Corruption case studies highlight Pakistani challenges

January 20, 2015

Pakistan, literally meaning ‘land of the pure’, is considered the principal gateway to the Central Asian Republics and has good connections to the Middle East and to South Asia. It is rich in natural resources and abundant in land. The labour and raw materials are cheap; the population of 180 million is the sixth-largest in the world, and growing fast, with over 50 percent under the age of 20; and tax and set-up incentives for foreign investment are impressive.

GlaxoSmithKline Consumer Healthcare has called Pakistan a ‘high-growth market’ and is planning to invest PKR2 billion (US$19.6 million) in the coming years. And Coca-Cola has seen country’s  potential and is planning to set up three new plants in the next 18 months.

Pakistan has been a predominantly-agricultural economy since it gained independence in 1947. It has come a long way during that time to become the 44th largest economy in the world in terms of GDP. This is especially when considering it is the sixth-most-populous country in the world.

Pakistan is however burdened by political instability, with past democratically-elected governments struggling to complete their terms and being dismissed by presidents and removed by the country’s army chiefs. The resulting ineffective political parties and governance has led to constant political unrest.

Pakistan continues to face extraordinary challenges on the security and law enforcement front. In fighting extremism and terrorism, the country has suffered greater military, law enforcement and civilian casualties than almost any other country. In the midst of this difficult security situation, Pakistan’s civilian government remains weak, ineffectual and corrupt.

Corruption in Pakistan

Corruption manifests itself in various forms in Pakistan, including widespread financial and political corruption, nepotism and misuse of power. Both petty and grand corruptions are prevalent in the country.

Corruption involving high-ranking officials and office bearers is common. Former president Asif Ali Zardari served 11 years in prison on corruption and murder charges despite never being convicted. Another former president, Yousuf Raza Gilani, was recently granted bail by the federal anti-corruption court in Karachi for 12 pending alleged corruption cases.

The lack of political will among the leaders coupled with the arbitrariness of many anti-corruption proceedings poses a major obstacle in the fight against corruption in Pakistan.

Petty corruption in the form of bribery is common in law enforcement, procurement and the provision of public services.

Pakistan’s judiciary is notoriously inefficient and corrupt. Experts claim that 96 percent of the people who came in contact with the judiciary encountered corruption, and 44 percent of those reported having to pay a bribe to a court official. Despite these existing systemic issues, judges are exempt from oversight and investigations by Pakistan’s national anti-corruption agency, the National Accountability Bureau (NAB). According to a 2010 paper published in the Pakistan Economic and Social Review, judicial corruption in Pakistan has the ability to frighten off domestic and foreign investments due to fear of usurpation or misappropriation.

The public procurement process in Pakistan is a perfect example of where corruption can take place. In principle, the law in Pakistan provides for open and competitive bidding in awarding government contracts. However, information on government expenditures and decisions is not always made public. For example, Pakistan Railways, the state-owned rail transport service in Pakistan, has been suffering huge deficits for years and has been forced to cancel many services. When a report for the restoration of Pakistan Railways was presented in the Supreme Court, the Chief Justice observed that corruption had caused the railways to be on the brink of collapse. It was found that in 2010 alone, the railway lost PKR5.6 billion due to misappropriation of funds and embezzlement.

Doing foreign business in Pakistan can be challenging, especially for United States citizens, with a number of extremist groups within the country continuing to target United States citizens and other Western interests as well as Pakistani officials. Terrorists have demonstrated a willingness and capability to attack targets where United States citizens are known to congregate or visit. Terrorist actions may include, but are not limited to, suicide operations, bombings (including vehicle-borne explosives and improvised explosive devices), assassinations, carjackings, assaults and kidnappings.

National Accountability Bureau

The NAB was established in 1999 by the National Accountability Ordinance (NAO) to prevent corruption, raise public awareness and enforce anti-corruption measures in Pakistan. As per the NAO, unexplained assets are viewed as corruption, and the responsibility to present proof that the assets were legitimately obtained rests with the accused. Acts of corruption and attempted corruption in the form of extortion, active and passive bribery, bribing a foreign official, abuse of office and money laundering are illegal.

The NAO criminalises both public- and private-sector corruption and sets the maximum penalty for corruption at 14 years rigorous imprisonment (implying hard labour), with a fine and confiscation of assets acquired through corruption in the name of the accused or of the accused’s dependents or beneficiaries. The NAB developed the National Anti-Corruption Strategy in 2002 as a comprehensive plan for tackling corruption. The NAB is endowed with wide-ranging powers to investigate and prosecute cases.

The efficiency of the NAB has always been questioned, as it doesn’t have the jurisdiction to investigate judicial officers and military personnel. The judiciary and military are instead meant to rely on internal mechanisms of accountability; however, those internal mechanisms have long been criticised as being ineffective, while the NAB has claimed many victories in the fight against corruption. The NAB is also poorly funded and understaffed.

The NAB is not free from political interference and is subject to direct and indirect political pressure. A former NAB chief has come out and alleged that he was often pressured to close cases against former president Musharraf’s favoured politicians and businessmen when he was in office. The NAB is said to be continuing the process of internal reforms to make it more efficient and independent, and is currently going through a transition period, both legally and administratively.

Other measures

In an effort to curb corruption and excessive red tape, Pakistan is attempting to eliminate several bureaucratic measures. For example, the government has introduced a simple five percent customs duty on imported machinery for the manufacturing sector. Furthermore, the government introduced new equipment and improved electronic communication between the Karachi Port authorities and the private terminals, thus shortening the time needed to export goods.

Conclusion

Pakistan offers foreign investors an abundance of natural resources including land, cheap labour and raw materials. However, political instability and lack of political will are underlying factors behind many of the existing challenges in the country that can affect investors.

Although there is no quick fix, previous corruption cases and allegations in Pakistan teach us that those companies that wish to conduct business in the country should strictly develop, implement and strengthen their compliance programmes as well as carry out extensive due diligence.

 

Corruption cases

Smith & Wesson

On 28 July 2014, the United States Securities and Exchange Commission (SEC) announced that Smith & Wesson Holding Corporation had agreed to pay US$2 million to resolve Foreign Corrupt Practices Act (FCPA) offences. The company, whose handguns are popular in law enforcement and military services, was accused of facilitating bribes of US$11,000 worth of cash and free guns to Pakistan police officials in 2008 in return for obtaining a supply contract. The SEC did not file a civil complaint against Smith & Wesson and the matter did not go to court; instead it was settled through an internal administrative order.

Siemens

Engineering company Siemens is alleged to have exaggerated the costs for the construction of a power plant in the Punjab region of Pakistan in the mid-1990s. According to a World Bank Group document, Siemens ‘acknowledged its responsibilities’ over widespread corruption concerning World Bank funds that were earmarked to set up the power plant. Consequently, World Bank debarred Siemens AG and its consolidated subsidiaries from conducting any further business with World Bank Group.

In September 2011, the Competition Commission of Pakistan requested Siemens Pakistan Engineering (Siemens Pakistan) to present its legal position regarding an alleged five-year-old anticompetitive arrangement in the field of transformers and air insulated switchgears. In December 2011, Siemens Pakistan filed a leniency application with the Competition Commission. This application was accepted in April 2012, and the Competition Commission granted Siemens Pakistan a 100 percent penalty reduction for the alleged behaviour.

Avery

In 2009, office-supplies manufacturer Avery discovered a corrupt arrangement via an internal investigation. The company successfully stopped the payment before it was made, and voluntarily disclosed the findings of its investigation to the United States Department of Justice (DOJ) and the SEC.

After the voluntary disclosure, Avery received a whistleblower complaint pertaining to allegedly-corrupt payments to customs and tax officials by employees of Paxar Corporation, a publicly-traded company that Avery acquired during the course of its internal investigation. Avery subsequently undertook a comprehensive compliance review of Paxar’s worldwide operations, including an intensive FCPA-focused review in ten ‘high-risk’ countries, and discovered that Paxar employees had made improper payments both before and after the acquisition, including approximately US$30,000 in illicit ‘petty cash payments’ to government officials in Pakistan.

To settle the SEC investigation, Avery agreed to disgorge US$318,470 in profits, plus prejudgment interest, and to pay a US$200,000 civil penalty. The DOJ closed its investigation without filing criminal charges.

Microsoft Corporation

According to a 2013 article in The Wall Street Journal, a tipster emailed Microsoft in January of that year alleging that executives at Microsoft’s Pakistan operations paid for a December 2009 trip for a Punjabi provincial government official and his wife to win a three-year contract to supply the government with its Microsoft Office software. The trip, booked by a travel consulting firm on behalf of Microsoft, supposedly included business-class airfares and a stay at a luxurious hotel. According to the tipster, Microsoft won the partnership, worth roughly US$9 million, three months later.

DynCorp

The State Department’s Office of Inspector General conducted a four-year investigation into security company DynCorp, a United States contractor working with the Pakistan Army Aviation. It alleged that Islamabad-based partners paid local officials various kickbacks in order to facilitate the issuance of weapons licences and visas.

For example, in one case, DynCorp is alleged to have paid approximately US$2,000 each for 138 weapons licences (totalling US$276,000) for private United States security company Inter-Risk, which was on contract in Pakistan. The standard government fee for each licence is normally approximately US$100. In another deal, DynCorp is alleged to have paid subcontractor Speed-Flo Filters US$17,000 in ‘facilitation’ services for 15 visas. This would normally cost approximately US$3,000.

Investigators subsequently dropped all cases against the company as it said there was insufficient evidence to support allegations that DynCorp and its employees had knowledge of the bribes or the “requisite corrupt intent” needed to secure convictions for FCPA violations.

 

 

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