Sense of security

IFR Asia - Asian Development Bank 2012
5 min read
Steve Garton

Another ever-present theme reared its head over the last 12 months with a series of scandals involving Asian companies. What can be done to improve governance and limit losses?

An election worker scans each ballot at a polling station in Ulan Bator.

Source: Reuters/Claro Cortes

An election worker scans each ballot at a polling station in Ulan Bator.

In the capital markets, a high-profile fraud case tends to trigger a correction. Asset prices are often adjusted across an entire sector as investors worry that the same thing may happen to them.

The highest-profile scandal of last year – involving alleged fraud at Canadian-listed Chinese timber company Sino-Forest – went one step further, freezing similar companies out of the international capital markets altogether. Investors realised that they had ignored some warning signs in their enthusiasm for China’s emerging industrial sector, and shifted their attention elsewhere.

In the public sector, however, that kind of response is just not an option. A multilateral development bank cannot simply decide that its mandate is too risky and start doing something else.

While promoting better governance is part of the ADB’s core strategy, the bank faces a growing challenge in minimising its own risks, while continuing to expand its private sector operations and its lending in riskier frontier markets.

No single institution can hope to eliminate fraud and corruption in a region as diverse as Asia, but the ADB has introduced a number of initiatives to protect itself and better monitor its operations.

The Office of Anticorruption and Integrity – the only wing of the ADB’s Manila headquarters where a fingerprint scan is required for access – has been given additional responsibilities, including performing second-tier due diligence on the ADB’s projects and background checks on the bank’s own staff.

“Because the bank’s private-sector operations are now bigger, and that brings with it more risk, the bank has put in place more procedures to ensure that any risks are being mitigated appropriately,” said Clare Wee, director of the OAI. “All private-sector projects have to go through a screening process, and that now includes integrity risk – reputational risk for the ADB.”

Wee’s office received 225 allegations of corruption or integrity violations last year, and that figure is rising.

“We’ve now trained 97% of the bank in the obligation to report fraud and corruption in ADB projects, as well as how to spot it. If those numbers are going up, that’s a good thing – and the percentage of staff reporting is going up,” said Wee.

Governance is now a condition of lending.

“Clear provisions and covenants are required in project and financing documents to mitigate risks and ensure the ADB has the right to require good governance within client corporations,” explained Lakshmi Venkatachalam, vice president in charge of the ADB’s private-sector operations.

While those measures boost the ADB’s safeguards, other initiatives are needed to tackle the root cause.

Under the second governance and anticorruption action plan, referred to internally as Gacap II, the ADB carries out regular assessments of political and other risks in member countries, both to highlight concerns and promote engagement with individual governments.

“Any new engagement with a country that has been previously closed off from the international arena is a great opportunity for economic development, but it is also an increased vulnerability to risk that the funds can get captured by those with influence and power. The importance of integrity systems and recognising the vulnerabilities cannot be overstated,” said Sandra Nicoll, ADB director of governance and public sector management.

The ADB can point to some big investments in improving public sector integrity, notably a US$350m loan to promote access to justice in Pakistan.

Intervention, however, is more common at the sector level, such as encouraging public officials to invest in maintaining and upgrading existing infrastructure, instead of handing out lucrative new construction contracts.

Most public sector work goes on behind the scenes. The ADB and OECD, for instance, have been co-operating on a joint anti-corruption initiative for the last 10 years, fostering policy dialogue between member governments and encouraging the creation of sustainable safeguards against economic, political and social corruption.

Improving governance, of course, is a never-ending challenge. Allegations of corruption have reached as high up as former Philippines president Gloria Macapagal Arroyo, who pleaded not guilty to charges of graft in April relating to a US$330m telecoms contract.

Even Hong Kong’s image as a corruption-free open market has taken a knock in recent months with an investigation involving the heads of one of the city’s biggest property developers and a former government official.

Every cloud, however, comes with a silver lining and, with corporate scandals having again sounded the alarm, at least Asia’s public and private sector leaders know that their future business dealings will have to pass more intense scrutiny.

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