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COVID-19 and fragility: The threat posed by corruption, crooks, and the resulting illicit financial flows

08.06.2020

Jana Warkotsch und Carola Frank

Worldwide, stories abound about public officials diverting funds provided for the procurement of much needed food and medical supplies in response to COVID-19. There is evidence of criminal networks abusing the crisis by selling forged COVID-19 tests, issuing fake fundraising campaigns, and selling rationed goods at an increased price. INTERPOL recently published a warning that fraud in connection with the virus has already caused damage amounting to several million dollars. UNODC estimates that for every dollar spent on procurement, 10-25 cents are lost due to corruption. Corruption and IFF thus directly undermine the effectiveness of the fight against the pandemic.

Corruption and IFF undermine  fragile states’ ability to cope with the pandemic

The money lost due to corruption and IFF is even more needed in fragile and conflict affected states, where weak governance structures, low state capacities and a lack of resources have left behind desolate health care systems. The Ebola epidemic recently showed how this toxic mix of factors can affect the ability of fragile states to cope with a crisis like COVID-19. The Red Cross alone estimates that at least 5% of their disbursements in their emergency response to the Ebola-outbreak were lost to corruption. Lack of trust in state institutions meant that populations did not follow safety procedures advertised by their governments, severely impeding containment measures. Corruption, power abuse, crime and the resulting erosion of trust in state actors thus threaten the very effectiveness of government action to contain and mitigate the pandemic.

Corruption and IFF not only divert funds at the state level, however. They can hurt the most vulnerable groups in society by preventing access to health care services, medicines, food and shelter. Not only are the most vulnerable and poor at a greater risk of catching the disease, but they are hardest hit by the socio-economic consequences of containment efforts. This is especially true for people depending on the informal sector to survive, as well as refugee populations. Both often find themselves excluded from access to formal state structures and services. This makes them especially vulnerable to exploitation and corruption.

Helping immediately but sill complying with the rules

Donor action can play a central role in ensuring that emergency funds are spent, where they are most needed, and do not end up in the pockets of crooked government officials and criminals. Anti-corruption safeguards are therefore an essential part of following the do-no-harm principle. As a part of this, partner governments in fragile states characterized by weak governance need to be strengthened not only in their capacity to deliver health outcomes, but in their capacity to do so in a transparent and accountable way. The urgency of the situation puts additional pressure on development and humanitarian actors. They should nonetheless resist the initial impulse to skip out on transparency and accountability measures to speed up the process. Without proper safeguards against corruption and IFF donors might contribute to further destroying trust and potentially empowering actors invested in continuous fragility and conflict. The repercussions of this might be felt way beyond the current crisis.

How to ensure accountability and transparency in the fight against the pandemic

The first step in confronting corruption and IFF during COVID-19 is ensuring that funds are spent in a transparent and accountable way, both at the partner country level, as well as at the level of the funding organizations themselves. As the IMF stated, “governments should do whatever it takes, but keep the receipts.” This entails making sure that information is freely available both on part of the donor organization, as well as encouraging partner countries to make their own budget and funding lines transparent. Secondly, it needs local actors to translate and localize information – both on the pandemic and on adequate safety measures. Civil society and media are crucial for monitoring the way funds are used, and blowing the whistle, where mismanagement becomes obvious. The past few months saw the space for these actors shrinking further, with many governments restricting access to information and prosecuting critical civil society actors and journalists. International support for freedom of information as well as media and civil society actors should thus be a crucial part of the crisis response. Strengthening vertical accountability in partner systems with low capacities is not enough, however. Donors also need to pay attention towards horizontal accountability by strengthening accountability and control institutions such as Supreme Audit Institutions (SAI), or investigative bodies like financial intelligence units (FIU) from the get-go.

International financial secrecy enables illicit capital outflow

However, it is not enough tackling the outflow of illegal funds only at national level. The international community needs to confront its enabling role in the immense capital drain resulting from corruption and IFF, which plagues fragile countries disproportionately. Money once stolen often ends up in those countries in the global north that provide high financial secrecy and abundant investment possibilities. Increasing global transparency on ownership structures and strengthening the repatriation of stolen funds can make a real difference for developing countries. As long as it is possible to move IFF undetected through the international financial system, and to hide ownership behind intransparent shell companies, criminals and the corrupt can continue to benefit from the proceeds of their crimes.

In conclusion

Fighting corruption, profit-driven crime and the resulting IFF, should therefore be considered alongside emergency measures. Spending pressures and the current concentration of public resources should not be a free-for-all for criminals and the corrupt. The domestic resources lost in fragile countries due to IFFs and corruption are needed more than ever for bolstering strained health sectors, purchasing much needed medical supplies and providing relief for crumbling economies.

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Authors

Jana Warkotsch is working as an adviser in the sectoral programme „Anti-corruption and integrity“ within Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH.

Carola Frank is working as an adviser in the Global programme „Combating Illicit Financial Flows“ within Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH.