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A Norwegian local government corruption case: What happened, how and why? Liss Schanke, special adviser, KS

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Presentation on theme: "A Norwegian local government corruption case: What happened, how and why? Liss Schanke, special adviser, KS"— Presentation transcript:

1 A Norwegian local government corruption case: What happened, how and why? Liss Schanke, special adviser, KS

2 KKS internasjonale prosjekter The Norwegian corruption case: Water Companies and African farms

3 KKS internasjonale prosjekter Short description of the case In February 2008, a former director of 3 water and sewerage companies owned by local governments in the Oslo region was sentenced to 8 years of prison and payment of compensation of 10 million USD – along with family members, business partners and a Swedish construction company The guilt is established, sentences are appealed The company manager has been tapping the local government water companies for funds through a system of companies, family members and subcontractors – probably since the 1970s. The money was channelled into purchase of 9 farms in South Africa

4 KKS internasjonale prosjekter What is corruption?

5 KKS internasjonale prosjekter Secret misuse of power - private gain Transparency International defines corruption as “The misuse of entrusted power for private gain.” The Norwegian Unit for Economic Criminality, underlines the secret aspect: “Corruption implies a secret agreement between two or more parties, to achieve inappropriate benefits.“ We find all these three elements in this case: –the misuse of entrusted power –the private gain –the secret agreement between the parties

6 KKS internasjonale prosjekter Bribery, nepotism and clientelism Bribes –Staff members received favourable pension deals, salary increases and could buy company cars cheap –Board members got gifts, free plane tickets and trips abroad with their spouses. –Local governments got kindergartens, the police a helicopter field, and private individuals new bathrooms Favouritism (nepotism and cronyism) –The manager’s friend and son were given contracts without competitive tendering, his daughter was on the company payroll without working for the company Patron-Client relationships –There were mutual but unequal exchange of favours between the manager and persons of lower status

7 KKS internasjonale prosjekter Direct result: Loss of public money and reduced public service delivery Economic: high consumer prices, reduced taxes and loss of USD 10 mill in public money Environmental: water pollution above the permitted limits due to false tests Institutional: negative company and management culture Private sector: lost opportunities because of lack of competitive tendering Social: greater inequality in the community International: possible illegal actions in S- Africa?

8 KKS internasjonale prosjekter Indirect result: Loss of political trust and legitimacy Short term: Reduced trust in political systems and local governments in the communities involved – and in the Norwegian population in general Short term: Increased focus on possible corruption cases by control systems and media – and more corruption cases revealed Long term: Possibility of Reduced political legitimacy - and will to pay taxes/fees? Long term: Vicious circle with constantly reduced democratic trust as result

9 KKS internasjonale prosjekter Many challenges: Technical, financial, legal and political

10 KKS internasjonale prosjekter Challenge 1: Financial management and audit Financial management –The financial management was informal and not according to rules and regulations – without competitive tendering Financial audits –The companies were given clean audits by the international audit company PWC every year, the board members trusted the PWC audit. –An independent Local Government Audit revealed the corruption in 2007 –The role of PWC and a possible compensation is being assessed

11 KKS internasjonale prosjekter Challenge 2: Legal framework Transformation of former local government units into shareholding companies is a general international trend - especially for technical sectors as water and electricity Shareholding companies are governed and managed by other laws and rules than local government units and are less transparent Local Governments are owners, but own companies on behalf of tax payers

12 KKS internasjonale prosjekter Challenge 3: Role of company boards Most board members were active local politicians from the area- challenge re. political independence, possible conflicts of interests, capacity, competence The boards did not fulfill the legal duties re. internal control, and endorsed activities and budgets beyond the mandate The board members may be held responsible There were close bonds between the director and the board - the allowances for board members were set by the manager and doubled six times during the period 1990-2005

13 KKS internasjonale prosjekter Control challenge 4: Role of staff, unions, and civil society Whistle blowers where not taken seriously: A local carpenter 1978, a trade union representative 1994 and complaints from the LG CEO from 1991. No whistle blowers among the staff, possibly because of the informal Human Resource Management of staff benefits and contracts The director was very well known and respected locally, trusted by local government politicians and private sector, and was awarded a Royal Gold Medal in 2002

14 KKS internasjonale prosjekter How can you overlook a stuffed African animal in a water company?

15 KKS internasjonale prosjekter Question 1: Why did nobody tell about the mismanagement? Why did not staff, board members and local government politicians say anything? –Some of them did not notice the mismanagement –Some of them benefited from the mismanagement –Some of them feared that revealing the mismanagement might be uncomfortable or even dangerous for them For some there may be overlapping reasons

16 KKS internasjonale prosjekter Question 2: Is this an isolated case? In 2007, Norway dropped 10 points to no. 14 on the Transparency International CPI – behind the 4 Nordic countries, Canada, Netherlands. Australia The SG of the Norwegians Section of Transparency International has stated that “Norwegian local governments are naïve when it comes to corruption; we have still only seen the top of the iceberg”…. Probable reasons for increased CPI: –Several recent corruption cases in Norwegian local governments and oil companies –Oil producing countries tend to have high CPI

17 KKS internasjonale prosjekter Question 3: Does Norway have any systemic challenges? Internationally, corruption is seen as a product of bad governance. The water company case shows failures re. key good governance elements: –Transparency: Manager control, little information –Financial control: Weak audit system –Legal compliance: No competitive tendering –Independent representation: LG board members Systemic challenge : Small country, small communities, close bonds and informal tradition. Last example: Messages between Prime Minister and Bank Director Oct.2008. Inside trading?

18 KKS internasjonale prosjekter Question 4: Is the case unique? comparison with Tanzanian case Similarities with a T –Corruption aspects (bribery, favouritism, clientelism) –Control challenges (legal, financial, political, civic) –Loss of public money, impact on services and prices –Loss of public trust in LG systems and democracy Differences –Scale: N: 10 mill USD, Tanzania: 58 mill. USD –Poverty impact on users and population –Threats or harassment against users or whistle blowers –Links to elite groups at national level –Media role, coverage and impact –Public audit report –Judicial process - and sentence

19 KKS internasjonale prosjekter Question 5: What is KS doing to promote ethical behaviour? Establishing an independent external advisory committee on ethics and an internal working groups Establishing a voluntary web register for politicians and staff on private interests and representation Assisting and encouraging local governments and companies to develop guidelines on ethical challenges and anti- corruption measurements Assisting in integrating ethics, openness, transparency and accountability in local government management, policies and strategies. Holding conferences, meetings, training sessions, capacity building for staff and politicians etc.

20 KKS internasjonale prosjekter Question 6: Who are responsible? The company manager and his family? The private business partners? The board members? The local government owners? The financial auditor, PWC? The company staff? The local trade unions? The judicial system? The Civil Society and the general public?

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