(Asian Intelligence 823) Political and Economic Risk Consultancy, Ltd.- PERC-Asian Corruption Update (2011)

ASIAN INTELLIGENCE An Independent Fortnightly Report on Asian Business and Politics

POLITICAL & ECONOMIC RISK CONSULTANCY LTD.

No. 823 Wednesday March 23, 2011

REGIONAL OVERVIEW ................... 2

AUSTRALIA ...................................... 6

CAMBODIA ....................................... 8

CHINA ................................................ 9

HONG KONG ................................... 12

INDIA ............................................... 14

INDONESIA ..................................... 16

JAPAN .............................................. 18

MACAO ............................................ 19

MALAYSIA .......................................21

PHILIPPINES ...................................23

SINGAPORE ...................................25

SOUTH KOREA................................26

TAIWAN ...........................................28

THAILAND .......................................30

UNITED STATES .............................32

VIETNAM .........................................34

EXCHANGE RATES .........................36

Corruption’s Impact on the Business Environment

9.27

9.25

8.90

8.67

8.30

7.93

7.55

5.90

5.70

5.65

4.68

2.39

1.90

1.39

1.10

0.37

0 1 2 3 4 5 6 7 8 9 10

Cambodia

Indonesia

Philippines

India

Vietnam

China

Thailand

South Korea

Malaysia

Taiwan

Macao

USA

Japan

Australia

Hong Kong

Singapore

Grades are scaled from zero to 10, with zero being the best grade possible and 10 the worst. The question asked was: “To what extent does corruption detract from the overall business environment?”

Political & Economic Risk Consultancy, Ltd. Issue #823

Page 2 ASIAN INTELLIGENCE March 23, 2011

REGIONAL OVERVIEW

Asian corruption update

What is the most corrupt country in the

world? It’s the place where you are losing your own

money to graft or losing business to a competitor

who is paying a bribe. Corruption is a global

problem, not one that is exclusively Asian or

Western. There is not a single country that is

immune. It affects democracies, communist systems

and authoritarian governments. It is a problem in

developed countries as well as emerging markets. It

has both private and public sector dimensions, and

every industry – from hedge funds to

telecommunications – is vulnerable. Religious

organizations, charities and schools are not immune.

Corruption also has increasing cross-border

dimensions that facilitate corruption by allowing

individuals and companies to circumvent laws in one

country by channeling transactions through other

jurisdictions and by allowing those who are guilty of

corruption to avoid prosecution by fleeing to safe

havens that offer protection from extradition.

For well over two decades now, we have

been surveying nationals and expatriates about how

they perceive various aspects of corruption. We have

just finished our latest survey, covering 1,725 middle

and senior expatriate business executives working in

Asia, the US and Australia. In each of the 16 countries

and regions (Hong Kong and Macao) covered by our

survey, we interviewed by mail and face-to-face at

least 100 executives between the last week of

November 2010 and end-February 2011. We asked

expatriates to provide scores only for the country in

which they are working and their country of origin.

Before we get into the specific results of the

survey, let us emphasize up front that we are

analyzing perceptions, not reality. Biases exist in

respondents, depending on both the country

involved and the nationality of the respondents.

Countries that threaten whistle-blowers with

expensive liable suits and worse penalties can

intimidate people into being unwilling to discuss the

full extent of the problem, while democracies that

practice freedom of speech and the media can play up

corruption scandals so much that the pervasiveness

of graft is magnified. Recent high-profile acts of

corruption can make respondents more pessimistic

than respondents of countries where there have not

been such incidents to dominate the headlines and

private discussions. In many countries, opposition

parties have a strong vested interest in playing up

instances of corruption in order to discredit the

government in power and either to hurt its chances

of being re-elected or to justify their own actions to

topple a government through a coup or other extra-

constitutional means.

Because corruption is, by its nature, largely

invisible until the spotlight of a trial or government

crackdown shines on it, it is extremely difficult

measuring its actual magnitude. For the same

reason, governments that argue no acts of corruption

have been proven frequently sound like the emperor

who is wearing no clothes. For reasons like this,

perception surveys like our own are useful. They

help to show how local feelings toward corruption

are changing over time and if people are viewing

major institutions like the police and court system

with more or lesser confidence. Companies have to

go by their perceptions when they select partners,

suppliers and joint-venture partners. In other words,

perceptions do matter.

In the country entries that follow, we give

the raw results of our latest survey. We show

different aspects of corruption like how it is

perceived at the national and local levels, how clean

local civil services are perceived and how prevalent

the problem of bribery in the private sector is seen.

We try to provide insights into how the problem is

perceived in institutions like the police, military,

judiciary, and various regulatory bodies.

This year, as in all previous years, we asked

respondents to indicate the extent they felt

corruption detracts from the overall business

environment. The chart we have made from this data

is on the cover of this report. This does not mean

that this is the ranking of countries in terms of the

magnitude of corruption or where it is worst and

where it is best. Rather, it indicates where

respondents encountered corruption the most on a

daily basis. Not surprisingly, the worst rated

Issue #823 Political & Economic Risk Consultancy, Ltd.

March 23, 2011 ASIAN INTELLIGENCE Page 3

Institutional Corruption

9.49

8.80

8.50

8.48

7.94

7.40

7.04

6.58

6.18

5.91

5.09

2.48

2.03

1.75

1.31

1.02

0 1 2 3 4 5 6 7 8 9 10

Cambodia

Indonesia

Philippines

Vietnam

Thailand

India

China

Malaysia

Taiwan

South Korea

Macao

USA

Hong Kong

Japan

Australia

Singapore

Grades are scaled from zero to 10, with zero being the best grade possible and 10 the worst. The grades are an average of the following institutions: police, courts, stock market, Customs, tax bureau, government licensing bodies, government inspection bodies, and the military.

Political Corruption

9.11

9.07

8.54

8.27

7.98

7.97

7.48

6.54

6.52

6.08

4.95

3.24

2.95

1.52

1.17

1.04

0 1 2 3 4 5 6 7 8 9 10

Indonesia

Cambodia

India

Philippines

Vietnam

Thailand

China

Malaysia

South Korea

Taiwan

Macao

Japan

USA

Hong Kong

Australia

Singapore

Grades are scaled from zero to 10, with zero being the best grade possible (least corruption among politicians and civil servants) and 10 the worst grade (most corruption among politicians and civil servants).

countries were the ones with the worst paid civil

services and poorest economies. These are also the

places, often because of a lack of funding, that cannot

afford to modernize the police and the military,

where regulatory and licensing bodies frequently

charge extra for their services or create extra red

tape simply to have a reason for collecting a fee.

Therefore, it is no coincidence that our survey scores

measuring perceptions of how corruption affects the

business environment match closely to the scores

measuring the extent that corruption is a problem in

major institutions and political circles.

Cambodia, the poorest country

covered in our report, ranked the worst in

two of the three cases, along with

Indonesia, the Philippines, and Vietnam

(Indonesia ranks worse than Cambodia for

political corruption). At the other end of

the spectrum is Singapore, along with Hong

Kong, Australia, Japan, and the US. They

are the wealthiest countries covered by our

survey and have some of the best-paid civil

services and best-equipped institutions.

This does not mean that the

problem of corruption in Cambodia is the

worst of any country covered here or that

Singapore is not exposed to the problem.

Common sense, backed up by plenty of

anecdotal evidence, suggests that the

problem of corruption in the US the biggest

in dollar terms and has the most far-

reaching implications. It is the world’s

largest single economy and when incidents

of corruption do occur, their dollar value

can be larger than anything that is possible

in smaller countries. No country shapes

exchange rates and interest rates like the

US. It is the world largest single market, a

major global investor, and a destination for

foreign investors. When corruption

contributes to economic destabilization in

the US, such as what happened in the lead

up to and the aftermath of the sub-prime

crisis, the global repercussions are far

bigger than any fallout could possibly be

from corruption in places like Cambodia,

the Philippines, Vietnam or Indonesia.

Similar logic would put China as the country

with the second most serious corruption problem.

Last year China overtook Japan to become the

world’s second largest economy. It is a global

manufacturing powerhouse and is attracting

unprecedented amounts of capital. How it employs

this capital affects every country in the world. The

government plays an important role by deciding

where to place the country’s massive foreign

exchange reserves and how to invest savings in

China, but individuals and companies are playing a

big role too. Corporate governance standards are

low and a great deal of state wealth is finding its way



into the hands of individuals, many of whom figure

prominently as gamblers in Macao, property buyers

in Hong Kong, and forces behind other deals in other

parts of the world.

Corruption in China is helping to drive

economic growth in neighboring economies and the

threat from corruption in China comes as a two-

edged sword. One edge is that corruption could

make China’s growth unsustainable and ultimately

result in a derailing of the economy that causes social

and political instability. This would have unsettling

implications for the rest of the world. The other edge

of the sword is the shock that other economies would

feel if China’s government were to suddenly clamp

down on illegal capital outflows and start

prosecuting those involved. This would not only be

painful to economies that are growing accustomed to

this illegal capital outflow but also could be politically

embarrassing for the governments of these countries

and prominent local companies and business people

who have worked with corrupt elements in China to

facilitate this outflow.

Two other corruption themes that emerge in

the country entries that follow relate to cross border

corruption and to private sector corruption. The

most successful economies in the world have all

embraced globalization, none more so than

Singapore, Australia and Hong Kong. All three of

these economies rate strongly in terms of the

absence of corruption in their political structure and

key national institutions.

However, the major companies of all three

of these economies are expanding abroad, including

into some environments like China, Vietnam, India,

Thailand and Vietnam that do not have nearly as

good a reputation for being free from corruption.

There have been cases for every one of these

countries where foreign deals have become

entangled in corruption scandals. Some have

involved bribery by companies from countries that

hard reputations for being “clean.” Others have

involved scandals in which the foreign companies

have simply chosen the wrong partner or invested in

the wrong local company and found themselves in

the middle of a political dogfight in which corruption

allegations are a typical part of the mudslinging.

Part of the difficulty is building an internal

culture in foreign investments, especialy joint

ventures, that meet head office compliance

standards. Part of the difficulty is being able to steer

clear of foreign political scandals. A place like

Singapore faces an especially large threat from this

type of problem since many of the largest foreign

investments in political sensitive fields like

infrastructure companies are by government-linked

Singapore companies. It is one thing for a private

Hong Kong entrepreneur to behave one way in Hong

Kong and another way in China, but many Singapore

companies do not have this flexibility. They have to

maintain the same standards abroad that they do at

home and they have to be seen doing so, something

that can be almost impossible when foreign

politicians can make unsubstantiated accusations in

their own jurisdictions. This is one reason why we

contend that corruption is a big problem even for

countries that have been extremely effective in

fighting it.

Then there is the issue of private sector

corruption. Most places that have set up special

agencies to fight corruption – like Hong Kong, Macao

and Korea – have started by focusing first on the

problem of corruption in the public sector. Only after

they felt they were making significant headway on

cleaning up the public sector did they turn their

sights to private sector corruption. With limited

resources and personnel that virtually every anti-

corruption agency has, this makes sense. Corruption

is not something that can be eradicated with the snap

of a finger. It has to be done step by step, starting

with the biggest priorities (usually cleaning up the

police and judiciary, followed by other government

offices like tax, Customs and land), and then

progressing to other facets of the problem.

With this is mind, it is perhaps not surprising

that the perception grades in our survey for the

existence of bribery in the private sector are worse

than for public sector corruption in every country

that has mounted a serious long-term campaign to

fight graft. It has been the most difficult aspect of the

problem. The anti-corruption agencies must stop

companies from bribing officials in order to win

contracts, obtain licenses, pass inspections, avoid

taxes, and get other favors. The graft fighters must

also investigate and prosecute acts of individuals and



Private Sector Corruption

8.95

8.89

8.50

8.50

8.11

8.10

7.75

7.70

7.10

5.70

5.25

4.20

4.05

3.45

3.17

2.76

0 1 2 3 4 5 6 7 8 9 10

South Korea

Indonesia

Cambodia

Philippines

India

Vietnam

China

Thailand

Taiwan

Macao

Malaysia

USA

Hong Kong

Japan

Australia

Singapore

Grades are scaled from zero to 10, with zero being the best grade possible and 10 the worst. The question asked was: “How widespread is the problem of bribery by private sector parties?”

companies bribing other private sector entities – for

example to get a loan approved, a supply order

signed, or inside information needed to gain an edge

on the competition.

There is another aspect to corruption in the

private sector that makes it especially damaging. The

vast majority of players in any given industry might

be extremely ethical and have an internal policy that

strictly prohibits all kinds of corruption. A very small

number of bad apples might account for a majority of

the problem. However, because of those bad apples

and the examples of corruption in the past that have

caused major problems, most developed economies

like the US have passed regulation upon regulation to

close loopholes that have been exploited.

Compliance standards companies have to meet

therefore keep getting more onerous. Unethical

companies and individuals, by their nature, have no

compunctions about ignoring those requirements or

creating smoke screens that hide what they are really

doing. It is the ethical companies and banks

that meet the standards not just to the letter

but also to the spirit, but this entails a heavy

cost in both money and time. It can also

divert the best talents of senior

management away from much more

productive endeavors.

In other words, the cost of putting

in systems to fight corruption can be so

burdensome that they tilt the competitive

landscape toward those who are willing to

cut corners and act corruptly. This is

another reason why we would rate the

problem of corruption to be the worst in the

US. It is not just the magnitude of

corruption but also the magnitude of what it

costs individuals and companies who are

not corrupt to meet compliance

requirements.

Our latest survey, however, produced a

different result. It put the problem of bribery in the

private sector to be the biggest problem in South

Korea of any country covered by this report. One

way to look at this is that expatriates living and

working in Korea have been shocked by the

numerous scandals that involve family-owned

conglomerates, or chaebol. Expatriates and the

companies for which they work might even have

been directly hurt by the tactics these companies

have taken to protect and promote their business.

Another way to look at it is that the fight against

corruption in the public sector in Korea has gone

about as far as it can unless the authorities now start

going after privates sector corruption in a much

bigger way than they have to date. This includes not

just investigating and prosecuting acts of corruption

but also actually carrying out those punishments,

which is something Korea so far has not done.

How Corruption Has Been Perceived over the Past Decade

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Australia 2.08 2.50 2.20 2.24 1.67 0.83 0.98 1.40 1.47 1.39

Cambodia n.a. n.a. n.a. n.a. n.a. 9.10 8.50 8.10 8.30 9.27

China 7.00 8.33 7.48 7.68 7.58 6.29 7.98 7.30 6.70 7.93



Hong Kong 3.33 3.61 3.60 3.50 3.13 1.87 1.80 1.74 1.75 1.10

India 9.17 9.30 8.90 8.63 6.76 6.67 7.25 6.50 8.23 8.67

Indonesia 9.92 9.33 9.25 9.10 8.16 8.03 7.98 7.69 9.07 9.25

Japan 3.25 4.50 3.00 3.46 3.01 2.10 2.25 2.63 2.63 1.90

Macao n.a. n.a. n.a. n.a. 4.78 5.18 3.30 3.75 5.71 4.68

Malaysia 5.71 6.00 7.33 6.80 6.13 6.25 6.37 7.00 6.05 5.70

Philippines 8.00 7.67 8.33 8.80 7.80 9.40 9.00 7.68 8.25 8.90

Singapore 0.90 0.38 0.50 0.65 1.30 1.20 1.13 0.92 0.99 0.37

South Korea 5.75 5.50 6.67 6.50 5.44 6.30 5.65 4.97 4.88 5.90

Taiwan 5.83 6.33 6.10 6.15 5.91 6.23 6.55 5.85 5.62 5.65

Thailand 8.89 8.75 7.80 7.20 7.64 8.03 8.00 6.76 7.33 7.55

USA 1.57 2.57 2.45 2.33 2.83 2.28 1.83 2.71 1.89 1.39

Vietnam 8.25 8.83 8.71 8.65 7.91 7.54 7.75 7.40 7.13 8.30

Asian Average 6.33 6.54 6.47 6.43 5.81 6.01 5.96 5.59 5.90 6.08

Grades range from zero to 10, with zero being the best grade possible and 10 the worst.

The specific survey question asked was: “How big is the problem of corruption in terms of its being a feature influencing the overall

business environment.

The Asian Average score is a straight average of all scores except those for Australia and the US.

AUSTRALIA

Dimensions of Corruption

To what extent do you perceive corruption to be a problem in the following positions?

Grading Scale: Not serious 0-1-2-3-4-5-6-7-8-9-10 serious

Average

Score

National-level political leaders 1.25

City and other local-level political leaders 1.18

Civil servants at the national level 1.10

Civil servants at the city level 1.15

To what extent do you perceive corruption to be a problem affecting the following institutions?

The police department 0.97

The court system 0.88

The stock market 1.07

Customs 2.07

The taxation bureau 1.55

Government licensing bodies related to real estate development/land projects 1.87

Inspection bodies, e.g., fire, health, environmental compliance 1.81

The military 0.25

How effective is the system at prosecuting and punishing individuals for corruption when abuses are

uncovered?

0 = effective, 5 = average, 10 = ineffective

0.70

How serious is the government about fighting corruption?

0 = serious, 5 = average, 10 = not serious at all 0.50



How tolerant are average citizens of corruption?

0 = intolerant, 5 = moderate, 10 = extremely tolerant 1.00

How widespread is the problem of bribery by private sector parties?

0 = uncommon, 5 = average, 10 = common 3.17

To what extent does corruption detract from the attractiveness of the overall business environment?

0 = not at all, 5 = moderately, 10 = a really major detraction 1.39

How difficult is it for your organization to deal with corruption?

0 = easy, 5 = average, 10 = difficult 1.00

How easy is it building an internal culture in your organization to ensure you meet your compliance standards:


Comments

Australia is the one country covered by our report that rivals Singapore in terms of being seen as a

country that is relatively free from corruption. Singapore’s overall political score was better than Australia’s.

That was mainly because there are fewer layers of government and bureaucracy in Singapore than in Australia

due to the difference in the size of the two countries both demographically and geographically. Thus, whereas

Australia received different grades for national and local level political leadership and civil servants, Singapore

received only a single grade. Viewed institution by institution and at the national level of political leadership

only, Australia and Singapore are comparable in terms of being perceived as “clean”.

Australia’s court system actually rated slightly better than Singapore’s and the stock market also was

graded slightly more favorably. On the other hand, Singapore’s Customs was rated better than Australia’s, as was

the problem of corruption in the tax authorities. The important point is not that one place is “more corrupt” than

the other but that perceptions are extremely positive in both places and it is really splitting hairs to call one

better than the other. Both systems are effective at prosecuting instances of corruption when they are uncovered

and both civil services are seen to be professional and clean.

The problem of corruption in the private sector is seen to be quite a bit larger in Australia than in Singapore,

and to this extent it detracts from the overall business environment. However, it was not a factor at all in

discouraging foreign investors from expanding in Australia. In general, foreign investors in Australia, especially

US and European investors, considered it easy to build an internal culture in their organizations to ensure they

meet their compliance standards. Interestingly, Asian investors in Australia, although also bullish in their

assessment of being able to meet their internal compliance standards, were less so than Western investors.

Asian investors were just as bullish as Western ones when it came to assessing the problem of corruption in

Australia’s public sector, but they were more critical than Western investors in evaluating the problem in the

private sector. This could be because of what they have experienced or heard about concerning the tactics

employed by some Australian companies in other parts of the world. For example, there was a recent high

profile case involving the controversial behavior of Rio Tinto executives in China. In a different case, Sucurency,

a joint venture between the Reserve Bank of Australia and a UK-based specialist filmmaker has been under

investigation by the Australian Federal Police for the past two years over allegations that it made payments to

agents in a number of countries that are suspected of having been used to pay kickbacks to government officials.

Some of the countries included Indonesia, Malaysia and Vietnam. The Reserve Bank has tried to distance itself

from the scandal and sold its stake in the company late last year.



CAMBODIA




Average

Score








The stock market n.a.

Customs 9.35




The military 9.50


uncovered?


9.70













Comments

Cambodia scores poorly for almost every measure of corruption. While the perception is quite easily

explained, it is not really an accurate measure of the magnitude of the problem (in dollar terms), the threat to the

country’s economic development prospects, or Cambodia’s attraction to foreign investors.

First, look at why the perception of corruption is as bad as it is among foreign investors (and most local

Cambodians, for that matter): Cambodia is an extremely poor country with an extremely large bureaucracy.

This means there are comparatively few actual “money makers” – primary generators of income. Many

Cambodians either live off what they can get from these “money makers” or from foreign donors. Official pay in

the civil service is barely enough to maintain a subsistence level of living, which means the motivation is



extremely strong to supplement this income – which happens both legally and illegally. Moreover, a “civil

service” job in Cambodia does not mean your typical firefighters, policemen, teachers and lower level

bureaucrats. The Cambodian public sector is actually “top heavy”. The executive branch of government alone

consists of the King, who is head of state; an appointed prime minister; 10 deputy prime ministers, 16 senior

ministers, 26 ministers, 206 secretaries of state, and 205 undersecretaries of state. There are more

undersecretaries than there are legislators (the bicameral legislature consists of a 123-member National

Assembly and a 61-member Senate). It is debatable whether the bigger problem for Cambodia is outright

corruption or an attempt by civil servants to justify their demands for payments by creating red tape for foreign

investors and other money makers that serves no purpose whatsoever other than creating an opportunity to ask

for a payment.

Last year the government set up an Anti-Corruption Commission, but this body has no chance of being

effective in the kind of environment that exists. Other institutions like the judicial system, police and various

regulatory bodies are too weak to give graft fighters much support. That will depend mainly on the desire of the

Prime Minister and a few other powerful individuals to throw their personal support behind corruption

crackdowns, and that means cases will be arbitrary, at best, at possibly politically motivated at times.

Still, corruption is not an insurmountable obstacle to Cambodia’s economic development. The role of

state-owned enterprises is much more limited than in many Asian countries, as is the role of entrenched local

family conglomerates who have built their wealth through their local political connections. Such families

certainly exist in Cambodia, but they are all in their first generation of leadership and, unlike in places like the

Philippines and Indonesia, do not control most of the major economic engines. The Hun Sen government is

genuinely eager for economic development. It has opened the door to foreign investment. Consequently, the

majority of manufacturing is foreign owned, as are key parts of the tourism sector – the country’s two major

economic sectors in addition to agriculture. The banking system is also largely foreign owned and still mainly

cash-based, which means there is less reliance on lending and other sophisticated facilities that define a more

advanced economy but also are potential vehicles for corruption. Finally, while indigenous institutions are

extremely weak, there is a large presence of multilateral organizations like the World Bank, the Asian

Development Bank and foreign government aid bodies that promote certain standards of governance and have

some leverage with which to pressure the government to adhere to these standards.

Cambodia is decidedly less developed than any of the other countries covered by this report, and the

corruption situation is not pretty, but it has not prevented the economy from growing rapidly. Real GDP has

bounced back strongly from the 2009 recession. Foreign direct investment is expanding, pushing up exports in

the process, and there is no indication that major foreign donors are growing so frustrated with the level of

corruption that exists or with the way that the government is developing its institutions that they are reducing

their aid commitments or even pressing for a major revision in the direction or pace of reform. The two most

significant responses to our survey were probably not the grades assessing magnitudes of different types of

corruption but the ones in which respondents could comment on the difficulties they are having in adjusting to

the problem. The majority recognized that dealing with corruption on a day-in and day-out basis was a challenge

but they did not think it was too difficult building an internal culture in their organization to ensure they could

meet their compliance standards.

CHINA














Customs 6.72




The military 4.73


uncovered?


6.20













Comments

The Central Government freely admits that rampant corruption is one of the country’s biggest problems.

It is a cause of social unrest, as increasing numbers of average Chinese grow frustrated with what they consider

to be abuses by lower-level officials. It is an internal threat to the Communist Party, since the worst problems of

corruption are within its own ranks and therefore threatens the image of the Party unless it can be seen to be

serious about fighting this internal cancer. Finally, it is a threat to the country’s economic development by

inflating costs, contributing to project inefficiency, and undermining official monetary, fiscal and other policies

intended to maintain balanced growth.

The dollar-value of corruption in China has grown along with the expansion of the Mainland’s economy.

Part of our reason for making this claim is because of official statistics. From 2003 to 2009, prosecutors at all

levels investigated more than 240,000 cases of embezzlement, bribery, dereliction of duty and rights

infringement. Last year alone the Central Commission for Discipline Inspection and its sub-agencies received

almost 1.43 million petitions and tip-offs. They punished 146,517 officials for corruption and recovered 9.87

billion yuan in economic losses for the state.



China’s infrastructure building boom – with so many massive projects being pushed in such a relatively

short period of time – has provided an enormous opportunity for corruption – much more than at any other time

in China’s modern history. China has spent more than 68 billion yuan over the past five years building or

expanding 53 airports. The government’s spending watchdog now says that 10 of those projects cost taxpayers

some 159 million yuan in false accounting and tax avoidance, while one northeast airport cost double the amount

it should have due to inflated contracts. The projects in nearly half of all the airports were not open to public

tenders as they were supposed to have been.

Corruption involved with airports was small change compared with rumors surrounding the Ministry of

Railways, whose head, Liu Zhijun, was unceremoniously fired in February. This case undoubtedly involved much

more than just corruption. It is part of the on-going struggle to reform some especially powerful ministries so

they are not in as strong a position to oppose the government’s development program or to pursue their own

agendas without the oversight to which other government departments are subject. For example, the Ministry of

Railways has extensive landholdings and warehousing space (which are now being converted for a range of

purposes); it operates its own schools and hospitals; and still has its own telecommunications system – all of

which are a sore point with the government departments that normally are responsible for overseeing these kind

of activities and industries but have had to keep their distance from the Ministry of Railways. Under Mr. Liu’s

leadership, China was to spend 700 billion yuan in railways construction this year and trillions more in following

years, as it works towards its goal of having 13,000 kilometers of high-speed rail in place by next year and more

than 16,000 km by 2015.

Another reason we believe the dollar value of corruption is increasing in China along with its being a

concern for foreign investors is the deterioration that has taken place in our survey responses over the past few

years. Perceptions have not worsened too sharply about national-level political leaders and civil servants

practicing corruption, but they have toward local-level political leaders and civil servants. This supports a

widespread view that corruption in China is most serious at the local level and that leaders at the top of the

national government and the Party can still be trusted. However, there has been a deterioration in views toward

this top strata too, which is a worrying sign.

Moreover, as the transition to the next generation of leaders approaches, there are some indications that

corruption is being used as a way to differentiate certain groups at the top too. The housecleaning at the

Ministry of Railways is a case in point. However, the other side of the coin could be just as relevant. Some

individuals positioning for advancement, like Bo Xilai, the Party Chief of Chongqing, are clearly trying to claim the

moral high ground over their rivals by being seen as leading the fight against corruption at the local level. People

emerging from other organizations – like the Communist Youth League and the PLA – are similarly being

presented as deserving promotion because they have had nothing to do with corruption and have “good moral

standards.”

The above relates to the politics of corruption in China, not necessarily the dollar-and-cents reality. That

is much more difficult to see. Official reports have little credibility. One of the best gauges that corruption is a

large and growing problem in China is the flood of Mainland money into the casinos of Macao and the real estate

of Hong Kong. In both cases, the surge in business in 2010 and continuing so far this year has been truly

astounding. It explains why the Hong Kong government was able to report fiscal revenues that were more than

US$10.5 billion or 28.4% more than originally budgeted for the year ending this March 31; why Macao’s gross

gaming revenues increased more than 57% last year to the equivalent of US$23.7 billion, and why the 25%

increase in Chinese visitors to Singapore in 2010 was a major reason that city’s gaming revenues in their first

year of operation, at US$2.8 billion, exceeded all expectations. Nothing about these sums was illegal or corrupt

for Hong Kong, Macao or Singapore, but their actual sources in China are highly suspect.



Other countries might not see how corruption in China affects them, and to the extent that economies

like Hong Kong, Macao and Singapore are benefiting from capital inflows that are in many cases the earnings of

corruption in China, the problem actually “feels good” for these economies. However, it has made these

economies extremely vulnerable to Beijing’s ever being successful in cracking down on the problem of

corruption in the Mainland. It also makes it all but impossible to have any meaningful discussion about how

much the Chinese currency might be “over” or “under” valued and what is really happening to the capital account

of China’s balance of payments. The State Administration of Foreign Exchange (SAFE) reported that US$75.5

billion entered China last year that could not be explained by transactions such as trade and foreign direct

investment. Of this amount, HK$40 billion were payments under the country’s new cross-border yuan-

settlement program, leaving HK$35.5 billion classified as speculative investments, or “hot money”, an amount

SAFE considers to be “ant like” in comparison to the size of the economy. Actually, the revised number needs to

be scrutinized. It is a net figure. As noted above, tens of billions of illegal yuan are also flowing out of the country

by people gambling in places like Macao and buying real estate in places like Hong Kong. These outflows are so

large that they are a major factor behind recent growth in these smaller economies. China’s net inflow figures,

which ultimately are reflected in the rise in the country’s foreign exchange reserves that are not accounted for by

trade or investment flows, are undoubtedly much smaller than gross inflow figures, implying that the

government has less control over total flows than it likes to give the impression. The gross figures are far from

“ant like” and more threatening for both China and the rest of the world than Beijing is willing to admit (maybe

even to itself).

HONG KONG












Customs 0.97




The military n.a.


uncovered?


1.00





How widespread is the problem of bribery by private sector parties? 4.05



0 = uncommon, 5 = average, 10 = common







Comments

Hong Kong is like Singapore insofar as the problem of corruption within its borders makes it much

easier to police than in larger countries where there are more layers of government and bureaucracy. However,

unlike Singapore, Hong Kong is not a sovereign country but a Special Administrative Region within China.

Therefore, our survey could ask expatriates in Hong Kong to evaluate aspects of corruption in China as well as in

Hong Kong, since there actually is a difference between “national” and “local” levels of politicians and civil

servants. Also, there is a potential for corruption to leak across borders in Hong Kong or, conversely, for Hong

Kong’s fight against corruption to at times catch some Mainland fish in the net who otherwise would go

undetected and unpunished in the Mainland.

Expatriates in Hong Kong were much more critical of the problem of corruption in China than in Hong

Kong. Their perceptions of national level leaders and civil servants were in line with perceptions of expatriates

living in China, but unlike those expatriates, who were much more critical of the politicians and civil servants in

the localities in which they worked, Hong Kong expatriates were much more positive toward local officials. As in

past years, Hong Kong’s government gets high marks for keeping corruption low. Both politicians and civil

servants in Hong Kong are graded favorably compared not only with other Asian countries but also with

developed ones like the US. The lower and middle-ranks of the civil service – those parts that most people and

companies encounter on a daily basis – are seen as efficient and uncorrupted. However, in some government

branches senior civil servants, politicians and business mix more than is probably healthy and there have been

several controversies where senior civil servants have joined major local conglomerates shortly after retirement,

creating some controversy about whether or not favors were being repaid. The most critical grade in our survey

of Hong Kong institutions was reserved for licensing bodies related to real estate development/land projects,

which is where this type of controversy is most common.

Hong Kong’s police and judiciary get favorable grades. Hong Kong’s Independent Commission Against

Corruption is also widely credited with doing a good job of fighting corruption in both the public and private

sectors. However, the ICAC’s own image has been hurt this past year by the arrest of three officers amid

allegations that they coached a man accused of manipulating the derivatives market to give false evidence. The

three officers have been charged with intending to pervert the course of public justice and misconduct. The

police raid on the ICAC and the on-going trial of the officers charged is being widely covered in the local media,

but the transparency with which the affair is being dealt is as much an indication of the institutional strengths for

dealing with corruption as a sign that the institutions themselves are flawed.

Considering that Mainland-related enterprises now account for 60% of the Hong Kong stock market’s

capitalization and about 70% of its daily turnover, up from less than 30% a decade ago, while the balance is

dominated by shares of property-related companies in Hong Kong, it helps to explain why the local stock market

is graded as critically as it is in our survey. It is probably more a reflection of a concern of vulnerability that

could materialize in the future rather than one that is actually happening today. The absolute grade for Hong

Kong’s stock market is still good – better than the US, for example – but it indicates a degree of caution that has

probably been exacerbated by the recent decision by regulatory bodies on the Mainland and in Hong Kong, to



allow A and H share companies listed on both the Mainland and in Hong Kong to choose to prepare one set of

financial statements based on Mainland accounting rules, rather than two sets of financial reports based on rules

adopted by the two jurisdictions as currently practiced.

Our survey indicates that corruption is perceived to be a bigger problem in the private sector in Hong

Kong than it is with the public sector. This could be because of the publicity surrounding such controversies as

last November’s Jockey Club bribery scandal, when 29 people were arrested for allegedly accepting bribes of up

to HK$1 million for helping people join the elite Club. Other parts of the private sector in which corruption is

seen as a problem include the practices of some building management offices, while the biggest examples of

people flirting with graft are those who help Mainland Chinese and others non-Hong Kong residents invest and

channel funds through Hong Kong in order to avoid taxes or other penalties at home – for example, by helping

Mainland individuals get money out of China in order to buy real estate or stocks in Hong Kong. This might not

be illegal in Hong Kong, but it is not a practice that people readily admit to openly because they know it violates

China’s laws – or at least bends them so far that there is a risk of penalties or reputation damage if the Chinese or

the Hong Kong authorities ever want to crack down.

INDIA












Customs 8.37




The military 7.72


uncovered?


8.75















Comments

The issue of corruption has grown and overshadowed the second term in office of the Congress-led

coalition headed by Prime Minister Manmohan Singh. The government has been wracked by a series of scandals

involving the sale of cellular phone licenses, the preparations for the Commonwealth Games, a land scam

involving high level military officers, and improper property loans made by state-owned financial institutions.

Mr. Singh has promised to punish the guilty and to reform political funding. The Central Bureau of Investigation

says charges are about to be brought against India’s former telecoms minister and two companies suspected of

corruption (as many as 31 companies were summoned for questioning in the telecoms scandal). Those facing

charges will appear before a special court, currently being established, to try the corruption case in New Delhi.

Still, Indians are questioning whether or not the prime minister has the political muscle to fight graft and

whether the actions now being taken are more for show than proof that the government really is cracking down

on business practices that are common but corrupt. Prime Minister Singh has been put in such a defensive

position that most of his recent statements have been to stress how he has not personally been involved with

corruption, even through it appears that almost everyone around him was. This point is underscored by a recent

Wikileaks report that the ruling Congress Party paid off parliamentarians back in 2008 to pass the US-India civil

nuclear deal.

Making matters worse, the Prime Minister’s appointment of Mr. P. J. Thomas as chief of the Central

Vigilance Commission, the country’s main anti-corruption body, was successfully challenged by the Supreme

Court because Mr. Thomas was formerly the secretary of the now disgraced telecoms ministry and faces charges

in a corruption case in the southern state of Kerala involving palm oil imports. Neither the Central Bureau of

Investigation nor the office of Chief Vigilance Commissioner is satisfactorily independent of the government.

Both need to be overhauled, given more manpower and resources, as well as independence.

It is getting hard to find senior officials at the national or state level who are not tainted by corruption.

This issue has struck an extremely sensitive nerve with the public. In January of this year thousands of Indians

responded to a campaign organized by civil society group India Against Corruption by attending marches calling

for anti-corruption laws drafted by citizens instead of measures proposed by the government. In an open letter

to the government released last January, 14 industrialists, former central-bank governors and retired judges

warned that corruption is harming India’s growth. Only a fraction of the money destined for infrastructure and

other projects to help the poor currently reaches its intended destination. Projects are delayed until payoffs are

made, and contracts frequently are awarded not on the basis of the best price or quality but under-the-table

commissions. The Federation of Indian Chambers of Commerce and Industry is worried that the problem of

corruption and the way it is being treated in the media could seriously hurt India’s international image and scare

away potential investors.

It takes two to tango and the level of corruption in the public sector would not be possible if there were

not plenty of private businessmen willing to pay bribes and work the political system. This is why some leading

businessmen are bemoaning the telecommunications scandal for the way “it has let the genie of corruption out of

the bottle” by revealing how business is conducted in India. The private firms that won the 2-G telecoms licenses

are known names, so people can and do see both sides of the corruption equation in this case. The reputations of



a lot of prominent businessmen have been dirtied, which explains why some have expressed concern that the

anti-corruption campaign could sully the reputation of industrial houses and destabilize the government.

A year ago when we did out last survey, all this was suspected. This year, it is known for fact, which is

probably why so many of the grades in our survey have deteriorated as badly as they have. The only defense of

the private sector that rings a bit of truth is that the government must take a bigger share of the blame because it

“holds up the hoops of corruption through which entrepreneurs are obliged to jump.” Viewed another way,

India’s problem is not the influence that businessmen wield in politics but the influence that politicians wield in

business. The recent scandals have prompted a pointed debate about whether India, as its economy gallops

ahead, can become more transparent or will forever be mired in a culture of corruption.

INDONESIA












Customs 9.17




The military 8.49


uncovered?


9.50















Comments

The biggest change in corruption in Indonesia in the past year does not have to do with any success in

cracking down on the problem or with new embarrassing incidents that show it is as bad as ever but with

growing disillusionment with the credentials of President Susilo Bambang Yudhoyono as being clean and leading

the fight against graft. One of the main reasons Mr. Susilo was able to win the presidential elections twice was

because of his success in convincing the electorate that he was not tainted by corruption personally and would

use his period in office to fight the problem. There is still no evidence that he or his family have profited

personally during his time in office, but he does not have the political strength to avoid making deals and

compromises with other power centers who have a worse reputation for graft. He is therefore being tainted by

his association with these people.

On one level, Mr. Susilo’s behavior can be considered political pragmatism. Other power centers in the

civil service, state-owned companies, the military, religious groups and political parties like Golkar have the

power to undermine the president’s entire agenda, not just his fight against corruption. Whatever

disappointment there might be regarding the continuing high levels of corruption, Indonesia’s economy has

performed strongly during Mr. Susilo’s period in office. More foreign investors are showing an interest in the

country. Average Indonesians have enjoyed a rise in their standards of living. Rebellions like the insurrection in

Aceh province have stopped. At a time when the gaps between the general population and the governments of

countries like Egypt and Libya are looking increasingly strained, there is no indication of this kind of

disenchantment in Indonesia. It is starting to be viewed as one of the most stable Islamic countries in the world

and proof that Islam and democracy are compatible.

Corruption is clearly a problem – a big one -- but it is not a fault that is going to result in rioting in the

streets in the near future. Neither are government security forces cracking down on activists who are trying to

publicize incidents of corruption. This distinguishes Indonesia from a country like China and Vietnam. The

problem in Indonesia is closer akin to that in India. – and it is probably no coincidence that grades in our survey

are similar for these two countries.

Indonesia’s Corruption Eradication Commission (KPK) has been weakened by special interest groups

who feel threatened by the anti-corruption movement and are bent on defending the status quo. However, the

KPK is still not a toothless tiger. In January, for example, it arrested 19 former and sitting members of parliament

and an ex-government minister for allegedly accepting bribes for electing a leading official at the Central Bank.

However, the KPK does not have the high-level backing needed to go after certain well-connected people in the

private sector, military and government.

Perhaps even worse, those people who are arrested and prosecuted for corruption are really not

penalized as harshly as the system would like the public to believe. This is a problem Indonesia shares with

places like the Philippines and South Korea. This truth was brought home by an embarrassing scandal last year

in which an Indonesia tax official, Gayus Tambunan, not only made millions of dollars helping companies evade

taxes but also made a mockery of the court and prison system by paying off police inspectors and prison guards

in exchange for allowing him out of jail for dozens of day trips. Apparently, this was not just an isolated incident

but a common practice. In another case, an Indonesian businesswoman sentenced to seven years in jail for

selling government-subsidized fertilizer hired someone else to go to jail on her behalf. It is for reasons like this

that police are graded as poorly as they are in Indonesia, why the system is graded so badly for prosecuting and

punishing individuals for corruption when abuses are uncovered, and why bribery by private sector parties is

considered to be widespread. In the case of tax official Gayus Tambunan, for example, he testified that at least

149 companies, including those linked to the powerful Bakrie family, paid him to evade taxes. President Susilo

might be serious about wanting to fight corruption, and average Indonesians clearly are upset with the problem,

but those favoring preservation of the status quo still have the upper hand. President Susilo has ordered



Indonesian authorities to investigate the allegations in the 149 companies named by Mr. Tambunan. There likely

will not be any convictions resulting from these investigations or more than a few token examples where

companies are forced to pay the taxes they bribed Mr. Tambunan to evade.

JAPAN












Customs 0.78




The military 0.60


uncovered?


1.97













Comments

Japan is an example of a country where the pervasiveness of corruption is relatively low, but its

importance as an issue is large and growing. The grades in our survey reflect the former point. Corruption is not

a major feature of Japan’s business or political landscapes and most of the grades in our survey compare

favorably with perceived conditions in both developed Asian and non-Asian countries. Major institutions are



perceived to be clean and run professionally. The court system prosecutes acts of corruption quite effectively

when they are uncovered, and graft is not a feature that intimidates foreign investors much at all.

However, corruption exists. One of the charges brought most frequently against senior politicians

relates to campaign contributions. Seiji Maehara, for example, resigned this month as foreign minister to defuse a

scandal caused by his acceptance of a campaign contribution from a Korean living in Japan (which is illegal under

Japanese law), while former Democratic Party leader Ichiro Ozawa was ousted from the party over a scandal

involving misuse of campaign funds. This type of abuse might seem relatively small compared with what goes on

in most of the other countries covered by this report, but the scandals have seriously interfered with the

government’s ability to implement any major policies. The result is legislative inertia and frequent changes in

government.

In the wake of last week’s earthquake and tsunami disaster, Japan has a lot more to worry about than

political donation scandals. It is possible that politicians from different parties might set their differences aside

temporarily so the government can concentrate on dealing with the emergency and begin the reconstruction

effort. However, this process will not get far before debate and controversy flare up. In a country where so much

value is placed on consensus, there is no way a government can put together and implement quickly a

reconstruction program involving so much money without debate.

The first part of the reconstruction program will involve a review of what Japan could have done better

to prepare for the disaster. While this will involve mainly new ideas for design of port facilities and tsunami

barriers along the coast, it will also mean a review of the inspection and safety procedures, which are already a

source of controversy but now, in the wake of the disaster, could become even more controversial and

politicized. It is the early days of the crisis, but Tokyo Electric Power (Tepco) is already coming in for criticism

for the way it has handled the power blackout coordination. The public is also likely to demand and get a review

of past Tepco mistakes, like when Tepco admitted back in 2002 that it had falsified the results of safety tests on

the containment vessel of the No. 1 reactor, which as of this writing is one of the ones that is highly vulnerable to

a meltdown. Again, in 2003, Tepco shut down all of its nuclear reactors for inspections, acknowledging the

systematic cover up of inspection data showing cracks in reactors. So far it appears that the reactors stood up

well to the earthquake, but the damage was caused by the tsunami. There is bound to be an investigation if

anyone spotted this potential weakness before and, if so, how this report was handled.

Japan is entering a new chapter. As Prime Minister Kan has already analyzed, this is the biggest

challenge the country has faced since World War II. So far one of the most outstanding features has been the

absence of looting and violence by individuals and gangs that was typical in so many other countries in aftermath

of disasters like Hurricane Katrina in the US and the 2010 Chile earthquake. The bottom-up response of people in

Japan has been to help each other as much as possible. It is an affirmation of one of the most positive aspects of

one of the world’s great cultures. With the government already facing a fiscal crisis even before the

reconstruction work has begun, there is even less room for the waste and inefficiency of corruption than before.

If incidents are uncovered, they are likely to be dealt with severely and could be political game changers by

turning the public strongly against any groups associated with such abuses.

MACAO













The stock market n.a.

Customs 5.21




The military n.a.


uncovered?


4.20













Comments

The Macao government is doing more to fight corruption, but the magnitude of money involved is so

much larger than in earlier years that the dollar-value of the problem is soaring. Senior officials are under

pressure, on the one hand, to let casinos and real estate developers have the free rein they need to keep

expanding at a breakneck pace while, on the other, to ensure that Macao’s poorer and middle-class residents are

taken care of too and that the quality of life for all residents is actually enhanced. If the wealth generated by

Macao’s gaming boom is enjoyed only by a small elite while the rest of the population suffers from rising costs,

deteriorating services, and displacement by immigrants, it is a recipe for social unrest. Striking the right balance

will be a major challenge for the government. Corruption is the variable that could upset this balance.

It is difficult to overstate the transformation that has taken place in Macao since 1999. Prior to the

handover from Portuguese to Chinese sovereignty, Macao was an island in decline, with a growing problem of

triads and gang violence. However, following the handover, China moved quickly to clean up the violence. It

cracked down down on the triads, backed the Macao government in ending the gaming monopoly and opened

the market to competition, including the largest casinos from Las Vegas, and turned Macao into the gaming hub

of Asia. Today, the total volume of gambling in Macao is some four times larger than in Las Vegas. Back in 2002,

gaming revenues totaled US$2.6 billion. Last year they amounted to US$23.7 billion. The growth in just one year

from 2009 was 57.5%.



The amounts of money involved are substantial: nearly US$43,000 last year for every man, woman and

child in Macao. Officials with licensing authority have correspondingly more power – if power is defined as the

dollar value of the projects they are approving – and with this comes more temptation and opportunity for

personal profit. This is especially the case since the private players involved are eager to stake out claims to the

world’s most rapidly growing gaming market. They don’t want licenses tomorrow; they want them yesterday.

They want property re-zoned and they want permission to bring in large numbers of foreign workers from a

variety of different countries so projects can be built and staffed as quickly as possible.

This kind of growth and demands associated with it are difficult to regulate. There have been a few high

profile examples of senior civil servants accepting bribes, but Macao’s anti-corruption police organization, set up

shortly after the 1999 transition, and court system have done a good job of prosecuting these cases transparently

so the public could see justice done. However, the entire focus on corruption to date has been on the problem as

it exists in the public sector. What has been largely ignored are the private individuals and companies who have

been willing to pay the bribes. What could be unique for Macao is that this private sector corruption could

involve more foreign investors than is usual, further complicating the issue.

A crack in this opaque world was opened recently when the Las Vegas Sands Corp. was sued by a former

chief executive of the company’s main casino in Macao, Sands China. The American executive, who says he was

fired in the middle of last year without cause, alleges that his foreign employer pressured him to “use improper

‘leverage’ against senior government officials of Macao” to get them to help the company with a property deal

and labor quotas. Nothing has been implied yet that the Macao officials actually helped the company, but Las

Vegas Sands has announced that it has received subpoenas from the US Securities and Exchange Commission and

the Department of Justice.

It will be interesting to see if Macao launches any formal investigations of its own into these kinds of

allegations. The local Commission Against Corruption is undergoing some changes in senior personnel, so the

spotlight is on the organization, especially since it only recently got the power to investigate private sector

corruption. If Macao follows the path of Hong Kong’s ICAC, the initial focus and convictions will be weighted

heavily in favor of public sector corruption, but as time goes on the emphasis will shift more to the private sector.

This did not happen overnight in Hong Kong, but over the span of two decades beginning in the mid-1970s, but

as rapid as Hong Kong’s economic growth has been, it has never experienced anything resembling Macao gaming

boom. Moreover, in Macao’s case, there is also the element of gamblers from Mainland China. Some are

gambling their hard-earned cash. For others, the money came more easily and was not “earned” – but gotten

through ways that could get them a jail term or worse in China. Beijing is turning a blind eye to this issue so far,

but this probably will not always be the case. When the crackdown happens, it will be difficult for the Macao

authorities to do anything but support it.

MALAYSIA














Customs 6.39




The military 6.32


uncovered?


6.17













Comments

Malaysia’s problem with corruption is not so much the magnitude as the failure of leading officials to

acknowledge that it exists. Throughout the Mahathir years there was a high risk that anyone who made

accusations of corruption would be threatened with a lawsuit. Consequently, people were intimidated into not

talking about the problem. Even our own survey scores were tainted by the bias. It was the elephant in the living

room that everyone ignored. When Dr. Mahathir was succeeded by Abdullah Ahmad Badawi and led UMNO to a

stunning election victory in 2004 on a strength of a campaign that emphasized the need to fight corruption, he

opened the door to a public discussion of the problem. It became obvious that corruption was a political hot

button that sparked a strong negative reaction from Malaysians of all races and religions.

Our own survey grades suddenly jumped – not because the problem was worsening but because people,

including foreigners in the country, suddenly felt safer talking about it. However, the enthusiasm that greeted

the anti-corruption campaign turned into disappointment and frustration as Mr. Badawi’s term of office wore on

due to his perceived failure to fight the problem effectively. This provided opposition parties with an

opportunity to claim the moral high ground and start building their base of support. Only when the scales

threatened to tip in favor of the opposition did the ruling coalition pick a new leader, Dato Sri Najib Razak, who

renewed calls for a crackdown on corruption, along with other reforms that would address major ethnic and

religious grievances.

Malaysians are waiting to see if Prime Minister Najib will be more effective than his predecessor. Our

survey scores remain quite negative, especially for the police but also for civil servants and political leaders,

although Malaysia’s scores are better than for most other developing Asian countries.



One problem with assessing the extent of any improvement in the fight against corruption is that it is in

the interests of opposition political parties to publicize instances of graft and to argue that no progress is being

made. This is one reason why scandals like cost over-runs in the Port Klang Free Trade Zone, alleged mis-use of

funds derived from the Sarawak timber industry, and the death of an opposition activist under mysterious

circumstances after being interrogated by anti-graft officials go on and on. As long as the opposition can make

political mileage from these kinds of issues, they will keep them alive in Internet discussion sites and other

places. The reputation of the official media for being so tightly controlled by the government might actually be

working against the government since there is distrust of the content in the official media, while the unregulated

unofficial media has more credibility in the minds of many Malaysians, no matter whether it deserves it or not.

It will take years to improve Malaysia’s reputation for corruption. There will have to be real headway in

investigating and prosecuting cases – and that progress will need to be seen in transparent trials and treatment

in the media. If the opposition parties gain political power in elections, it might be easier to convince the public

that a high-profile anti-corruption fight is working, since that would be in line with the promises of the

opposition all along. However, if there are more examples of bid-rigging, cost-overruns and other abuses after

the opposition comes to political power, it would only make people more cynical and convinced that corruption

in Malaysia is endemic. If UMNO and the ruling coalition are able to keep winning elections (clean, transparent

elections, not ones tainted by allegations of corruption or manipulation of the system), it will take longer to

change perceptions, since Malaysians will have to be convinced that the leopard actually has changed its spots.

There will have to be more high-profile court cases that result in convictions and tough penalties so that the

reputations of key institutions can be improved. This will take actions being seen, not rhetoric heard, which is

where Malaysia is at today.

PHILIPPINES












Customs 8.73




The military 9.25


uncovered?


9.25















Comments

The Philippines may not be the most corrupt country covered by this report. Unlike China or the US, the

magnitude of the problem in the Philippines is definitely not so large that it has many cross-border implications.

But that is more a measure of just how much corruption has cost the Philippines over the decades. The

Philippines is, perhaps, the Asian country that has been hurt the most by corrutpion. If one looked at the end of

World War II as the starting point for modern Asia, the Philippines today should be the richest economy on a per-

capita basis in Asia and a leader in many fields, from the size and sophistication of its manufacturing sector to the

depth and role of its capital market. After all, it started out the post-WWII period as the closest ally of the US,

with relatively open access to the US market and enjoying more direct investment from US companies and banks

than any other Asian country. Its educational system, judiciary, capital market and other infrastructure were

superior to most other Asian countries. Unlike Korea, Taiwan, Hong Kong, British Malaya and Japan, the

Philippines had a functioning democratic system.

So what went wrong? Why did the Philippines mark time, allowing other countries in Asia to surpass it

economically and in terms of regional and global importance? Why are average Filipinos today some of the

poorest in East and Southeast Asia instead of some of the wealthiest, and why has 10% of the population left the

country is search of employment abroad? Of all the reasons, corruption deserves to be near the top of the list. It

was a cancer that caused the Philippines to focus on import substitution at a time when Asia’s most dynamic

economies were nurturing export-oriented industries. It allowed an extremely small number of families to keep

an iron grip on a disproportionate amount of the country’s wealth, land resources and political power. It

undermined the quality and independence of institutions like the police and judiciary. It emasculated the

country’s middle class, weakened the quality of the educational system and military, and stunted the growth

even of industries in which the country should have a strong natural competitive advantage (such as tourism).

It is tempting to blame the abuses of the Marcos regime for all the country’s problems, but Marcos was

able to consolidate power the way he did only because he could point to many of the corruption-related

problems cited above as an excuse for his actions. It has been exactly 25 years since the collapse of the Marcos

regime. Since then the country has had five different presidents, and yet the Philippines has not been able to

start moving up places in the league of Asian economies. It still has a reputation for high levels of corruption.

The Philippines now has a president who is personally untainted by corruption allegations, which stands

in sharp contrast to the previous two administrations. However, it remains to be seen if Mr. Aquino will be

effective in reducing the more systemic features of corruption. Stronger predecessors who were also relatively

free from corruption allegations, such as former President Fidel Ramos, were unable to make a major dent in the

problem. Mr. Aquino still has to work with institutions and bureaucrats who have bad habits built up over

generations. All Mr. Aquino can do is to make a start in addressing the problem and to set personal standards of

behavior that future presidents will be under strong pressure to match instead of being able to slip back into the



shoddy standards of the past. If he can do this, it would be no small feat and might be enough to generate a sense

of optimism about prospects for the Philippines that has been lacking for years now. Other countries that are

poorly graded in our corruption survey like Cambodia, Indonesia, Vietnam, China and Thailand have not lost this

sense of optimism, and that is one reason why more foreign investors seem to be attracted to these countries

than to the Philippines.

SINGAPORE





City and other local-level political leaders n.a.


Civil servants at the city level n.a.





Customs 0.59




The military 0.45


uncovered?


1.00













Comments

The Singapore government has no tolerance for corruption and uses an effective combination of carrot

and stick to keep graft low. The carrot is to pay civil servants and politicians a high salary and to pursue policies

that foster rapid economic growth in which the entire population benefits. The stick is to police and prosecute



hard all cases of corruption when they are uncovered. Viewed from within, therefore, corruption is not an

attractive proposition. The benefits are not worth the risks.

If there is any big downside to Singapore’s zero tolerance to corruption (none is obvious from our

survey results), it is that Singapore’s cross-border corruption risks are increasing. Foreign companies that invest

in Singapore are expected to comply with Singapore’s laws regarding governance, transparency, regulatory

requirements, etc. If they commit acts of corruption, they will be prosecuted according to local laws, and the

onus is on the foreign companies to know what the spirit, not just the letter, of the law is in Singapore. In this

aspect, Singapore is similar or even tougher than Hong Kong. Singapore does not have a relationship with any

foreign government the way Hong Kong has with China. If a really major state-owned Mainland company were

to fall afoul of Hong Kong’s anti-corruption laws, the Hong Kong authorities would be under some pressure at

least to communicate with Beijing on the best way to handle such a sensitive development. Singapore is under

no such pressure.

The other direction is more complicated. Hong Kong does not have a sovereign wealth fund like

Temasek or GIC. Foreign direct investment from Hong Kong is undertaken by private individuals and companies,

and they are responsible for meeting the requirements of the countries in which they are investing, which may or

may not mean that they behave differently in, say, China, than they do in Hong Kong. In Singapore’s case, the

biggest foreign investors are government-linked companies and they are investing what are essentially

Singapore’s national savings. They cannot be seen to be following one set of standards in Singapore and another

set in a different country. However, many of their investments are joint ventures, and they are vulnerable to

being tarred with the practices of their local partner. Thus, when Temasek invested in Shin Corp. in Thailand, it

fell into a public relations nightmare when Prime Minister Thaksin Shinawatra was ousted by a coup and later

was accused and convicted of corruption in local courts. It does not matter that Temasek behaved completely

above board in its investment. It was hurt simply by being associated with a person whose actions, for whatever

reason, were labeled corrupt by his enemies.

It would be nice if this was a one-off case, but it most definitely will not be. Singapore is investing in

countries like India, China, Indonesia and a number of others where major deals can sometime fall victim to

corruption scandals. A good example is the 2G telecoms corruption scandal in India, or the ongoing

investigations in to airport and railway projects in China. These are exactly the kinds of projects that Singapore’s

sovereign wealth funds are looking for investment opportunities. Making sure their internal standards for

corruption are not in any way compromised by the different standards that exist in the countries in which they

are investing will not be easy. Even if there is no legal risk, there is a reputation risk to consider. The best due

diligence will not uncover some of the potential political risks that could occur further down the road, and the

fallout from scandals abroad could have political repercussions back in Singapore – if only by bringing into doubt

the judgment of managers with close links to or appointed by the government.

There is a saying: he who lies with dogs comes up with fleas. If the 1997-98 Asian financial crisis and the

2008-09 US financial sector meltdown showed anything, it is that there are many dogs in the world when it

comes to companies whose managements can be accused of unethical or corrupt behavior. This is perhaps the

biggest risk that Singapore faces from corruption in the future. It has its own house in order, but that will not

protect it from the problem that exists elsewhere. Even if the absolute magnitude of the corruption problem in

the country in which Singapore is investing is not increasing, Singapore exposure to these countries is.

SOUTH KOREA














Customs 4.15




The military 4.11


uncovered?


9.10













Comments

Progress is being made in reducing corruption in both the public and private sectors, but this is going to

be a long process and many people are looking at the issue of corruption in Korea through rose tinted lenses –

expecting too much progress too fast, while ignoring on-going problems with graft. The country’s first anti-

corruption commission was set up in 2002 and since then it has merged with other bodies so that the fight

against corruption is more centralized than before. Although it is portrayed as being independent, the Anti-

Corruption and Civil Rights Commission is vulnerable to budgeting and manpower constraints and some of its

biggest backers have been found, with the benefit of hindsight, to have practiced corruption themselves, which

raises the question of how much the government’s anti-corruption campaign has been for public relations’

purposes and how much has been a substantive program backed by genuine political will and muscle.

It is hard to downplay the seriousness of corruption in government circles or suggest that it has taken

enormous strides over the past 20 years of democratic government when so many former presidents and/or

their immediate family members have been jailed for accepting bribes. The previous president, Roh Moo-hyun

(who started the first anti-corruption commission), committed suicide after apologizing over allegations his that



family took US$6 million in bribes during his 2003-2008 term. Moreover, the fact that all this came out only after

Mr. Roh left office raises the question of how much independence government investigators had to pursue

rumors of corruption at the highest level. After all, the anti-corruption office reports to the president.

In every election in recent years there have been some elected officials who are subsequently booted

out of office because they have violated the campaign spending laws. Moreover, when it comes to major military

contracts, there have been instances of bribery and influence peddling in major military equipment programs.

There are also continuing allegations that promotions in the military and perhaps in the senior ranks of the civil

service are based upon private favors being offered and accepted.

Then there are the recent scandals such as the KEB/Lone Star case, which many Koreans still believe,

despite the lack of evidence, that the former official who approved the Lone Star takeover deal was on the

receiving end of some favors. And in the private sector, it is even worse! Chaebol leaders convicted for

corruption have been excused from their sentences not just on rare occasions but normally! Late last year,

government prosecutors indicted the chairman and six other senior executives of the Taekwang Group, the

country’s 40th largest chaebol, on charges of embezzlement and breach of trust. The company’s leaders are also

alleged to have set up a slush fund to finance illegal lobbying of influential figures, including tax agents. The

chairman apologized for causing controversy, but there has not been any day of legal reckoning or real

punishment to those who were responsible. In our survey the grade Korea received for the magnitude of the

problem of private sector bribery, at 8.95, was worse than for any other country covered by this report,

developed or developing. This could help explain why the shares of Korean companies historically have traded

at a discount compared with what they should be priced at based on the quality of their products and profits.

Perhaps most serious, a number of foreign investors we interviewed noted that it is difficult setting

things up in their Korean operation so that the local staff abide by head office compliance processes. The score

in our survey for Korea for this variable was much worse than for any of the other developed countries covered

by this report. Old habits die hard, especially where there might be a cultural dimension to them.

TAIWAN












Customs 4.10




The military 6.17




uncovered?


6.94













Comments

The good news for Taiwan is that it is no longer the worst rated developed country of Asia in terms of

how corruption is perceived. Korea has that dubious distinction this year. Moreover, Taiwan is also not graded

as bad as China, which gives the government in Taipei an ability to claim its ethical and governance standards are

higher than in the Mainland.

However, the problem of corruption is Taiwan is still bad. It needs to be looked at from a longer-term

perspective. The problem was much worse in the 1950s, 60s, 70s and 80s, when the KMT sat unchallenged on a

much more authoritarian system of government and also owned some of the island’s biggest domestic banks and

industries (including many monopolies). Perpetrators of corruption in those years were largely immune from

prosecution, since they controlled the police and judicial system too. Average Taiwanese did not have much

choice but to accept the situation for what it was.

This changed as democracy took root and the opposition DPP could use charges of KMT corruption to

broaden its own grassroots base of support. However, matters took a turn for the worse once the DPP actually

gained political power and won the presidency. In this position they were able to highlight instances of KMT

corruption even more. Unfortunately, they were also in a position to use their new access to public funding to

carry out acts of corruption themselves, which they apparently did on a fairly large scale. However, the more

democratic system, including a freer press and a more independent judiciary, kept the DPP on a shorter leash

than was the case when the KMT was in power. In the opposition, the KMT could play the role of whistle-blower,

and the DPP’s acts of corruption did not stay secret for long.

The problem of corruption under the DPP went all the way to the top, and shortly after he left office

former President Chen Shui-bian found himself facing corruption charges, of which he was convicted and jailed.

The DPP is still trying to recover from this blow, but its image as the “clean” party has been destroyed. The KMT

has tried to reinvent itself as the new clean party. So far President Ma Ying-jeou has escaped serious allegations

involving his personal behavior, but there has been no shortage of scandals. Three officials from the Forestry

Bureau, under the cabinet-level Ministry of Agriculture, were recently suspended due to accusations of

corruption on the public bidding of offshore island afforestation projects. In the middle of last year, three High

Court judges and a prosecutor were detained. Two of the judges were accused of taking bribes from a former



KMT lawmaker facing corruption charges, in exchange for a 'not guilty' verdict. Another judge and a prosecutor

allegedly acted as brokers.

The military has also seen its reputation seriously tarnished by a string of scandals. Early last year a

retired lieutenant general was indicted on charges of bribery, blackmail and leaking secrets. The incident led to

the investigation of 114 generals for alleged corruption or bribing their way to their rank, creating questions not

only about the integrity of the island’s armed forces but also about their combat readiness.

As in Korea, the problem of bribery, fraud and other forms of graft is probably at least as bad in the

private sector as in the public sector. However, the Taiwan population is much more sensitive to the issue of

corruption than it was in the old days. It is frustrated that the problem seems to permeate the system and key

institutions as much as it does. This frustration has only grown with the realization that the issue tarnishes both

political parties and that many previous attempts to show that the fight against corruption is being intensified

were more for show than substance. Whoever runs for office in Taiwan – not just for president but for any other

position – now has to deal with a voting public that is looking and expecting to find dirt. At best, people are

skeptical, but there is a danger that they could be turning cynical. What is the difference? The former people

have doubts but are still keeping an open mind about the possibility of a person being what he says he is and

doing what he says he will do. The latter group have no belief what-so-ever that the person running for office is

what he says he is and think he will act corruptly once in office no matter what he might promise in the election

campaign.

THAILAND












Customs 7.90




The military 9.37


uncovered?


8.70















Comments

Endemic corruption probably ruled out a nuclear power industry for Thailand long before the present

disaster in Japan. Even Thais who favor nuclear energy have argued that its establishment in their country

would be too perilous because, they say, every major infrastructure project over the years has been impaired by

corrupt practices that led to design flaws, shoddy construction and the use of degraded materials.

Thai academics who have been researching corruption reported recently that private companies

awarded state contracts have had to pay on average 5% of a project’s value in kickbacks in order to secure the

contracts. They identified bureaucrats, politicians, the police and army as the most corrupt groups.

Earlier the National Counter-Corruption Commission calculated that graft had siphoned off more than

US$700 million from government funds in one single year although that amount covered only losses from the

direct embezzlement of funds and property. Bribe money was not included in that sum.

The United Nations has characterized Thai corruption as “highly systematic involving people working

both in the public and private sectors.” Efforts to eradicate corruption are rapidly countered by more careful

planning and implementation by the lawbreakers.

Corrupt government officials skillfully utilize laws and regulations to benefit themselves and their

business cronies. They set criteria and conditions for the bidding for construction contracts in a way that will

benefit themselves and private sector clients but will discriminate against competing bidders. When the

government offers a monopoly concession to private firms as it sometimes does, the temptation to pay bribes is

enormous.

Meanwhile, officials are also misappropriating funds from the government budget and filing falsified

accounts and expenses claims.

Officials who perform inspection and business licensing duties may often fail to provide those services

unless those needing them reward them financially.

The convoluted controls on the production and sale of a wide range of goods are an open invitation for

corrupt practices as they enable politicians and officials at national and local levels to interfere in the allocation

of quotas and subsidies. As these malpractices apply particularly to foodstuffs, consumers are directly hit. This

happened recently by what appears to be an engineered shortage of cooking oil, a vital ingredient in Thai

kitchens, and a savage leap in its price. Fears that something similar is shortly going to happen with the supply

and price of sugar are now widespread.

These events will be issues at the mid-year election and could damage the government’s chances at that

poll. While being well-aware of corruption, Thai families have not always in the past felt so directly hurt by it,



but the current wave of anger over graft that is this close to home is evident in the slanging that the prime

minister and others in the government now sometimes suffer when they appear in public places. That form of

abuse is uncommon in Thailand.

All the corruption reports blame chronic political instability, weak law enforcement and the

fragmentation of the anti-corruption agencies for the persistence of corruption. One agency, for instance, deals

with corruption among politicians, another with corrupt bureaucrats and others still with corruption in the

corporate world. Shaping all their approaches to the problem is a culture that favors keeping these matters “in

house” as much as possible (unless it is politically expedient for those in power to make corruption details public,

as was the case when those staging the last coup tried to justify their actions by accusing former Prime Minister

Thaksin Shinawatra of corruption).

Another brake on the fight against corruption is the inability of the media to act as an effective watchdog.

Newspapers and the broadcast media do not have the expertise, courage and legal protection for that job. There

are few if any investigative reporters and on those rare occasions when someone has come up with an exposure

of graft, the report risks being silenced by legal action or disowned by his bosses. The rapid spread of social

networking may be improving that situation although censorship is cramping the development of new media.

Corruption is often hidden by the opacity of government policies, a problem of major concern to foreign

investors and of foreign business more widely and one that certainly deters new and expanded investments. As

a result some foreign firms have invested elsewhere in the region. Most expatriates working in Thailand are not

unduly worried about corruption as it impinges on them directly but they are convinced that the lack of

government transparency in business laws and regulations facilitates corruption.

The corruption of national institutions is probably even more serious than bribery and extortion. This

development has been quickened by the politicization in recent years of the judiciary, the civil service, the police

and military. The new political powers accorded the judges in the military’s 2007 constitution require them to

appoint half of the Senate, the upper house of Parliament, as well as members of supposedly apolitical bodies

that deal with elections and corruption. Public confidence in the integrity of the courts has sagged since they

began delivering judgments that have seemed tailor-made to please the government and the elite groups that

sustain its authority.

UNITED STATES












Customs 1.32






The military 2.50


uncovered?


4.20













Comments

As noted in the Regional Overview of this report, corruption is probably the biggest in dollar terms in the

US than any other country in the world. Moreover, the fallout from serious acts of corruption in the US has

negative global implications than is the case with other countries. This means they adversely affect the largest

number of people. The US has a sophisticated monitoring system to police against corruption, but the US

economy is so large and complicated, there are so many layers of government, and many rules are so complex

that the potential for corruption is huge – so huge the the country attracts some of the sharpest con artists,

fraudsters, and unethical professionals in the world. Just look at the international cast of characters in the on-

going trial of Galleon Group founder Raj Rajaratnam, who faces 14 counts of securities fraud and conspiracy.

However, it would be unfair to blame the problem of corruption in the US on foreigners. Bernie Madoff,

Allen Stanford, Jeffrey Skilling were all home-grown figures. So were Ted Stevens and Tom DeLay, Charles

Rangel, all of whom rose to positions were they were some of the most respected public sector people in the

country until their darker sides were exposed. This is just a tiny sampling. Although some of the biggest US

banks and companies have been involved in major scandals in recent years, there have been few prosecutions.

Proving such cases is extremely difficult and expensive, and the system is such that companies can frequently

simply pay a penalty and avoid actual prosecution. This might explain why the grade in our survey assessing

how effective the system is at prosecuting and punishing individuals and companies for corruption when abuses

are uncovered is as bad as it is. Perhaps it should be even higher.

There is another side to the cost of corruption in the US that does not jump out from our survey results,

but it is extremely significant. It is hinted at in the last two grades assessing the difficulty companies have in

dealing with corruption and how easy it is to build an internal culture in organizations to ensure they meet

compliance standards. At first glance this might be taken to imply the existence of a “culture of corruption” in the

workforce, a character flaw of employees that employers have to guard against (although employers would

presumably have this same character flaw). What we think respondents to our survey were referring to when

they provided grades for these two variable is the extremely high cost of compliance that exists in the US,

particularly in the banking industry. This could be a case where the medicine is as bad as the disease from the



patent’s perspective. There have been many scandals over the past decades – including but not confined to the

savings and loan scandal, the Dot.com bust, different money-laundering scandals, the Long-Term Capital

Management scandal, and, now, the sub-prime crisis. Industry regulators in the US have responded by slapping

on more regulations and tougher compliance requirements. What is clear is that these requirements are time

consuming and expensive. What is not clear is that they work well. The scandals keep happening, but the extra

compliance requirements could be undermining the competitiveness of US banks and multinationals and causing

an exodus of business from the US – quite likely to jurisdictions where regulatory oversight errs on the other side

(insufficient) and corruption is easier to do.

VIETNAM












Customs 8.77




The military 7.70


uncovered?


8.32













Comments



Corruption in Vietnam might be much more pervasive than in the US, but it has much smaller regional

and global implications. Neighboring Cambodia and Laos are probably hurt by Vietnam’s corruption, but the

main loser is Vietnam and its general public. Vietnam’s economy is out of step with the rest of Asia. Inflation is

accelerating. There is a balance of payment crisis. And the official market has been so badly disrupted that an

increasing amount of business has shifted to the black market, on which the government is now trying crack

down. There are two main reasons for the current sorry state of affairs. The first is mismanagement,

particularly at state-owned companies and banks. The second is corruption, which is rampant at all levels.

Conditions for corruption in Vietnam are ripe. First of all, the public sector (including the government,

military, Communist Party and state-owned companies) is extremely large compared with the private sector and

pay levels are low. Secondly, although the economy is growing rapidly, there is still a scramble for money. A

growing number of foreign companies would like to invest in, sell to or buy from Vietnam. As in the case of

Cambodia, bureaucrats have the motivation and excuse to demand special payments, which frequently means

requiring licenses and approvals simply for the sake of having an excuse to collect funds.

With potential penalties for corruption so high, senior officials try not to be too blatant in their graft, but

sometimes scandals surface that reveal the scale of the problem. A recent Australian investigation into alleged

foreign payoffs by an Australian/UK joint venture uncovered allegations that the venture paid more than A$15

million in commissions to one or more Vietnamese government officials in return for help in winning a banknote

printing contract. Australian newspapers said the firm, Securency, allegedly paid a bribe to Le Duc Thuy, who

served as governor of the State Bank of Vietnam until 2007 and still chairs the National Committee for Financial

Supervision.

Average Vietnamese are increasingly resentful of a problem that they see benefiting a few at the expense

of many. The government is aware of this negative grassroots feelings and tried to make the fight against

corruption a main point of discussion at this year’s Communist Party Congress. Pressure is building for the

authorities to make some high profile examples of officials being prosecuted and punished for corruption, which

is likely to happen in the months ahead. These symbols of the fight against graft will not solve the problem, but it

could help to deflect criticism away from the government for a while.


Published by:

Political & Economic Risk Consultancy, Ltd. 20th Floor, Central Tower 28 Queen’s Road, Central, Hong Kong Mailing address: G.P.O. Box 1342, Hong Kong

Tel: (852) 2541 4088 Fax: (852) 2815-5032 E-Mail: [email protected] Web site: http://www.asiarisk.com

The material in this report may not be reproduced in whole or in part without permission in writing from the publisher. While eeffort has been made to collate, check and present without ambiguity all data contained herein, the variety of sources from which they have been assembled and differing methods of reporting render verification oftentimes impossible. Thus, they are published without warranty.

EXCHANGE RATES

Currency 3/18/11

Chinese renminbi 6.5694

Hong Kong dollar 7.8001

Indian rupee 45.025

Indonesia rupiah 8,772

Japanese yen 80.756

Malaysian ringgit 3.0525

Philippine peso 43.573

Singapore dollar 1.273

South Korean won 1,125

Taiwan dollar 29.5946

Thai baht 30.312

Vietnamese dong 20,855

Commercial middle rate expressed in terms of US$1.

Documents

(Asian Intelligence 823) Political and Economic Risk Consultancy, Ltd.- PERC-Asian Corruption Update (2011)