The struggle against corruption is part of a larger U.S. aim to introduce rule of law into the international marketplace. In this article, Under Secretary Eizenstat presents the U.S. case for trying to change the way international business has been conducted in the past and describes the benefits the changes will bring.

The development of the rule of law and effective anti-corruption strategies in the international arena, especially in developing and transitional economies, is very much in our national interest and has now become an integral component of U.S. foreign policy. The transition of emerging nations toward rule-of-law based societies free of corruption helps to support the development of accountable democratic institutions and market economics and to promote trade liberalization and economic growth from which American firms and workers can benefit.

The Clinton administration has a real sense of optimism about the rule of law and anticorruption efforts. There has been a sea change in this area, with governments around the world recognizing the importance of having law-based systems and willing to discuss and address in meaningful ways issues of corruption.

The development and implementation of a proper legal framework -- modern constitutions with basic freedoms and human rights and an independent judiciary to enforce those rights -- is vital to fostering democratic ideals. The ability of citizens to turn to courts for protection of their rights is fundamental. While these concepts are taking root around the world, the process of education and change is a complex and long-term one.

The need for change is not just a matter of new laws or even the building of institutions, but is systemic in nature. It requires nothing short of the building of civil society in cultures long dominated by nondemocratic, autocratic traditions. This includes the cultivation of the ethos of the rule of law and the need to replace cynicism about the rule of law with optimism. The notions that a government is bound by rules and that individuals have the right to challenge their governments have traditionally not been established norms in many societies. Yet, it is fair to say that the movement globally is in the right direction.

FAIR AND PREDICTABLE LEGAL RULES

Having the necessary legal framework in place also is vital to the development of the global marketplace. The establishment and implementation of a fair, predictable and flexible set of legal rules is vital to the processes of business formation, the establishment of capital markets, the ownership and transfer of real property, the protection of contract rights, and other key elements which undergird economic development. Likewise, the establishment and enforcement of shareholder rights and rules on intellectual property are critical to fostering market economics and a climate hospitable to the foreign investment necessary to generate economic growth. An independent judiciary also is important as a check against arbitrary government actions that affect business -- a common problem in emerging markets -- and as a means of resolving private commercial disputes. I cannot emphasize enough the role that an independent judiciary can play in both the development of democratic and market-based institutions. In short, as the Asian financial crisis has revealed, the rule of law is important to long-term economic growth. Nobel economics laureate Douglass North expressed the connection between democratic governance and economic development in his Nobel acceptance speech: "While economic growth can occur in the short term with autocratic regimes, long-term economic growth entails the development of the rule of law."

The rule of law also supports social stability and peace by promoting decision-making according to rules rather than fiat; by providing reliable, nonviolent methods of settling disputes; and by creating a framework of justice within which violent conflicts involving war crimes and massive human rights abuses can be resolved. Enhancing the rule of law also improves our domestic security by fostering legal institutions in other countries with the capacity to combat transnational crimes such as terrorism, money laundering, drug trafficking, and trafficking in women before they reach our borders.

The development of the rule of law is also important to the current global efforts to combat corruption -- which have been gathering a head of steam and have now reached critical mass. The dilemma is that corruption tends to thrive in developing and transitional economies with incomplete and evolving legal systems; the phenomena are closely related.

The very complexity, overregulation, and lack of predictability in the legal systems in numerous transitional and developing countries where governments lack accountability and transparency serve as windows of opportunity for corruption. Paradoxically, as these economies liberalize and open their doors to foreign investment and trade, the very processes of change -- privatization, procurement, and the like -- become areas where corruption tends to flourish. Thus, corruption has become more of a factor to U.S. and other firms doing business in these emerging markets in recent years.

Corruption and related lack of transparency take many forms, from grand corruption -- outright requests for large payments as a condition for obtaining business -- to petty corruption -- the small payments typically requested by a foreign customs agent. It includes procurement fraud, money laundering, and classic cases of conflict of interest by foreign government officials. A related set of issues concerns insider dealings -- cozy relationships -- that can be seen in state-owned or private firms in emerging markets. Also, U.S. firms have been faced with the unwillingness of foreign courts to enforce rulings in their favor.

THE HIGH PRICE OF CORRUPTION

Plainly, corruption damages economic development and reform and hinders the growth of democratic institutions. Corruption impedes the ability of developing countries to attract scarce foreign investment and distorts capital allocation. Finally, corruption hurts U.S. exporters and suppliers -- in every state and district in the United States -- and impedes international trade.

The U.S. government is aware of allegations of bribery in the last year affecting international contracts worth almost $30 billion by foreign firms, which are not bound by anti-bribery laws in their home jurisdictions. Of course, in contrast, under the U.S. Foreign Corrupt Practices Act, U.S. firms are criminally barred from participating in the bribery of foreign government officials in international business transactions. Thus, corruption has been a real impediment to American firms seeking to do business abroad.

Paradoxically, while corruption concerns have been on the rise in recent years in emerging and transitional economies, there has at the same time been a fundamental sea change in the willingness of many governments to address these issues. This is reflected in a number of concrete steps being taken internationally to counter corruption and promote the rule of law in a variety of ways -- through multilateral conventions, bilateral diplomacy and assistance, international financial institutions, and the work of nongovernmental organizations.

A NEW TREATY TO COMBAT CORRUPTION

Of most significance, on December 17, 1997, on behalf of the United States, Secretary of State Madeleine Albright signed the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. In this convention, 34 nations -- our major trading partners -- have agreed to enact criminal laws which will closely follow the prohibitions in our own Foreign Corrupt Practices Act (FCPA).

This convention is a major achievement for the rule of law and has been a goal of successive administrations since the 1977 passage of the FCPA. As then-President Carter's chief domestic advisor, I was involved in development of the FCPA and can attest to the high priority attached to getting a commitment from the world's largest industrial countries that they adopt strict anti-bribery laws of their own. The U.S. government, with the support of the private sector, has worked on this steadily and has now met our goal of strengthening the rule of law in international business and providing a more level playing field for U.S. businesses overseas.

The governments that signed the convention have pledged to seek its approval and the enactment of implementing legislation by the end of the year. Significantly, the United States has followed through on this commitment. The U.S. Senate has ratified it, and Congress has passed implementing legislation, which President Clinton has signed into law. Such early American action will help to spur our major competitors, whose implementation efforts will directly benefit our international interests and U.S. firms and their employees.

The convention obligates the parties to criminalize bribery of foreign public officials, including officials in all branches of government, whether appointed or elected. This prohibition includes payments to officials of public agencies, public enterprises, and public international organizations. This, therefore, would cover government-controlled parastatals, such as airlines, utilities, and state telecommunications companies, which are increasingly important in public procurement. Only those operating on a purely commercial basis would be exempt.

The parties must apply "effective, proportionate and dissuasive criminal penalties" to those who bribe foreign public officials. The convention also requires that the parties be able to seize or confiscate both the bribe and the bribe proceeds -- net profits that result from the illegal transaction -- or to impose equivalent fines so as to provide a powerful disincentive to bribery.

The convention has strong provisions to prohibit accounting omissions and falsification, and to provide for mutual legal assistance and extradition.

The convention will cover business-related bribes to foreign public officials made through political parties, party officials, and candidates, as well as bribes paid directly to foreign public officials. While the convention does not cover directly bribery of foreign political parties, party officials, and candidates for political office, OECD members have agreed to discuss these issues on a priority basis in the OECD's anti-bribery working group and to consider proposals to address these issues by the May 1999 OECD annual ministerial meeting. A follow-up process in the OECD will allow us to monitor and evaluate national action to implement and enforce the convention.

Also, while the tax deductibility of bribery is not covered by the convention, we are pressing our partners that allow such payments to be deducted as business expenses to eliminate this preferential treatment. Since a 1996 OECD recommendation which called for such action, three countries -- Denmark, Norway, and Portugal -- have completed the necessary legislative action, and 9 of 10 remaining countries have begun the process of changing their laws so as to deny the tax deductibility of bribes.

THE U.S. STRATEGY

The convention is the centerpiece of a comprehensive U.S. government strategy to combat corruption and bribery and promote the rule of law. In this hemisphere we successfully concluded in 1996 the Inter-American Convention Against Corruption, which also was recently submitted to the U.S. Senate for ratification. Like the OECD convention, this convention, negotiated under the auspices of the Organization of American States, requires the parties to criminalize transnational bribery of public officials. It also addresses broader issues of corruption. The convention provides procedures for cooperation in extradition, seizure of assets, mutual legal assistance and technical assistance where acts of corruption occur or have effect in the territory of one of its parties. The convention also contains preventive measures that the parties agree to consider, including systems of government procurement that assure openness, equity and efficiency.

Through a variety of mechanisms, the U.S. government also has taken steps on the demand side of the corruption equation to promote the rule of law and good governance in developing and transitional economies and, in so doing, limit the opportunities for corruption in these dynamic environments. Obviously, it only makes sense to work on these issues in countries where there is some high-level willingness by the governments involved to address these concerns. We are, however, seeing increased interest in these issues in the developing world. We also work closely with the international financial institutions, particularly the World Bank and the International Monetary Fund, to encourage their increased emphasis on anti-corruption activity.

We have identified eight key elements of the corruption problem and are developing programs to deal with each separately.

First, economic policy reform, including deregulation. Onerous and unnecessary licensing requirements need to be removed, discretionary authority over business matters needs to be reduced, and more competition needs to be injected into the economy. This involves reshaping the relationship between government and business into an arms-length one, within an appropriate but not stifling regulatory framework.

Second, transparency reforms, including steps to streamline and make more predictable administrative processes affecting trade and investment.

Third, public sector/civil service reform to shrink the size of bureaucracies in formerly state-controlled economies and reduce their influence in markets. This includes the establishment of a professional civil service and a merit-based system.

Fourth, public finance reform to create effective surveillance agencies armed with accounting and auditing skills. The need for procurement reform -- the establishment of fair and open procedures for public purchasing with World Trade Organization norms -- also is important.

Fifth, judicial reform to create independent court systems with powers to enforce their rulings. This includes the development of independent judiciaries that operate pursuant to ethical principles and codes of conduct, and to establish the judiciary as a check against arbitrary state power in both the economic realm and the area of personal freedoms.

Sixth, commercial law reform to create appropriate regulation to deal with securities, shareholders' rights, real estate, intellectual property, bankruptcy, anti-trust, and the environment. The effort here is not only to create new laws but to develop appropriate institutions to administer them.

Seventh, strengthening civil society through public education and civic awareness programs to improve public oversight and participation in government, as well as support for an independent media. U.S. international broadcasting provides anti-corruption programming on a broad range of issues, broadcast worldwide and to select regions. The U.S. Information Agency also has provided grant funds to organize international conferences and networks on the proactive role that civic education can play in creating an environment resistant to crime and corruption.

Eighth, reform of law enforcement agencies to root out internal corruption and raise respect for human dignity.

In addition, there is the area of ethics reform -- the establishment of codes of conduct for government officials and financial disclosure rules.

It is important to underscore that rule of law and anti-corruption efforts are by no means reserved for the public sector. Indeed, our assistance efforts heavily rely on private sector support and private/public partnerships abound in this area. For example, the American Bar Association's Central and East European Law Initiative is a public service project designed to advance the rule of law by supporting legal reform in Central and Eastern Europe and the Newly Independent States.

U.S. firms doing business abroad can help by establishing their own internal corporate compliance programs and guidelines and follow these standards in our business dealings. The adoption of these private self-help approaches and the broad dissemination of corporate best practices are important in changing the landscape on bribery and corruption and advancing the rule of law in the global business community.

These types of private efforts, together with the Administration's efforts, can make a difference in working toward greater acceptance of the rule of law as we move toward the twenty-first century.