Testimony of Fritz F. Heimann
Mr. Chairman, members of the Committee on Foreign Relations, I am very pleased to be invited to testify on behalf of Transparency International. TI is a non-governmental organization committed to combating international corruption. It was launched in 1993 and now has national chapters in over 70 countries on every continent. TI-USA, of which I am chairman, is supported by a broad coalition, including more than thirty major American companies, labor, scholars, development experts, and many distinguished individuals. I have been a lawyer for General Electric for over four decades and serve as Counselor to the General Counsel. I also chair the working group on extortion and bribery of the U.S. Council on International Business.
Chairman, Transparency International USA
Senate Committee on Foreign Relations
OECD Convention On Combating
The Bribery Of Foreign Public Officials
In International Business Transactions
June 9, 1998
I am here to urge prompt action by the Senate to ratify the OECD Convention to Combat Bribery of Foreign Public Officials. The Convention would take bribery out of the equation in international business. This would level the playing field between U.S. companies and foreign competitors, resulting in more orders for American companies and more jobs for American workers. The Convention would also contribute to other key U.S. objectives, by helping to overcome the effects of corruption on international development programs and on the stability of struggling democracies is Central and Eastern Europe and elsewhere.
The Convention has the overwhelming support of a broad coalition of major business organizations, including the Business Roundtable, the U.S. Council on International Business, the National Foreign Trade Council, the National Association of Manufacturers, and the Emergency Committee for American Trade.
My testimony will cover three subjects: (1) Why corruption has finally become a high-priority inter national issue; (2) Why the OECD Convention provides a solid framework for combating corruption; and (3) What steps must be taken to make sure that the objectives of the Convention are achieved.
I. Why Corruption Has Become Critical International Issue
During the past five years there has been a remarkable transformation in the willingness of the international community to confront the cancer of corruption. This is a development of which the United States can be justly proud, and for which the U.S. Congress deserves particular credit.
In 1977 the Foreign Corrupt Practices Act passed the Senate 87-0 and the House 349-0. The FCPA was an historic step, the first time any country made it a crime to bribe foreign officials. It was expected that other countries would follow the American example. After all, the same bribery scandals which prompted Congress to act had created major reverberations in Japan, Italy, the Netherlands, Indonesia and Honduras. This expectation proved wrong. Not a single country acted to curb foreign bribery.
Since the FCPA went into effect, U.S. companies have lost orders amounting to many tens of billions of dollars to foreign competitors who remained free to pay bribes.
.1 The U.S. Department of Commerce estimates that 139 international commercial contracts valued at $64 billion may have involved bribery by foreign firms and that U.S. firms lost 36 of those contracts valued at $11 billion. The National Export Strategy, Fourth Annual Report to the U.S. Congress, October 1996, at 113.
1 In many countries, including Germany and France, bribes continued to be treated as tax-deductible business expenses. Foreign governments not merely condoned, but effectively subsidized foreign bribes. Notwithstanding the failure of other countries to act, the U.S. Congress refused to repeal or water down the FCPA and insisted on retaining the moral high ground. In the past five years the tide has finally began to turn. There is now widespread recognition that international bribery should no longer be tolerated. This changes reflects the following factors:
The end of the Cold War has resulted in the spread of democratic governments around the world. Political processes have become more open and corruption is harder to cover up. There is more freedom of the press, more independent prosecutors and judges.
Corruption has been identified as a major obstacle to the transition to democracy and market economies in Central and Eastern Europe.
Much of the failure of international development programs to improve the economies of the world’s poorest countries is now widely attributed to corruption. The World Bank, under the leadership of Jim Wolfensohn, has made corruption a high-priority issue.
The Asian crisis has discredited the claim that rapid economic growth can continue notwithstanding endemic corruption. The IMF is making transparency a key element in its assistance programs.
Massive bribery scandals in highly industrialized countries, including Italy, Japan, Korea, Spain, France and Belgium, have demolished the common excuse for inaction, that corruption is a serious problem only in developing countries. This has clearly created support for the OECD program.
There is increasing recognition by international business leaders that a global economy requires common rules, and that these rules must be morally defensible. This has resulted in the development by the International Chamber of Commerce of strong Rules of Conduct to Combat Extortion and Bribery.
Transparency International has grown with extraordinary speed and has helped raise public awareness of the costs of corruption. TI actively promotes the development of systemic reforms such as the OECD Convention.
These factors have produced a tidal change in public perceptions around the world. There now is widespread recognition that action against corruption is required. There are still entrenched groups who oppose reforms. Corruption obviously has powerful beneficiaries: corrupt companies, corrupt officials, and a legion of middlemen. However the prospects for reform have never been better.
II. Why OECD Convention Provides Solid Framework for Combating
The OECD Convention is the most important achievement to date of the international drive for reform. The OECD is the ideal forum for tackling the supply side of international corruption because the industrialized countries that belong to the OECD are the home bases of practically all major international companies.
The Convention is the product of four years of hard work. The U.S. Government deserves great credit for diplomatic skill, forcefulness, and above all perseverance. The Convention provides a solid framework for an effective international system to prohibit bribery of foreign public officials.
Bribery is broadly defined, more broadly than in the FCPA. The Convention prohibits not only bribes “to obtain or retain business” but also to secure “other improper advantage in the conduct of international business.” This makes clear that bribery is prohibited not just in procurement of orders, but also in environmental and other regulatory procedures, in tax and customs matters, and in judicial proceedings.
The term “foreign public official” is also broadly defined and includes administrative, legislative and judicial officials, whether appointed or elected. It also covers officials of government-controlled companies. This was a big win for the American negotiating team, over determined opposition, because in many countries procurement in key sectors such as transportation, telecommunications, energy and infra-structure projects is conducted by government corporations.
Sanctions for foreign bribery must be comparable to those for bribery of domestic officials, and must include effective criminal penalties or equivalent civil sanctions.
The Convention also calls for establishing accounting and auditing standards, including prohibition of off-the-books accounts.
Mutual legal assistance, including extradition, is required. This is important because investigations under the FCPA were often stymied by lack of cooperation from foreign governments.
The Convention establishes a monitoring and follow-up process. This is of critical importance to assure effective and consistent implementation by 34 countries with major differences in their legal systems. The monitoring program will be conducted by the OECD’s Anti-Bribery Working Group, and is expected to be modeled on the monitoring program of the Financial Action Task Force on money laundering. The FATF process is widely respected.
Like any agreement emerging from multi-party negotiations conducted on a tight time schedule, the OECD Convention has some shortcomings. A follow-up process has been established by which the OECD Anti-Bribery Working Group, the same body that drafted the Convention, will address such issues as prohibition of improper payments to officials of foreign political parties, and treatment of foreign subsidiaries. Proposed changes will be taken up at the May 1999 OECD Ministerial.
The Convention in its present form is a first-rate document that closely parallels the requirements of the FCPA. There is no reason to delay bringing it into effect. Further improvements can be made over time.
As noted before, the Convention tackles the supply side of corruption. The demand side -- corruption by public officials -- must also be addressed. The World Bank and others are working on procurement reforms, increased transparency, and other programs to combat demand-side abuses. The credibility of efforts from the North to promote reforms in the developing world will be greatly strengthened by the OECD effort to end foreign bribery by the industrialized countries.
III. Assuring Effective Implementation and Enforcement
Agreement on the text of the Convention by 34 nations represents a major breakthrough. However, three additional steps must be taken by national governments before the Convention will have a practical impact on the conduct of international business: (1) ratification by enough countries to meet the entry into force provision, (2) passage of implementing legislation, and (3) enforcement by national prosecutors.
All 34 governments have committed to seek ratification by the end of this year, a very challenging target. Prompt action by the Senate would provide an enormously helpful signal. Other countries are watching what we do. Any delay here would be regarded as a ready excuse for delays elsewhere. Without U.S. ratification it would be practically impossible to meet the conditions for entry into force in 1998.
Passage of implementing legislation is a bigger step in other countries than in the U.S. Here only relatively small changes are required to conform the FCPA to the requirements of the Convention. In other countries making foreign bribery a crime requires new legislation. After implementing laws are passed, enforcement programs must be organized. This is key challenge: the history of corruption reform is replete with anti-bribery laws that are never enforced. Effective enforcement requires political will, plus adequate resources.
While these three steps require action by national governments, the OECD monitoring program must make sure that consistent and effective results are achieved. This will not be easy because there are substantial differences in how the 34 legal systems work. It is important to forestall major differences in how foreign bribery is prohibited. Governments will be reluctant to impose stricter prohibitions on their own companies than will be imposed on their competitors. This could lead to a lowest common denominator trend. This risk can be overcome, provided the monitoring program provides clear assurance that all parties will be held to high standards.
The experience with the monitoring program of the Financial Action Task Force on money laundering indicates that the challenge of achieving effective and consistent enforcement can be met. The effort to organize the OECD monitoring is already under way. We want to stress three issues which we consider essential for an effective monitoring process.
First, the effort to design and organize a strong monitoring program should proceed as quickly as possible. The message that all parties will be held to high standards must go out before any tendency to enact minimalist implementing legislation gathers force.
Second, monitoring should begin promptly, even if it starts on an informal basis. To wait until after the Convention enters into effect would run the risk that many countries will have enacted inconsistent implementing laws, which will be difficult to correct.
Third, the monitoring process should be open to inputs from the private sector and from civil society. It should not be limited to governments criticizing other governments behind closed doors. The monitoring process should be as transparent as possible in order to facilitate non-governmental inputs.
Because the development of a strong monitoring program is so important to achieving the objectives of the Convention, we suggest that this Committee ask the State Department to provide periodic progress reports
The Convention is part of on ongoing process at the OECD. This includes not only the monitoring program and the follow-up program to address unresolved issues, but also the implementation of several OECD anti-bribery initiatives dealing with issues other than criminalization, including the 1996 recommendation to terminate tax deductibility of bribes. The success of the OECD to date, coupled with the change in public opinion regarding corruption, provides assurance that the challenges ahead can be dealt with successfully.
To conclude, the Convention will make foreign bribery a crime in the world’s major exporting nations. It will significantly raise the standards for global competition, thereby improving American competitiveness, and strengthening international development, market reforms and democratization programs. The Convention deserves strong support from your Committee on both practical and moral grounds. Finally, we want to express our appreciation to the Chairman for scheduling this hearing so soon after the Convention was transmitted, and for placing the Convention on the agenda for action on June 23.