PMU-18 Corruption Scandal: Donor Response

UNCLAS SECTION 01 OF 03 HANOI 001090

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SUBJECT: PMU-18 Corruption Scandal: Donor Response

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REF: Hanoi 771 and previous


1. (SBU) Summary: Following the break of the Project
Management Unit 18 (PMU-18) corruption scandal involving a
substantial amount of Overseas Development Assistance (ODA),
bilateral and multilateral donors met to share reactions and
discuss a coordinated response. Donors agreed: that
corruption should be an agenda topic at the mid-year
Consultative Group (CG) meeting; to devise strategies to
protect better their ODA investments; and, to develop a
common approach to the "small envelope culture."
Significant momentum exists in Vietnamese society to address
corruption, and donors expect stronger statements from the
GVN after the conclusion of the 10th Party Congress.
Corruption remains a complex issue; donors exchanged ideas
on controlling it, and shared examples of recent incidents.
Post will continue working with other donors to ensure
proper oversight of ODA and to encourage the development of
a transparent and accountable system in Vietnam. End
Summary.

Donor Reaction and A Way Forward
--------------


2. (SBU) The Danes convened an informal group of
multilateral and bilateral donors to follow upon the April 3
Ambassadors' Donor Coordination Group meeting with a more
detailed discussion of how to seek to assist the GVN in
combating corruption. Present were a mixture of
Ambassadors, development and economic sections staff from
the British, Canadian, Danish, European Commission, French,
Netherlands, New Zealand, Norwegian, Swedish and Swiss
Missions, as well as the United Nations Development
Programme (UNDP),Asian Development Bank (ADB) and
International Monetary Fund (IMF). ECON/C and EconOff
attended. (Note: The World Bank was not present, but
supports the group's agenda. End Note.) Donors agreed that
corruption should be on the agenda at the Consultative Group
(CG) meeting in June, and explored how to incorporate
corruption into the agenda and prepare the GVN for a
productive discussion. The UK Department for International
Development (DFID) and the World Bank agreed to take the
lead on this issue. Donors also recognized a need to devise
strategies to protect better their ODA projects, nominated
Sweden to head the effort, and agreed that the GVN should be
alerted to the potential impact of corruption on ODA. Swiss
Ambassador Benedict de Cerjat noted that the Office of the
Government has requested assistance in establishing a
national anti-corruption steering committee to be chaired by
the Deputy Prime Minister, which will present an opportunity
to press the issue. Finally, Denmark and the EC agreed to
lead an effort to develop a common approach to Vietnam's
"small envelope culture."

The Media and Vietnamese Reactions
--------------


3. (SBU) Donors noted that there is significant momentum in
Vietnamese society to address corruption, and anticipate
that stronger anti-corruption statements will come from the
GVN after the Party Congress concludes around April 26.
Recently arrived Asia Development Bank (ADB) Country
Director Ayumi Konishi expressed concern that in covering
the PMU-18 scandal, the media has portrayed this sort of
project as the problem, rather than focusing on the more
general lack of checks and balances. EC Ambassador Markus
Cornaro commented that several local contacts have told him
that the World Bank's positive statements regarding the
Government's response to the scandal are naive, and that
donors should push for concrete action. (Note: The World
Bank missed the meeting because of a scheduling error. End
Note.) Association pour le Developpement des Echanges en
Technologie Economique et Financiere (ADETEF) Director
Emmanuel Ly-Batallan repeated that he has learned that
Transportation Minister Dao Dinh Binh, who resigned under
pressure following the scandal, was generally disliked, and
questioned whether the GVN is prepared to hold other
ministers similarly accountable.

Anti-Corruption Policies
--------------


4. (SBU) All donors said they were signatories to the OECD
Anti-Bribery Convention, which makes a bribe paid by one of
their multinationals to a public official in a developing
country for a public works contract a punishable offense.
Many have also devised codes of conduct for their grant aid
recipients based on OECD principles. Common practices

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include: anti-corruption clauses in grant contracts;
requirements to report any suspected corruption cases to
appropriate oversight agencies; mandatory investigations
into any suspected corruption case; freezing of funding;
and, fund recovery in corruption cases. The Danish
International Development Agency (DANIDA) requires all aid
recipients to go through anti-corruption training, and
solicits confidential reporting of suspected corruption.
The EC has tight auditing procedures of both budget support
and grants, and reviews all projects under Euro 5,000
(approximately USD 6,175); France manages the funds for all
small projects, while Norway hires independent auditors.
Cornaro expressed concern that this tight oversight
undermines Vietnamese ownership and hampers the development
of more robust control systems.

A Problem with Many Facets
--------------


5. (SBU) Donors recognize the need to take different
approaches to corruption in budget support and grants. In
the case of budget support, donor funds are co-mingled with
those of the Government, and the focus is on strengthening
the Government's systems and creating transparency rather
than on fund recovery. Donors seek to recover misused
grants. De Cerjat noted that it is also useful to
differentiate between "big" corruption and "little"
corruption. He recounted that when he arrived to post,
Vietnamese journalists expected to receive "small envelopes"
to attend press conferences. These Vietnamese "traditions"
may be harder to eradicate than larger fraud cases. Donors
agreed that they should have the same approach on this
issue, that is, refuse to pay. (Comment: We have heard
similar stories of other bilateral and multilateral for
getting GVN officials to attend seminars. It is surprising
that this is still an issue for some of our donor community
colleagues. End Comment.)


6. (SBU) Netherlands Deputy Head of Mission Bengt van
Loosdrecht noted that while anti-corruption is high on the
political agenda, there are only limited tools to address
it. In his opinion, there is more focus on the management
of the perception of corruption than on tackling the issue
itself. De Cerjat commented that building monitoring
systems takes many years and will not have an impact in the
short term. It is therefore important to look for tools
that will be effective in the immediate future. The ADB's
Konishi noted that in order to truly address corruption, the
civil service needs to be reformed, including the pay
structure. He added that the lack of proper accounting
procedures is a major obstacle to transparency, and that
enterprises need to be given incentives to keep clean books.
Currently it is cheaper to pay off government officials than
to pay taxes. British and French representatives commented
that the fact that corruption is a capital punishment
offense acts as a deterrent to their pursuit of some serious
cases. This is not unique to Vietnam.

Donor Experiences with Corruption
--------------


7. (SBU) Given endemic corruption in Vietnam, there have
been relatively few cases of corruption involving donor
projects until now. The PMU-18 and PMU-5 cases, however,
involve a significant amount of donor money. A Danish
investigation found that 60 percent of funds in which
projects on a general principle have not been properly
documented. Konishi said he is reasonably comfortable about
the integrity of ADB projects, and that out of 18 cases
referred to the internal investigation unit since 1993, only
one was found to be serious, while the others involved minor
instances of misreporting.


8. (SBU) Cornaro said that recently corruption has been
found in two EC projects. A case of double-invoicing and a
potential conflict of interest of family ties in a printing
contract at the Ministry of Health (MOH) resulted in an
investigation by the European Anti-Fraud Office (OLAF).
While the GVN initially convinced OLAF that there had been
no fraud, the EC Mission in Vietnam persisted, and the case
concluded with MOH covering the disputed amount. The GVN
has acknowledged "fishy intent" in a case at the Ministry of
Agriculture and Rural Development (MARD),and has agreed to
restore Euro 100,000 (approximately USD 123,600) of misspent
funds. Cornaro said that the former MARD Project Director
has offered to pay back the money to the EC in cash, but the
EC has refused, maintaining the recovery should go through
proper MARD channels and procedures.


9. (SBU) Sweden has been working with four other countries

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to support the Government Inspectorate. They recently fired
two GVN inspectors whose official final report contradicted
their preliminary report of apparent corruption by
exonerating the parties under investigation. Sweden has
heard unofficially that the Inspector General and several
Vice-Inspectors will likely be replaced after the Party
Congress as a result.

MARINE