USIS Washington 

25 November 1998


(Program applied in narrow market sectors) (1560)

Washington -- A leading anti-corruption activist group has devised a
strategy to eliminate corruption in narrow market sectors and limited
territorial areas.

The Integrity Pact of Transparency International draws commitments
from transnational companies and the governments of developing
countries to ban corruption in pilot programs, says Michael Wiehen and
Carel Mohn of Transparency International.

An article describing how the Integrity Pact works appears in the
current issue of USIA's Economic Perspectives, which can be found on
the Internet at

(Following is the text of the Integrity Pact article.)

(begin text)

The Integrity Pact: A Way Out of the Trap.

by Michael Wiehen, chairman of the Germany chapter of Transparency
International, and Carel Mohn, TI's chief information officer

It's a nightmare for every company, particularly if it is among the
more competitive ones in the market. The preselection phase in the
bidding process of a public procurement exercise is past you, contract
negotiations with the government and the financing institutions have
been successfully completed. All of a sudden unforeseen problems are
coming to the surface. Junior government officials begin to question
details of the contract and demand renegotiating technicalities.
Licenses and permits you need to apply for to start implementing the
contract -- mere formalities as the government representatives
affirmed just before the contract was signed -- are suddenly stuck in
a seemingly impenetrable bureaucratic jungle. And, quite to your
surprise, you find that the even more senior-ranking government
officials are beginning to question the validity of the project. After
having invested millions of dollars and thousands of staff hours on
such a major project, everything seems to be in shambles. And the
solution to saving the project from suddenly turning foul also
gradually edges to the surface -- extra payments or, simply, bribery.

When bidding for major projects, companies usually have a strong
interest to avoid just that. A company that can rely on the quality of
its products simply has no interest in entering into a field where
there is no reliability, no prospects to enforce contracts, no
certainty as to the behaviour of either clients, competitors or
counterparts on the government side. In markets distorted by
corruption, companies are facing a prisoner's dilemma: while it may be
profitable for all competitors to put an end to corruption, no one
wants to take the first move for fear of losing the contract to a less
scrupulous competitor.

The OECD Convention that is likely to enter into force in January next
year wants to change that situation by creating a level playing field
for everyone in the market and by giving the credible assurance that
bribing an office holder abroad will be prosecuted as a crime in all
OECD countries. While this international framework can be regarded as
a major breakthrough and as a victory for those who have long been
calling for a stop to the reckless business of exporting bribery from
the North to the South, change will not come over night. It will take
time before foreign corruption will be prosecuted with the same vigor
and consistency all over the industrialised countries. And in the
immediate and mid-term future, the OECD Convention will only partially
address the ambiguity and uncertainty that exists in those markets
that have traditionally been under the dark clouds of corrupt

In that situation, a case-by-case approach in tackling corruption may
prove to be more effective and will certainly give companies greater
assurance that they can reap in the profits of freedom from corruption
without taking the risk of being the one to make the first move.


The TI Integrity Pact (TI-IP) intends to accomplish two objectives:

-- to enable companies to abstain from bribing by providing assurances
to them that their competitors will also refrain from bribing, and
that government procurement agencies will undertake to prevent any
form of corruption, including extortion and to follow transparent

-- to enable governments to reduce the high cost and the detrimental
impact of corruption on public procurement.

A government may wish to begin by establishing first one or several
"Islands of Integrity" where for selected projects, or for all
projects in a sector, corrupt practices would be eliminated by
agreement among the government and those companies interested in
bidding for services or the supply of goods. The Integrity Pact
concept could also be employed in similar situations, for example when
a government, as part of its privatization program, invites bidders to
tender for the acquisition of government assets, or for
telecommunications, mining or logging licenses.

The Integrity Pact would function as follows: a government, when
inviting contractors or suppliers of goods and services to tender for
a specific contract, informs the potential bidders that their tender
offer must contain a commitment, signed personally by the bidder's
Chief Executive Officer (CEO), not to offer or pay any bribes in
connection with this contract. This covers, of course, all stages of
the procurement process as well as the execution phase. The
government, on its part, will commit itself to prevent price-fixing
and the acceptance of bribes by its officials, and to follow
transparent procurement rules. Legally speaking, these commitments are
nothing other than a commitment to respect and invoke the existing
laws of the country. It is expected that the explicit commitment and
the mode of operation established by it can make a significant
difference in the political and business reality.

The sanctions provided for violations, and the monitoring system put
in place, may go well beyond the existing legal system. Bidders who
violate their commitment not to bribe will be subject to significant
sanctions, such as denial or loss of contract, liability for damages
(to the government and the competing bidders), and forfeiture of the
bid security. The government could also debar the offender from all
government business for an appropriate period of time. By empowering
unsuccessful bidders, who have evidence of corruption by their
competitors or the principal, to enforce sanctions themselves (through
the courts or by international arbitration) their confidence in the
integrity of the process as a whole will be increased.

Because a bidding company acts through many employees and agents, the
Chief Executive Officer's commitment should (not least for the CEO's
own protection) be implemented through a compliance program which
assures that all employees and agents will observe the no-bribery
commitment. Where the company already has a written anti-bribery
policy in effect, it can furnish a copy of that policy together with
the compliance program implementing that policy. Where a company does
not have such a policy, or does not have a written compliance program,
it can furnish a copy of the compliance program established for the
particular contract.

One key lies in transparency relating to payments to agents and other
third parties in connection with the contract. There are, of course,
good and valid reasons why agents should be engaged to perform
legitimate services. However, agents' commissions are a traditional
avenue for the concealing of bribes. The Integrity Pact therefore
envisages a requirement that all past and intended future payments to
third parties be disclosed at the bidding stage, and that they be
formally recorded and reported during the execution stage by the
successful bidder, with appropriate certification by the CEO.

A second feature of the Integrity Pact is the involvement of CEOs
personally or through other appropriate senior managers. The procedure
requires them personally to certify amounts of payments to third
parties. They will be required to be personally involved, so they will
not be able to disclaim knowledge of malpractice as is often the case.
This requirement is bolstered by the compliance provisions which the
successful bidder normally must have in place.


While TI has discussed this approach in a number of countries from its
very inception in early 1993, it was introduced only in a few rather
different cases in Latin America: in a refinery rehabilitation project
in Ecuador (1994), in a modified version in the privatization of
telecommunications in Panama (1996) and in procurement by the
provincial government of Mendoza in Argentina (1997); other
initiatives are in varying stages of implementation.

While the Integrity Pact concept has the backing of major
international financing institutions -- World Bank President James
Wolfensohn has endorsed it as have representatives of the regional
development banks -- Transparency International today faces the
challenge of proving that the concept can be applied on a broader
basis and that it has matured beyond the pilot project phase. Numerous
companies -- many of them playing in the top league of their sectors
-- have voiced their great interest in taking just the
project-oriented approach that the Integrity Pact concept is
propagating. They have seen too many government-led anti-corruption
campaigns come and go without achieving substantive change. Civil
society also stands ready to work on concrete Integrity Pact projects,
perhaps in the form of a National Chapter of TI, that would monitor
the bid evaluation and the selection of the successful bidder. With
the support of the private sector, civil society and the financing
institutions it is now upon governments to demonstrate that they are
willing to handle things differently - at least in individual
large-scale projects.

(end text)