Corruption
Supply Side Perspectives

Anti-corruption drive in Nepal is limited to the government sector, which constitutes only the demand side (bribe takers) in the corruption equation (see box for the demand-supply debate on corruption). The private sector, which forms the equally important supply side (bribe payers) in the equation, is mostly left out by the anti-corruption agencies, such as the Commission for the Investigation of Abuse of Authority (CIAA), saying that the private sector is beyond their jurisdiction. One latest example is provided by the case of Chiranjibi Wagle, a former minister, who was fined nearly Rs. 27 million by the Special Court after hearing a case filed by CIAA. The court acquitted Wagle's son in the same case. Though the details of the verdict are not made public yet, it can be guessed that the lack of CIAA jurisdiction on private sector may be the reason why junior Wagle is acquitted. He does not hold any official position.

Corruption takes place at the interface of public and private sector (demand and supply sides), with the consequence felt mostly by the civil society.  Therefore, these three actors, namely, public sector, private sector and civil society constitute the primary actors in any anti-corruption movements. Efforts by a single agency will have little impact.

“I hope we can make a big difference” Surya Nath Upadhyay The Chief of the Commission for the Investigation of Abuse of Authority (CIAA) Surya Nath Upadhyay The Chief of the Commission for the Investigation of Abuse of Authority (CIAA) What is corruption as per the focus of CIAA activities? CIAA is mandated to investigate “improper activities” and “corruption” committed by any public office holder. It also does many activities to prevent abuse of authority in the public office. Besides, it acts as a recommendatory body in cases where it deems necessary to make improvements in the functioning of any public office. As its purview is wide-spread we are trying our best to act on each of these fronts. However, prosecution of offender as a deterrent and recommendations of improvements in the day to day functioning of the public office as a prevention are the main focus of CIAA to combat corruption. Generally, in a major corruption case, there are two elements, supplier and receiver of bribes. Corruption in bureaucracy is basically a demand side issue. The suppliers of bribes are in the private sector. If the private sector is not under jurisdiction of CIAA, how is it possible to combat corruption just by fighting a one-side war? It is commonly misunderstood that private sector is not under the jurisdiction of CIAA. As a matter of fact, both taking and giving bribe are criminal activities and are punishable under the anti-corruption law. I will like to remind you of the famous case relating to advancement of loan to private firms where CIAA prosecuted both the bank officials and the proprietors of these companies. There are hosts of cases where a private person or a firm found to be in complicity with any public official, has been investigated by CIAA and, if found guilty, has been prosecuted in the court. This sort of jurisdiction, however, may be termed as “indirect jurisdiction”. As regards a direct jurisdiction, i.e. of the violation of the regulatory regime for personal gains or public loss by a private individual or a firm, that could be dealt with by regulatory body through regulatory regime under which such a regulatory body is mandated. Since CIAA is not a regulatory body, in that sense private firm and body per se do not come under our jurisdiction. My opinion is that if the regulatory body becomes effective, the activities, which you call “corruption” by private firm and individual, may substantially be checked. Corruption is generally known to be the function of “opportunity” and “incentives” to be corrupt. In your experience, which of these two elements are serious factors in breeding corruption in Nepal? Yes, “opportunity and incentives” both provide breeding grounds for corruption. It is difficult to compare their degree of fertility. In Nepal both were in a high pitch in the past.  Due to the lack of capacity and indifference or ineffectiveness of the regulatory body, ‘opportunity factor' has been very high. Similarly, impunity in the act of corruption has promoted people to commit this crime. However, with the growing transparency and supervision of the government action and the increasing number of conviction by the special court, the scenario is changing. In my opinion, if corruption is to be checked we need to check both “opportunity and incentive” factors. It is sometimes raised that there should be some sort of mechanism to monitor and control the officials of CIAA by an independent agency. How you view this? Every institution needs to be accountable and CIAA cannot be an exception.  The framers of the constitution have rightfully placed the accountability of CIAA to parliament. The annual report of the activities of CIAA is placed and discussed in the parliamentary committee. There is constitutional provision to remove the chief commissioner and commissioners by the parliament. Given the status of CIAA as a constitutional body this is the right mechanism to monitor its activities. As regards the employees of the commission, they are under the jurisdiction of the commission as any employee of the government. In this context, let me also inform you that as a self-regulating mechanism, we in CIAA have developed and adopted a code of conduct that is applicable to commissioners, employees and consultants who work with us. There is also a self-monitoring mechanism. I hope this should go a long way to make CIAA an institution of integrity. Recently, the private sector of Nepal has started showing some anti corruption activism, for example with the setting up of Corporate Ethics forum under FNCCI. How are CIAA and FNCCI cooperating in this field? The move of FNCCI towards establishing and adhering to the corporate ethics is a welcome step. FNCCI president and others have informed me about their activities. I understand that right now they are in the process of preparing a document. When they approach us for any cooperation on the basis of programmatic actions we shall lend our support. Sometimes it is heard that the liberal economic system introduced recently has contributed to increase corruption by enhancing competition. How is your view about it? A liberal economic system opens opportunities for work and naturally competition grows in all sectors of economic activities. In a liberal economic environment, if the government machinery and procedures are not clear and transparent the chance of mal-administration and impunity becomes high lending support to high corruption. Hence, the liberal economic activities should be coupled with stiff anti-corruption measures and effective machinery of the government. It is perceived that corruption is a pervasive phenomenon that has engulfed all sectors of Nepali society. How is your assessment? It is not only is Nepal. Corruption has spread its tentacles to a great proportion in many counties. In Nepal, however, we sometimes become cynical about the problem and instead of understanding the problem and starting serious and determined steps to solve it we start trumpeting it loudly as if this is the only solution. I view this problem as something that needs serious determination from all walks of our life. The nature of our corruption is unique in the sense that it has grown in a ‘soft state’ environment. Therefore, we need to end this ‘soft state’ environment and move firmly. Given the determination from all of us, I hope we can make a big difference.

Though there has been some activism shown also by the private sector associations to combat corruption recently, such activism is again focused on the government sector giving the impression that corruption is only in the government. There is virtually little research done in private sector corruption in Nepal. Though political corruptions were major feature in Nepal's political economic history, an anthropologist studying on the development of modern private sector in Nepal had concluded that business corruption, i.e., the bribing of public officials by the private sector is an alien concept in Nepal. According to her, the businessmen who were expelled from Burma in early sixties introduced bribery in Nepal.  In a closed and extended family system, it is difficult to bribe someone. It will be risky both for the bribe payer and bribe taker. However, for a foreigner the risk element is virtually absent. Therefore, corruption thrived in Nepal with the onset of foreign businessmen and traders doing business in Nepal.

Most of the corruption studies in Nepal have focused on the government sector (see box for some books published on their topic). There are various other surveys as well conducted on different sample sizes). But this is not only a feature unique to Nepal. The literature on corruption at the global level is limited to corruption at the government. The cases that may be called as corruption within the private sector are generally referred to as fraud.

Another important feature of the researches on corruption in Nepal is that they are generally financed with some donor assistance. And most of them are laden with emotions than objective analysis. Some are philosophical and go on to show that the entire philosophy of life in the Nepali society is a breeding ground for corruption, thus negating any possibility for the success of anticorruption drive in the country.

“They are forced to pay bribes” Binod Bahadur Shrestha President, FNCCI What is corruption as per the focus of the anti-corruption activities from FNCCI? Corruption in this country is often misunderstood as involving only the illegal exchange of money. To pay for a political or some other favor is bribery, but corruption is much more than that and it involves among others: abuse of office for private gain that can be a political or economic favor like a contract for public works; misuse of public funds and donations; disrespect of laws such as the Procurement Law; tax evasion; bank fraud, etc. It is, therefore, very important to fully understand this societal evil, as only the well informed citizens can scrutinize institutions, thus making anti-corruption and transparency efforts sustainable. Corruption is a term with many meanings. Viewed most broadly, corruption is the misuse of office for unofficial ends. The catalog of corrupt acts includes - but is not limited to – bribery, extortion, influence peddling, nepotism, fraud, the use of ‘speed money’ (money paid to government officials to speed up their consideration of a business matter falling within their jurisdiction), and embezzlement. FNCCI is increasingly taking interest in anti-corruption activities. You have established Corporate Ethics Forum, you have CSR sub-committee, and you are also involved in propagating Global Compact and giving Excellence Awards to your members. Is this because some donor money is available or you have a concerted plan of action to combat corruption? The primary reason for us to be involved in the anti corruption activities are that the corruption impacts negatively on the overall business. It not only dampens the business climate but also reduces the competitive strength of the business. Our development partners have been somewhat involved in the governance reforms programs with many stakeholders. We strongly feel and believe, it is not the donors money that can reduce corruption, but it is our own conscious effort that can make it happen. The involvement of donors can help us with resources and expertise. Private sector is accused to be main supplier of bribes to the administration, how is it possible for you to convince your members that we should stop bribing government officials? The businesspersons are often blamed for corruption as we are the giving side. We understand that the collusion of immoral politicians, greedy government employees and, unethical businessmen leads to rampant corruption in the country. But we at FNCCI know there are thousands and thousands of businessmen who do want to do business in ethical and legal manner. They are forced to pay bribes. They have to pay as the alternate would be a total loss of business. We have  seen there is increasing number of businesses who understand this problem. The question is not merely convincing the businessmen not to pay bribes, but changing the entire environment. We need to generate the environment where bribe giving and bribe taking is condemned, not condoled. The FNCCI is very keen to extend its involvement in fighting corruption in Nepal. In particular, it wants to see: (1) greatly improved dialogue between government officials, civil society and business people to explore how to reduce corruption; and (2) practical systems for corruption victims to seek redress against corrupt officials and businesses. This project will incorporate these and other solutions in the first initiative specifically targeted at reducing business related corruption in Nepal. FNCCI has been opposing financial sector reforms activities like ‘black listing of bank debtors’ or ‘management contracting of commercial banks’. Would you like explaining such FNCCI attitude against these actions taken to curtain private sector corruption? We are not per se opposing these measures. We fully understand the need for financial sector reforms as a sound financial system is the necessary precondition for sustained economic growth. Our grievances are on the timing and the procedure of the acts. We feel that the businesses should not be squeezed when the economy itself is passing through a very difficult phase. The black listing norms are such that anyone can be blacklisted. There is also the question of sharing of responsibility. Let us punish those who are involved in mal practices, but let us not disturb those who are not involved in such activities. How is the Corporate Ethics Forum going about in addressing the internal corruption in the corporate entities? Some of the activities being propagated by the CEF are as follows: Creation, monitoring and evaluation of the Code of Conducts, training and creation of public awareness, revision of financial working procedure and making them practical, lobbying for practical scientific tax system, simplification of administrative procedures, making constitutional bodies active, social boycott of the corrupt, moral awareness, fight for revision of laws, effective enforcement and information about working procedure, transparency at all levels of activities. Sometimes it is heard that the liberal economic system introduced recently has contributed to increase corruption by enhancing competition. How is your view about it? Deregulation of prices or other aspects of production or trade are important steps toward reducing opportunities for corruption.  Implicit price subsidies, in the form of tax and utility arrears, provide politicians and bureaucrats with discretionary power that is highly subject to abuse. Liberalization can help to reduce this discretionary power, but only if reform is undertaken in a transparent and nondiscriminatory way; otherwise, there is a risk that the reform process itself will be corrupted. What seems to have happened in Nepal is the partial liberalization and reform. Much of the discretionary power especially in revenue collection, government procurement and contracts are still there. There seems to be little disclosure of information. Loose requirement for corporate disclosure and weak enforcement of whatever disclosure requirement is there are cited as the major reason encouraging the private sector corruption. How do you comment on it? A commitment to disclosure and transparency of information ensures a corporation’s accountability to its investors and other stakeholders. It fosters trust, credibility and confidence and allows shareholders, would-be investors and boards to make informed decisions. The type of information, the degree to which it is disclosed and how disclosure is enforced vary across countries. Information disclosure requirements may cover a range of items, from financial and non-financial information to ownership identity and holdings. In Nepal there are very few listed companies. The rules and procedures of various agencies and the tradition itself also seem to discourage disclosure. In countries where there are few listed companies, financial intermediation takes place through banks and so the corporate governance of banks is also important. As some international scandals have proven, deficiencies in disclosure are not a problem of countries like Nepal alone. Some scandals have also renewed the debate regarding the responsibility, liability and independence of auditors. It is perceived that corruption is a pervasive phenomenon that has engulfed all sectors of Nepali society. How is your assessment? There can be any doubt that the corruption has become a very serious problem. If we are to rely on the headlines and news coverage of all papers irrespective of their political or otherwise leanings, corruption is simply rampant in Nepal. The tenth development plan (2002-2007) accepts that the efforts to make public administration system productive, quick, cost effective, service oriented, transparent, innovative and responsible and accountable have been challenging. Accordingly, the plan has accorded high priority to ensure good governance has defined as one of the objectives for attaining during the plan period. It is not merely corruption but also the tendency to see corruption in all actions is a problem in Nepal. So much so we seem to find sinister motives whenever somebody does something. There is need to fight against the tendency to see sinister motives as much as to fight the corruption. In Nepal we seem to think that everybody is a thief and create barriers in doing anything. Actually majority of the people in any profession are not sinister. We need to encourage the honest persons and punish the dishonest one. The restoration of democracy in 1990 raised the expectations of the people not only in ensuring people’s rights and faster development but also in good governance, transparency and corruption and hassle free administrative set up. In this respect people were blatantly disappointed with the reported rise in corruption, politicized administrative setup and service delivery mechanisms. The headlines and news coverage in papers indicated substantial rise in corruption. It emanates both from the negligence of public officials towards their responsibilities or making administrative procedural and legal errors.

Despite the lack of attention by the anticorruption agencies and researchers on private sector, everybody agrees that corruption can be as rampant in the private sector as in the public and both will have equally far reaching consequences on the society if not checked (see box on some examples of the corporate and private sector corruption).

Liberalisation & Corruption

One prevalent perception about corruption in Nepal is that the liberal economic policies introduced beginning 1990s triggered corruption. This logic is forwarded to explain why there were so many corruption scandals during the last 14 years, as reported in the media and pursued by the CIAA.

But economists do not agree that liberalization brings about corruption. They believe it must be the other way round: more liberal the economic system and more political freedom in the country, the lower the chances for corruption and vice versa. Though the corrupt behaviors were there also during the pre-1990 period and the volume of corruption as measured in terms of the ratio of the corruption figure as a percentage of the national income was perhaps higher, not less, than in the post-1990 era, very few of the pre-1990 cases of corruption would get reported due to various reasons, one primary reason being the suppressed press. More incidents of corruption scandal were reported during the post-1990 period due to more press freedom, increased public awareness and massive development in information and communication technology.

Another explanation about the number of reported cases of corruption being larger in the liberalization era is that the corruption before 1990 was centralized - the business was required to pay bribe at one or two places only. But after 1990, there were many power centres formed where the businessmen had to go and pay separately.

While the decentralized corruption made it more cumbersome as it required one to approach various power centres and negotiate for the bribe money separately, these power centres also posed as stumbling blocks in getting the jobs done. Often there would emerge a new, previously unknown, power centre that required being satisfied. While it increased the likelihood of the job not being done despite paying bribes, it also increased the chances of getting the corruption exposed. The result was two fold: First, the chances of the scandal being exposed was highly increased, and second the rate of the bribe also increased as a premium to cover the additional cost needed to be covered in case of being exposed. Economists call it "anarchic bribery" or "economic warlordism." Corruption has a sort of snowball effect - the more one comes across another corrupt person, the more one is tempted to become corrupt. And the more one expects to meet another corrupt person, the higher the benefit from corruption, because in that case the chances of being exposed are less. Even when one gets caught, he can expect to escape the punishment by paying a cut from the bribe to the next corrupt person who is in a position of punishing him. 

Compare that with centralized corruption, as used to be in South Korea or even Japan, in which case the bribe is paid at a center of power. In Korea and Japan, the major form of bribe payment was massive donations to the political parties for election funding. The one time payment would be enough to ensure facilities in the future dealings. Though the political parties in Nepal, after 1990, reportedly accepted such fundings from the private sector to finance election expenses, the Nepali private sector was chagrined to find that such payments did not save them from the drudgery of paying bribes to the state functionaries on case-to-case basis. That partly explains why the business community expressed happiness when the political system seemed to returning to pre-1990 form.

The famous dollar scandal of the pre-1990 period is enough to give an idea as to how was the perception during the pre-1990 days about corruption. As the story goes, the leaders of that time, including the then Prime Minister and Finance Minister as well as the governor of the central bank were convinced by a group of foreigners to use the Nepali banking system to recycle the black money from an African country. The benefit to Nepal was that it could get a couple of million dollars as the cut. It was almost like the proposal that one gets almost every day on the email from some one who identifies as the son or wife of a famous former president of a country notorious for corrupt dealings. This is a clear case of money laundering. If so well placed leaders of the country's government system could view money laundering as a legitimate method to make money for the country, one can easily imagine how they viewed other forms of corruption.

One method of corruption that developed after 1990 is presented by what is known as "representation business". Though this method of business helps a foreign company do business in Nepal thorough its representative, and some representatives of such foreign businesses maybe doing a clean business, some analysts point out that such method was promoted by some foreign companies to circumvent the laws of their home country which prohibits such companies from paying bribes to the government officials of the third world countries in return for the orders for their goods and services. If they have a representative in Nepal, they can pay the bribe money to the representative writing it off as the sales commission and the representative pays larger part of it to the government officials as bribe, retaining the smaller amount as its actual commission.

The privatization of state-owned properties that was speeding up after 1990 provided the other new ground for corruption. But, as some economists have concluded from experiences elsewhere, such corruption will reduce and come almost nil when such state-owned properties are completely privatized. Speeded up liberalization will do away with permits and licensing. However, a zero-corruption situation cannot be imagined. Even countries with highly liberal economies and transparent governance have been reporting cases of petty bribery as well as big scandals. The Haliburton case from the USA in several contract deals in Iraq after US occupation is one latest example.

Why do the businessmen pay bribe?

One reason is explained by the somewhat euphemic term "speed money" or "grease money" used instead of 'bribe'. Bribe not only speeds up the movement of file across the bureaucratic layers in the government and help the businessman save on the costs of delay, it may actually enhance macroeconomic efficiency in underdeveloped countries like Nepal where the legal and administrative systems is cumbersome. Economists have shown that in situations where there are pre-existing policy distortions, additional distortions in the form of black-marketeering, smuggling etc., may actually improve welfare even when some resources have to be spent in such activities. When a prized license is on the offer at a very low official price, which does not reflect its actual economic value, the bribe offered to the server of the license by different bidding parties will correct the distortion so that the license goes to the most efficient party. The logic is that higher the efficiency of briber to use the license, higher will be bribe offered.

Second, the middlemen benefit by spreading rumor of corruption. All the business houses or big companies have at least one person believed to have good contacts in the power centres whose only real job is to deal with the government bureaucracy. Such people retain their jobs by frequently convincing the employers that the government bureaucracy is corrupt. This perpetuates the corruption culture even when the practice of corruption in the bureaucracy may have actually gone down. By fuelling the rumor of corruption such people not only retain their jobs, they also pocket the money that their employers provide them to pay as bribe.

Because of this reason, the private business houses or companies have to indulge themselves in some corruption within their own organizations writing fake bills to cover the expenses incurred in paying bribe and in this they find many auditors helpful who in turn may be acting as the bribing agent to pay to bribe some state revenue offices (e.g. in tax offices). Again such auditors are able to charge higher to their clients by convincing them that the tax administration is actually corrupt and needs paying bribes. Thus they too benefit by spreading rumors of corruption being high though it may actually be in the decline.

Another reason for which the private sector pays bribe is 'to jump the queue' to get various business permits. Such bribe payment will not be there when there will be no need to seek those permits by the supply of such permits to infinity. That situation will arise if the present pace of economic liberalization is further speeded up. But as long as that is not accomplished, there will be newer and newer scandals being reported about such corruption - both real as well as imaginary.

MNCs & Corruption

Cases are aplenty as reported in international literature about corruption propagated by the multinationals and business firms from developed countries. This is more pronounced in cases of contracts in developing countries for works financed by aid from the respective developed country from where the aid is flowing. Under such situation the corruption may take the form in which supply side is dominant over demand side as described in the box under corruption typology. Recently, Dr. Ram Sharan Mahat, who has served as Minister of Finance and Vice Chairman of National Planning Commission, discussed this situation in greater detail in a newspaper article and pointed out that the donors have in fact promoted such corruption.

Internal Corruption in Private Sector

Paying bribe to the public officials is done with complete knowledge of the owners of the business. So the owners clearly know the benefit and costs of the bribe paid and take the decision when the benefits outweigh the cost. Thus at least the owners are able to maximize their benefit by paying bribe. But this culture of corruption outside the business breeds a culture of internal corruption within the business, which causes the cost of the business to go up. When the procurement officer of the business knows that his employers are paying out bribe, he also thinks that it is not bad if he too takes bribes from the suppliers of raw material. The marketers and other department staff may also follow same logic.

Such internal corruption in the private sector organizations may affect only the owner of the organization if the business is 100% owner managed. But if the company is owned also by the general people who are only shareholders and have no control on the management, such corruption will harm their interest as well. Since such corruption increases the cost of the business, the prices of the products sold by the business would be higher thus reducing the sales volume or the profit margin of such business would be lower. As a result, the shareholders would be getting less or no dividend.

Same explanation applies also to the internal corruption in business for which bank financing is used. Nepal has plenty of examples in which the owner of the business arranges his accounts in such a way that all the financing for the buildings, land and machinery is virtually through bank loan without a single penny invested by the so-called owner. This harms the interest of the depositors whose money is so lent out by the bank to the miscreant owner of the business. The bank may not be able to offer higher interest to the depositors or higher divident to its shareholders. Similarly, the bank also would be forced to charge higher interest from the other sincere borrowers.

The other type of private sector corruption is the one in which the customers are the victim. One example is the lucky prize schemes under which the customers are incited to buy the product offering the hope of a fabulous prize if they are fortunate enough to find a lucky coupon inside the packet of the product they purchase, but when someone actually finds the elusive coupon and presents it to the company claiming the prize, he gets the reply that the either the validity of the scheme is already over or the coupon so presented is not the real one as it does not bear the signature of a certain officer of the company.

Apart from that, there may be several other instances of business corruption harming the interest of the consumer. Wrong labeling, underweight packets, etc. are some examples. But all these are treated more as fraud than corruption, thus excluding them from the jurisdiction of corruption.

The officials at the anti-corruption agencies say that the private sector corruption cases are best addressed by the respective regulatory bodies, e.g. the Company Registrar's Office, the Central Bank, the Security Board, the agencies designated to oversee consumer interests etc.