Preventing Policy Capture in Policy Making, Learning from OECD

The 2018 The Organisation for Economic Co-operation and Development (OECD) Global Anti-Corruption and Integrity Forum: Planet Integrity revealed that people in the OECD countries are losing faith to their national government. On average, 58% of citizens do not have trust in their government. One of the reasons is because people have questioned the quality of public services. In this paper, I would like to discuss reasons why people tend to distrust their government and what solutions might be taken by governments mainly based on OECD research findings. 

In democracies, attempting to influence and convince other parties on priorities and policy decision through public consultation and lobbying is common reality. In principle, policy decision has to pursue the public interest. However, since policies involving stakeholders who have different interests, those involved parties need to consider strategies to influence public decisions in favor of their interests.    

Clearly, it opens government elites and political parties a temptation to gain unwarranted advantages using their power and authority to impose their interests on public decisions. In many cases public policy decisions have been directed away from the public interests towards the interests of a specific interest of group or individual. Consequently, it can have several impacts, such as:

·         Misallocation of public and private resources for the interest of a particular group or individual;

·         Attract rent-seeking behavior;

·         Endanger sustainable growth;

·         Nurture a vicious circle of inequality due to benefits for particular group or individual’s interests;

·    Decrease trust in government because it may foster the perception that politics are unfair and unduly influenced;

According to OECD Public Governance Reviews in 2017 in their book with the title “Preventing Policy Capture: Integrity in Public Decision Making” this phenomenon is known as “policy capture”.

Many cases reveal that the capture of public decisions can be achieved through a wide variety of illegal instruments, such as bribery, which undermines core democratic values of inclusive and fair policy-making. OECD report in 2017 revealed that no country is immune to policy capture. It also happens in Indonesia.   

Sadly, currently we got news about graft case committed by Malang city council members and the local government. As news reported by the Jakarta Post on September 4, 2018, in total, 41 of 45 Malang City Council members or more than 90% have been accused in the graft case.

Another similar case, as reported by Kompas on August 23, 2018, acting governor of Jambi, Zumi Zola was accused of bribing 53 members of the Jambi Regional Representative Council. It was also reported that Zumi would have bribed the board members for a total amount of Rp.16.5 billion for getting approval of the regional regulation of the regional budget and expenditure of the Jambi.

Policy capture violates the trust and power of society. As we know, in a democratic system, people have placed their trust and authority in their democratic government through an election. People give up their power and authority to the group of elites either in government or parliament to take care of them and trust the elected elites to work for public interests. Thus, policy capture is illegitimate and breaks core democratic values. 

OECD has identified factors that facilitate policy capture of public decision-making processes as follows:

Opportunity

·         Unchecked discretion

·         Technical complexity

·         Opacity of decision-making

Plus

Ability and capacity

·         Availability of resources

·         Concentration and inequalities

·         Recurrent benefits

·         Stable captor networks

Equal to Inherent higher risks and capture

Source: OECD Public Governance Reviews Preventing Policy Capture Integrity in Public Decision Making (2017)

As can be seen from the formula above, we identify that if the process of making policy lacks of appropriate accountability mechanisms and not visible to public, a policy capture tends to occur. Moreover, if the issue is too complex, public may withdraw their interest and control to the process. 

In term of ability and capacity, arguably government elites can easily mobilise ample of amount of budget to bribe political members to approve their programs. On the other hand, political elites depend on large monetary supports to finance their election campaigns and maintain their constituents happy. It is like a win-win relationship to maintain a stable policy network between government elites and political members that makes policy capture flourish in many democratic countries. Take the two cases in Malang and Jambi above as our examples we can be assured that the factors identified by OECD are valid.

Now, how could we reduce a policy capture and what are strategies to overcome the phenomenon?  Fortunately, OECD has proposed a complementary model that we could possibly adopt and adapt it in the Indonesian context. The model is not intended to replace current anti-corruption strategies, but it has a function to be a complementary tool. The Four complementary strategies against risks of policy capture are as follows:

1.      Levelling the playing field: Promoting stakeholder Engagement

2.      Ensuring transparency and access to information

3.      Address inherent capture risks at organisational levels through internal integrity policies

4.      Promoting accountability of decision-makers through Supreme Audit Institutions competition authorities and regulatory agencies

Source: OECD Public Governance Reviews Preventing Policy Capture Integrity in Public Decision Making (2017)

As suggested by OECD in their model, in order to ensure the inclusive and fair participation of different interests, involved parties have to promote and conduct transparency to every step of the decision making processes. However it should be borne in our mind that transparency is a necessary but it is not sufficient to promote accountability and foster confidence in public institutions. Lobbying activities are not forbidden. In many cases, lobbying could improve the quality of policies, but it needs transparency to safeguard the public interest as well as a level of playing field for various interests. In addition, we need policy makers and political elites involving more stakeholders to engage an open debate in order to control and eliminate self-interested arguments.

Lastly, OECD suggests to involving independent Supreme Audit Institutions, competition authorities and regulatory agencies. In case of Indonesia, we advise that government elites and parliament members should involve independent audit institutions or other similar bodies, such as Indonesia's Corruption Eradication Commission (Komisi Pemberantasan Korupsi), especially related to policies in political finance and big budget projects.   

To sum up, the proposed strategies could be considered by government of Indonesia as one of the strategies to strengthen anti-corruption strategies. In addition, as OECD would suggest, organisations need to ensure open and free discussion of ethical dilemmas and public-integrity concerns.  

The author is a public official in a ministry in Indonesia. The views expressed are his own and do not reflect the official stance of the institution he is working. His writing is not intended to vilify particular persons or institutions. The content of this article and related references are mainly derived from the OECD paper and the 2018 OECD Global Anti-Corruption & Integrity Forum discussions which the author participated in. He blogs at http://whistleblowing-indonesia.blogspot.com/

GKI

ACAMS

Testamur

Breakthrough Strategies to Detect Corruption in the Directorate General of Taxes

On October 4th, 2018, the Indonesia's Corruption Eradication Commission (KPK) announced that they arrested six people, including a senior tax official and investigators of the Directorate General of Taxes (DGT), for alleged bribery in Ambon, Maluku. Before the case, in April 2018, KPK also arrested a tax official in Pangkalpinang, Bangka Belitung due to an allegation of extorting Rp50 million from a taxpayer.

The two cases have added a long list of corruption offences at DGT since the case of, arguably, the most Indonesia's most notorious corrupt tax official, Gayus Tambunan was in 2010. Although Gayus has been punished in prison, he described himself as a ‘small fish’ compared to other much larger wrongdoers in the DGT. Following the Gayus case, several other corruption cases emerged in the mass media in the last decades. Some of them, at least eight perpetrators of corruptions from Bahasyim Assifie to Handang Soekarno have attracted high media coverage.

Those cases above involved DGT employees from various positions indicating that regardless of the level each tax employee is an inherent risk to commit bribery or corruption.

I believe that the revealed cases are just iceberg phenomena. It seems that a larger percentage of a problem is subclinical, unreported, or otherwise hidden from our view. Based on my research in 2016 and from other sources indicated that the number of corruption cases at DGT is greater than those of published by the media.

Such behaviours may destroy public trust in tax employees. It could trigger a public’s movement to boycott pay tax, which potentially decreases tax revenues. So, we need to take extra ordinary strategies to tackle corruptions in DGT. An enemy within is as dangerous as criminals outside. One or some employees can cause the same or an even greater threat of damaging institution’s reputation. Thus, Know Your Employee Program is seen as crucial to an institution's protection against any possible frauds within an organization.

Theoretically, there are some common red flags of suspicious employee activities that are commonly used as examples, such as:

Ø  Employee exaggerates the credentials, background or financial ability and resources of a customer in written reports the bank requires;

Ø  Employee frequently is involved in unresolved exceptions or recurring exceptions on exceptions reports;

Ø  Employee lives a lavish lifestyle that could not be supported by his or her salary;

Ø  Employee frequently overrides internal controls or established approval authority or circumvents policy;

Ø  Employee uses company resources to further private interests;

Ø  Employee assists transactions where the identity of the ultimate beneficiary or counter party is undisclosed; and

Ø  Employee avoids taking vacations.

However, I believe that the red flags are just not sufficient to identify suspicious activities. It is easy for a bad employee to avoid them. Many employees may easily not show off their wealthy at their office in order to avoid colleagues’ suspicious. Red flags are just indicators of possible fraud that can be easily evaded by wrongdoers since they know precisely what actions can be categorizes as suspicious activities.

Actually, the DGT employees have to report their wealth to KPK and the Inspectorate General. However, the big question is whether they have reported their “self assessment” wealth honestly.

Thus, the Ministry of Finance (MoF) needs to implement breakthrough strategies namely establishing an independent special task force within DGT to audit annual tax returns (SPTs) and wealth of tax officials, especially the highest levels, tax auditors and ‘high risk’ employees. The big question is whether they are brave enough to scrutinize their bosses and colleagues’ wealth and SPTs. Thus, the task force has to be given with a huge mandate to conduct this task and shall function independently and be directly accountable to the Minister of Finance. Moreover, members of this task force have to be guaranteed with immunity to conduct their jobs and have career path certainty. To select and recruit members of the task force, MoF may learn from the establishment of ICAC in Hong Kong in 1974. Arguably, they successfully recruited “the most honest and ethical” police staff to investigate corruption cases in public departments including the police counterpart.    

MoF needs also to involve Neighborhood Association (RT) and Community Association (RW) to scrutinize and report ‘suspicious’ tax officials’ life style in their area to the task force. Psychologically individuals tend to share their achievements, wealth and hide their failures. So by involving individuals’ nearest the tax officials in their daily life would be an effective strategy to reveal indicated illegal wealth. Moreover, following the philosophy of the PP 43/2018, the informants who disclose to the task force regarding possible corruption or suspicious life style of DGT employees could be rewarded with a financial incentive. 

Then, MoF needs to implement Reverses Burdens of Proof Program. Although I do not try to simplify the situations, it is quite easy to prove whether the money or belongings come from legal sources or not. The simple formula is employee’s wealthy and belongings should be able to be supported by his or her incomes. Then, if there is an excess wealthy that cannot be supported by his or her incomes, the accused person should demonstrate that the excess is derived from legal sources, for instance from inheritance or other side job income. Their belongings should be also supported by legal documents. Full access to DGT employees’ private account and belongings is a compulsory for the task force.                

The author is a public official in a ministry in Indonesia. The views expressed are his own and do not reflect the official stance of the institution he is working. His writing is not intended to vilify particular persons or institutions. He blogs at http://whistleblowing-indonesia.blogspot.com/. 

Strong Know Your Employee (KYE) Program Needs Whistle Blowing and Reverse Burdens of Proof System

As we know that enemy within is as dangerous as criminals outside. We have learned that one or some employees can cause the same or an even greater threat of money laundering as can be done by a bad customer. For example, a criminally co-opted public service employee might facilitate inside trading or information leaking. Thus, Know Your Employee (KYE) Program is seen as crucial to a financial institution's protection against money laundering as knowing its customers.

Furthermore, many financial institutions have expensed a lot of money to put firmly in place KYE program comprising policies, procedures, internal controls, background screening of potential employees, conflict of interests assessments, job descriptions, code of conduct/ethics, levels of authority, compliance with personnel laws and regulations, accountability, dual control, segregation of duties and other deterrents. They also put red flags of suspicious activities of their employees in order to detect and prevent money laundering crime assisted by employees as early as possible.

Theoretically, there are some common red flags of suspicious employee activities that are commonly used as examples, such as:

Ø  Employee exaggerates the credentials, background or financial ability and resources of a customer in written reports the bank requires;

Ø  Employee frequently is involved in unresolved exceptions or recurring exceptions on exceptions reports;

Ø  Employee lives a lavish lifestyle that could not be supported by his or her salary;

Ø  Employee frequently overrides internal controls or established approval authority or circumvents policy;

Ø  Employee uses company resources to further private interests;

Ø  Employee assists transactions where the identity of the ultimate beneficiary or counter party is undisclosed;

Ø  Employee avoids taking vacations.

However, considering recent conditions, I think that those KYE approaches including red flags are just not sufficient enough to identify suspicious activities. It is easy for a bad employee to avoid them. Many employees may easily not show off their wealthy in order to avoid others suspicious. Red flags are just indicators of possible fraud that can be easily evaded by wrongdoers since they know precisely what actions can be categorizes as suspicious activities.

Moreover, some recent data reveals that there are no unique characteristic of a fraud perpetrator[1]. Many employees and employers seemingly having excellent reputation are also possible to commit in frauds, corruptions, embezzlements, extortions, and other white-collar crimes. The characteristics and behaviors of frauds perpetrators do not necessarily “anomalies”. They can be married, have well education, an employment record of one to more than 20 years, range in age from teens to 60s or even beyond, no criminal record, are socially conforming, and are likely to belong to a church[2]. The person likely to commit next fraud could be anybody in the office because, under the right set of circumstances, anyone could become a fraud perpetrator”[3].

Thus, I, personally, believe that strong KYE program could not merely rely on KYE approaches including red flags. Indeed, it needs additional components such as whistle blowing system and reverses burdens (transparency) especially for high level authorities in order to prevent “enemy within”.  

Whistle Blowing System

 “A whistleblower is an employee or other person in a contractual relationship with a company who reports misconduct to outside firms or institutions, which in turn have the authority to impose sanctions or take other corrective action against the wrong-doers”[4].

The following research below showed that 64.1% occupational frauds were detected and reported by employees (whistle blowers). Other reports came from outside information such as from vendors, customers, and anonymous with totally of 35.9% Source: 2006 ACFE Report to the Nation on Occupational Fraud and Abuse[5]

The report shows that whistle blowers in a good faith can be an effective tool to detect and reveal the internal frauds, even much more effective compare to traditional KYE program. I believe that peer group supervision is much more effective and efficient rather than top down supervision since the later has a lot of limitations to scrutinize employees’ daily activities. In early stage of its implementation, whistle blowing system may increase a feeling of uncomfortable and insecure among employees, but in the future, it may increase the awareness of employees about the dangerous of committing crime by someone or a group of people for the whole company safety. If somebody commits crimes, his or her action will threat the entire company safety including most of good employees’ interests. The illicit actions conducted by one or some wrongdoers often become the heavy burdens carried on all employees’ shoulders. This awareness is a very important key to implement whistle blowing system successfully. Furthermore, encouraging and protecting all employees to involve in company’s protection program by providing strong supports and commitments from management, and opening secret, sterile and secure hot line services become crucial ones. Another issue is that keeping intensive contacts to complainant and paying attentions to his or her reports can detect the illicit actions. Moreover, it can prevent the whistle blower to report his or her complaints through mass media that can damage company’s good reputation.  

According to Teen, Co-Director, Corporate Governance and Financial Reporting Centre who presented the Whistle Blowing: Developments and Implementation Issues at Institute of Internal Auditors Annual Conference, 7 October 2005, there are some key considerations in implementing the system[6]:

Ø  Procedures of submitting complaints and the official address to submit to (e.g., legal/compliance, audit committee, external hotlines);

Ø  Types of offensiveness which are covered (accounting irregularities, theft, fraud, corruption/dishonesty, harassment, unethical behavior, improper conduct, workplace safety hazards, breaches of legislation);

Ø  Investigation, follow up and reporting processes;

Ø  Types of prohibited retaliations (e.g., discrimination, harassment, intimidation, demotion, termination, etc.); and

Ø  Policy regarding whistleblower’s immunity from disciplinary proceedings and civil/defamation claims.

However, although a whistle blowing system has a lot of benefits; it is not a panacea that can solve all problems related to white-collar crimes. Moreover, it also has some negative impacts if not used properly, such as the system may be abused by someone or group of employees to defame innocent rivals. If there is no secure and secret line for whistle blowing system, bad news of accused one will easily become black campaign to destruct his or her reputation. Remember that a bad news and rumors are usually easier to be generally trusted by most of people. Another potential bad massive impact is if a whistle blower does not feel that his or her report is handled properly by company internal authority or management, they may speak out through mass media that can damage institution’s reputation severely. 

    

Reverses Burdens of Proof Program

Actually reverses burdens practices have been known and implemented since a long time ago. The problem is in the hands of whom the obligation to provide evidence must be carried out. Traditionally, many people believe that if you assert someone doing wrong things, you should be able to prove his or her mistake. Thus, the obligations to prove all elements of offence are in hand of prosecutor(s). It based on the opinion that one of the fundamental principles of criminal justice is the presumption of innocence[7].

However, recently many people consider in the name of fair justice and protect bigger society’s needs of safety; it seems that a lot of people need new methods to prove the wrongdoers’ illicit actions. If we link it to company, many honest employees who do rely on continual company’s long live may agree that internal wrongdoers are not easily to be catch merely based on whistle blowing reports. Whistle blowing is merely a trigger for further investigation to the accused persons. To prove whether somebody has commit crime or not, accused person not only should prove the neat documents of his or her duty jobs, but also if needed, they may have to prove that his or her “variance” belongings are not derived from ill-gotten money compared with his or her standard known incomes.

Although I do not try to simplify the situations, it is quite easy to prove whether the money or belongings come from legal sources or not. The simple formula is employee’s wealthy and belongings should be able to be supported by his or her incomes. Then, if there is an excess wealthy that cannot be supported by his or her incomes, the accused person should demonstrate that the excess is derived from legal sources, for instance from inheritance or other side job income. Furthermore, their belongings should be also supported by legal documents. Full access to employees’ private account and belongings is a compulsory. Thus, the company authority, without deposing or reducing or substituting legal actions that may be taken by government authorities, should have full access to their employees’ wealthy and have rights to fully investigate and track the sources of money.                

Conclusion

Although there are some impediments that may hamper the implementation of whistle blowing and reverses burdens of proof system, such as potential abusing of the systems for defaming innocents and black campaign, I do believe that considering the necessity of effective KYE Program, it should consider whistle blowing and reverses burdens of proof systems as additional complementary tools. In addition, in order to protect the reputation of both complaint and accused persons, whistle blowing and reverses burdens of proof systems should be firmly in place of secure, secret, and safety line with only limited authorized persons who can open it, like a company hot line.   

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[1] http://www.fraudcorp.com.au/Hotline%20News.pdf. Accessed on February 26, 2008

[2] http://www.fraudcorp.com.au/Hotline%20News.pdf. Accessed on February 26, 2008

[3] http://www.fraudcorp.com.au/Hotline%20News.pdf. Accessed on February 26, 2008

[4] http://goliath.ecnext.com/coms2/gi_0199-6711263/Getting-the-word-out-about.html. Accessed on February 26, 2008

[5] http://www.acfe.com/resources/publications.asp?copy=rttn. Accessed on February 26, 2008 

[6] http://www.cgfrc.nus.edu.sg/download/IIA_Conference/The_Challenges_of_Whistleblowing_Implementation.ppt. Accessed on February 27, 2008

[7] http://www.hart.oxi.net/updates/crimlaw/crimlaw_burden05.htm. Accessed on February 27, 2008

The author is a public official in a ministry in Indonesia. The views expressed are his own and do not reflect the official stance of the institution he is working. His writing is not intended to vilify particular persons or institutions. He blogs at http://whistleblowing-indonesia.blogspot.com/

Extrinsic Rewards May Encourage Whistle-blowing