Fighting Corruption in Foreign Aid

Neil Levine
senior adviser for governance
U.S. Agency for International Development
before a workshop in The Hague, Netherlands
at the Second Global Forum on Fighting Corruption and Safeguarding Integrity

Abbreviations used in the text:

USAID = U.S. Agency for International Development
USG = U.S. government
IG = inspector general
OAS = Organization of American States
IDB = Inter-American Development Bank
IMF = International Monetary Fund
NGO = non-governmental organization
CSO = civil society organization
OECD = Organization for Economic Cooperation and Development
G-5 = United States, Japan, Germany, France, United Kingdom
TI = Transparency International

Introduction

Thanks to Minister Herfkens for the invitation to participate on this particular panel and in general, to commend our hosts for this very successful conference. From the range of its participation to the scope of the topics under discussion, it truly is a Global Forum.

Most importantly, however, it is not just an international gathering of individuals. It is a gathering of the momentum behind the international movement to fight corruption.

The Perspective of a Bilateral Donor

No nation is immune from the problem of corruption. Scanning the headlines of any daily newspaper from any of the countries here in attendance, one will find not just one, but several examples of betrayals of the public trust in one form or another.

In giving advice in this area, it's better to offer it as a pragmatist rather than a moralist. As a pragmatist, USAID engages in anti-corruption as a development issue:

• Because the marginal cost of corruption is so much greater in the developing world, where resources are scarce to begin with.
• As a donor, we are interested in what works programmatically.
• We are interested in practical ways to see that donor efforts are better coordinated.

Part of a Broader Relationship: Our assistance takes place in the context of a broader political relationship between nations where issues that affect that relationship (like corruption) can be raised directly in the course of our ongoing policy dialog. Some would say that bilateral donors are more likely than multilateral institutions to push on anti-corruption issues; that is true, although it's not always true.

Political will: We should be increasingly aware of political will to fight corruption, not only in recipient countries, but among the donors in each developing country context. Strong donor coordination can help overcome a single donor's reticence to engage in a given country. Such reticence is only natural given the differences in history, governmental structure and internal political dynamics in our countries. Donor coordination will allow us to use our differences as a source of strength, allowing us to pitch-in for each other.

Flexibililty/Agility:

1. loan v. grant;
2. variety of partners;
3. able to call on other USG agencies (Many of those institutionsare part of the Global Forum: our Justice Department, Customs Service, USAID's Office of the Inspector General, the Treasury Department and the Office of Government Ethics.)

Three Critical Challenges

• Keeping Foreign Aid Clean
• Donor Coordination
• Sustainability

Challenge Number One is Keeping Foreign Aid Clean

While this seems an obvious place for donors to begin, it remains a challenge for a number of reasons.

1. First, our ability to mount and sustain a long-term institutional response to corruption depends in large part on our ability to remain completely accountable for the assistance we now provide. Support for anti-corruption assistance is the single issue that seems to unite supporters and critics of foreign assistance in our Congress and in our country.

2. Second, as long as there is leakage, fraud and waste, we will continue to undercut the individuals and the institutions we wish to support.

3. Finally, with corruption now a front-burner issue in so many countries, we have an opportunity to make long-lasting institutional changes that will help change the way we do business. Let me provide you with some examples.

Role of the IG: USAID's Office of the Inspector General (IG) is charged by the Congress to perform audits and investigations of U.S. government agencies' program and operations, promote agency economy, efficiency, and effectiveness, and help prevent fraud and abuse.

Internal Controls: By law and regulation, the U.S. has established a system of control in order to fulfill our responsibilities as careful stewards of U.S. taxpayers' money. (As our president likes to say, it's not the government's money, it's people's money. When money comes from our Congress, we implement programs in trust on behalf of the U.S. government and, ultimately, the American people.)

Supreme Audit Institutions: But accountability for these funds does not and should not rest only with donors. In addition to our system of internal controls, the Office of Inspector General has undertaken an aggressive campaign to identify, support and enhance the capacity of Supreme Audit Institutions in the counties where we work. Over time, with the necessary training and other support, the audit function once performed internally can now be transferred to the host country. The Supreme Audit Institution in Tanzania, for example, recently audited nearly $9 million in USAID funding. Similar audits are taking place in Zambia, Ethiopia, Honduras and El Salvador, just to name a few.

Prevention/Fraud Awareness: Keeping Foreign Aid Clean does not rest on internal controls alone. The most effective, least costly method to fight corruption is prevention. Again, USAID's Office of the Inspector General has begun training courses in Fraud Awareness, not just for USAID staff, but for our implementing partners in country. This training includes an in-depth presentation of fraud indicators, and introduction of aggressive law enforcement strategies, which enhance our ability to deter corrupt acts. When they do occur, we are better able to detect, investigate and prosecute cases where warranted. In fact, a recent IG investigation has led to the prosecution of several multi-national corporations for bid rigging. As a result, these companies have been ordered to pay over $100 million in criminal fines and civil restitution.

The second challenge is donor coordination

Again, this is not a news flash. But what may be new is the opportunity to develop better mechanisms for ensuring that our work is effective, well targeted and not duplicative. If there is any good news, it may be that there are some examples of donor cooperation that have been successful and merit further exploration and use.

Accountability and Anti-Corruption in the Americas Project (AAA): One example of successful donor coordination was the creation of the Donor Consultative Group on Accountability and Anti-Corruption in the Americas, now known as the AAA Project. Over the course of 12 years, the project moved from eight to nineteen bilateral and multilateral institutions including the U.S., Canada, Germany Japan, the Central American Bank for Economic Integration, the OAS, the IDB, the IMF, World Bank Institution, the UN and others.

The early years focused on financial management and the donor forum helped to devise a division of labor whereby a single donor would take the lead in a particular country, coordinate the needs assessment and propose ways to institutionalize integrated financial management systems in national entities.

Today, virtually every country in the Hemisphere has undertaken financial management system reforms using a similar model developed under the project. The donor forum continues to meet quarterly to share information. Its next challenge is aimed a bringing these financial management reforms to the sub-national level, working with municipalities.

A state of the art website (www.respondanet.com) makes anti-corruption resources widely available. According to a recent ranking done by websmost-linked.com, an independent Internet rating service, this website is in the 8.9 top percentile of the most visited in the world.

Coordination with NGOs: The project has expanded to include civil society organizations (CSOs) with a sub-project called Anti-corruption Without Borders (ACWB). It promotes the use of the Internet as an indispensable tool for all CSOs engaged in anti-corruption activities in the region. Maintained in both English and Spanish (Anti-Corrupcion Sin Fronteras), it allows NGOs an opportunity to share resources, information, exchange ideas via list-serves and generally serves to link anti-corruption CSOs across the region. Technical assistance in website construction and design is also available.

OECD Anti-Corruption Network for Transition Economies: Another example in Eastern Europe, USAID is providing initial support for the operation of the OECD Anti-Corruption Network for Transition Economies. This anti-corruption initiative serves the Baltics, Central and Eastern Europe and the New Independent States. It links international donors, key government officials, and civil society representatives in a forum to exchange information about anti-corruption policies and best practices. Building upon existing regional initiatives, the Network co-ordinates efforts, shares information, and promotes international instruments and best practices as benchmarks.

Best Practices

Field-Based Coordination with Parallel Mechanisms at the Capital Level: As a highly decentralized, field based organization operating in over 80 missions around the world, USAID tends to believe that the best donor coordination occurs first at the field level. Because not all bilateral and multilateral donors have a technical field presence, we have found that field level efforts are even more effective if there exists a parallel donor coordination mechanisms at the level of the capitals. Experience with Consultative Groups and other mechanisms such as those undertaken by the bilateral donors and the IDB following Hurricane Mitch represented an advance in this type of parallel donor coordination.

Lessons form Hurricane Mitch

• Broad Donor Consensus on Objectives of Reconstruction: embodied in the Stockholm Declaration -- committed a reconstruction based on transparency and good governance and coordination of donor efforts.

• Field-based Coordination -- led by G-5 and broadened to all interest donors. Allowed donors to coordinate efforts, speak with one voice on policy maters and to avoid duplication at the programmatic level.

• Parallel Mechanisms at the Capital Level -- Rotating chairmanship among the G-5 took place at the field level and the capital level. This ensured a continuity and coherence of policy, in the field and in the capitals and most importantly at the Consultative Group meetings.

Three Concrete Suggestions: In the area of anti-corruption, we have two suggestions that we believe will assist in the effort to improve donor coordination.

1. The first is the use of joint assessment teams (meaning multi-donor technical representatives) sent to analyze a given country so that we can begin with a common reference point as to the nature of the problem and begin to plan a coordinated response.

2. To that suggestion, we would add the suggestion of cross training -- meaning providing opportunities to our technical officers to participate in each other's respective training programs. Each December, USAID brings in over 100 of its field based democracy officers for training. We would like to open spaces for interest donor representatives to participate and share their experiences in the training mode. We have also developed a distance-learning module, available on CE, which we would like to share with those interested for comment and critique.

3. Third, we believe a new area for donor coordination has emerged with the development of regional anti-corruption conventions and agreements. These agreements give us an agreed upon set of goals. Now begins the hard work of bring institutions into compliance, as well as establishing effective peer- and civil society monitoring mechanisms. As donors, we need to be active, not only in our support for the passage of conventions, but especially for the monitoring work and institutional development that must follow. The clear terms of these agreements make this an area where we can more easily work together.

The third challenge is sustainability of anti-corruption efforts

With the launch of various anti-corruption initiatives over the last several years, we are now running into the challenge of making these donor-supported efforts sustainable over the medium and long-term. Again, some good examples exist.

USAID's work with Supreme Audit Institutions is aimed at raising the institutional capacity of these entities to continue to do their jobs on a sustainable basis.

In the non-governmental sector, I know that this is a prime concern of Transparency International, an organization we are proud to have supported, almost from the beginning. In order to maintain the independence necessary to be an impartial advocate for anti-corruption reforms around the world, TI, and other similar organizations, should ideally be freed from year-to-year reliance on donors. To this end USAID will work with TI and with other donors on a long-term sustainability strategy.

More generally, the lesson for donors, we believe, is not to underestimate the degree of capacity building that will be needed, in addition to technical assistance and financial support (and the duration of that need) in order to create sustainable institutions. Concretely, it should be a requirement of donor engagement in the anti-corruption area that beyond the cost of the programs we want to support, that we accept responsibility for the institutional development costs for NGOs. All of us need to provide organizational development, capacity development, and financial management assistance. We all need to be aware of the temptation to be a "free-rider" in the donor community; yet if all of us provide only the "program costs" how will local organization acquire the organizational capacity to carry-out programs and develop the sustainability needed for long term anti-corruption programs that extend beyond our development projects?

We have found that there are no "one-shot deals" when it comes to funding effective anti-corruption initiatives. As we bring discussion of this once taboo subject out into the open, we need to find ways to support efforts that go beyond raising awareness. Ultimately, we must help countries change the incentives that lead to corruption -- by driving home the costs of corruption on development; by reducing the opportunities for the exercise of unlimited discretion and by penalizing bad behavior when it occurs.

Donor Endurance over Donor Fatigue: These are long-term challenges that are first and foremost to be faced by the countries themselves. In anti-corruption, our slogan should be donor endurance rather than donor fatigue.

The Hague, Netherlands
May 29, 2001