Helping Countries Combat Corruption Combat Helping Countries The World Bank June 2000 Progress at the World Bank Since 1997 Bank Since World at the Progress Helping Countries Combat Corruption Progress at the World Bank The World Bank Since 1997 1818 H Street N.W.,Washington, D.C. 20433 USA Telephone: 202-477-1234 • Facsimile: 202-477-6391 Telex: MCI 64145 WORLDBANK • MCI 248423 WORLDBANK Internet: www.worldbank.org • E-mail: [email protected] Operational Core Services (OCS) A FREE PUBLICATION Poverty Reduction and Economic Management (PREM) Network June 2000 Helping Countries Combat Corruption Progress at the World Bank Since 1997 The World Bank Operational Core Services (OCS) Poverty Reduction and Economic Management (PREM) Network Copyright © 2000 The International Bank for Reconstruction and Development / the world bank 1818 H Street, N.W. 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A FREE PUBLICATION ii Helping Countries Combat Corruption This report was produced as a joint effort of the Poverty Reduction and Economic Management (PREM) Network and the Operational Core Services (OCS) Network at the World Bank, under the general direction of Katherine Sierra, with Cheryl Gray and Caroline Harper leading the inputs from each network. Further information about the Bank’s work in this area can be obtained by contacting staff of the PREM and OCS Networks. The report details the progress made to date by the World Bank Group on its anticorruption and governance initiative. The initiative was launched by Mr. James D. Wolfensohn in September 1996. List of Acronyms and Abbreviations AfDB African Development Bank IMF International Monetary Fund AFR Africa Region INTOSAI International Organization of Supreme Audit AsDB Asian Development Bank Institutions AU Antibribery Undertaking LACI Loan Administration Change Initiative BEI Business Ethics and Integrity Department LCR Latin America and Caribbean Region CAS Country Assistance Strategy MDB Multilateral Development Bank CDF Comprehensive Development Framework MNA Middle East and North Africa Region CFAA Country Financial Accountability Assessment NGO Nongovernmental Organization COSO Committee of Sponsoring Organizations OAS Organization of American States CPAR Country Procurement Assessment Review OCS Operational Core Services CPFA Country Profile of Financial Accountability OECD Organization for Economic Cooperation and CPIA Country Policy and Institutional Assessment Development CRD Urban and Rural Commune PER Public Expenditure Review CSA Control Self-Assessment PIP Project Implementation Plan DAC Development Assistance Committee PMR Project Management Report EAP East Asia and Pacific Region PREM Poverty Reduction and Economic Management EBRD European Bank for Reconstruction and PRSP Poverty Reduction Strategy Paper Development PSAL Programmatic Structural Adjustment Loan ECA Europe and Central Asia Region QAG Quality Assurance Group ESW Economic and Sector Work SAR South Asia Region FATF Financial Action Task Force SIGMA Support for Improvement in Governance and FINMI Financial Management Initiative Management in Central and Eastern European FY Fiscal Year Countries GAO U.S. General Accounting Office SOE Statement of Expenditure IAD Internal Auditing Department SSR Social and Structural Review IADB Inter-American Development Bank TI Transparency International IDA International Development Association TIR Transition Impact Review IDF Institutional Development Facility UNDP United Nations Development Program IFAD International Forum on Accountancy WBES World Business Environment Survey Development WBI World Bank Institute IGR Institutional and Governance Review WTO World Trade Organization Helping Countries Combat Corruption iii CONTENTS 1. Executive Summary:The World Bank’s Approaches to Combating Corruption 1 Progress on the Four Pillars of the Bank’s Anticorruption Strategy 2 Minimizing Fraud and Corruption in Bank-Supported Projects 3 Helping Countries That Request Assistance 4 Mainstreaming Corruption Considerations into the Bank’s Operational Work 5 Supporting International Efforts to Address Corruption 5 Conclusion: The Road Ahead 6 2. Minimizing Fraud and Corruption in Bank-Financed Projects 7 Strategic Compact 7 Creation of the OCS Network to Ensure Quality in Business Processes 10 Financial Management Reform 10 Procurement Reform 12 Monitoring and Evaluation 15 Dealing with Allegations of Corruption in Bank-Financed Projects 16 Sanctioning 17 Business Ethics and Integrity 18 External Independent Review 19 3. Helping Countries That Request Assistance 21 Diagnostic Tools 23 Country Assistance Programs 28 4. Mainstreaming Corruption Considerations into the Bank’s Operational Work 37 Country Assistance Strategies 38 Regional Strategies 38 Research and Knowledge Sharing 40 Sensitizing Bank Staff to Corruption Issues 40 Helping Countries Combat Corruption v 5. Supporting International Efforts to Address Corruption 43 Collaborating with Other Multilateral Development Banks 44 Supporting the Efforts of Other International Organizations 46 The Continuing Partnership with the IMF 47 Consulting both the Business Community and NGOs 47 Communicating the Bank’s Anticorruption Strategy to the World 48 6. The Road Ahead 49 Annex I 54 Anticorruption Action Plan: FY99 (Progress as of July 1999) 54 Anticorruption Action Plan: FY00 61 Annex II 67 Management, Procurement, and Financial Controls in Bank-Financed 67 Investment Projects Project Preparation, Appraisal, and Approval 67 Implementation and Supervision 68 Field Supervision 70 Other Oversight Functions 70 Annex III 71 Partial Inventory of the Bank’s Governance and Institutional Reform 71 Programs FY98, FY99, and FY00 (1st half) Annex IV 103 Empirical Studies of Governance and Development: An Annotated Bibliography 103 vi Helping Countries Combat Corruption EXECUTIVE SUMMARY: The World Bank’s Approaches to Combating Corruption n 1996, President James D. Wolfensohn committed BOX 1.1 the World Bank to “fight the cancer of corruption.” IThis public commitment intensified the strategy the Corruption Is a Problem Common to Bank has long pursued to ensure internal probity and Businesses and Public Enterprises of to encourage the development of new approaches to fighting corruption in its borrowing countries. It also all Kinds helped catalyze a truly global response to the problem, • A recent report published by the Association which is essential if we are to make enduring progress. of Certified Fraud Examiners finds that organ- The purpose of this report is to identify the progress izations—public and private—lose 6 percent the Bank has made to date in this difficult arena and to of annual revenue to fraud and corruption point out the many challenges still facing the Bank. each year. In the United States alone, fraud and The Bank is committed to ensuring that Bank- corruption claim $400 billion per year. financed projects are free from corruption and to help- ing countries build transparent and accountable govern- • Ernst and Young, in a survey of certified fraud ment institutions. The reasons why the Bank has taken examiners, found that one out of four busi- a leading role in the fight against corruption are clear: nesses loses more than $1 million annually to fraud and corruption and that 67 percent of • Corruption hurts the poor most severely: it diverts those polled believe that fraud is getting worse. public services from those who need them most and More than three-quarters of respondents strangles private sector growth. believe that the worst of the fraud could be • Corruption undermines public support for devel- prevented through the use of adequate policies opment assistance by creating an erroneous percep- and controls. tion that all assistance is affected by corruption. Helping Countries Combat Corruption 1 • Corruption