available on the OECD web site. An additional country, New Zealand, was reviewed in June 2001 but this report is not yet available on the website.

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Recommendations, particularly those relating to accounting and auditing requirements to prevent bribery payments. The Convention was by no means the end of road for OECD anti-corruption efforts. Phase 1 and 2 may call for a re-evaluation of the existing instruments to ensure that there are no loopholes or gaps. Countries are also committed to examining other areas that relate to corruption in international business such as bribery to foreign political parties and bribery by foreign subsidiaries, to assess the extent of the problem and identify the most effective way to address them.

Does Peer Pressure Work? The Convention does not contain a dispute settlement mechanism nor does it foresee sanctions for parties that do not live up to their obligations. Thus one may query whether the "soft" approach of pressure by peers is sufficient to guarantee good behavior. So far we see the process is proving successful, if somewhat slow due to local parliamentary procedures that must be respected. Quite a few countries, including Japan and the United Kingdom have announced changes in their national laws largely as a result of the recommendations made by the OECD in reviewing their current legislation. The Working Group on Bribery is set to have another look at these and other recent measures taken by countries in response to their phase 1 reviews. The criticism of peers is made even more forceful by public scrutiny. Making country reports available to the public, including publication on the OECD's website, increases public pressure to effectuate changes. Civil society has taken a very active interest in the results of these evaluations and that plays a key role in maintaining public vigilance over government commitments in this area. Globalizing the Fight against Corruption Since its entry into force, the Convention has attracted increasing attention from countries that are not members of the OECD. The

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Convention is open to non-members and four non-OECD countries presently take part: Argentina, Brazil, Bulgaria, and Chile 4 . Many other countries have demonstrated an interest in associating themselves with the OECD fight against corruption. While recognizing that they have particular responsibility as major trading countries, OECD Members are aware that it is essential in an increasingly interdependent world, that all countries share responsibility for combating bribery. OECD governments therefore are keen to discuss ways to improve the effectiveness of the agreed international standards with all interested parties. A country that expresses a specific desire to join the Convention must first become a member of the working group on bribery. To do so, it must apply formally to the organization. In deciding whether to invite an applicant to join, other members of the Convention may well want to assess how the country interested in joining measures up against an objective set of criteria. These criteria include whether the applicant is a "major player" and whether the association will bring "mutual benefit". In applying these criteria, certain essential economic, institutional and legal factors will be examined, including a country's participation in sensitive sectors such as aviation or defense, and its existing legal framework to combat domestic corruption. A positive evaluation of a country's request may result in participation as an observer for an initial period of time or as a full participant. Not all countries engaged in the fight against corruption will join the Convention and the Working Group. They may decide that other regional initiatives are also compatible with their aims or they may well wish to improve links and co-operation without formal participation. This opens wide opportunities for additional regional events and the other sorts of dialogue and communication that the OECD organizes. The following section will briefly describe the regional dialogue with the countries of Asia-Pacific that is

4

Slovenia has been invited to accede to the Convention but as of 15 August 2001 has not yet deposited an instrument of accession with the OECD Secretary-General.

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leading to concrete anti-corruption action being taken in many Asian countries.

The Asia-Pacific Anti-Corruption Initiative In many countries of the Asia-Pacific region, corruption exists at all levels of dealings, between public officials a n d business people, as well as ordinary citizens. In Asia as elsewhere, the consequences of corruption o n economic development are particularly pernicious. Three years ago, the Asian Development Bank (ADB) a n d the OECD l a u n c h e d the regional forum o n combating corruption in Asia a n d Pacific economies. T h e idea of the F o r u m e m e r g e d from a m e e t i n g in Manila in September 1999 o n Combating Corruption in Asian and Pacific Economies that was sponsored by the OECD a n d the ADB. T h e meeting revealed a strong consensus to fight corruption o n several fronts a n d clearly showed that anti-corruption efforts in the Asia-Pacific region must engage all sectors of society. T h e forum identified some ways in which the different sectors could contribute to the fight against corruption: Public sector. G o v e r n m e n t measures to c o u n t e r corruption must be accompanied by law enforcement mechanisms, with a special role for the judiciary. Witness protection p r o g r a m m e s are also required to e n c o u r a g e reports of wrong-doing. Transparency can be e n h a n c e d t h r o u g h the establishment of competitive public p r o c u r e m e n t procedures a n d e n c o u r a g e m e n t of adoption of relevant international rules. Simplification of government procedures can help improve the conditions for international investment. Private sector and Trade Unions. Effective measures by business a n d trade associations can take many forms. These can be aimed at making company employees aware of corruption a n d educating t h e m against it through, for example, the development of codes of c o n d u c t a n d mechanisms to enforce the codes. In addition, it is effective to advocate of m o r e dialogue with public officials

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to propose a n d i m p l e m e n t reforms, including public sector reform, such as m o r e transparent p r o c u r e m e n t rules. Civil Society. T h e involvement of civil society a n d the media is a critical c o m p o n e n t in all anti-corruption strategies a n d can be particularly influential in i m p l e m e n t i n g civic education p r o g r a m m e s aimed at fostering an anti-corruption culture. These bodies help to relay policies by assuming greater responsibility for m o n i t o r i n g good governance a n d integrity in business a n d government operations. Regional a n d national networks for civil society as well as increased co-operation with international organizations can also help prevent the misuse of domestic resources. This m e e t i n g established the A D B / O E C D Initiative for Asia-Pacific whose objective is to support national a n d regional anti-corruption efforts. In a later follow-up m e e t i n g in the Republic of Korea, in D e c e m b e r 2000, it was a g r e e d to develop a r e g i o n a l anticorruption plan that would contain legally non-binding principles a n d standards for strengthening national a n d regional efforts to combat corruption. Presently, experts from nine Asian countries (Indonesia, J a p a n , Korea, Malaysia, Pakistan, People's Republic of China, the Philippines, Singapore, a n d Thailand) together with international organizations a n d others are drafting an action plan for Asia-Pacific. T h e plan would politically commit interested governments of the region to u n d e r t a k e actions to combat bribery a n d m o n e y l a u n d e r i n g a n d p r o m o t e public sector integrity based o n relevant international instruments a n d good practices, including the OECD anti-corruption instruments. Countries adopting the action plan would also agree to have their anti-corruption efforts regularly reviewed by their peers. At the same time, the international d o n o r community would pledge to strengthen country-capacities t h r o u g h technical co-operation. T h e draft action plan is now being circulated a m o n g ADB regional m e m b e r countries for their consideration of the possible endorsement at the next a n n u a l conference of the ADB-OECD anti-corruption

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initiative that will be hosted by the G o v e r n m e n t of J a p a n o n 2 8 - 3 0 November 2001.

Are Anti-Corruption Efforts Working? J u d g i n g from the plethora of international agreements, conferences, symposia, initiatives, scholarly articles, a n d the like, the rhetoric against corruption has certainly reached fever pitch. In the midst of this flurry of activity, o n e hardly dares to raise the question w h e t h e r the fight against corruption is actually being won. Certain type of information would suggest the contrary. T h e press continues to uncover almost daily allegations of corruption as well as instances of companies constituting illegal slush funds to pay bribes to foreign officials. Transparency I n t e r n a t i o n a l has published for the first time a bribe payers perception index in which some OECD countries, signatories to the Convention, are listed. In its C o r r u p t i o n Perception I n d e x of 2001, despite the advances m a d e by some Asian countries, still quite a few are represented in the b o t t o m half of the index. While this serves a vital purpose of keeping attention focused o n the n e e d to fight corruption, there is n o conclusive evidence proving that the international initiatives of the last few years, c o m b i n e d with a growing n u m b e r of countries i m p l e m e n t i n g comprehensive anticorruption strategies, are n o t having the desired effect of reducing the incidences of corrupt or illicit behavior. Perceptions change in t h e wake of legal a n d institutional c h a n g e s , which may n o t b e immediately apparent, a n d which take time to deliver "hard" results. This a u t h o r believes that m o r e time is necessary before final j u d g m e n t . N o o n e would dispute the fact that there has b e e n a seachange over the past fifteen years in governments' a n d international organizations' willingness to admit to the pervasiveness of corruption a n d to confront it head-on. Fortunately, n o o n e subscribes to the discredited theory that corruption brings some economic benefits, notably by way of cutting down bureaucratic decision-making. T h e economic evidence of the staggering cost of corruption a n d its

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impact on development has mostly demolished complacent attitudes towards corruption. But if heightened public awareness and increasing in-tolerance of corruption are more evident today than a decade ago, when will evidence emerge that the anti-corruption initiatives are beginning to bite? For national and international efforts such as those of the OECD Convention to bear fruit, certain essential elements are needed: The first element is strong political leadership. Collectively, through international or regional programmes, and individually, countries must provide political leadership demonstrating their commitment and ability to affect change. A second element is effective enforcement that includes a consistent and fair application of sanctions against wrongdoers. Countries must allocate sufficient resources to investigate and prosecute cases of alleged corruption. Openness to public scrutiny is the third element. By allowing public oversight and participation that includes the monitoring of countries' p e r f o r m a n c e vis-a-vis their commitments or obligations, governments can help build the confidence and trust in their citizenry that will begin to change perceptions. The foundations of anti-corruption strategies are mostly in place — although on a national and often regional level more can be done to develop, implement, and enforce these strategies. Especially important for Asian countries where p u b l i c / private partnerships are weak or lacking, governments need to work closely with the private sector to fully engage them as stakeholders in anti-corruption programmes. Company codes of conduct and compliance schemes, as well as improved corporate governance, can go a long way in shaping, or re-shaping, attitudes about acceptable business conduct. Civil society also has a key role to play in encouraging and supporting reforms and in harnessing community support for change. Until these measures have been allowed some time to take effect, it may be premature and

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perhaps, to some extent, counter-productive to begin to decry the failure of anti-corruption efforts.

References Cartier-Bresson J (1995) Leconomie de la corruption. In: Delia Porta, Donatella and Meny, Yves (eds.), Democratic et corruption en Europe. Paris, La Decouverte: 149-164. Eigen P (1994) Corruption, a catastrophe for developing countries. In: Due V. Trang (ed.), Corruption and Democracy. Budapest, Institute for Constitutional and Legislative Policy: 65-72. Mauro P (1997) "Why worry about corruption"? The Economic Issues, Series, Washington, The International Monetary Fund, 1997. Peith M (2000) From ideal to reality: Making the new global standard stick. In: No Longer Business As Usual: Fighting Bribery and Corruption. OECD, Paris: 51-65. Quah JST (1999) Accountability and anti-corruption agencies in the AsiaPacific region. In: Combating Corruption in Asian and Pacific Economies. Manila, Asian Development Bank/OECD: 101-124. Sacerdoti G (2000) To bribe or not to bribe. In: No Longer Business As Usual: Fighting Bribery and Corruption. Paris, OECD: 29-49. Sullivan PH (1999) The "Keynote Address". In: Combating Corruption in Asian and Pacific Economies. Manila, Asian Development Bank/OECD: 1-9.

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Chapter 3

The Asian Money Laundering Explosion

Peter Lilley

"Gold is tested by fire, man by gold" — Ancient Chinese proverb "True Gold fears not the test of fire" — Traditional Chinese saying

What Is Money Laundering? Whilst it is universally accepted a n d used incessantly, the phrase "money laundering" has n o single — or accepted — definition. Many perceptions still e n d u r e in the collective psyche of what money l a u n d e r i n g is: ranging from the suspicious character turning u p at a bank c o u n t e r with a suitcase overflowing with used notes, to the dictum that money laundering is solely drugs related predominantly, if n o t exclusively, focused o n t h e nefarious activities of South American gangs. Certainly this latter version of "reality" has b e e n p r o m o t e d by t h e US g o v e r n m e n t a n d r e i n f o r c e d by various Hollywood blockbusters. It is only recently b e c o m i n g clear (or at least clearer) that m o n e y l a u n d e r i n g is a robust, corrosive, all consuming a n d dynamic activity that has a series of processes which have far reaching financial, economic a n d social consequences a n d effects. At their zenith these effects engulf financial institutions, capital markets, currencies, interest rates, national economies a n d ultimately national, regional a n d international security.

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Drug money, although still an i m p o r t a n t part of the funds that n e e d to be washed, is merely o n e facet of a wide range of criminal activities that generate the money to be laundered. Such money is effectively useless unless the original source of it can be disguised, or preferably obliterated. T h u s the money l a u n d e r i n g dynamic lies at the c o r r u p t h e a r t of many of the world's social a n d e c o n o m i c problems. T h e list of crimes generating the dirty money includes — b u t is definitely n o t limited to — political corruption, illegal arms sales, terrorism, h u m a n trafficking, fraud, blackmail/extortion a n d customs a n d VAT fraud. Added to this list — or at least according to the pre-Bush US administration — is tax avoidance. But the new Bush Administration seem to be looking to allow m o r e o p e n 'avoidance' systems to be enacted in the US. In May 2001, the Malaysian finance minister, Daim Zainuddin c o m m e n t e d that the washing of dirty money gives "wicked legitimacy to proceeds acquired t h r o u g h d r u g trafficking, extortion a n d arms smuggling". Not only is m o n e y l a u n d e r i n g difficult to define b u t also the a m o u n t s involved are impossible to estimate. T h e United Nations H u m a n Development Report of 1999 stated that global criminal activity g e n e r a t e s $1.5 trillion each year; o t h e r estimates have concluded that money l a u n d e r i n g accounts for between 2 a n d 5 p e r cent of GDP — giving a global total of u p to $3 trillion p e r a n n u m . Whilst such estimates have b e e n dismissed in some quarters as alarmist, inaccurate or incorrect (or all t h r e e ) , it is actually highly likely that such staggering totals are an u n d e r estimate, r a t h e r than the widely assumed opposite. O n e m i n o r yet recent example was offered by T h e Wall Street J o u r n a l Europe, 18 July 2001 which r e p o r t e d that the Central Bank of Kazakstan confirmed that a "grey money" amnesty b r o u g h t in $480 million T h e m o n t h long "no questions asked" amnesty which e n d e d in the middle of July 2001 drew in money from over 3,000 people — b u t only 11.4% of the cash was repatriated from foreign bank accounts. Views o n the purpose of the amnesty were mixed: some commentators saw it as an antidote to previous chaotic tax regimes, whilst others saw it as a m e t h o d of legitimizing massive

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amounts of money obtained through bribery and corruption by officials. Money laundering is simultaneously both a staged process (placement, layering, integration) and a cyclical dynamic — with the end result that the profits from crime can be washed only to be reinvested in further criminal activities, which can be the same as those which originally generated the funds or new ventures. One obvious by-product of this dynamic flow is that the conditions and effects of the original environment(s) that facilitated the criminal events and resultant profits are maintained, reinforced and reinvigorated. The explosion in money laundering that has been ignited in the last few years has been fueled by some key factors, such as: • The globalization of markets, financial flows and information — most prevalent in the single global market of the Internet. Virtual money laundering is now a reality with money being transferred across the globe in nano seconds • Just as there is no global definition of money laundering, there exists no consistent or coherent anti-money laundering regulation or legislation (in fact in some Asian countries, there is simply no regulation or legislation whatsoever). Added to this important problem is lack of co-operation between individual countries: cooperation is increasingly needed to tackle pan-global washing of funds • A global unregulated market puts at its pinnacle the need for profit — sometimes at any cost. Criminal organizations and the funds that they generate can, and do, yield great influence in their relationships with the legitimate businesses that are driven by the need for turnover and profit. Simultaneously such unfair competition can drive legitimate concerns out of business, and at its extreme can threaten the economies of whole countries. • Running as a parallel stream to these factors is the rapid, and ever increasing, pace of technological-driven change. Criminals operate at the cutting edge of technology; sadly regulators and law enforcers do not

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The global impetus to fight money laundering comes from the basic premise that dirty money is the lifeblood of all criminal activity: if it can be identified and seized then crime will be stifled, and ultimately halted. Well, at least that's the theory... The Increased Relevance of Asia in the Global Money Laundering Dynamic The increased realization of the importance of Asia in both global geopolitical and geoeconomic terms has meant that money laundering has become a key issue in the region. That is not to say that money laundering in the area is a new event — quite clearly it is not — rather that it is now being discussed and (to varying extents) addressed. However because of the rapid pace of globalisation — as typified by the spread and reach of the Internet — discussion of money laundering purely in Asia is, in many ways, an artificial distinction. Moreover it is also important to distinguish between domestic money laundering (which is essentially money generated by crime and laundered in the banking system of the same country) and transnational money laundering (where the original criminal activity and the laundering are separated by one — if not numerous — national borders). It is not only because of these factors that generalizations relating to this problem in Asia are difficult. As a recent paper by the Malaysian central bank, quoted by Agence France-Presse on 21 May 2001, observed "Since money laundering is an international problem, a collective international and regional response is necessary in the fight against it — with globalization it has become an issue of global dimensions" Notwithstanding such caveats, estimates have placed the amount of money laundered annually in Asia at around 200 billion US dollars, or at least one fifth of the global total. Japan, for example, investigated at least seven billion dollars worth of suspicious transactions in fiscal 2000 — a rate of between 100 and 200 each week.

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Interestingly though, T h e Financial Action Task Force (FATF) seem to h a v e s o m e w h a t o v e r l o o k e d p r o b l e m s in Asia w h e n t h a t organization n a m e d countries that are uncooperative in dealing with money laundering. T h e two FATF "blacklists" issued in J u n e 2000 a n d 2001 have included three Asian countries: Indonesia a n d Myanmar (included in the 2001 list for the first time) a n d the Philippines (which is o n both lists, a n d in the J u n e 2001 list, is o n e of the top three targets for action, together with N a u r u a n d Russia) (FATF, 2000a, 2000b, 2001a, 2001b). T h e r e are some factors which are u n i q u e to Asia (or parts of it) that facilitate money laundering. These include: •

An economy still based o n cash transactions, which in turn leads to a willingness to conduct large transactions by cash (This creates special difficulties for a "western"-based money laundering regulation system, which has as a fundamental tenet the highlighting of large cash transfers as being suspicious transactions) • N u m e r o u s u n d e r g r o u n d banking a n d remittance systems (such as "hawala" a n d "hundi") which operate as traditional cash a n d trust based processes. In India, Pakistan a n d Dubai, the Hawala system creates significant m o n e y l a u n d e r i n g problems. And of course o n e of the problems is that it is very difficult to distinguish between legitimate transactions a n d those involving m o n e y laundering. Because such systems are n o t designed to deal with "official transactions" they provide complete confidentiality a n d n o p a p e r trail. They are essentially based o n trust, a n d involve n o physical transfer of funds: rather a hawala broker in o n e country essentially arranges for his client for a broker in a n o t h e r country to make a payment to the i n t e n d e d beneficiary. Increasingly the funds to be "transferred" are paid in gold to the brokers, who have later to rationalize their own 'interbanking' levels a n d fund flows. T h e 'transfers' are between the brokers so will consist of b o t h legitimate transactions a n d money laundering. • T h e region contains various major narcotic p r o d u c t i o n areas, the two principle being the Golden Crescent of Afghanistan, Iran

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a n d Pakistan) a n d the Golden Triangle of Thailand, B u r m a a n d Laos. Whilst t h e obstacles of m o n e y l a u n d e r i n g a n d corruption are present in each of these countries the most corrosive effects can be seen in Myanmar. T h e G o v e r n m e n t has arranged a series of cease-fire agreements with rebel groups for decades; however such agreements have simply m e a n t that d r u g cartels have b e e n able m o r e easily to traffic their opium, heroin a n d m o r p h i n e . Such p r o d u c t i o n (which has increased since 1989) effectively means that the economy of Myanmar is p r o p p e d u p by dirty money which is being l a u n d e r e d there. • Across Asia there are serious problems with product counterfeiting — c o m p u t e r software a n d music CDs are t h e m o s t usually reported illegal products; however there are many m o r e — China is a substantial p r o d u c e r of counterfeit cigarettes, for example. Such widespread illegal m a n u f a c t u r i n g activities are almost exclusively the d o m a i n of organized crime groups, most of whom are both highly efficient a n d very influential. Their activities create substantial volumes of funds that n e e d to be washed a n d these give them the ability to corrupt weak officials and politicians, a n d to infiltrate their ranks. • In 2001, the US D e p a r t m e n t of State c o m m e n t e d that in Asia "weak governments with poorly developed a n d financed law enforcement infrastructures provide fertile environments in which d r u g trafficking organizations have flourished" (US D e p a r t m e n t of State, Bureau for International Narcotics and Law Enforcement Affairs, 2001). A n d as if to show b o t h the diversities of the region a n d the flexibility a n d agility of money launderers, the washing cycle is encouraged a n d achieved by countries that either (i) have highly developed banking systems (thus compliant professional advisors), or (ii) in those countries with u n d e r d e v e l o p e d b a n k i n g a n d legal systems.

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In the former, l a u n d e r i n g can be h i d d e n , a n d in the latter there is little risk of detection. Global m o n e y l a u n d e r i n g has b e e n substantially aided by the I n t e r n e t explosion. In this respect Asia has a further handicap: the r e g i o n lags b e h i n d in the r e l a t e d areas of c o m p u t e r security, the prevention of cyber crime, a n d its investigation a n d prosecution. Criminals optimize the benefits of cutting edge technology, a n d thus Asia's lack of relevant laws a n d resources to tackle the p r o b l e m may well prove to be the biggest security threat in the region. Each day millions in Asia log o n t o the Internet, in J a p a n alone there are 60 million mobile p h o n e users, a n d China's population now have m o r e mobiles than are owned in the United States. Interpol has highlighted that hacking is already a considerable problem: in South Korea incidents (or we should say r e p o r t e d incidents) against state a n d business organizations rocketed by 400% in 2000 (as r e p o r t e d by the Australian Broadcasting Corporation o n 27 February 2001). T h e overflow of such activity in Asia has already b e e n felt the world over, thanks to the "I love you" virus which originated in the Philippines b u t caused worldwide computer disruption a n d damages estimated in the region of 18 billion dollars. Whilst many now realize the real threats posed in Asia by the criminal usage of technology, relevant laws are still few. It has b e e n argued that Asian firms lag b e h i n d the U n i t e d States by 18 m o n t h s to three years in security developments. Evidence already available supports that view that organized crime groups in Asia show n o such resistance to technology, a n d are already maximizing its use (Lilley, 2000).

Money Laundering Typologies in Asia T h e money l a u n d e r i n g typologies utilized (or at least those that have b e e n identified) in Asia are virtually identical to those utilized across the world. T h e only key differentiating factor is that the actual composition of m e t h o d s may vary from o t h e r regions. Particularly prevalent are:

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• Cross border smuggling of cash a n d / o r money orders and bank drafts • The use of telegraphic transfers • The utilization of bearer instruments (including bank drafts, stock certificates, insurance certificates, bonds) • The purchase of items of value to launder funds (such items include the usual favorites of luxury goods, gold, cars, and real estate) • The opening of accounts at financial institutions in false names • False invoicing Transparency International, in their annual Corruption Perception index, which in turn is a telling evaluation of those countries with severe money laundering problems highlights the wide disparities present in Asia. In the 2001 index (Transparency International, 2001), covering ninety-one countries, Singapore was ranked the fourth least corrupt country in the world, with Hong Kong the fourteenth. Other Asian countries faired less well: Taiwan (2V), Malaysia (36), South Korea (42), China (57), Thailand (61), Philippines (65), India (71), Vietnam (75), Pakistan (79), Indonesia (88) and Bangladesh (91). Such findings are reflected in various other surveys that uniformly place Singapore and Hong Kong as the least corrupt jurisdictions, and Indonesia regularly is being named as the most corrupt nation, which raises serious causes for concern. Such surveys — whilst interesting to read and quote — also have a discernible effect on the international perception of countries. For instance, it may influence the international credit rating agencies' evaluations of such countries and their financial institutions. Money laundering is migratory — thus countries perceived as being corrupt actually attract further sums to be laundered, and attract also the criminals behind this money. It is only a small step onwards for the launderers to influence financial, political and economic institutions in the relevant country and this in turn affects national or regional security issues. In such a situation, money laundering feeds corruption as proceeds of crime are paid to bank

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officials, politicians, businessmen, law enforcement a n d government personnel in r e t u r n for the acquiescence or, even better, active cooperation. T h e migratory effect would t h e n c o n t i n u e with foreign criminals being attracted. Ultimately such a pervasive e n v i r o n m e n t of crime, money l a u n d e r i n g a n d corruption will have social effects in that citizens will lose trust in the country's banking system a n d political structures. Foreign corporations (and thus their investment) will avoid such countries, a n d international bodies will advise against investment a n d dealings with these countries. Of course what I have just described is a theoretical chain of events. Regrettably t h o u g h reality is n o t so dissimilar — b o t h Indonesia a n d T h e Philippines seem to exhibit many of these traits. T h e corrupt environment in Indonesia is immediately a p p a r e n t in escalating money-laundering problems: it is estimated by US law enforcement West Africans a n d Southeast Asians using West African Couriers wash some $500,000 o n a weekly basis (Lilley, 2000) T h e general picture in Indonesia is saddeningly familiar, with a critical factor being that the Indonesian National Police lack sufficient resources, training or expertise to tackle the serious problems that they face.

Organized Crime Groups in Asia It is almost impossible to catalogue the many a n d various organized crime groups that exist in Asia. T h e region has groups that specialize in every area of criminal activity encompassing higly profitable d r u g cartels, a r m e d terrorist groups, a n d financial fraud specialists. In Myanmar, as n o t e d above, the Government has negotiated ceasefires with U n i t e d Wa State Army (UWSA), t h e M y a n m a r Democratic National Alliance Army (MNDAA), the Mongko Defence Army (MDA), the Shan United Revolutionary Army (SURA), the Kachin Defence Army (KDA) a n d the Eastern Shan State Army. It has b e e n persuasively argued that many of these groups, who are now officially tolerated, are n o t h i n g m o r e than a r m e d terrorists who generate funds t h r o u g h narcotics.

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In J a p a n , the influence of the Yakuza o n the country's business a n d b a n k i n g sectors were severely u n d e r e s t i m a t e d until t h e i r activities e m e r g e d as a key facilitator a n d cause of J a p a n ' s financial turmoil. Estimates as to the m e m b e r s h i p of the Yakuza hover a r o u n d the 100,000 mark, with an annual turnover of u p to US$90 million per a n n u m (Lilley, 2000). Such estimates make the Yakuza by far a n d away J a p a n ' s biggest business. They have c o r n e r e d the market in J a p a n for property a n d loan fraud, together with prostitution, debt collection a n d extortion rackets. T h e downturn in the domestic economy has m e a n t that the Yakuza has spread o u t from their traditional family/national base a n d taken u p investments a n d business opportunities in Hawaii, Australia, the Philippines a n d o t h e r areas of South East Asia. T h e intricate network of Chinese criminals, which are commonly referred to as Chinese Triads now operate in every major center of the world having a sizable Chinese population. From their origins in the seventeenth century it is now estimated that there are u p to 100,000 c u r r e n t m e m b e r s organized in six main gangs that are rivals at local levels, b u t which co-operate globally. T h e Triads are heavily involved in gambling, illegal prostitution, h u m a n trafficking, extortion, fraud, loan sharking, counterfeiting, d r u g trafficking a n d money laundering. Apart from, a n d in addition to, the vast range of domestic organized crime groups Asia is a particularly appealing location for foreign crime groups to extend their business activities to. Already Russian gangs a n d Nigerian/West African groups are heavily active in the region. Further, it should n o t be forgotten that there is increasing reliable intelligence that confirms that many individual criminal gangs are now co-operating with similar gangs from different countries to their mutual benefit (Lilley, 2000).

Offshore Financial Centres in Asia — A Growing Threat Palau has a land area of 458 square meters, a population of a b o u t 18,000 — a n d unless you have an interest in advanced geography is

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impossible to find o n a m a p . T h e island in fact used to be called Belau, a n d is in the Pacific O c e a n east of the Philippines. Such a jurisdiction gives a frightening indication as to where money laund e r i n g in Asia a n d o t h e r geographically close locations may go next. Palau appears to be setting itself u p as an offshore financial center, or tax haven. Courtesy of the Internet you can buy a Palau offshore banking license — well, you d o n o t (strictly speaking) have to apply for a b a n k i n g license, merely register a normal company a n d say somewhere in the objectives that your company is going to act as a bank. Governments in many m i n o r jurisdictions are setting u p similar offshore financial centers a n d thus stimulate (if n o t totally maintain) the local economy. Already across the world, locations that you have probably never h e a r d of have escaped from poverty a n d debt by providing a p a n o r a m i c variety of financial services a n d corporate vehicles. International pressure has to a large degree forced traditional a n d established offshore centers to substantially clean u p their acts — thus gray opportunities exist for new entrants, willing to attract new customers. Already it has b e e n r e p o r t e d that the Nepalese government is p l a n n i n g to establish an offshore center in Katmandu — I suspect that others in Asia will follow. T h e key criteria to watch o u t for are: • • • • • • • •

Corporate structures that can be created or b o u g h t quickly, easily a n d cost effectively A financial center that maintains absolute secrecy a n d confidentiality T h e absence of any tax b u r d e n A non-existence of any treaties to exchange tax information with any o t h e r countries Excellent communication links N o exchange controls P r e d o m i n a n t use of a major world currency, preferably dollars T h e ability to disguise the ownership of corporate vehicles through the use of n o m i n e e directors a n d bearer shares

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T h e absence of normally accepted reporting requirements for companies such as annual financial returns T h e absence of normal accepted company supervision

Of course to a certain extent Asia already has some key offshore centers, such as H o n g Kong — a n d various lesser-known ones, such as Labuan (Malaysia). H o n g Kong provides offshore banking licenses, t r u s t a n d m a n a g e m e n t c o m p a n i e s a n d h a s at least 500,000 International Business Companies. However H o n g Kong is perceived as having tight anti-money l a u n d e r i n g controls a n d crucially has criminalized m o n e y laundering beyond drugs. Brunei, Macau, T h e Philippines, Singapore a n d Thailand also offer varying levels of offshore financial services a n d products.

A Country by Country Evaluation of Money Laundering Problems in Asia Afghanistan T h e US G o v e r n m e n t position is that Afghanistan is a major d r u g p r o d u c i n g a n d / o r transit country that has n o t b e e n certified as trying to combat the problem. Even t h o u g h the country is o n e of the largest producers of opium, because the banking system has effectively b e e n destroyed by political upheaval it is n o t used by domestic (or international) m o n e y launderers. T h e major p r o b l e m in the country (as far as the thesis of this book is concerned) is that it is estimated to be the world's second largest p r o d u c e r of o p i u m poppy; major regions are Helmand, Kandahor, Uruzgan a n d Nangarhar provinces. T h e r e are n o international organized crime problems as such, b u t as the o p i u m poppy is the country's main cash crop it obviously provides a substantial source of revenue a n d thus i n f l u e n c e . As t h e r e is n o "official" g o v e r n m e n t , an official position is difficult to gauge, although it is now suspected that the Taliban are involved in narcotics trafficking. Like some o t h e r Asian c o u n t r i e s , profits from d r u g s have m a d e substantial in

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r o a d s into t h e legitimate e c o n o m y t h r o u g h c o n s t r u c t i o n commercial projects.

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Armenia A r m e d organized crime has a heavy presence; the gray economy is massive; public corruption is widespread. T h e situation is m a d e worse by high unemployment, low salaries a n d a large u n d e r g r o u n d economy. However as Armenia is n o t a major international financial center, the problems are predominantly domestic ones.

Azerbaijan Strong organized crime presence, weak legal system a n d e n d e m i c corruption are present in Azerbaijan. T h e country does n o t have any anti-money l a u n d e r i n g legislation b u t the problems are mostly domestic a n d specifically related to tax evasion.

Burma

(Myanmar)

T h e Country is the world's second largest p r o d u c e r of O p i u m . Money l a u n d e r i n g problems are exacerbated by a cash-based economy, a n d whilst anti money-laundering legislation exists it is n o t enforced. Details are sketchy b u t because of the major d r u g p r o d u c i n g levels it must be suspected that domestic money l a u n d e r i n g is substantial. Commentary suggests that Casinos on the country's borders are used for money laundering, as these establishments are entry points to the international financial system. T h e government actively encourages d r u g groups to invest their profits in legitimate enterprises, a n d it is r u m o r e d that the Government itself is involved in d r u g trafficking. T h e r e is n o p r o b l e m with international organized crime as such, b u t domestic groups obviously p r e s e n t as part of the d r u g p r o d u c t i o n a n d distribution culture.

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T h e Burmese government cease-fire agreements with d r u g groups in various areas (particularly the Shan State) have in effect legitimized the p r o d u c t i o n of narcotics a n d the resultant money l a u n d e r i n g — in fact the government have e n c o u r a g e d such groups to l a u n d e r funds t h r o u g h investments in hotels a n d construction enterprises (Lilley, 2000). Thus the l a u n d e r i n g of drugs cash is a significant factor in the Burmese economy — appearing in major infrastructure projects, banks, airlines, real estate. In fact some drugs m o n e y has b e e n used to s u p p l e m e n t g o v e r n m e n t funding of d e v e l o p m e n t projects. This e n v i r o n m e n t is further worsened by r u m o r s that g o v e r n m e n t a n d / o r army officials are heavily involved in d r u g production, or are corruptible to allow others to engage in such businesses without constraint.

Cambodia Cambodia's law enforcement bodies are chronically u n d e r resourced a n d lack even basic relevant training. T h e long history of internal disputes m e a n that the country has e n d e m i c corruption problems, which are further exacerbated by low levels of pay for civil servants, a weak judicial system, and a perception that justice can be "bought". However such corruption a n d money l a u n d e r i n g are merely two difficulties in a country that is poor, fragile a n d developing. O n e of the most difficult issues is that this state of affairs makes the country particularly vulnerable to organized crime groups, especially bearing in m i n d the country's position as a transit country for h e r o i n from the Golden Triangle.

China C h i n a has a c o m p l e t e r a n g e of o r g a n i z e d c r i m e g r o u p s a n d escalating crime rates t o g e t h e r with increasing domestic d r u g problems. Official corruption is widespread in the country, b u t greater effort is being focused on the money laundering, o n e reason b e i n g that the g o v e r n m e n t views such activities as o n e way of simultaneously tackling corruption (Lilley, 2000).

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Hong Kong H o n g Kong is an obvious target for money launderers, particularly the washing of proceeds from the sale of illegal drugs. A variety of factors contribute towards the importance of H o n g Kong as a money laundering target: • • • • • •

T h e strength a n d high level of infiltration of Chinese organized crime groups A low tax system Acting for China as its offshore banking center Sophisticated financial environment a n d infrastructure T h e absence of any currency a n d exchange controls T h e presence of various offshore company structures that can be used by non-residents.

Money l a u n d e r i n g in H o n g Kong extends to all serious crime. All banking a n d financial institutions must take customer identifications, a n d report suspicious transactions to a central unit. However because of the size a n d complexity of H o n g Kong's financial world there still remain problems — exhibited by: •

• •

T h e relatively low level of suspicious reports — the vast majority of which come from banks, with very few coming from insurers or professional advisors like solicitors a n d accountants T h e o p e n i n g of accounts with forged d o c u m e n t s T h e operation of cash cleansing t h r o u g h b u r e a u x de change a n d money remitters

India Money laundering is a growing p r o b l e m in India b u t is mainly confined to domestic activities that are far from being only drugs related: fraud, corruption a n d smuggling being obvious additional ones. T h e l a u n d e r i n g dynamic is exacerbated a n d facilitated by the hawala alternative remittance systems. T h e legal position in India in relation to money l a u n d e r i n g is also confused.

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Indonesia Indonesia lacks comprehensive anti-money laundering legislation. These are needed urgently because the country's economy is particularly vulnerable to money laundering. The reasons for this are: • • • •

The geographical location of Indonesia Strict banking secrecy High levels of corruption Various banking scandals including fraudulent schemes

Although most money laundering in Indonesia has related to domestic narcotics trafficking and the proceeds of corruption, urgent action is required.

Japan Japan has significant domestic problems with the Yakuza who are alleged to have in excess of 100,000 members. They were key factors in the collapse of various major Japanese Banks due to the somewhat irregular loan arrangements that were set up with them. First h a n d evidence from my own research confirms that until fairly recently Japanese banks accepted all kinds of funds without questioning their provenance. Because Japan is a major financial center, any weaknesses in the country's banking systems means that the proceeds of domestic crime have an easy entry point into the world's banking system — particularly that of the United States.

Kazakhstan The country is on the transit route of drugs from Afghanistan and Pakistan together with being an opium producer itself. Wide-spread and endemic corruption doesn't help matters, neither does the country's fairly advanced financial services environment. The country

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has, however, criminalized money l a u n d e r i n g in relation to drugs a n d o t h e r serious crimes. Unfortunately the enforcement of the relevant laws is weak.

Laos Laos is the third largest p r o d u c e r of o p i u m in the world, although m u c h of it is c o n s u m e d domestically. T h e country has n o antimoney l a u n d e r i n g legislation, even t h o u g h it is a regional financial center. Because Laos has strict laws o n the exporting of currency it is suspected that l a u n d e r i n g out of the country is achieved t h r o u g h alternative remittance systems.

Mongolia Whilst details are sketchy there is some intelligence that suggests Russian organized crime groups are making use of the country's banking system.

Nepal Nepal has n o anti-money l a u n d e r i n g legislation. It has, however, problems with drugs, currency smuggling, a n d the trafficking of h u m a n beings. H i g h levels of c o r r u p t i o n are suspected, a n d c o m m e n t e d o n by internal governmental reports (Lilley, 2000). T h e Government also has plans to establish an offshore financial center in Katmandu.

Pakistan T h e country is a major distribution a n d refining center for o p i u m (mainly in the Khyber region, a n d northwest frontier province). With it's formal e c o n o m y in tatters, various political scandals that contain allegations of m o n e y l a u n d e r i n g by various former

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leaders, a costly nuclear programme, and a military government that has placed the cleaning-out of corruption at the top of its agenda. Pakistan has more than enough domestic problems to contend with. The Philippines

No effective legislation, much political uncertainty and public corruption, and existing as a transshipment route of opium and other drugs from China, Organized crime groups from China, Taiwan and Hong Kong are all active here. There is strict banking secrecy. What more does one need? The country has no basic antimoney laundering regulations or legislation. The US treasury has already issued an advisory note recommending enhanced scrutiny for transactions involving the Philippines. Recent local media coverage has described Manila as "Asia's Money Laundering Capital", drawing attention to anonymous safe boxes, tight bank secrecy laws, and the irony that being awarded such a dubious provenance actually attracts a substantial inflow of funds.

Singapore

Singapore is simultaneously a major financial center with many shops trading in high value goods and a country that has a strong anti-drug culture. Additionally there exists a persistent undergound banking system, which when allied to the various shops selling high value goods provide a strong conduit for the washing of Asian heroin dealer's cash. To make this situation worse there are no controls on currency being brought in or taken out of Singapore. The anti-money laundering laws apply to banks, insurance companies, and bureaux de change and money remittance companies, but are currently only drugs related. The regulations mean that suspicious transactions must be reported and customers engaged in significant currency transactions should be identified.

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Taiwan T h e c o u n t r y has m o r e t h a n 60,000 h e r o i n addicts a n d is a transshipment p o i n t for Chinese heroin, thus creating a substantial money l a u n d e r i n g risk. T h e presence of sophisticated organized crime groups a n d persistent corruption makes the situation worse. It is estimated that at least half of the funds l a u n d e r e d t h r o u g h Taiwan are t h e n transferred abroad.

Thailand T h e country is trying to combat its money l a u n d e r i n g problem. But, because of its cash based economy a n d geographical position, Thailand is particularly p r o n e to m o n e y launderers, particularly funds g e n e r a t e d by illegal drugs in South East Asia.

Vietnam T h e r e exists little evidence to suggest that money laundering is a serious p r o b l e m in Vietnam, b u t the country has a substantial gray economy that makes the identification of dirty m o n e y difficult. Vietnam, because of its geographical position, is a transshipment country for drugs from the Golden Triangle together with being an attractive target for overseas crime groups.

Some Solutions to the Asian Money Laundering Explosion "The art of war lies in thwarting the enemy's plans, in breaking u p his alliances, a n d then, only then, in attacking his army": Sun Tzu circa 5BC (Sun Tzu, 1995) It is n o t at all difficult to suggest solutions to the m o n e y laundering problems e n c o u n t e r e d in Asia. What is difficult is to i m p l e m e n t such solutions. This is particularly so w h e n severely affected Asian countries c a n n o t h o p e to successfully tackle the washing of criminal funds in isolation, b u t only as part of a co-

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operative robust set of actions to deal with the underlying and interlinked causes (and effects) of organized crime, drug production and corruption. The worldwide initiatives against money laundering provide the framework, ground rules and benchmarks for a national anti money laundering regime. The key documents are: • The United Nations convention against illegal traffic in narcotic drugs and psychotropic substances, issued in 1988 and known as the 'Vienna Convention' (United Nations, 1998) • The prevention of criminal use of the banking system for the purpose of money laundering, issued by the Basle committee on banking supervision in 1988 (Basle committee on banking regulations and supervisory practices, 1988) • The forty recommendations to tackle money laundering issued by the Financial Action Task Force on Money Laundering (The FATF) (The Financial ActiForce, 1999). One of the many positive joys of the Internet is that you can download each of the above documents at the click of a mouse, thus I do not intend to repeat secondhand all of the information that each of the above contain. That being said, it is important to highlight the key elements where they may provide a way forward for countries in Asia. The Vienna Convention provides extensive advice and guidance for countries in the control of illegal drugs. Specifically in relation to money laundering the United Nations urges member states to implement the following: • To establish a comprehensive legislative framework to criminalize money laundering related to serious crimes; and to prevent, detect, investigate and prosecute money laundering by: - identifying, seizing and confiscating the proceeds of crime. - including money laundering in mutual legal assistance agreements to ensure assistance in international investigations, court cases and judicial proceedings

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the establishment of an effective financial a n d regulatory regime to deny access to national a n d international financial systems by criminals a n d their illicit funds through: -

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Customer identification a n d verification requirements Financial record keeping Mandatory reporting of suspicious activities Removal of b a n k i n g secrecy i m p e d i m e n t s to a n t i - m o n e y laundering efforts

T h e implementation of enforcement measures to provide for: - Effective detection, investigation, prosecution a n d conviction of criminals engaged in money l a u n d e r i n g activity - Extradition procedures - Information sharing mechanisms

T h e prevention of criminal use of the b a n k i n g system for the p u r p o s e of m o n e y laundering, issued by the Basle Committee o n b a n k i n g supervision in 1988 set o u t best practice guidelines to "encourage vigilance against criminal use of the payments system". Key r e c o m m e n d a t i o n s are: • To implement customer identification (the "Know Your Customer" principle) • Banks should r u n their business to high ethical standards, a n d n o t be associated with any transactions they suspect are associated with money laundering • Banks should co-operate with law enforcement agencies • Banks should retain key records a n d train staff It should also go without saying that such principles should n o t only be applied to banks, b u t o t h e r corporate entities that can be utilized for money laundering, such as b u r e a u x de change, moneychangers, securities traders a n d so on. T h e FATF's forty r e c o m m e n d a t i o n s are now very m u c h the cornerstone of national anti-money l a u n d e r i n g programs, a n d are

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a b e n c h m a r k against which such programs are measured. T h e key issues of the r e c o m m e n d a t i o n s are: • • •

• • •

Each country should ratify a n d i m p l e m e n t fully the Vienna Convention Multilateral co-operation, mutual legal assistance a n d extradition treaties are stressed T h e importance of Know Your Customer procedures a n d the statement that "Financial institutions should n o t keep anonymous accounts or accounts in obviously fictitious names" Necessary records should be maintained for five years so that relevant transactions can be reconstructed Policies, procedures, controls, ongoing staff training a n d compliance testing are all r e c o m m e n d e d T h e final set of r e c o m m e n d a t i o n s p r o m o t e s i n t e r n a t i o n a l cooperation t h r o u g h the exchanging of intelligence, a n d bilateral a n d m u l t i l a t e r a l a g r e e m e n t s facilitated by c o m m o n legal concepts. T h e tools to achieve this include financial institutions which are to p r o d u c e records, identifying, freezing, seizing a n d confiscating criminal proceeds, together with extradition a n d prosecution agreements.

Of particular relevance to Asia is the advice given to compliant nations that they should be particularly wary of business relationships a n d transactions t h a t involve countries that d o n o t apply the r e c o m m e n d a t i o n s . In o t h e r words unless Asia as a whole a n d / o r specific nations do n o t clean u p their act then it is almost certain that sanctions will be forthcoming. To enact anti-money l a u n d e r i n g legislation, politicians must b e convinced of the necessity of such a step. But willpower in itself is n o t e n o u g h : financial a n d m a n p o w e r resources are b o t h a prerequisite for a successful regime. Even if these are available relevant laws will only work if they are: • •

Simple to understand a n d implement Efficient a n d effective

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Able to co-exist a n d supplement existing laws a n d procedures Have a strong d e t e r r e n t e l e m e n t Are comprehensive.

Money l a u n d e r i n g is the lifeblood of crime, to cut off this supply should prevent criminals from retaining the proceeds of their activities by: • • •

Restraining or seizing property p e n d i n g investigation a n d prosecution Confiscating property u p o n conviction Restraining a n d confiscating property where launderers have fled the country.

Crime can only succeed if the dirty money generated by such activity can be washed, a n d thus legitimized. If such cleaning can occur t h e n the original (and subsequent) criminal activities e x p a n d a n d flourish. Money l a u n d e r i n g is the key tool to enable this dirty dealing. Much activity, legislation, regulation a n d enforcement has taken place in the West to tackle the m o n e y l a u n d e r i n g problem: b u t it still exists a n d shows n o sign of abating. If the individual countries of Asia (both independently a n d collectively) do n o t begin to robustly a n d uniformly tackle the p r o b l e m they r u n the very real risk that they will b e c o m e ostracized a n d marginalized from the global economy, with devastating financial (not to m e n t i o n social) results.

Postscript This chapter was written in August 2001, a n d thus predates the terrorist atrocities of 11 September 2001. In many ways those events provide the most dramatic example of the social a n d political effects of money laundering. T h e Al Q u a d a network could never have m o u n t e d such attacks without extensive l a u n d e r i n g of their funds t h r o u g h the world's b a n k i n g networks a n d systems, whilst the actual amounts n e e d e d to m o u n t the September 11 attacks were relatively

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small, the key underlying volume of funds to support global terrorist activities are e n o r m o u s . Much of this money is b o t h generated in Asia a n d placed into the global b a n k i n g system there. T h u s the immediate n e e d for unified worldwide enforcement action against money l a u n d e r i n g has never b e e n greater. Neither has the critical r e q u i r e m e n t for individual governments in the Asian continent to p u t their houses in o r d e r b e e n m o r e vital. Similarly the likelihood of severe enforcement action against non-compliant countries is now n o t just a probability b u t a certainty.

References and Further Reading T h e r e are (as far as am aware) very few — if any — books that solely focus on money laundering problems in Asia. This is probablyjust as it should be, bearing in m i n d the global n a t u r e of the problem. In writing this chapter I have m a d e use of the following reports a n d books as background material: Basle Committee on Banking Regulations and Supervisory Practices (1988), Prevention of criminal use of the banking system for the purpose of money laundering, Basle. Lilley P (2000) Dirty Dealing. Kogan Page, London. The Financial Action Task Force (1999) The Forty Recommendations, Paris. The Financial Action Task Force (2000a) Annual Report XI, Paris. The Financial Action Task Force (2000b) First FATF Review to Identify Non-Cooperative Countries or Territories, Paris. The Financial Action Task Force (2001a) Annual Report XII, Paris. The Financial Action Task Force (2001b) FATF review to identify noncooperative countries or territories: Increasing the worldwide effectiveness of anti-money laundering measures, Paris. Sun Tzu edited by Clavell, J (1995) The Art of War. Hodder & Stoughton, London. Transparency International (2001) Corruption Perception Index 2001, Berlin. United Nations (1998) Convention against illegal traffic in narcotic drugs and psychotropic substances, Vienna.

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US Department of State, Bureau for International Narcotics and Law Enforcement Affairs (January 2000) Narcotics Control Report, Washington. US Department of State, Bureau for International Narcotics and Law Enforcement Affairs (January 2001) Narcotics Control Report, Washington. Additionally many if n o t all of the d o c u m e n t s a n d guidelines referred to can be found in full o n the internet, links to all relevant sites are listed at my firm's website, www.proximalconsulting.com.

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Chapter 4

Corruption in Context

Leslie Palmier

Introduction As generally used, corruption is a term applied to the illegitimate use of office by a public officer for his personal advantage. Most often, this means his e n r i c h m e n t or that of his family or close associates, b u t it would be difficult to deny the term to o n e who used his office to better himself in, say, a political party. T h e phrase "public officer" covers b o t h officials a n d ministers, that is to say all who draw an i n c o m e from public funds. Similar activities by those n o t so employed have different names. T h e activities principally covered by this definition are bribery, extortion, a n d conspiracies to defraud public funds. T h e last are, in financial terms, perhaps the most important. A recent example is the Bank Bali Scandal of 1998 in Indonesia. A PricewaterhouseCooper r e p o r t showed that Bank Bali used a firm owned by a senior official in the government's party, Golkar, to collect interbank loans for a commission of US$80 million, despite a g o v e r n m e n t ruling that such commissions were n o t payable. T h e funds were to be used to help the t h e n president Habibie win a renewal of his term of office (see http://www.thejakartapost.com).

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Similarly, it is n o t u n k n o w n for purchasing officers of Indonesian d e p a r t m e n t s to collude with their d e p a r t m e n t a l heads to set u p a d u m m y company with which they place contracts. Bribery is often part of fraud. A d e p a r t m e n t a l buying officer may arrange for a large bribe to be paid to him by a supplier; the latter simply a d d i n g it to the invoice, which the buying officer t h e n authorizes for payment. Plans for building projects are drawn u p with the full cooperation of the contractor, a n d the 'commission' to be paid to the official c o n c e r n e d (usually 12.5 per cent of the 20 p e r cent profit), is agreed in advance. T h e proposals are so designed that n o inspector would be aware of anything amiss. This form of fraud is referred to as "planned corruption" (Hamzah, 1984). Extortion is the exacting of payments in cash or in kind from those over w h o m the officer has authority. This is sometimes the abuse of a traditional custom of gift giving, which becomes extortion when the balance of power changes in favor of the officer. T h e corruption of the 18th century English East India Company included this practice. W h e n the company assumed the government of Bengal, its officers f o u n d the custom prevalent, a n d they quickly took advantage of the situation. ' T h e extent of present-taking... however justified by the practice of the country, u n d o u b t e d l y whetted the appetites of [Company] merchants; d e m a n d followed d e m a n d a n d d o n a t i o n donation...it was the Bengal peasantry a n d merchants who were being squeezed... (Spear, 1975). Similarly, in the Java of the 18th century, ruled by the Dutch East India Company, 'Officials used the tremendous power that their position in the Company gave them to extort money from the few Europeans who were settled in Java and from the many natives.' (Day, 1904) Two centuries later, extortion also accounted for the greater part of the e m o l u m e n t s of Soviet U n i o n public officers (Simis, 1982). It would be wrong, however, to convey the impression that extortion was u n k n o w n until these two trading companies acquired

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territorial control. It is also e m b e d d e d in local historical tradition. O n e may take as an example the small 19th century sultanate of Aceh (pr. Acheh) in the n o r t h of the island of Sumatra, which later became part of the Netherlands Indies. While it was still independent, an e m i n e n t Islamic scholar of the day c o n d u c t e d a field study. H e r e p o r t e d of the subordinate chiefs c o n c e r n e d with the administration of justice that: It is only... in the direst necessity that their mediation is sought, for these chiefs hold it before t h e m as their principal aim to get as m u c h h a r d cash as possible for themselves, a n d take b u t little pains with cases, however weighty, from which there is n o t m u c h profit to b e won (Hurgronje, 1906). T h e spirit of these subordinate chiefs lives o n in the Indonesian administration, where those who j o i n its h i g h e r levels d o so because their positions will "contribute" to their private wealth (Hadisumarto, 1974). As a m o r e m u n d a n e example o n e may cite the situation where there is a severe shortage of telephones a n d telecommunication officials exact a bribe of several multiples of the official price. At the petty level, b u t of frequent occurrence, is the extortion of bribes by police from vehicle drivers. In some countries where imports of alcoholic beverages are forbidden, customs officers will p e r m i t t h e m if presented with a bottle of such drinks. In sum, varieties of extortion are limited only by the imagination of the officer a n d the opportunities available.

Characteristics F r a u d u l e n t corruption has often b e e n treated as a crime like any other, whereas it is quite distinct, even from extortion. To begin with, it is secret; there is n o evidence of anything amiss, n o safe burgled, n o corpse. T h e n , uniquely, there are n o obvious victims; it is a conspiracy between two or m o r e people against an abstraction, the state. This perhaps makes it m o r e acceptable to its perpetrators (though it does not, of course, lessen the offence). Also, detection is difficult b e c a u s e c o n s p i r a t o r s in fraud have n o interest in d e n o u n c i n g o n e another, all being very satisfied parties. Lastly, a n d

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often overlooked, as an enterprise such corruption gives an extremely high r e t u r n o n money a n d time e x p e n d e d , requiring very little, if any, capital, with only slight risk. Its attractions should therefore n o t be underestimated. Corruption of any kind is encouraged by the fact that it is difficult to punish. Public officers have often so a r r a n g e d matters that sanctions are far lighter than in the private sector. T h e r e , extortion, bribery, a n d fraud, when discovered are likely to result in immediate dismissal. T h e same activities in public services often merely require investigation. This could last several years, in the course of which the accused officer may well take early retirement, with pension, as the better p a r t of velour, so bringing proceedings to a close, a n d the officer leaving with character untarnished. T h e extent to which public officers protect o n e a n o t h e r could n o t be better illustrated than by a recent account in an Indonesian newspaper (JP, 15 September 2001). Allegations of bribery h a d a t t e n d e d the election of the governor of North Maluku, a n d the Indonesian government set u p a team of senior officials to investigate. T h e i r c h a i r m a n r e p o r t e d that there h a d i n d e e d b e e n bribery of two m e m b e r s of the provincial legislative council, b u t ' . . . t h e prevailing regulations... stipulate that allegations of money politics can only affect the election result if m o r e than o n e councilor has r e p o r t e d vote-buying to the provincial legislative council [but in this] case ...only o n e councilor h a d received a bribe, while a n o t h e r h a d only b e e n promised a b r i b e . . . '

Comment is Superfluous However, corruption is stimulated perhaps less by laxity of sanctions than by opportunities available. As an Indonesian proverb has it: 'Opportunities make m e n steal' (Hamzah, 1984). It has b e e n shown elsewhere that c o r r u p t i o n a m o n g I n d i a n officials is greatest in d e p a r t m e n t s having financial dealings with the public (especially Finance) (Palmier, 1985a). In the Indonesian Dewan Perwakilan Throughout this article, masculine terms include the feminine.

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Rakyat or parliament, its m e m b e r s openly recognize this distinction. As o n e of t h e m revealed: Those considered "wet" commissions ... were commissions ... which dealt with supervisory tasks over banking and state enterprises. "Wet" commissions refer to those where bribery is a common practice, whereas in "dry" commissions it is not. (JP, 21 Sep 2001) Apparently the bribery by the government d e p a r t m e n t s is often b e i n g supervised. All this may provide a corrective to the frequently q u o t e d phrase from a letter by the British historian Lord Acton: 'Power tends to c o r r u p t a n d absolute power c o r r u p t s absolutely' 2 . T h e I n d i a n officials m e n t i o n e d did n o t differ greatly in rank; it was t h e availability of opportunities that distinguished t h e m . It would be m u c h closer to t h e m a r k to say t h a t ' o p p o r t u n i t i e s i n d u c e corruption, a n d the widest opportunities corrupt absolutely'. Support for this contention may also be drawn from the history of the East India Company m e n t i o n e d above. O n e of the major measures it took successfully to curb corruption was slowly b u t surely to remove officials from all contact with c o m m e r c e (Palmier, 1985b). It is therefore hardly surprising that corruption should flourish in developing countries. T h e m o d e l of development chosen, a n d sometimes for good reason, places officials in positions of authority over agricultural, industrial, a n d commercial activity, a n d in frequent a n d close contact with those so engaged, a n d thus with great opportunities for c o r r u p t i o n . Unfortunately, it is rare for such officials to be paid generous salaries. These conditions (very similar to those existing in b o t h Dutch a n d English East India Companies) provide a fertile soil for corruption. Strangely e n o u g h , official approaches to corruption rarely take opportunities into consideration. T h e unspoken assumption seems to b e that, irrespective of the strength of temptation, officials should be honest. If they are not, the fault lies exclusively at their

2

Proper consideration of this assertion requires taking into account the one by which it is followed: 'Great men are always bad men'.

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doors, n o t with the situation in which they are placed. This is of course wildly unrealistic, a n d goes a long way to explain the general a n d manifest failure to curb corruption. T h e r e is n o suggestion h e r e that public officers are less honest than o t h e r people, a n d therefore fall immediately into temptation. T h e p o i n t rather is that if o p p o r t u n i t i e s are a b u n d a n t a n d sanctions weak, it m u s t be expected that public officers will be corrupt. This is very m u c h the case in Indonesia; in the m o r e rigorous situation of public officials in India, the available evidence indicates that even complaints (leave alone proof) of corruption are directed at only a minority of public officers, even in those d e p a r t m e n t s p r e s e n t i n g lucrative opportunities (Palmier, 1985c).

Social Pressures In seeking to account for corruption, it seems useful to identify the social pressures bearing o n public officers. Some indication may be obtained by establishing the precise nature of the offence. As it was p u t d u r i n g the trial of a policeman in the British Central Criminal High Court, corruption alienates loyalty (Palmier, 1983). So perhaps corruption should be seen as a sign that the officer's loyally lies elsewhere than with the public service. For we may safely assume that generally ties of loyalty link people; a n d if it is n o t to their employers, o n e has to enquire where it lies. In developing countries, loyalty is often limited to traditional groups, which may be variously defined, for instance by kinship or territory. Two scholars of West Africa in the mid-1950s point to the fact that whereas corruption pervaded the local authorities, the tribal associations, often spending as m u c h money, were doing so honestiy. T h e r e was n o d o u b t where loyalty lay. N o r was the reason far to seek. T h e local authorities were 'government-sponsored a n d

3

Many ordinary Indonesians divide their history into 'the Dutch period', 'the Republican period', 'the New Order period', and so forth 3 . One does not get the impression of identification with any of these 'periods'; they are visitations over which there is no control.

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copied from a foreign m o d e l . . . ' (Wraith RE & Simpkins A, 1963a). O n e has to ask w h e t h e r at least some public officers in developing countries d o n o t have a similar view of the governments they serve a n d the international organizations with which they deal. T h e r e is an echo of this in a speech in Tokyo by the Indonesian President, Megawati S u k a r n o p u t r i . Referring to the wholesale theft of foreign loans by public officers, she asserted 'Although the m o n e y h a d g o n e , the Indonesian people were lulled with the word 'aid', so they felt it n o t was necessary to repay it.' (Kompas, 28 September 2001) A generation before she spoke, a n Indonesian a u t h o r identified the moral vacuum which underlay such attitudes: ... the moral norms of their own culture were certainly something that they greatly respected. That they may not take anything which it was not their right to possess, that they may not cheat, was a moral level which they considered holy, eternal, God-given. But when they entered a new environment and situation where their own culture no longer had authority, then the moral norms which usually they gready respected, became subject to challenge. The new moral norms they were not yet able to absorb into their consciousness, the old moral norms were shaky. (Soedarso, 1969a). O n e obstacle to u n d e r s t a n d i n g the situation is the obfuscation that pervades approaches to the study of developing countries, whether in Asia or elsewhere. It is well known that European colonies usually included several disparate peoples, often inimical to o n e another, a n d that b o t h the inception a n d persistence of E u r o p e a n rule may often be traced to these animosities 4 . For whatever reasons, it seems widely assumed that this situation changed with the achievem e n t of i n d e p e n d e n c e . This is reflected in the language used. Both official a n d i n d e p e n d e n t publications refer to developing countries as 'nations', whereas the reality is perhaps that for most, if n o t for

4

Not so much 'divide and rule', perhaps, as 'restrain and rule'. A contemporary western example is the situation in Northern Ireland.

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all, there is certainly a state, b u t n o t yet a nation; the holding of state power is precisely the most dangerous point of contention between the various population groups, as sometimes appears in very sanguinary fashion 5 .

Indonesia To illustrate the above, we may take die case of Indonesia, particularly as it is often called o n e of the m o s t c o r r u p t c o u n t r i e s . It is distinguished from many o t h e r former colonies in that the former ruler, the Netherlands, n o t only made n o attempt to unify the peoples it governed, it was a cardinal principle of policy that the various cultures s h o u l d b e m a i n t a i n e d u n c h a n g e d as far as possible. Consequently, they were d e n i e d the modernization that might have created a unified elite. What little education was vouchsafed certainly resulted in the development of a nationalist movement, b u t this was in fact a coalition of westernized leaders of ethnic groups, with the leading role being held by the largest, the Javanese. In the 1930s, the colonial government summarily placed several nationalist leaders in 'internal exile' o n a r e m o t e island in the archipelago. Even u n d e r these conditions the various ethnic groups did n o t coalesce, b u t r e m a i n e d distinct (Mrazek, 1994). Opposition to the colonial power held the nationalists together; i n d e p e n d e n c e dissolved the b o n d . In a b a c k h a n d e d acknowledgem e n t of the strength of ethnic ties, the new Indonesian government decided to sweep t h e m u n d e r the carpet a n d e n d the Dutch colonial practice of identifying ethnicity when taking a census. T h e first democratic elections, held in 1954, gave rise to some 27 parties with very similar p r o g r a m m e s , (Kepartaian di Indonesia, 1951) distinguished m o r e by the fact that they represented different ethnic groups. T h e elections also gave rise to a great deal of corruption, which was perfectly understandable. Indonesia at the time did n o t 5

The Concise Oxford Dictionary refers to a nation as "a large number of people of mainly common descent, language, history, etc." Few developing countries meet this criterion.

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have a large indigenous middle class, the essential r e q u i r e m e n t in countries where democracy has flourished, so that the only source of funds with which to fight an election was the government. Thereafter, t h r o u g h the country's many vicissitudes, there has b e e n a constant growth of allegations (sometimes well supported) of fraudulent corruption. At this point it is necessary to m e n t i o n the peculiar situation that applied in Indonesian law. In general parlance the m e a n i n g of, a n d attitude to, corruption are very similar to those the world over. Sharp distinctions are m a d e between bribes a n d corruption. T h e former, w h e n exacted by officials o n very low salaries, is considered forgivable, a n d the bribe readily given. This is n o t the case with fraudulent corruption, which is universally c o n d e m n e d . However, the laws relating to the offence, a n d which r e m a i n e d in force until the e n d of the 'New O r d e r ' in 1998, stipulated that for an action to be considered corrupt it must d a m a g e the finances or economy of the state. (Bribes, however, do not have this requirement) ( U n d a n g - u n d a n g ...1971). It must be obvious that this condition is very difficult to meet, a n d helps to explain why successive recent attorneys-general have found it hard to respond to vociferous public d e m a n d s that former president Suharto be charged with corruption. His main offence appears to be n o t that h e e n r i c h e d himself, b u t that h e provided his children with substantial monopolies (such as motorways). It might n o t be easy to show that this h a d d a m a g e d public finances or economy, particularly since until his deposition Suharto was known as the 'father of development'. O n e must also bear in m i n d that b u t for this condition a large n u m b e r of officers in the a r m e d services would be charged with corruption. T h o u g h fraudulent corruption is deplored, loyalty to one's group, however defined, may require its acceptance. Very revealing in this context are attitudes to the I n d o n e s i a n Chinese. (They will b e referred to h e r e as SinoTndonesians, since many of their families have b e e n in the country for decades if n o t centuries). T h e r e is n o d o u b t of their enterprise a n d generally greater prosperity than o t h e r indigenous ethnic groups in the country. This creates envy

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a n d fear. Typical of the general attitude was the answer given m e some time ago by a long-standing acquaintance (a Javanese a n d former official) w h o m I h a d n o t seen for some twenty years. To the r e m a r k that corruption seemed to have grown by leaps a n d b o u n d s over that period, the answer came, after a pause: 'How else can we keep u p with the Chinese?' In the same fashion, any ethnic g r o u p will be able to find a c o m p a r a t o r with which to c o n d o n e corruption. In any case the riches so acquired c o m m a n d respect. As the previously q u o t e d Indonesian a u t h o r tells us: [The corrupt rich] do not feel themselves condemned, and their social circles, too, neither censure nor ostracise them.. .On the contrary, their wealth has given rise to a feeling of social deference and respect. (Soedarso, 1969b) In other words, the social sanctions required to buttress anti-corruption regulations a n d laws (Wade, 1989) are absent. As a m o n g several pre-industrial peoples elsewhere, mutual help a m o n g those who define themselves as of c o m m o n origin, w h e t h e r t h r o u g h kinship or place, is of long standing. U n d e r Dutch rule, when very few of their Indies subjects qualified for higher education, it was n o t u n c o m m o n for whole villages to pay for the cost of sending their gifted m e m b e r s to study in the Netherlands. Similar attitudes are to be found in p r e s e n t day India, where caste m e m b e r s club together to build university halls of residence for their young. Also revealing is the experience of an international body's social research center based in that country in the 1950s. A p r o m i n e n t local academic was recruited as director. H e forthwith recruited virtually all the staff, from messenger to senior research officer, from his own population g r o u p in a distant part of the country. This would n o t have b e e n discovered b u t for the fact that the c e n t e r ' s a c c o u n t a n t , from a different p o p u l a t i o n g r o u p , was a p p o i n t e d by, a n d r e p o r t e d directly to, the international body. T h e social mores that obtain d o n o t consider such behavior corrupt. In Indonesia,

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... [many officials] always feel that they are justified in setting aside the principles that regulate and govern modern administration [i.e., probity] for reasons of family, for reasons of common welfare between colleagues and dependants. (Soedarso, 1969c) It would be naive to think that there is n o expectation of this help being repaid. O n the contrary, the assumption is that, say, the young person helped through university will in d u e course, having achieved the position of p r o m i n e n c e expected, use his or h e r influence a n d resources in favor of the traditional g r o u p m e m b e r s . This is in any case d u e from those favored by fortune. For Indians, an e m i n e n t novelist has brilliantly described the agonies of m i n d suffered by a young official, English-educated at his rich father's expense, when the latter, incriminated in an official d o c u m e n t which has reached his son's desk, as a matter of course expects him to s u r r e n d e r it (Jhabvala, 1987). In Indonesia, individuals in m o r e fortunate circumstances are expected to distribute as widely as possible opportunities for work or office or o t h e r favors they are in a position to bestow... [and] the d o n o r or even potential d o n o r creates rights to call u p o n the recipients for whatever type of help, s u p p o r t or loyalty h e may in turn n e e d a n d that they are or will be in a position to provide (Willner, 1970). Lest it b e t h o u g h t this is a peculiarly I n d o n e s i a n or, m o r e generally, Asian relationship, the situation in West Africa appears to have b e e n remarkably similar. 'Any man rising to a place of importance in politics will be surrounded by relatives and friends looking confidently to him for patronage; the tradition of centuries leaves them in no doubt that he will provide for them, and that if jobs do not exist they will be created.' (Wraith RE & Simpkins A, 1963(b)) In these circumstances allegiance is to a person, n o t to an abstraction such as 'the service' or 'the country'. In Indonesia, this was m u c h r e i n f o r c e d by t h e fact t h a t u n t i l t h e 1980s it was h e a d s of departments who appointed their own staff. In an attempt to improve

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matters, a system of selection for the bureaucracy by examination was introduced. But success indicates only that the examinee has reached the necessary standard, it does n o t give automatic right to a n a p p o i n t m e n t . This will d e p e n d u p o n a vacancy b e c o m i n g available, which of course leaves plenty of r o o m for nepotism. F u r t h e r s u p p o r t for traditional loyalties has b e e n provided by a well-meaning rule that posts should preferably be filled by a qualified person from the local province, for example by Javanese in their homelands, by West Sumatrans in West Sumatra, a n d so forth. In the early years of the republic, when the Javanese were the most educated, they filled most senior posts t h r o u g h o u t the country, a n d t h u s p r o v i d e d a s t r o n g framework. C o n s i d e r a b l e advances in education have taken place over the last half-century, so that in several instances Javanese have b e e n ousted by m e m b e r s of local groups. It would be surprising if their traditional loyalties were n o t thereby reinforced. F u r t h e r m o r e , Indonesian circumstances frequently compel the individual to appeal for help to the traditional group. W h e n law a n d o r d e r break down a n d are n o t quickly restored, the state is perceived to be partial towards the lawbreakers. This of course arouses traditional loyalties if only for self-protection, even a m o n g public employees. In o t h e r words, a classic vicious circle is set u p . T h e state, w h e n weak, is perceived to be partial, so traditional loyalties are aroused, a n d further weaken it. E n o u g h has b e e n said, perhaps, to emphasize the importance of including traditional g r o u p loyalties in the analysis of corruption. It is customary to invoke "market pressures" to explain western commercial behavior, while "peer g r o u p pressures" are used to explain individual activity. Similarly, it would seem appropriate to include "traditional g r o u p pressures" in analyzing corruption in developing countries, in Asia as elsewhere. Nevertheless, it must be emphasized that such pressures are perhaps best seen as permissive a n d supportive, n o t determinant. More i m p o r t a n t is the presence of opportunities, which usually means money. T h e m o r e of it that is controlled by public officers, the m o r e will stick to their fingers.

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Reform T h e enquiry presented above into the factors making for corruption does n o t imply c o n d o n i n g . It remains the case that the eventual goal must be to distance public officers from activities that lend themselves to extortion, bribery or fraud. This process is already u n d e r way in some developing countries, as they expand their market economies, a n d discard the permits a n d licenses that were an invitation to extort bribes. Private businesses so created may well b e c o m e a pressure g r o u p for probity, insisting that their taxes b e n o t misappropriated. By the same token, the m o r e the state b u d g e t is drawn from internal rather than external sources, the greater the pressure to curb corruption. As an example of what may b e d o n e o n e may refer to a measure taken by the I n d o n e s i a n g o v e r n m e n t in the 1980s. T h e ports, particularly that of the capital, Jakarta, h a d became notorious for the extortion exercised by customs officers. No solution was found until the government e n t e r e d into a contract with an international firm to examine — for customs purposes — at the ports of lading, containers destined for Indonesia, which then e n t e r e d the country without examination. However, o n e should also be aware of the political difficulties in the way of removing public officers from control over the economy. T h e case of Indonesia shows the problem in acute form. To remove controls, in I n d o n e s i a n eyes, is to move to a totally privatized economy. As they see it, this would have o n e major consequence: the c o m m a n d i n g heights would b e held by the sino-indonesians who are, after m o r e than a half-century of i n d e p e n d e n c e , still m o r e a d e p t at doing business than most o t h e r Indonesians, a n d who would exclude them. If the only way to prevent this is to retain g o v e r n m e n t c o n t r o l of t h e e c o n o m y with t h e a c c o m p a n y i n g corruption, then so be it, they argue. T h e r e can also be grounds, of a general welfare nature, for retaining control over economic activity. As an officer of India's Vigilance system p u t it to me, when we were discussing corruption in i m p o r t licensing:

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"We could indeed get rid of it at a stroke simply by putting licences up for auction. What would be the consequence? One of the two largest Indian enterprises would make a successful, if expensive, bid for the entire quota and use its monopoly power to recover the cost by putting up the price of goods imported. This would place them beyond the reach of the poor. We prefer to maintain the system of import licences and to try to control the concomitant corruption." 6 In any case, removing corruption opportunities is a necessary, b u t n o t sufficient, m e a s u r e . T h e u n s c r u p u l o u s will always find opportunities not evident to anybody else. Elsewhere (Palmier, 2000) it has b e e n suggested that probity is a function n o t only of removing such opportunities, b u t also of the selection of public officers, their character formation, a n d their morale. T h e object is the cultivation a m o n g at least the most senior ranks of a sense of honor, so that the notion of corruption is r e p u g n a n t , a n d the corrupt when found incur social ostracism. To consider morale first, public officers in developing countries are paid poorly c o m p a r e d to others with comparable training, a n d an i m p o r t a n t step in the development of high morale is the payment of adequate, even generous, salaries. However, these e n c o u r a g e h o n e s t y only after c o r r u p t i o n opportunities have b e e n removed, otherwise matters remain m u c h as they were. T h e r e seems n o particular reason why the corrupt should b e c o m e honest merely because they are given m o r e pay; this can always be rationalized as insufficient. T h e difficulties in the way of reform should n o t be u n d e r estimated. P o o r salaries are d u e , a m o n g o t h e r reasons, to the superfluity of public officers. It may well be true that fewer better paid would be at least as productive as the large n u m b e r s now employed. T h e difficulty, however, is that before industry a n d c o m m e r c e are well d e v e l o p e d , g o v e r n m e n t s often see public employment as a means of absorbing the educated, a n d so removing possible disaffection, while winking at corruption. O n e answer may be n o t to attempt to clean u p the entire government service, b u t to concentrate only o n the senior ranks of decision makers, removing 6

Personal information. Interview, July 1974.

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t h e m from o p p o r t u n i t i e s while substantially i n c r e a s i n g t h e i r salaries a n d so, o n e would h o p e , raising their morale a n d resistance to corruption. At least as important, if n o t m o r e so, is the character of public officers. What seem required in many developing countries, in Asia as elsewhere, are formative institutions that encourage greater loyalty to the g o v e r n m e n t service, at t h e expense of traditional groups. T h e English East India Company m e n t i o n e d above, having removed opportunities for corruption a n d m u c h improved the salaries of its officials, t h e n established a college to inculcate values of probity a n d loyalty. T h e final result was the Indian Civil Service, which became renowned for its honesty. T h e object of such institutions is to instill loyalty to the government service and its values and traditions. This is not a matter of developing loyalty where there is n o n e , b u t of weakening traditional ties in favor of the nation a n d the public service. In several of the great powers this is achieved by residential e d u c a t i o n a l institutions inculcating their charges with loyalties away from the traditional primary group, the family, a n d towards created institutions such as sports teams a n d the institution itself, as a preparation for the giving of loyalty to the individual's future employers. Taking Indonesia again as a n o t untypical Asian developing country, o n e finds that the formative residential institutions, which exist, are of a religious, a n d therefore divisive nature, such as Muslim ' p e s a n t r e n ' a n d Catholic and Protestant schools. T h e universities are not residential, a n d n o n e may claim a truly national intake; all have a p r e d o m i n a n c e of local students. In brief, the strength of traditional loyalties meets n o resistance from inculcated allegiance to the nation as a whole. T h e Indonesian a r m e d forces, it is true, d o m e e t some of the requirements for probity. Selection to their Academy is o n a national basis (except that sino-indonesians are n o t recruited), limited to those who d o best in the most difficult subjects at high school. T h e r e is n o sign of p r o m o t i o n being influenced by ethnic origin, a n d little d o u b t of the officers' loyalty to their units a n d to the a r m e d forces in general, rather than to their traditional groups.

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Equally, their morale is quite high, a n d their salaries adequate. Unfortunately, " u n d e r the 'New O r d e r ' [1966-1998] the official, semi-official a n d private business activities of military personnel e x p a n d e d rapidly at all levels..." (Crouch, 1975) while "the army leadership... adopted the view that it was perfectly natural for officers to exploit their official positions for personal gain" (Crouch, 1988). In o t h e r words, corruption was licensed. In consequence "serving m e m b e r s of the a r m e d forces ...devote considerable energy a n d time to income-supplementing schemes, often to the d e t r i m e n t of their professional duties" (Lowry, 1996), as is perhaps evident from their operational performance. T h e improbity of former general Suharto has n o t helped, a n d in the o d i u m that surrounds the forces for their excesses d u r i n g his "New O r d e r " regime, they are in n o position to provide national leadership. W h a t seems r e q u i r e d , in I n d o n e s i a as also in several o t h e r developing countries, is the establishment a n d development of civilian formative institutions to p r e p a r e a truly national elite with high morale a n d a code of h o n o r that spurns illicit financial gains. This is of course n o t a task of a few years, b u t of generations. But there seems n o o t h e r way to cure a country of the disease of corruption.

References Crouch H (1975) Generals and business in Indonesia. Pacific Affairs 48(4): 519-540; 524. Crouch H (1988) The Army and Politics in Indonesia. Ithaca, Cornell U.P. 1988: 285. Day C (1966) The Dutch in Java. Kuala Lumpur, Malaysia, Oxford U.P. (Reprint of 1904 edition by Macmillan, New York): 104. Hadisumarto D (1974) The Indonesian civil service and its reform movements. DPA dissertation, School of Public Administration, University of Southern California: 269, n. 18. Hamzah A (1984) Korupsi dalam pengelolaan proyet pembangunan [ Corruption in the Management ofDevelopment Projects]. Jakarta, Akademika Pressindo: 59. Jhabvala RP (1987) The Nature of Passion. Harmondsworth, Penguin.

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Jakarta Post, daily newspaper, Indonesia. Kompas. Jakarta, Indonesia, daily newspaper. (1951) Kepartaian di Indonesia [Parties in I n d o n e s i a ] . Jakarta, Kementerian P e n e r a n g a n Republik Indonesia [Ministry of Information, Republic of I n d o n e s i a ] : passim. Lowry R (1996) The Armed Forces of Indonesia. St Leonards, NSW, Australia. Allen & Unwin: 144. Mrazek R (1994) Sjahrir: Politics and Exile in Indonesia. Ithaca, Cornell, Southeast Asia Program: 138. Palmier L (1983) Bureaucratic c o r r u p t i o n a n d its remedies. In: Clarke M (ed.), Corruption: Causes, Consequences and Control. L o n d o n , Frances Pinter: 208; 207-220. Palmier L (1985) The Control of Bureaucratic Corruption: Case Studies in Asia. New Delhi, Allied, a: 107; b: 4, 5; c: 103, 109. Palmier L (2000) C o r r u p t i o n a n d probity. Asian Journal of Political Science, 8(1) J u n e : 10, 11. Simis K (1982) USSR: Secrets of a Corrupt Society. L o n d o n , J M D e n t & Sons: 58 a n d passim. Soedarso B (1969) Korupsi di Indonesia [Corruption in Indonesia]. Jakarta, Bhratara, (a): 66; (b): 75. Spear P (1975) Master of Bengal: Clive and His India. L o n d o n , T h a m e s a n d H u d s o n : 110, 111. (1971) Undang-undang tentang pemberantasan tindak pidana korupsi [Laws Concerning the Fight against Criminal Corruption]. Jakarta, P.T. Intibuku Utama: 40. Wade R (1989) Politics a n d graft: recruitment, a p p o i n t m e n t a n d promotions to public office in India. In: Ward PM (ed.), Corruption, Development, and Inequality. L o n d o n , Routledge: 73-109; 107. Willner AR (1970) T h e neotraditional accommodation to political independ e n c e : T h e case of Indonesia. In: Pye LW (ed.), Cases in Comparative Politics: Asia. New York: 242-306; 260. Wraith RE & Simpkins A (1963) Corruption in Developing Countries. L o n d o n , Allen & Unwin: (a): 50; (b): 34.

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Chapter 5

Is the 21 s t Century 'the Age of Asia-Pacific Region'? Hopes and Expectations as Viewed from East Russia

Anatoly Korchasin and Alex Ivanov

Introduction Many scholars and practitioners, politicians a n d economists, lawyers, journalists a n d o t h e r experts, observers, investigators of social processes in the world have t h o u g h t of the 21 s t century as the coming age of Asia, or to p u t it m o r e precisely — of the AsiaPacific region. It was n o t a coincidence that the 12 t h international congress o n criminology, o n the eve of the coming 21 s t century (Seoul, 2 4 - 2 9 August, 1998), was organized u n d e r this symbolic n a m e a n d for the first time was held in Asia (The 12 t h international congress o n criminology). What should we expect now, after the 21 s t century has b e c o m e reality? A brief look at some trends in countries, which, in o u r opinion, have h a d a leading role in the Oriental region — China, J a p a n , s o u t h e r n Korea, a n d Russia — will help o u r evaluations. It is regrettable that Russia in terms of its economic development has steady b e e n left b e h i n d by o t h e r countries. This can bring catastrophic consequences as we may easily lose a part of the country, for instance Siberia a n d the Far east. Certainly by now, in the Russian far east, the businesses either d o n o t belong to Russians, or they

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have b e e n even oriented o n China (and they account for some 30% of region's GDP). In economic terms we can single out three models of development of m o d e r n market systems: 1. "the neoliberal model" is considered to be the only o n e that is able to ensure the growth of GDP; 2. "neostatism", presupposes an active impact of the state on economic processes (as experienced by J a p a n , or South Korea); a n d 3. "neocorporativism". This m o d e l has b e e n used in the countries of n o r t h e r n E u r o p e a n d it is known for its high level of state costs. Apparently the strategic aim in Russia was defined by the present president to remove oligarchy from the power that was formed by the time of the ex-president Yeltsin. T h e activity of the president V. Putin has b e e n to a great extent defined by that real political force in which h e seeks his support: state apparatus, a n d the enforcement bodies (structures). The system of bureaucratic capitalism has o n e gross feature: it is economically n o t effective. T h e supporters of the state's impact have by now h a d high chances to lead the country, but democracy a n d the support of the European democratic way of development are m o r e preferred (Naumov O, 2000). Even so, we find that the most complicated counteractions against free enterprise are criminal organizations, a n d the corruption of state officials.

The Definition of Corruption Russian a n d western scientists were going in different ways in defining corruption. T h e former generally used a definition that is a generalization of all the known ways of corruptive actions, connecting this to t h e definitions of 'an official a n d mercenary profit' — it stresses the criminological aspect of studying this problem. T h e latter g r o u p inclined towards aspects of political sciences a n d so e x p a n d e d the notion of corruption 'to the deviant behavior of political elite'. T h e results of c o m p a r i n g the foreign a n d Russian

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determination of the essence a n d definition of certain interest. H e r e we can single out similar features. are:

the special socially privileged position of empowered subjects as the main participants of corruptive relations; the illegality of their actions; at the base level of the illegality of corrupt officials there are personal a n d g r o u p interests a n d corporative interests, connected to seeking for their ownership of the good. T h e distinguishing features are:

•

•

an a p p r o a c h to the defining of the subject structure of corrupt officials (if for the Russian investigators such are "the persons empowered to perform state functions a n d persons equated with them", against the western concepts of such persons who are the representatives of political elite); the definition of the 'good', which the corrupted officials are seeking to own (the representatives of Russian approach define it as property or non-property goods, the foreign persons define these as State resources).

T h e Russian a n d western approaches to investigating the problem of c o r r u p t i o n should be u n i t e d as they are p r e c o n d i t i o n e d by the social a n d legal n a t u r e of this p h e n o m e n o n . In m o d e r n sociology a n d political sciences corruption usually is considered to be the deviant behavior of socially privileged groups, a n d so we can thus begin to explain a great n u m b e r of its forms. T h e starting p o i n t of investigating of the deviant behavior of c o r r u p t officials should be the c o r r e s p o n d e n c e (or not) of their activity to the social n o r m s a n d evaluation systems in the society a n d the state (Volzhenkin B, 1999). T h e following features characterize the legal nature of corruption: • •

specificity of public status a n d the legal status of corrupt officials; the perversion of the c o n t e n t of legal relations;

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the illegal activity of participants of c o r r u p t legal relations c o n n e c t e d with using the resources of the society a n d the state; high latency a n d great n u m b e r of forms of display of corruption.

Corruption as legal p h e n o m e n o n is an abuse of public power a n d the over-use of one's status by an empowered person. This is displayed in the illegal use of the resources of society a n d / o r the state for personal, group, or corporate interests (Luneev V, 1999; Garayev & Selikhov, 2 0 0 1 ) . T h e full a p p l i c a t i o n of t h e laws c o u n t e r i n g corruption, which criminalize illegally obtained money, would help to the "clean the h a n d s " of public officials. These laws have b e e n applied in the USA, J a p a n , Italy, Great Britain a n d o t h e r countries, where the leading principle is: "authority is the basis of the power". In Russia however, power is considered to be the basis of authority.

The Main Organized Crimes in the Far East of Russia Criminal Organizations Perhaps there is n o exaggeration in saying that the process of surviving, into which the folks of the previous USSR a n d Russia have b e e n thrown, has created a very perverse situation. O n o n e h a n d , the thrusting by all mass media of a shameless seduction (corruption) of folks has resulted in a bifurcation because the main propagation can be r e d u c e d to a scheme: all for myself, n o t h i n g for the society (state)- it is r o u g h individualism. O n the o t h e r h a n d , because of the pressure of antinational governmental programs, the survival of an individual, apparently, has b e c o m e impossible. A n d so, in spite of the expectations of the organizers of the breakdown of, a m o r e or less, legally governed country, there still came a unification: b u t already at a criminal level, as a result of banal reason — it is easier to survive togetherl Thus, in the searching of an antinational government to separate the people, it (the government) itself is gradually b e c o m i n g the fiction, because the people, o u t of their practical n e e d to survive, go over to an illegal way of life. Now

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a m o r e a n d m o r e powerful "state within the state" is being created. This, in a short while, thanks to the shortsighted vain steps of the world government, will throw down from the stage the presently unnecessary antinational government. This threat is so real that now a b o u t the "Russian mafia" (to p u t it exactly — organized crime) is described as a serious competitor in the re-shaping of world's economy a n d territories — in all countries, especially in the developing ones. Strictly speaking, there is n o t h i n g strange a n d unusual in it. It is simply the ripening harvest of what h a d b e e n planted d u r i n g the process of breaking down Russia. A mighty state comes out of the shadow to the light, directed by the beast's laws, where its own laws act: a n d so this y o u n g p r e d a t o r becomes d a n g e r o u s for the old beasts. O n the far east of Russia, as everywhere, organized crime is developed in all directions. T h e displays clearly show the spreading of the criminal m o n o p o l y in the as-yet shadow state. At the same time, similar to processes in o t h e r countries, the greatest players take over those firms that are nearest to the profit sources. A n d if there is profit that means that there is a further connection to the economic administration. For the far eastern region the most typical sectors of organized crime are: • • • •

natural raw materials (timber, metals, oil products; reserves offish a n d o t h e r sea products) a n d financial machinations, construction business, trafficking in everything — b e g i n n i n g from natural resources a n d motorcars a n d e n d i n g with h u m a n beings!

T h e r e are n o reliable statistics available — b u t according to the evaluations of the Ministry for H o m e Affaires (MVD) organized crime controls 4 0 - 5 0 % of the country's economic sectors. O t h e r evaluations only increase this figure. They suppose that the criminal syndicates control over 50 p e r c e n t of Russian banks. T h e lawlessness can take worse forms, which lead into the vicious circle of impoverishment a n d greediness. This is m o r e characteristic of the farthest a n d consequently m o r e badly governed regions of the

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country, for instance Primorye. T h e so-called 'thief in law' "Jam" (Vassin Evgeny Petrovich) is considered to be the shadow governor of the far east: h e practically single-handedly controls over Far Eastern "obshchak". According to the analytical center of MVD of Russia h e is o n e of the ten of most authoritative 'thieves in law' in Russia. Annually, in the exclusive economic zones of Russian Far East, about four millions of tons of bio-resources are shoveled out of the sea, yet the legal export of sea products consists only of o n e million tons. T h e illegal gap — is m o r e than two million tons, b u t in the Russian market, only a b o u t ten p e r c e n t of the p r o d u c t remains. Annual losses for the country reach to a b o u t two millions of US dollars. T h e stealing from inside of the fleet, especially m a i n fishing o n e , gained h u g e a m o u n t s for the perpetrators. By the beginning of 1998 there were 1135 commercial companies registered in the region, which also h a d 2629 fishing ships. By the e n d of that year their n u m b e r was r e d u c e d by 530 units, a n d that process has b e e n "successfully" c o n t i n u e d (Reznik B, 1997; 1998). However, the illegal timber business — as a kind of criminal trade — appeared in Primorye after 1992, a n d since that time has reached an impressive m a g n i t u d e . T h e total volume of illegally p r o c u r e d timber across the region for o n e year comprised, according to some evaluations, about 1.5 millions of cubic meters. O n e of Chinese firms in the town of Nakhodka, having sold timber to J a p a n during 1998, gained US$5.5 millions of n e t profit, b u t their tax liability in Russia was... 10 rubles 47 kopecks! (Veterkova & Rudenko, 1999). T h e main displays of organized crime are as follows: Availability of such criminal societies the base of creation for which is n o t a c o m m o n criminal activity b u t the c o m m o n interests of its corporation, e n l a r g e m e n t a n d so o n p r e p a r e d for it the most favorable conditions. Availability of leaders from a criminal e n v i r o n m e n t a n d o t h e r persons practicing widely organized criminal activity ("thieves in law", "authorities", "warders", "petitioners" etc.). Crimes, committed in coordination with each o t h e r (exchange of killers etc.).

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Striving to widen the use of institutions of state a n d civil society (funds etc.) in criminal aims. Organized crime of Russia a n d its activity have acquired a m o r e distinctive transnational nature (Criminality..., 2001). Forcing the criminality o u t of business, h i n d e r i n g it coming to power, using severe measures by state organs ("cleaning-up" in Novorossiysk, Yekaterinburg, Krasnoyarsk region) show us that such a policy is possible. However, the opposition of the official society to the criminal society should be accomplished n o t only t h r o u g h a narrow legal nature, b u t also by economic a n d spiritual means. T h e characteristic feature of fighting organized crime u n d e r such conditions d e m a n d s a realization of the following measures in a system: Liquidation of organized criminal structures as such; Prevention, revelation a n d isolation of organized criminal activity; Revelation, cutting off the m o v e m e n t a n d confiscation [on the basis of law] all criminal funds, a n d n o t letting t h e m be legalized; Restoration of social relations damaged by the organized crime; Education of people, particularly the growing u p generation, in the spirit of an u n c o m p r o m i s i n g attitude to antisocial evil. T h e r e must be an assurance that: a) we might be guaranteed a complex of measures for the fight against criminality; b) we are intolerant of b e i n g carried away in some periods by the totality of measures of crime prevention; a n d in others by a reliance only on law enforcement, primarily by punitive measures (Dolgova, 2001).

Corruption of Officials T h e total n u m b e r of the state apparatus consists of 333,232 "units" (including 24,904 "units" of central apparatus). For these "units" the b u d g e t gave 39,727 millions rubles. This may seem a large sum of money — b u t it has b e e n known since the time of Peter I that

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officialdom (red tape) in Russia is ineradicable. In modern times the supreme power has undertaken many different reforms, reorganizations and staff reductions — thus the above sums are not enough. Acting against the State, it is estimated by officers of law enforcement bodies [who are engaged in fighting corruption], businessmen have to pay for the services of officials from 20 to 50% of their profit. Helpfully some foreign secret services have filed many volumes of dossiers for the Russian corruptive officials. In the draft law "About the fight with corruption" the legislator should have defined the kinds of crimes that belong to corruption, while in the new criminal procedure code of Russian federation, crimes of officials and bribery should be ascribed to the investigation competence of federal security service. A comparison of a moralistic and functional approach is evidence that corruption could not be explained only by a moral degradation of some authority's representatives. It (corruption) is an indicator of a correlation between group interests, and that it is a connection between formal and informal elements of the system of social government. They single out one more approach in the definition of causes of corruption — structural-functional. The main idea is that corruption as a deviant social behavior, and it is an unavoidable attribute of a developing society to which a weak mechanism of social control relates. Even in the USA one can observe the process of a state regulation of private undertaking in order to protect the interests of the society. In the USA and Japan there is the whole series, not only of general laws that regulate business on the whole, but a number of special laws on which basis the development of business in these countries was predicated. The comparison of criminal legislation related to the organized crime of Russia, European countries, and USA, make evident a certain trend to rapprochement of such legislation. Law making traditions mainly cause the difference. In the USA it is the law about controlling the organized crime of the 1970s. The main goal of "Status RICO" is to try to stop the penetration of organized crime into legal business. As a development of that law we see, in 1971, the adoption of the law about controlled substances

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(the latter has provided a section of legislation against the permanently active criminal enterprise). In Russia there has been an open question over several years about legislative 'fixing of amnesty' of funds "escaping" from the country — it has been discussed at the level of experts consultations. The question is pressing, if we are to believe that in country regions there are no more free funds that Moscow could divert as investments into the home economic. For instance, the parliament of Kazakhstan went further along this route, and on 14 th of June 2001 adopted the law "About amnesty of citizens in connection with their money legalization". This allowed a 'breathing space' of only 20 days for dubious funds transfer. Another way was chosen by the Ukrainian National Bank, which had prohibited the operations of the accounts of commercial banks situated in some off-shore countries: it had one-sidedly terminated contracts about the establishment of correspondent relationships. This however is not unique to Russia, we note in passing the scandal around Bank of New York that had announced the problem of changing the bank legislation in the USA. There were suggestions made to guarantee the deposit confidentiality only for American citizens, and the alien depositor-liars should be made criminally responsible and the immediately arrested. A large share of Russian funds passes through the Primorye region using so-called "one-day-firms". More and more popular to transfer funds away become barter transactions. Many businessmen like this method because it allows the factual data of the whole operation, and of all transactions, to be hidden with apparent legality. However, it should be pointed out that the pretty fashionable idea in Russia about amnesty about "escaped" funds would work only under one condition. That is, if the businessmen, in spite of their reputation, must have a guarantee that after returning the money it will not be impounded, and the businessmen themselves will not be imprisoned. The State Duma of the Russian federation has tried many times to adopt the law countering the laundering of criminal profits. We recognize that beyond Russia the main sources of "dirty" money are considered to be murder, narcobusiness and prostitution. Within

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Russia try to p u t into this "dirty money" category tax, customs a n d foreign exchange crimes. We must h o p e that invoking the help of the West against accepting "Russian criminal money" will help stem its flow from the country. T h e experts a n d the Russian population itself a m o n g the main causes that u n d e r m i n e the authority of the country in the world n a m e the economic weakness of Russia 80% a n d 67% a n d corruption a n d criminality, which have seized Russia (correspondingly 67.1% and 59.9%). The results of analysis of existing law enforcement practice bring us n o comfort-ing conclusions. We think that the measures taken for countering the economic crimes d o n o t answer the reality of the present day when the crimes in the sphere of economic activity seriously threaten the foundations of the state. Presently the West is c o n c e r n e d about three possible directions of c r i m i n a l d e v e l o p m e n t : First, t h e o r g a n i z e d c r i m e a b r o a d . Transnational groups a p p e a r to be a factor of instability a n d threat to the stable order. Second, organized crime often is so powerful that it is able to afford to establish its own "state within the state". N o less a disturbance is its "cooperation" with foreign criminal societies in the field, w h e r e Russian criminals now have their competitive priorities. J a p a n e s e gangsters groups, for instance, used the help of Russian hackers to break into c o m p u t e r databases of their law e n f o r c e m e n t bodies. A n d Russian professional killers are in great d e m a n d . Third, a n d maybe the worst, threat is h i d d e n in the merging of the apparatus of corruption with influential criminal groups. It is clear that the interests of organized criminality have global character a n d obviously are not drawn towards isolationism. But the growing concern is related to the fact that the activity of Russian a n d foreign organized criminal groups are aimed to p l u n d e r the natural resources of Russia. T h e transference of funds t h r o u g h the b o r d e r etc. would hardly be possible without the help (obvious a n d h i d d e n ) of the State structures b o t h of Russia itself a n d of neighbor countries. T h e social a n d cultural nature of corruption creates a paradox when, the daily practice of the corruption within Russia (in contradistinction, let us say, to m u r d e r ) begins to be interpreted n o t so

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m u c h as a wrongdoing, b u t rather as a n o r m of behavior. In accordance with this the society manifesting in words its resolution to get rid of such dangerous evil in reality sabotages the fight against it, b o t h o n a legislative level a n d o n the level of law implementation. Besides, the situation is aggravated by the fact that, as in China where the high-ranking officials of state a n d party apparatus are i m m u n e a n d 'above the law', so it is in Russia that highranking officials have the possibility to avoid criminal p u n i s h m e n t (Folsom etal., 1992). T h e true foundation of power lies in the spiritual respect a n d trust of people toward the government a n d of government toward the people. Each side should recognize, by its own sense of justice, the sense of justice of the o t h e r side, a n d so m e r g e with it to create a sense of unity. T h e exit from the "criminal trap" may be found in a perceptive complex decision relating the bi-united task of effectiveness a n d humanity in the fight against the continuously growing destructive h u m a n behavior. This rests in e x p a n d i n g a n d d e e p e n i n g social a n d legal control based o n the laws a d o p t e d in a democratic way (Luneev, 2001). It seems that the fate of the "Dry Act" in the USA is in store for Russian a n t i c o r r u p t i o n measures, as is the amnesty of illegally obtained profits (Sacks, 2001). Apparently the uncertainty in the consciousness brings us to the fact that in o n e of the versions of the draft law "About fight with corruption" there are two peculiarities. First, the definition of corruptive behavior has b e e n transformed from official abuse to bribery; second, the definition of bribery was changed to bribe giving. We can note h e r e the principle mistake by the developers of the draft. Changing corruption to bribery contradicts the logic of Russian criminal legislation, where the central role in the fight with criminal displays of corruption centers in article 285 of Criminal Law of Russian Federation. It includes the c o m m o n generic definition of abuse of official power, a n d at the same time serves as a reserve for the cases when special articles do n o t provide for the official wrongdoing. T h e latest version of the draft law "The bases of anticorruption policy" tries to eliminate this imperfection. In the explanatory note to the draft of this federal

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law it has b e e n stated that corruption consists n o t only of actions c o n n e c t e d with bribery (the giving a n d taking of bribes) by state officials, state a n d municipal officers, b u t does also consist of o t h e r abuses of persons having a public status c o n n e c t e d with illegal obtaining (appropriation) by such persons of properly, services or privileges contrary to the interests of their service (Mishin, 2000; Project, 2001).

A Short Overview of the Situation in the Far East Countries beyond Russia How d o the countries of the far east try to solve the problem of corruption? Which trends are real processes in those countries, a n d what should we expect from t h e m in the current "Age of the Pacific region"? T h e countries — China, J a p a n , South Korea — have recently b e e n characterized by some stability in their comparatively low rate of " c o m m o n " criminality: a b o u t 4—5 times lower than the related data of western countries (Korchagin & Ivanov, 1999). About o n e a n d a half centuries ago, b e g i n n i n g from the sixties of the 19 t h century after the western powers h a d contributed to final termination of self-isolation of the Far East countries, some of the politicians of those countries analyzed why they h a d to "lose out" to the western powers. They came to a peculiar conclusion that the power of western states a n d their scientific a n d industrial progress could have strongly d e p e n d e d o n the ideology of those states. Having attempted to accept some western European legislation a n d the basics of Christian culture the far east countries, really, began to d e m o n s t r a t e unusual changes in their social a n d economic development. Maybe their main achievement was the gain of democratic freedom, which became the basis for the potential development of people. But the excessive enthusiasm over the outer manifestations began gradually to bring a loss of i n n e r values. After that, many of politicians began to connect the decay of morality, a n d growth of the level of crime in their countries, with the influence of the same aspects in western civilization, n o t i n g their negative features (Ivanov, 1999).

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Moreover the moralization of law is fraught with negative consequences. On the one hand the dissemination of moral evaluation for the law contradicts the principle of autonomy of these norm-regulative formations. On the other hand the law cannot be excluded from the influence of moral evaluation. Here we could presume that the state power and the private lives of citizens are closely interconnected. The extent of state-law regulation of private life depends on the certainty of its influence: the outer (functional) aspects are regulated by the law, the inner (ontological) by other social norms (Baranov, 2000). Here we have also to take into account some negative factors of globalization, which is sometimes performed by inappropriate methods. Unjust distribution of goods from globalization generates social tension and threatens conflicts on regional, national and international levels. The West having less than 15% of Earth's population controls over 70% of world's production output, trade, and consumption. The social stratification according to numerous criminological investigations supports crime-generation. Among other problems of globalization we could also cite potential regional or even global instability because of mutual dependence of national economics at a global level, as well as fear, that the control over the economies of separate countries can pass from sovereign governments to other hands,

including here are the more powerful states, multinational or global corporations and international organizations. Due to this fact some scholars see in globalization an attempt to undermine the national sovereignty (Korchagin & Ivanov, 1999; Ivanov, 1999). The globalization of criminality, and the appearance of Russian criminal groups on the "markets" of Asian Pacific region has become a severe reality for the Russian law enforcement bodies. Today in the territories of the far east there are 149 major criminal groups, and 40 of them are "international" ones. The influence of their activity upon our region is quite traditional. The poaching, fishing, and smuggling of currency related to the consumption of sea products have already brought to our notice, in so far as their prices in Russia have been dictated by the aliens. Meanwhile, there were only 17 criminal cases initiated successfully involving ships

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captains — of Russian, J a p a n e s e a n d Chinese ships that "traded" in Russian waters. As a result only eight m e n were sentenced, which is certainly comparable to a d r o p in the ocean. "In o r d e r to make our efforts m o r e effective Russia has to finalize intergovernmental a g r e e m e n t s with C h i n a a n d J a p a n " , p o i n t e d o u t t h e g e n e r a l prosecutor, deputy K. Chaika. Not less alarming is a n o t h e r trend, which has b e e n fashioned over a long period — it is the transformation of Russian Far East to be an international transit corridor for narcotics. Even now we are unable to make a powerful e n o u g h barrier against the flow of efedron, which comes to Russia from China (Novak, 2001). T h e process of globalization provokes the establishment of some symbiosis of economical, organized and transnational crime, which is m o r e d a n g e r o u s than all currently existing forms of organized crime even if taken together, because it inherits a destructive capacity from the existing kinds of organized crime b u t now in a concentrated form. We already have observed how the organized criminal associations actively pass from violence to m e t h o d s of economic activity a n d how they learn how to master transnational relations. If the process of that m e r g i n g continues in the same direction t h e n the whole m a n k i n d runs risk awakening u n d e r a new invisible power controlled by a small g r o u p of criminals. Taking into account that retaining a h u g e population of their countries in obedience has for the governments a specific difficulty, the latter very often c o m e to conclusion that the way o u t of their "corruption dead-end" a n d "vicious circle" of crime lies in r e t u r n i n g to their national traditions, cultivating the positive relationships in their society. In J a p a n , for example, in order to fight the corruption of the officials, the government tries to develop new ethics codes o n the basis of the moral principles of the former nobility. This has b e e n derived from the well-known code of H o n o r of Samurais "The way of the bushido" (Kolodkin, 1996). In China, the development of the educational a n d cultural levels of Chinese population, plus the demonstrative factor (becoming acquainted t h r o u g h cinema, radio, TV, tourism etc. with the way of life in o t h e r countries) have caused explosive changes in the growing-up needs in providing for

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m o d e r n conditions of material a n d cultural life. This growth of needs in China is n o t linear b u t an o u t c o m e the growth of population (Naumov I, 1997). T h a t is why, in addition to the n o r m s of criminal code of China, which regulate bribery, the government tries to popularize old Confucian traditions. With that purpose, an encyclopedia on Confucianism in five volumes was newly republished (Korchagin & Ivanov, 1999). Such an a p p r o a c h is typical of the countries that were u n d e r the influence of Confucianism. T h e scholars a n d many practitioners across the whole world have warned that it is very difficult to make s o m e b o d y respect the law if it does n o t contain moral-ethical implementation (Di Pietro, 1999). That is why, for instance, Antonio di Pietro affirms that we have to take into account the fact that though proposals directed to the successful opposition to corruption which come from the temporal culture, nevertheless they almost fully coincide with the canons of catholic religion. These are n o t groundless, as h e recalls, "If we want to escape the t h r e a t of destruction of the law state (Rechtsstaat), we are bound to admit, that exactly ethics a n d morals have the m a i n role as indispensable conditions for a n o r m a l functioning of the society. Without a wide dissemination of moral a n d ethical standards taken a n d shared by all, o n e can never expect either that people suddenly begin to respect the law, or that in a country there will a p p e a r a feeling of legality" (Ibid). Thus b o t h East a n d West, in their main approaches to fight corruption, u n d e r s t a n d the situation analogously a n d o n the whole, in its essence, propose o n e a p p r o a c h — the dissemination of moral a n d ethical standards shared by all.

Comparisons of Fights against Corruption — as a Way of Perfecting of Russian Legislation Actually, this work is review of t h e existing variety of m e c h anisms that influence the control of organized criminality a n d corruption. T h e i m p o r t a n c e of comparative research for Russia lies in the fact that o u r country has b e e n for a long time a multi-

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confessional, -national, -racial state. Therefore the experience of Russia in its d e v e l o p m e n t of the legislation, taken against the experience of foreign countries, can play an invaluable role for the world's community as well, in their preparation of such acts of i n t e r n a t i o n a l law, which in m o r e c o m p l e t e m e a s u r e c o u l d correspond to the essential needs of the majority of the states. Life shows that the struggle against corruption is n o t achieved only by the application of the rules of criminal law. Moreover, as it seems to us, neither can the struggle be won by the means of any o t h e r b r a n c h of the law. In effect, if we consider the p h e n o m e n o n of corruption in the b r o a d sense of the word, it is n o t simply a crime or w r o n g d o i n g — it is the condition of the c o r r u p t e d soul that has got used to living in a sin. Each country has its own culture, the folks have their own worldview, way of thinking, a n d they differentially u n d e r s t a n d such concepts as "crime" a n d "corruption". For example, in some countries the corruption is almost completely a synonym of bribery, in others it is u n d e r s t o o d m o r e widely — such as the degradation of the state authority, a n d even of society itself. T h e comparative research can be carried out, as it is known, in three various phases: 1) it is possible to c o m p a r e the legislation of the various countries; 2) t h e n we can study the legislation of o n e country t h r o u g h its historical development; a n d 3) then it is possible to compare the norms of law regulating necessary relations in different branches of the law. T h e concrete n o r m s of law (those of criminal-law, administrativelaw, civil-law, etc.) are kinds of tactical measures of influence o n displays of corruption in a society. However, in all of this o n e can assume it is as an attempt to influence the consequences, which have arisen as a result of actions already of the formed person. It seems to us, that such a "narrow a p p r o a c h " to the problem of corruption reveals a hopelessness of the struggle against it, by virtue of the n a t u r e of h u m a n essence. As a matter of fact, all m o d e r n researches of the struggle against corruption a n d official service offences are

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r e d u c e d to development of the moral a n d ethical codes for the officials. It is n o n e o t h e r than an attempt to re-form the persons who are already "deep-rooted" in their worldview a n d evaluation orientations. It is difficulty to b e n d an adult tree, as it, m o r e often, does n o t b e n d b u t breaks. We have to b e n d a y o u n g tree. In o t h e r words, o u r aim must relate to their development "from the time of the cradle" to b e c o m e persons who have anti-crime as a n o r m a l way of thinking. It was n o t e d above, that b o t h East a n d West in their m a i n approaches to the struggle against corruption similarly u n d e r s t a n d the situation and, in general, as a matter of fact, offer o n e a p p r o a c h — the distribution of the moral a n d ethical standards to be shared by all. However, the adoption of the codes of official behavior, in itself, "from above" can a p p e a r an ineffectual step. These ethics should "have taken root" m u c h earlier in the officials. H e n c e , it is important, not to rely so much on the availability of the code or collection of rules or n o r m s of behavior, which such code include, b u t u p o n the existence of the person ready to adequately apprehend these norms and to adequately react to them. Therefore, as shown in the experience of Russia a n d of o t h e r countries, with respect to the laws about corruption, perhaps an appropriate p r o g r a m of education a n d preparation of the younger generation, that is — of appropriate staff — is necessary. For it is known, that from what the youth is — d e p e n d s the future of the world. A n d just in this very case, the p u n i s h m e n t of c o r r u p t e d persons will look fairer, rather than it is now, w h e n the state makes r e s p o n s i b l e t h e p e r s o n , w h o is n o t b r o u g h t u p by it in t h e a p p r o p r i a t e spirit. Besides, the y o u n g e r person, who has b e e n b r o u g h t u p in the spirit of u n c o m p r o m i s i n g attitude to any sort of offences, even if having committed u n d e r some life circumstances a certain offence, will have internal conflict. This will in effect be a pledge of correction of the person, since the person realizes the antisocial n a t u r e of his action. As a conclusion it is possible, probably to specify, that the systemic character of corruption in a m o d e r n society should be o p p o s e d by a systemic counteraction. In o r d e r to form the anti-corruption

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mentality in a system, a regular (system) control of the external flow of the information is necessary which directly and indirectiy influences the formation of corruptive person, in which (person) the latter's personal passions a n d ambitions prevail over the public interests. As it is always desirable to study n o t ones own b u t another's mistakes, comparative researches can, undoubtedly, serve to perfect the legislation of Russia in its various branches of the law that struggle against displays of corruption.

What Should We Expect from the 21 s t Age? Observing the Trends — in b o t h Russia a n d in the neighbor countries we can foresee that a further weakening of state a n d legal control is highly likely. U n d e r visible increases currently of the n u m b e r of registered criminal organizations these increases predict m o r e latent crime. To illustrate the process, we think, it would be e n o u g h to compare data concerning Russia and China, as in these countries the observable process is m o r e obvious. T h e n u m b e r of active criminal organizations, for e x a m p l e (according to the official data of MVD of Russia) for the period 1990 to 1998 has increased almost in 16 times (from 785 u p to 12.5 t h o u s a n d ) ; the n u m b e r of the participants of these organizations has grown 5 times (from 15 thousand in 1991 u p to 75 thousand members) (Vanyushkin, 1999). T h e Chinese officials point out the sharp growth in recent years — b o t h of the n u m b e r of organized criminal groups, a n d of the n u m b e r of their members. However, c o n t r a r y to J a p a n , they have n o t observed yet m u c h obvious consolidation of gangs in criminal syndicates, t h o u g h this process is gradually occurring. According to Chinese statistical data, d u r i n g 1983-1986, when t h r o u g h the whole country serious measures o n the eradication of criminality were undertaken; they revealed 197,000 criminal g r o u p i n g with a total m e m b e r s h i p of 876000. U p to 1994 the growth was 306 p e r c e n t in the n u m b e r of criminal groups, a n d

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403 p e r c e n t of their m e m b e r s . T h e groups themselves have undergone changes as well. Roughly speaking 1986 saw the beginning of a high growth in tightly c o n n e c t e d a n d highly organized forms of u n d e r g r o u n d movements (He Bingsong, 1996). In opinion of the experts, the Russian law-enforcement bodies a t t e m p t e d b u t only r e g i s t e r e d less t h a n o n e q u a r t e r of real criminality, obtaining less than 50 p e r c e n t of guilty sentences from the registered actions, a n d they b r o u g h t to the court only o n e in ten of actual criminals (Luneev, 2000).

The Actual Transformation of Russia — to a "raw materials a p p e n d a g e " of foreign countries on the backg r o u n d of the general breakdown of national economy, will p r o m o t e the further export from the Russian territory of natural resources, sea products, metal etc. This will give economic criminality greater p r o m i n a n c e , in comparison with o t h e r kinds of criminality. And it will occur on a b a c k g r o u n d of weakening revelation of crimes a n d the incompleteness of their qualification.

The Transnationalization

of Criminality

— as a process, criminality will be s t r e n g t h e n e d as a consequence of the above two reasons. It will find expression in the increase of n u m b e r of crimes m a d e by foreign citizens, especially from China a n d Korea. This change process can be observed already. Chinese citizens actively participate in illegal export of natural a n d biological resources, especially of timber, metal, seafoods, a n d wild plants. T h e aliens will be m o r e active in i m p o r t a n d transit of drugs. During recent years, a n d it has b e e n p o i n t e d o u t by many experts, the narcobusiness on the far east has b e c o m e stronger a n d has strongly fixed its positions. Now, in selling of h e r o i n together with derivatives of h e m p , are n o t engaged at the individual "businessmen" level, b u t via the organized criminal groupings (Volyntseva, 2001).

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Russia entered the third millennium with approximately [only] three millions of the registered drug addicts. In truth, there are many more. But until now in Russia there is no clear policy on the struggle with drug addiction. It seems, that under such conditions control only by measures of law-enforcement and upon the medical character, the ways of distribution of drugs can hardly be blocked. This has been realized all over the world for a long time. The Americans, having announced the struggle with drug addiction to be a national program, invest in counter measures from US$8 to 15 billions annually. Although in the Philippines and in China (and elsewhere in Asia) there are the severest measures not only for collecting and storage, and for the use of narcotics, nevertheless drug abuse is increasing. But in Russia all national counter-measures programs are reduced only to conversations about necessity of serious changes in the criminal law, criminal procedural and administrative legislation. It is not enough. Criminal groups for example, of the Far East will continue strengthening cooperation with local criminal organizations and maintain their "pressure" in foreign territories, especially in Southern Korea, China, and the western coast of USA etc. From our viewpoint this is the Pacific Rim. The Process of Corruption

— of bodies of authority and management, law-enforcement bodies will get its due rewards. Under conditions of the deformation of power, the continuation of a serious crisis situation in the economy, and in the absence of an integral system of measures of struggle against corruption (as well as in the absence of a comprehensive specialized law) we can hardly expect any radical change in the counteraction to this most dangerous phenomenon. Corruption, as an obligatory component of the organized criminality, is mostly observed in the economic sphere. As more and more economic disputes are settled with attention of lawenforcement bodies and their use of legal methods, it is no wonder

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that the corruption is e n h a n c e d in those institution using m e t h o d s , i n h e r e n t only in t h e m . O n e of such m e t h o d is bankruptcy, which in its present condition, as the chairman of arbitration court of Khabarovsk Territory Serov N. frankly has admitted o n a hearing in the Regional Duma, becomes a regrettable means of redistribution of property a n d the elimination of the competitors (Ivanov, 1999). However corruption prospers n o t only injudicial sphere. As the deputy of the State D u m a Boris Reznik has declared, every third corruption crime in Russia is c o n n e c t e d with the illegal circulation of drugs. Even people with diplomatic passports are engaged in this business. In Khabarovsk a case recently took place, when over forty kilograms of industrial h e r o i n were withdrawn from the citizens of DPRK. Further, quite often even employees of law-enforcement bodies participate themselves in transportation of drugs. T h e r e are cases, w h e n the revealed drugs were n o t destroyed b u t distributed t h r o u g h law-enforcement bodies.

Criminality in thejuvenile

Population

there will be further growth of criminality in thejuvenile population and, p e r h a p s — a sharp o n e — will take place. Nowadays all over the Russia (as well as in the Asian Pacific countries) we observe the destruction of the institute of family. Its disintegration, degradation, weakening of family relations, irresponsibility of the parents, their cruelty a n d violence etc. are all observable. It seems that it is a purposeful state policy of these countries which actively promotes the fact that whole armies of embittered a n d h a r d e n e d teenagers have grown u p to b e c o m e the robbers a n d violators. In their turn, the 'thieves in the law' pay attention "to their work with the youth" since in these cadre lie many young leaders of the criminal underworld. As a result of a perverse change of public consciousness predicated o n the strong influence of mass media, we find the population m o r e a n d m o r e rarely perceives corruptive actions as crimes (28).

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Conclusion In s u m m i n g u p we can make a general conclusion: the criminal situation a n d that of corruption in Russia will continue to worsen. Particularly as at the present time we observe the process of transformation of Russian far east to be o n e of new world's centers of activity for transnational organized crime. In these regions a n d groups we will observe a rise in narcobusiness, in the trafficking of people, a n d of economic crime that are almost impossible to commit without corruption. T h e economic potential of the far east makes the region o n e of the most attractive in Russia to be the " h o m e " for local a n d for foreign organized crime. It is precisely h e r e that o n e can obtain a massive profit t h r o u g h t h e c r i m i n a l o r g a n i z a t i o n s t h a t have interregional a n d international criminal relations.

References 50,000 soldiers of criminal army. Novosti, June 9 th , 2000. Baranov VM & Golovkin RB (2000) State and legal impact on private life of citizens in modern Russia: Legal and philosophic analysis. Filosofiya prava, 2: 33-36. Di Pietro Antonio (1999) My Policy. Cit. according to: J\w IlseTpo AHTOHHO. MOH nonHTHKa. U,HT. no: HTanna - onepau™ "HHCTHC pyKH" COCT. B.A. BaimaH; OTB. pea\ Cepa;>KO POCCH. - M., K)pimHHecKnft /JOM "IOCTHUHH(})OPM", C. 61. (- 72 c.) (c.

62).

Dolgova AI (2001) Criminality in Russia and Problems of Struggle with It. In: Dolgova AI (ed.), ITpecTynHOCTi, B POCCHH H npo6neMH 6opb6bi c Heft. IIOA pea. npocjteccopa A.H. .ZJonroBOH. - M., PoccHHCKaa KpHMMHOJiorHHecKaa accouHanHJi: 41-45. Dolgova AI (2001) Criminality, its kinds and organized crime. Presentation to the Conference Problems of Struggle with Criminal Market, Economic and Organized Crime. /JonroBa A.H. IIpecTynHOCTb, ee BHflti H opraHH30BaHHaa npecTynHOCTS. IIpo6jieMbi 6opb6bi c KpHMHHajiBHMM PBIHKOM, 3KOHOMHHecKoft H opraHH30BaHHOH npecTyiiHOCTbio. MaTepnajibi KOH(})epeHUHH. - M., PoccnftcKaa KpHMHHonorHHecKaa accomiaiiHH: 6-7. Folsom RH, Minan JH & Otto LN (1992) Law and Politics in the People's Republic of China. West Publishers: 160-161.

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Garayev RF & Selikhov NV (2001) Definition of corruption. Sledovatel, 2: 43-50. He Bingsong (1996) Interview, conducted by Roy Godson. Trends in Organized Crime 2(2): 8-9. Homenko A (2001) Bankruptcy today: A method to revive a venture or to destroy it. Priamurskiye vedomosti, March 12—18th. Ivanov AM (1999) Crime-generating a n d destructive impact of "democratization" in China, Japan and Russia. Presentation to the scientific conference dedicated to 100th anniversary of Far East State University, Vladivostok: 331-336. Ivanov AM (1999) 7b the problem of deviant behavior of juveniles in the Pacific Region Countries. Abstracts of the report to the conference Crime and Children. Moscow: 10. Kolodkin LM (1996) Corruption and deontologic measures of struggle with mercenariness. (Bushido in Japan). A presentation to the scientific conference Corruption in Russia: State and Problem, March 26-27, Moscow: 97-105. Korchagin AG & Ivanov AM (1999) Crime and Punishment in the AsiaPacific Countries. Vladivostok. Luneev V (1999) The tolerance of the authorities toward corruptive officials is brought to absurd. Chistiye ruki, 2: 26-33; Luneev W (2000) Legal regulation of social relations — Important factor of prevention of organized and mercenary crime. Report at international conference in Moscow, November. Luneev W (2001) Legal regulation of social relations — Important factor of prevention of organized and corruptive crime (Abstracts of the report). Gosudarstvo i pravo, 5: 106-112. Mishin G (2000) Struggle with bribery: Some directions of perfecting of criminal policy. Ugolovnoye pravo, 3:75-80. Naumov I (2001) Definition of "Xiaokan" and problems of increase of people's welfare. Problemy Dalnego Vostoka, 6:91. Naumov O (1999) Dictatorship of economy. Commersant, June 2 nd . Naumov O (2000) Oligarchy or autocracy? In: Democracy! The Power in Russia between Oligarchy and Autocracy, hvestiya, November 17 th . Novak O (2001) Crime does not recognize the border. Tihookeanskaya zvezda, April 3 r d . Oshchepkova T (2001) The age of criminal changes. Novosti, January 26 th . Project of Federal Law "Bases of Anticorruption Policy" (2001). Ugolovnoye pravo, 1: 87-98.

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Reznik B (1998) Through the holey net. Far Eastern fleet started to be plundered. Izvestiya, December 17 th . Reznik B (1997) Mafia and sea. Izvestiya, October 21 st . Sacks VA (2001) Social and cultural premises of corruption. Gosudarstvo i pravo, 4: 52-55. Social State of Khabarovsk Region in 2000. Khabarovskiye vesti, March 6 th 2001. The 12 th International Congress on Criminology (1998). Crime and justice in a changing world: Asian and global perspectives. Abstracts and participant's directory. Seoul, Korea, August 24-29 th . Vanyushkin SV (1999) Organized crime and directions of struggle with it under reforms in Russia. Abstract of dissertation. Moscow: 3. Veterkova N & Rudenkov V (1999) Forest lads. Novosti, February 26 th . Volyntseva A (2001) Criminal business cannot be overcome by disputes. Tihookeanskaya zvezda, March 1st. Volzhenkin B (1999) Corruption as a social phenomenon. Chistiye ruki, 1: 28-31.

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Chapter 6

Monopoly Rights and Wrongs: IWo Forms of Intellectual Property Rights Violations in Asia

Hock-Bens Cheah IPR theft hurts not only our national economy, but our world economy as well. This crime is already costing industry approximately 200 billion [US] dollars ... a year in lost revenue and nearly 750,000 jobs .... Our investigations have shown that organized criminal groups are heavily involved in trademark counterfeiting and copyright piracy. They often use the proceeds obtained from these illicit activities to finance other, more violent crimes.1 Contrary to the so-called free trade and trade liberalization principles of the WTO, TRIPs [the Agreement on Trade-Related Aspects of Intellectual Property Rights] is being used as a protectionist instru-ment to promote corporate monopolies over technologies, seeds and genes. Through TRIPs, large corporations use intellectual property rights to protect their markets, and to prevent competition. Excessively high levels of intellectual property protection required by TRIPs have shifted the balance away from the public interest, towards the monopolistic privileges of IPR holders. This undermines the sustainable development objectives that underpin [the European Union's] development policies, including poverty eradication, conserving biodiversity, protecting the environment and the realization of economic, social and cultural rights.2 Raymond Kelly, US Customs Service Commissioner, statement before the subcommittee on international economic policy and trade of the US House International Relations Committee, Washington, D.C., 13 October 1999. 2 Bob van Dillen, CIDSE Secretariat, statement to the European Parliament, Brussels, 19 September 2001.

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Introduction Intellectual property rights (IPRs) are m o n o p o l y rights created by legislative authority, with the intent to reward the owners of those rights with private benefits, for inventions a n d innovations that contribute to public benefit. 3 T h e tensions between the private benefits accrued from the monopoly thus created, a n d the public benefit i n t e n d e d by legislation, form the basis for the significant controversy over intellectual property rights violations (IPRVs). Are IPRVs a serious problem? If so, why, a n d for whom? These questions will be e x a m i n e d in relation to (a) the evidence o n the extent of IPRVs in Asian countries; (b) the recent changes in the international IPR regime; a n d (c) the responses to the international extensions of the IPR regime. T h e m o n o p o l y rights conferred o n intellectual property take the principal forms of copyrights, patents a n d trademarks. 4 Copy-right is provided automatically to the authors of original works such as books, music, movies, paintings a n d c o m p u t e r programs. Copyright was n o t aimed to protect the ideas associated with these works, only their form or expression manifested in tangibles such as publications, sheet music, a n d video recordings. T h e associated benefits include the exclusive right to reproduce the work, to create an adaptation or derivative work, a n d to engage in public performance. These benefits may extend for a period 70 years beyond the life of the author. 5 Patents are scientific a n d legal d o c u m e n t s that provide full disclosure of the technology associated with an invention. They are granted to the 'first to invent' (in the USA) or 'first to file' (in the rest of the world) basis, subject to the tests of novelty, non-obvious-

3

In the USA, the legal foundation for IPR rests with Article 1, Section 8, Clause 8 of the US Constitution, which vests Congress with the power "[t]o promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries." 4 O t h e r forms of intellectual property include trade secrets, geographical indications, industrial designs, integrated circuit design layouts, and plant breeder rights. 5 Scott (2001). For a recent survey of the literature, see Gordon and Bone (2000).

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ness a n d utility. They provide p a t e n t owners the exclusive right to exploit the invention, for 20 years. 6 T r a d e m a r k s c a n e n d u r e indefinitely, subject to r e c u r r e n t registration. They offer protection against infringement of distinguishing features such as b r a n d names, corporate logos, a n d geographic indications. This protection helps to establish a clear identity for an organization a n d its products to its customers a n d a m o n g the public at large. This offers some assurance of p r o d u c t origin a n d quality, a n d protection against confusion, counterfeiting a n d other deceptive practices. Considerable resources have b e e n devoted to p r o m o t e general acceptance of m o d e r n IPR regimes in the international trading community, a n d to establish the necessary national infrastructures for IPR p r o t e c t i o n as prescribed by TRIPs. Developed country governments a n d regulatory agencies argued that local innovation in developing countries would be encouraged as locals retained m o r e of the benefits of their own innovation, a n d that foreign investors would also be more willing to transfer technology with improved IPR protection u n d e r local laws. Thus, it was argued that higher levels of IPR protection a n d reductions in IPRVs would significantly benefit developing economies. However, there have also b e e n significant criticisms a n d resistance against these developments. These demonstrate that, contrary to conventional thinking, the p r o b l e m of IPRVs is actually a doubleedged o n e . O n o n e h a n d , there are private losses incurred by the owners of IPRs, from reduced or forfeited financial and other benefits. O n the other hand, there are social costs that result from the imposed restrictions o n the flow of benefits to the public. While the former has received greater p r o m i n e n c e , leading to substantial additions to domestic a n d international countermeasures, considerations a n d assessments of the latter have b e e n neglected. This has raised serious questions over equity, sovereignty a n d the overall impact o n the development process.

6

Park (2001, pp. 101-106).

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Intellectual Property Right Violations in Asia Violations of IPR are a global phenomenon, in the present as well as through the previous century. However, in recent decades there has been an increasingly vigorous push by American commercial interests, with the growing support of the US government, to take action against IPRVs that infringe the rights claimed by American IP owners. These efforts have led to strong American pressures for all countries to commit themselves to a uniform set of rules, or face US retribution for non-cooperation or non-compliance with these demands. In pursuit of these aims, the American firms and business associations, together with the US administration, have instituted monitoring and surveillance mechanisms to uncover and clamp down on IPRVs that impinge on American commercial interests and technological capabilities. From these efforts, the available evidence reported by American sources indicates that IPRVs of software are occurring at high levels in Asia (see Table 1). The reported levels of software piracy in 2000 are highest in Vietnam (97%), China (94%), Indonesia (89%) and Pakistan (83%). However, in 2000 the reported costs of losses of retail software revenue are highest in Japan ($1,666.3 million), China ($1124.4 million) and Korea ($302 million). The total costs for 13 Asian countries are reported to be $3,939.5 million. This compares with the reported costs of $11,750.4 million for the world. This suggests that, in 2000, approximately one-quarter

Table 1: Reported piracy rates and software revenue losses in selected Asian countries, 1994-2000 Piracy rates (%)

China Hong Kong* India Indonesia

1994

1995

1996

1997

1998

1999

2000

97 62 79 90

96 62 78 98

96 64 79 97

96 67 69 93

95 59 65 92

91 56 61 85

94 57 63 89

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Rights and Wrongs

Table 1: Reported piracy rates and software revenue losses in selected Asian countries, 1994-2000 Piracy rates (%) 1994

1995

1996

1997

1998

1999

2000

Japan Korea Malaysia Pakistan Philippines Singapore Taiwan Thailand Vietnam

66 75 85 95 65 20 20 55 100

55 76 77 92 91 53 70 82 99

41 70 80 92 92 59 66 80 99

32 67 70 88 83 56 63 84 98

31 64 73 86 77 52 59 82 97

31 50 71 83 70 51 54 81 98

37 56 66 83 61 50 53 79 97

Total World

49

46

43

40

38

36

37

Table 1 (cont'd) Retail software revenue lost to piracy (US$ million) 1994

703.8 129.1 255.3 197.3 1,190.3 515.5 121.5 23.1 70.7 56.6 117.0 137.1 15.2

1,449.4 122.1 184.7 193.3 752.6 582.3 82.5 20.4 49.2 56.6 136.9 94.4 10.1

1,193.4 88.6 197.3 58.8 596.9 197.5 79.3 22.7 31.1 58.3 141.3 48.6 10.3

645.5 110.2 214.6 42.1 975.4 197.3 84.2 18.9 33.2 61.8 122.9 82.2 13.1

1,124.4 86.2 239.6 70.0 1,666.3 302.9 95.6 31.4 27.1 44.2 154.8 53.1 34.9

3,532.5

3,734.5

2,724.1

2,601.4

3,930.5

364.0 64.5 103.1 104.5 1,399.8 510.6 66.7 10.9 40.6 37.3 112.0 67.8 3.9

443.9 122.9 115.6 150.9 1,648.5 675.3 80.6 14.2 45.0 40.4 165.5 99.1 35.1

Total for above 2,885.7

3,637.0

Total World

2000

1998

1996

China Hong Kong* India Indonesia Japan Korea Malaysia Pakistan Phillippines Singapore Taiwan Thailand Vietnam

1999

1997

1995

12,346.5 13,332.6 11,306.3 11,440.1 10,976.5 12,163.2 11,750.4

Source: BSA (1999 and 2000). * Special Administrative Region of China.

120

Hock-Beng Cheah

of the total revenue losses attributed to piracy of software occurred in Asia. 7 Moreover, software piracy is n o t restricted within individual countries, as there is a significant a n d increasing regional a n d global trade in pirated products. News reports indicate the existence of distribution networks of counterfeit products with links between Asia a n d California (Evange