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Corruption in foreign aid takes many forms and can be an obstacle to social and economic progress in developing countries. Less clear is how donor agencies and governments should address it—if at all. Effective anti-corruption efforts are obscured by misperceptions of the problem, weaknesses in measuring corruption, and limited evidence linking corruption, institutions, and development outcomes. CGD’s experts bring clarity to these issues by examining the implications of existing anti-corruption efforts and highlighting how data on development results can help guide more effective strategies to increase transparency and strengthen accountability.
CGD and Brookings recently co-hosted Former Finance Minister of Nigeria and Distinguished Fellow Ngozi Okonjo-Iweala to discuss her new book, Fighting Corruption is Dangerous: The Story Behind the Headlines. The book is part memoir, part how-to, as she draws on her years of experience as Nigeria’s Finance Minister to describe the dangers of fighting corruption and how best to do it. I drew four main takeaways from our conversation: you cannot fight alone; institutional systems are critical for transparency and accountability; international institutions should step up; and don’t underestimate the personal dimension.
You cannot fight alone; you need to build consensus
In order to effectively fight corruption, you need a coalition of support at all levels of government. From the top, it is important that your country’s leader supports anti-corruption efforts. Okonjo-Iweala emphasizes that the backing of both presidents with whom she worked was important in lending her efforts the necessary legitimacy and support to effectively fight corruption. She also notes that she had a supportive team working with her who had the same values and principles—and therefore worked diligently to implement the policies to prevent corruption.
We need systems
In addition to needing the support of the leader and your team, government-wide support is necessary in fighting corruption. Strong institutional systems are important for increasing transparency, conducting objective analysis of evidence, setting the rules of the game, and punishing those who break the rules. Some important institutions include: a strong, transparent and non-corruptible judicial system; a technical system to manage money and thwart corruption; and a strong executive office/leader that supports anti-corruption work. As she said in response to a question, “people are people everywhere.” What determines their behavior is the strength of the systems and institutions under which they operate.
How international institutions can help
Okonjo-Iweala is clear that corruption must be fought by those inside the country, but she recognizes that country partners and donor agencies can play an important role. Because of her experience both at the World Bank and in the Nigerian government, Okonjo-Iweala is in the perfect position to offer advice on how international institutions can best support in-country anti-corruption efforts. She advises that international institutions cannot be lazy, they need to spend the time and effort learning about the societies in which they are working to best understand how the systems actually function. Only then will they be prepared to offer effective solutions. Additionally, multilateral institutions such as the World Bank and IMF are primed to help with institution-building but they need to better signal their long-term commitment to fighting corruption. The fight against corruption is a marathon and development partners need to signal that they will be there to support beyond the three-year program or five-year project.
Fighting corruption is dangerous
The title of Ngozi’s book is not a marketing gimmick. The most moving part of her session was when she described the ordeal of her mother who had been kidnapped in reaction to Ngozi’s efforts to fight corruption. Alongside, she and many other campaigners against corruption have faced physical threats, mental intimidation, and character assassination—now aided and abetted by fake news and the power of social media. Even when a battle is won, there are long lasting scars on the individual and on their family. And when whistle blowers or anti-corruption officials have to flee for their safety, the international community that was encouraging them to move faster is often the slowest to offer a safe refuge. The most sobering lesson from this book: don’t underestimate the personal dimension of fighting this global scourge.
A recent article in the New York Times on the current situation in Gaza vividly illustrates what can happen when an entire community loses financial access. Because of Israel’s longstanding blockade of the territory and more recent decisions by Egypt and the Palestinian Authority to cut off financial support to Hamas, money no longer flows in Gaza. Without cash or credit to pay for critical supplies, the Gazan economy has seized up: unemployment is near 50 percent (and even higher for young people), electricity use is limited to 6 or 7 hours per day, and 95 percent of water is undrinkable. The dire situation has created a powder keg that many regional experts believe could lead to a new round of violent conflict with Israel.
The situation highlights the simple fact that goods only flow to the areas where they are needed when money is available to facilitate their purchase and transport. Gaza is not the only region suffering from loss of financial access: a growing number of humanitarian aid organizations operating in conflict zones are also having trouble finding banks willing to work with them. Notably, many humanitarian organizations working in Syria and Yemen report having difficult conducting payments.
Nonprofits cut off from bank accounts and wire transfers
In recent years, many large international banks have either ended or restricted their relationships with certain countries and types of customers. This process, commonly referred to as “de-risking,” is driven by a host of changes to banks’ business and regulatory environment since the global financial crisis, including stricter enforcement of laws and regulations designed to counter money laundering, terrorist financing, and sanctions evasion. In some cases, banks have concluded that certain types of customers pose too great an illicit finance risk, or else are not worth the rising cost of compliance.
The nonprofit sector is among those affected by de-risking, with NPOs reporting a range of financial access problems. This is especially true with respect to Islamic charities, humanitarian organizations operating in high-risk countries, and small nonprofits with limited compliance capacity. In some cases, NPOs have been denied bank accounts or have had their existing accounts closed. More frequently, they have had their transaction delayed. These delays can last for weeks or even months, which in a crisis can be the difference between getting life-saving materials or services to a vulnerable population in time or not. Unable to rely on the formal banking system, some NPOs have resorted to transporting cash or turning to money transfer operators.
The roots of the problem
While banks might have any number of reasons for deciding to exit a particular relationship, concerns about the cost of compliance associated with illicit finance risks often loom large.
Banks’ aversion to working with such NPOs may stem from the fear of inadvertently facilitating illicit finance—particularly terrorist financing and sanctions violations—and of the resulting fines, regulatory scrutiny, and reputational damage. The risk of personal liability for compliance officers undoubtedly fosters even greater caution. In recent years, regulators have consistently emphasized that banks should follow a risk-based approach; however, it appears that many banks and NPOs remain concerned that under US law, terrorist financing and sanctions violations remain “strict liability” offenses. Banks also say they fear being second-guessed by their examiners.
Some banks and bank examiners mistakenly perceive NPOs to be uniformly high risk. This is partly a legacy of the September 11 attacks and their aftermath, during which time NPOs were labeled as “particularly vulnerable” to terrorist financing by the Financial Action Task Force (FATF), the global standard-setting body for anti-money laundering and countering the financing of terrorism (AML/CFT) regulations. Although FATF retracted this language in 2016, the perception that NPOs are especially risky endures. While it is true that some NPOs do need to strengthen their AML/CFT controls, the sector has made important strides in recent years—as recently recognized by the UK government.
Banks’ misperception of NPOs’ riskiness is often exacerbated by a mutual lack of communication and understanding between banks and NPOs. Bank officers may lack a firm grasp of how NPOs operate or how they manage their risk exposures. NPOs, in turn, may not always be cognizant of how banks perceive them or why banks might require certain information of them.
Tackling the problem: advice for policymakers, banks, and NPOs
Due to the multifaceted nature of the problem, tackling it will necessarily entail a coordinated effort on the part of policymakers, banks, and NPOs.
Policymakers should continue to work with banks and NPOs to ensure that regulatory guidance is properly understood and followed. To its credit, FATF now regularly consults with the private and nonprofit sectors. However, given banks’ enduring uncertainty regarding the proper treatment of NPOs, it is clear that more needs to be done to ensure that the risk-based approach is implemented correctly. In addition, policymakers should consider expanding the use of humanitarian exemptions, which can smooth the way for humanitarian organizations to operate in high-risk jurisdictions. Currently, only in Somalia are humanitarian organizations exempted from UN sanctions.
While banks must make decisions based on their bottom line, they can also take an expansive view that recognizes the reputational benefit that providing services to NPOs can provide. Indeed, some banks make a point of doing business with charities and humanitarian organizations for precisely this reason. In addition, banks may wish to consider adopting sector specializations, as Barclays has done, so that they have dedicated staff who understand how NPOs operate and can therefore manage these relationships—and their attendant risks—more effectively. Finally, we encourage banks to continue working with policymakers and NPOs to develop a standardized customer due diligence template tailored to NPOs. Such a template, which the World Bank and ACAMs are working to develop, would be useful for establishing mutual expectations about the baseline information NPOs should be ready to provide their banks.
For their part, NPOs should continue to strengthen their own AML/CFT risk controls and to be proactive in managing their relationships with their banks. In addition, large NPOs might consider how they can provide compliance or financial-management support to the smaller NPOs they often work with to provide last-mile services, often in the most volatile circumstances.
If all three sets of actors can’t find a way to solve the problem, more radical solutions may be necessary. These could include setting up alternate payment channels where humanitarian aid can flow outside of the traditional banking sector but with government oversight (similar to the UK’s Safe Corridor Pilot for remittances to Somalia which was designed but never implemented). NPOs are also exploring whether tracking aid transfers on a permissioned blockchain network would give banks greater confidence and lead to easier access to finance.
The international stakeholder dialogue successfully brought together policymakers, banks, and NPOs to develop a common understanding of the problem and a shared purpose for addressing it. The priority now will be to maintain momentum and close cooperation moving forward.
Even while policy solutions to address de-risking are being implemented, new technologies have emerged to address de-risking by increasing the efficiency and effectiveness of AML/CFT compliance by financial institutions.
A year ago, I requested comments on a draft manuscript about corruption. Last week, we launched the resulting book: Results Not Receipts: Counting the Right Things in Aid and Corruption. I think the text was considerably improved by the comments process (and I hope the commenters agree). So I’m hoping the discussion can continue even though the book is now out.
Last week, Frank Vogl, a founder of Transparency International and long-time advocate and leader in the global fight against corruption, emailed me with a set of comments on the resulting book before the launch, and then raised many of his concerns during the book launch event. In the spirit of an ongoing discussion, I asked him if I could publish his written comments and he was kind enough to agree. They follow below.
Results Not Receipts: Counting the Right Things in Aid and Corruption is an excellent starting point for an important and overdue discussion.
Almost exactly 20 years ago (September 1997) ministers attending the World Bank-IMF joint “Development Committee voiced strong support in their communiqué for major actions by multilateral and bilateral development agencies, as well as by the IMF to promote governance and counter corruption.
Charles Kenny and CGD have gone far further than the reports mentioned above and challenged the core approaches of aid agencies in this area.
Since that time there have been a number of reviews about the ways in which the international community and official public institutions have implemented the Development Committee’s mandate. In September 2007, an independent panel chaired by Paul Volcker issued a report finding fault with the World Bank’s own integrity vice presidency. In 2008, the Bank’s Independent Evaluation Group issued a major report that found far-reaching problems in the ways in which the Bank had sought to counter corruption in its operations. A further IEG critical report was published in 2011.
But Charles Kenny and CGD have gone far further than the reports mentioned above and challenged the core approaches of aid agencies in this area. Millions of very poor people in many countries are what I call ‘double-victims:’ first they suffer because of corruption; second, they suffer because efforts by aid agencies to help them too often do no good and sometimes do harm. As Kenny asserts: “It is time for donor agencies to fundamentally rethink their anticorruption approaches.”
Results do matter and he argues that it is often the case that aid agencies spend so much resources—staff and cash—in bending over backwards to ensure that not a single cent of aid cash flows into corrupt hands that their impact on poverty alleviation is far less than it could be.
But the new book is insufficiently clear in articulating effective remedies. It falls short in fully explaining why the core approaches of the aid agencies are just wrong. In addition to Kenny’s points, the facts are that staff incentives at aid agencies are far greater in terms of shoveling out the cash, than waving red flags because of feared corruption; that aid agencies shy away from meaningful confrontations with governments over grand corruption and wrongly operate, as a result, as if widespread petty corruption is quite separate from grand corruption; and, the aid agencies are extremely reluctant to listen to and work with civil society in the most effective ways.
Kenny devotes considerable space in the book to a discussion of how best to measure corruption. To a degree, like so many others, he overstates the purposes and significance of Transparency International’s Corruption perceptions Index, which is a poll of 13 different polls, makes no claim to be more than a snapshot in time based on surveys. The CPI was originally designed to strengthen public awareness of the pervasiveness of corruption and that continues to be its prime objective.
In discussing aspects of measuring corruption, the new book fails to explore issues of income and wealth inequality. The 2013 report by the African Progress Panel, for example, researched why extreme poverty is so widespread in most of the 20 sub-Saharan African countries endowed with extractive natural resources. The analysis pointed to a good deal of waste and inefficiency, but also to corruption. Studies like this provide us with in-depth understanding of the impact and scale of corruption.
The more we anyalze public sector projects and programs, looking for funding discrepancies, searching for opacity in contracting, seeking weaknesses in project implementation, so more detailed pictures of the scale and impact of corruption emerge. Those most able to purusue such analysis are locally-based non-governmental organizations. Today, there are hundreds of such NGOs across the developing world. They have precise knowledge. They have the skills to engage citizens. They have demonstrated results, as many TI national chapters can attest and is evident by looking at the evaluations of scores of small projects funded and advised by the Partnership for Transparency Fund.
Aid agencies provide relatively small funding to NGOs—and it is decreasing. They rarely listen seriously to what they have to say in so-called “civil society consultations.” Many aid agencies are reluctant to agree to substantive monitoring of their projects by NGOs (this is a positive example).
The first sentence of this important new book in its Preface states: “Governance and corruption remain at the heart of discussion around global development.”
That may have been true a few years ago, but I do not think it is the case today. Part of the reason may be the recognition within aid agencies that curbing corruption is difficult, it does not yield results swiftly and it measurement is complicated. Part of the reason is that there has not been enough high-profile discussion of the inadequacies of the approaches that aid agencies deploy.
So Kenny’s book should be seen as a starting point for what needs to become a robust discussion. In the early 1990s, a few of us waged a campaign to convince the aid agencies to recognize that corruption is a problem in development and to ensure that curbing corruption becomes a meaningful priority for these agencies. Now, it is time to have a new and substantive set of initiatives—and I hope the aid agencies will be constructive partners with CGD and others—to look at all possible approaches to addressing the needs of the victims, especially those who live in acute poverty, so that their basic human rights are secured and that they can live in dignity.
I agree with much of what Frank says. And where I disagree, it is worth noting our comparative credentials on the topic. But here a few reactions:
There certainly are a lot of incentives at donor agencies to “shovel out the cash”—I wonder if the receipts-monitoring process is in part a response to that incentive. While not particularly effective at reducing corruption, receipts monitoring precisely measures the shoveling. Results measurement (and in particular payment on results) is at least a distraction and at worst a positive block to getting cash out of the door.
I do think inequality is linked to corruption—in particular in the broad sense of systems being stacked against the average person. Inequality is about equal between rich countries and poor, and I take this as evidence corruption in this broad sense is not simply a “problem of poor countries.” That even though straightforward bribery is far more common in poor countries than rich ones.
I’d say that aid agencies are very focused on corruption, but very narrowly focused. They are spending a lot on financial and procurement oversight of their own projects and not nearly enough on tackling corruption at the country level.
Frank’s helpful and deeply informed reactions certainly demonstrate the benefit of an ongoing discussion. I’d be very grateful for any more reactions to the book, by email or below. And many thanks in advance!
What impact does corruption have on development, and what’s the best way to stamp it out? In a new book called Results, Not Receipts, CGD senior fellow Charles Kenny offers a way to strengthen the case for aid and reduce corruption at the same time: focus on outcomes, rather than inputs.
What impact does corruption have on development, and what’s the best way to stamp it out? Some in the media would have you believe that large amounts of public money are being pocketed by corrupt officials, and that the only way to stop it is to cut foreign aid budgets. Meanwhile, aid agencies and others argue that foreign aid is necessary to save lives. How do we square these?
In a new book called Results, Not Receipts: Counting the Right Things in Aid and Corruption, CGD senior fellow Charles Kenny offers a way to strengthen the case for aid and reduce corruption at the same time: focus on outcomes, rather than inputs.
“If you get a road built to quality . . . and you’ve ended up with a price that seems right for the cost of building that road, there’s no money left over there to fuel corruption,” Kenny explains in this week’s podcast. On the other hand, he says, if you don’t monitor the outcome of your project, it becomes very easy for contractors to cut corners.
Focusing on outcomes also helps donors and agencies demonstrate impact. “When you focus very heavily on receipts, all you have to show your voter is a bunch of paper,” Kenny tells me. “I want to see the healthy kid, I want to see the kid who’s been educated. . . . If we can deliver that, I think we make the case for aid much stronger.”
A bipartisan group of eight Senators led by Senate Foreign Relations Ranking Member Ben Cardin (D-MD) has just reintroduced a new version of a bill designed to identify and combat corruption overseas. The Combating Global Corruption Act of 2017 ties some potentially useful anti-corruption measures to a less-than-useful exercise in corruption ranking that will blunt their impact. That’s a shame, but it also suggests an easy fix: junk the ranking.
The bill mandates a number of requirements around foreign assistance: clauses that allow aid contracts to be terminated if ‘credible indicators’ of corruption are discovered, claw-back clauses regarding recovery of misappropriated funds and (best of all) requirements for the disclosure of the beneficial ownership of all contractors and subcontractors receiving aid funding.
These are valuable steps, but the bill only directs their use in certain countries. The requirements are tied to a State Department review of (amongst other things) recipient country laws, policies and practices regarding detection, investigation, prosecution, conviction and punishment of corruption, and whether or not the government is supporting education, civil society oversight, independent judicial decision-making and international investigations. Countries will be sorted into three tiers: compliance, trying to comply, or not even trying. The list will be published, and tier three countries subject to the anti-corruption requirements.
The tiered system is modeled on the State Department’s Trafficking in Persons Report, credited as a useful diplomatic tool for encouraging countries to do more to fight trafficking. But for all trafficking is a complex and multidimensional subject, it is considerably narrower and more easily quantified than ‘corruption.’ The same applies to measuring efforts to combat it. A wide-ranging review of policies and practices governing an opaque, multifaceted issue without a clear and widely agreed common understanding of what counts as corruption will inevitably end up an exercise in subjectivity. And so the Secretary of State’s corruption measure would join an ever-growing pile of similar subjective measures, none of which have demonstrated any great reliability or influence on real world outcomes related to corruption or poor governance. Take the Worldwide Governance Indicators, with its (largely subjective) control of corruption indicator: as its authors have noted, the measures underlying that indicator show no average change over time. (For a summary and links to literature on why such measures are unreliable in the first place, see here)
What makes all of this particularly unfortunate is that most of the measures required of aid in tier three countries would be valuable everywhere. Wouldn’t American taxpayers want their money back even if it was misappropriated in a country that the State Department thought was trying hard to fight corruption? Wouldn’t beneficial ownership information be valuable in all countries as a check against nepotism or self-dealing?
In short, the bill suggests using a fuzzy measure to arbitrarily limit valuable anti-corruption tools to a subset of countries. But the problem is easy to address: forget the ranking and make the requirements universal Call it the no-tiers approach to fighting corruption in US foreign assistance.
Corruption in aid has been a major topic of discussion in Washington in recent weeks. One of the questions reportedly from the Presidential transition team to the State Department was: “With so much corruption in Africa, how much of our funding is stolen?” During the nomination hearings for Rex Tillerson to be Secretary of State, Senator Rand Paul provided one answer: seventy percent of aid is “stolen off the top.”
The question is a fair one to ask. The bad news is that the short answer is “we don’t know.” The better news is that the slightly longer answer is “nowhere near 70 percent.” And the best news is that if we spent more time tracking the results of aid projects, we’d have a much better idea of where corruption was a problem and if our efforts to reduce it were working.
Statistics about corruption are hard to verify and open to considerable dispute. I've written before about a recent Supreme Court case where the justices strongly disagreed about what counts as 'corrupt,' for example. But also, for obvious reasons, people don’t tend to advertise the fact that they are involved in corruption. That all makes measurement hard. Nonetheless, three indicators of corruption might help answer how widespread the problem really is:
investigative cases of particular aid projects;
survey evidence about bribe payments; and
'expert perceptions' about the general state of corruption in a country.
What does each indicator suggest about the extent of corruption?
1. Investigative cases
The World Bank’s Sanctions Evaluation and Suspension Office keeps track of cases where World Bank investigations have uncovered evidence of fraud and corruption. An analysis of cases between 2007 and 2012 found sanctionable fraud or corruption in 157 contracts worth $245 million, of which less than a third of contracts showed evidence of sanctionable corruption. The World Bank’s lending volume is about $40 billion a year, so this suggests less than a third of contracts collectively worth about 0.1 percent of volumes over the period involved discovered and sanctionable corruption.
2. Survey evidence
Of course, that investigative cases only capture ‘discovered’ corruption is a huge issue. It is likely that the great majority of corruption isn’t uncovered by investigators. So what about asking firms that work on aid contracts?
Sadly, we don’t have survey evidence of corruption specifically involving businesses involved in aid contracting, but we do have surveys of corrupt payments by firms to government officials for government contracts in general from the World Bank. Enterprise surveys ask firm managers how much are the “gifts” expected in return for winning a government contract in their sector. In 22 countries, the average is more than 5 percent of the value of the contract. In 38 countries, the average is between 2 and 5 percent; in 52 countries the average is below 2 percent. You’d hope aid would be less affected by corruption than local spending given all of the oversight apparatus from investigators general to procurement experts involved, but in truth there is limited evidence they have a big impact, so maybe the numbers are about the same for aid-financed contracts. Given the $161 billion global aid business, an average of (say) five percent being lost to corruption adds up to around $8 billion—a real loss. But not the $113 billion that would be suggested by Senator Paul’s figure.
3. Perceptions measures
The trouble with measures of bribe payments, however, is that they only capture one form of corruption, and one of its impacts. They don’t capture officials simply stealing funds on their own account. And if the bribe goes to cover up substandard work which means the aid-financed road falls apart or the aid-financed drugs don’t work, the impact of corruption is far bigger than the bribe payment made. Again, we don’t have a measure of this broader corruption specific to aid flows, but you can ask a bunch of people how corrupt they think a country is in general as one potential indicator. Using one such ‘expert perceptions’ measure, Bill Easterly at one point calculated that 76 percent of US foreign aid went to countries judged to be corrupt.
Sadly, as Easterly himself noted, "It is inherently impossible to calculate the number 'x percent of aid is stolen' from the numbers that I use on how much aid goes to corrupt countries." And that’s not to mention the considerable problems with regard to the accuracy—and even the meaning—of a single measure of how a small group of people feel about overall corruption levels in a country.
So, using available corruption measures we’re left with three answers to “how much of our funding is lost to corruption”: one almost-certain underestimate of “less than 0.1 percent,” one possible underestimate of one part of the problem of “a few percentage points,” and one arguable interpretation that doesn’t really help that “a lot of aid goes to corrupt countries.”
Measuring Lost Aid through Outcomes
Luckily there's another, better way to estimate how much aid is 'lost': look at outcomes. If the aid program manages to buy all of the things it is meant to buy and deliver them where they are meant to go at a reasonable price, the aid funds can’t have been lost to corruption. Of course, measuring missed outcomes would be an over-estimate of aid lost to corruption specifically—a lot of other things can mean aid fails to deliver from bad luck to incompetence.
But at least it might provide an upper-end figure.
One partial measure of outcomes is project ratings. Take the World Bank, where project outcomes are rated on a six-point scale from highly unsatisfactory to highly satisfactory. Assume all projects rated in the bottom three categories are ‘lost’ and that adds up to 461 out of 1,617 projects completed 2010-2015, or about 29 percent. Be a little more generous and assume only the bottom two categories are ‘lost’ and that drops to around nine percent.
Again, Sarah Dykstra, Justin Sandefur, Amanda Glassman, and I looked at evidence for waste in GAVI—an aid institution dedicated to expanding vaccination coverage in developing countries. While we found plenty of evidence that developing countries were spending less on vaccines themselves when GAVI gave them vaccines at no or low cost, we estimated actual waste (vaccines not leading to vaccination) at between 0.5 percent and 15 percent of vaccines delivered, depending on the vaccine.
Or following on through the causal chain from aid financing to outcomes, countries that were the focus of attention from the President’s Emergency Plan for AIDS Relief (PEPFAR) saw the annual change in the number of HIV-related deaths between 2004 and 2007 that was 10.5 percent lower than other African countries. If the money had been lost to corruption, we simply wouldn’t have seen these results.
All of the evidence we have—on corruption cases, bribes, and outcomes alike—suggests corruption is a problem for aid, but nowhere near as big a problem as suggested by Senator Paul. That said, we still don’t have enough evidence on results to come up with any conclusive overall numbers on ‘the percentage of aid that delivers the impact it was designed to.’ And we should. If the administration’s concerns over aid and corruption ended up improving the results focus of aid programs, that would be great news for many reasons—but not least because it would help reduce the real impact that corruption can have on development.