Highly corrupt countries receiving Covid debt relief; banking, health sectors deemed to face greatest corruption risks

Recently, international lenders have extended debt relief to the world's poorest countries, but many of those countries are also among the world's most corrupt. Although top officials representing the lenders have called for accountability, firms operating in those countries face heightened corruption risks, especially in the health and financial sectors, observers say.

On April 13, the International Monetary Fund provided grants for about $500 million covering six months of debt payments for 25 poor countries. Two days later, the Group of 20 coalition of advanced economies suspended debt payments for 76 countries between May and the end of the year. The value of the G-20 relief has been estimated to be at least $12 billion.

In both cases, about half of the nations receiving the relief ranked in the bottom quarter of the World Bank's "Control of Corruption Index."

As money that was once destined to pay international debts is freed to pay for health services or relieve unemployment, regulators warn that oversight is needed to ensure it's used for those purposes and not diverted to line the pockets of corrupt actors.

— Health and Banking Sectors at Risk —

For instance, the OECD Working Group on Bribery sees the health sector as particularly vulnerable.

"Corrupt business dealings endanger vital public services, which in the health sector could result in out-of-date, harmful, ineffective, or unequal access to medicines and medical equipment," the OECD said in a statement today.

“The high risk of corruption poses a major challenge to tackling this global health crisis” added Drago Kos, the working group's chair. “It is vital that countries remain actively engaged in anti-corruption efforts and work together to ensure their efforts to overcome this crisis are not weakened by corruption.”

Financial crime, such as laundering the proceeds of bribery, is also a risk faced by banks and other financial institutes. Also today, the Institute of International Finance, a banking group, said financial crime is on the rise as a result of the Covid-19 crisis.

"Specific jurisdictional policy pronouncements are helpful, but further assistance would come from the regulatory and law enforcement community coordinating their actions in concert with the private sector on an international basis,” the IIF said.

Some of the countries ranked lowest on the corruption index, such as Yemen, Afghanistan and Haiti, are simultaneously facing internal violence or the effects of natural disasters that have decimated their economies. But other poor-but-corrupt countries receiving aid are highly engaged in international trade and enjoy significant amounts of direct foreign investment.

For instance, Congo will obtain relief under both the IMF and G-20 actions. The mineral-rich nation was ninth from the bottom of the World Bank corruption index. The president who came to power last year, Félix Tshisekedi, has been credited with taking steps to lessen corruption in the sub-Saharan African nation.

But the attempts at reform must address decades of graft in the gold industry and in the extraction of minerals, such as coltan, that are vital to telecommunications equipment. A major US Foreign Corrupt Practices Act case involving hedge fund Och-Ziff included counts of bribery in the DRC. Further, the US Treasury's Office of Foreign Asset Control has placed a number of Congolese officials and business people under sanctions.

Also, Mozambique, which is 51 spots from the bottom of the index and is receiving both IMF and G-20 debt relief, has suffered from the "Tuna Bond" scandal in which three former Credit Suisse executives were charged with bribery conspiracy charges in connection with government-backed loans intended to develop Mozambique's fishery and maritime sectors. Mozambican officials, including former finance minister Michael Chang, were also charged with money laundering and fraud charges in the case. Mozambique and Switzerland also pressed charges in the case.

The case was an example of corruption being used to circumvent an IMF program, although it predates the current Covid debt relief by many years. Chang, according to the indictment, in 2012 told conspirators the loans were "constrained by the IMF limitation on the Government of Mozambique to accept commercial credit for commercial projects." The loans were concealed from the IMF, which was requiring Mozambique to reduce its debt as a condition of receiving IMF funding. The IMF withdrew that support in the wake of the scandal.

Daniel Kaufmann told MLex the IMF shouldn't miss an opportunity to monitor the integrity of countries receiving debt relief. Kaufmann and Aart Kraay in the 1990's developed the corruption index as part of the World Bank's broader Worldwide Governance Indicators, which they continue to produce today.

"The risks with this large and sudden and rushed rescue package are basically similar to those when there have been disasters or sudden crises of other types where there have been major, sudden inflows of funds without the typical checks and balances," he said. "It comes as general support which is not earmarked to particular projects, which have many more basic checks and balances.

"But it's not like it has never been done before," he said. "There are lessons from the past."

The IMF has an opportunity effectively implementing its own new policies on anti-corruption, but it can't police anti-corruption alone, Kaufmann said. He said that the Financial Action Task Force, an international coalition of financial crime intelligence units and enforcers from around the world, must remain vigilant in investigating corruption in the financial system.