Fast global fiscal response in a crisis

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Kate McMahon
Edmonds Marshall McMahon, London
katemcmahon@emmlegal.com

Mai Holdom
Edmonds Marshall McMahon, London
maiholdom@emmlegal.com

The unprecedented spread of the Covid-19 pandemic has seen an enormous global response to help fight the virus, improve health and safety and respond to the economic impact of a worldwide lockdown. Experts have given a near unanimous consensus that the world economy is facing the most serious challenge of the post-war era due to the sudden halt in economic activity in both advanced and developing countries.[1]

However, it is the scale of such events and the immediacy of response required that expose the increasing vulnerability of governments, non-profits and corporations to corruption and bribery. When money is passed out quickly and in vast quantities, with expedited checks and balances to match the hurried need for funds, control tends to be lax. Globally, the UN estimates that according to several studies, ten to 25 per cent of all public contracts are lost due to corruption, and this is without the hallmarks of the crisis we currently face. While we have seen that an authoritarian bureaucracy has allowed dramatic responses to the pandemic in the world, governments seeking to take greater control will also profit in times where the population is more willing than usual to submit to draconian measures in the interests of personal safety and less critical of its leaders. In such a situation as this, it is inevitable that corruption is already at work.

What is the current coronavirus spending?

Vast amounts of money are flowing in and out of countries. Larger amounts are on offer for loans, particularly to debt burdens for countries who are at risk. These are being provided by both the International Monetary Fund (IMF) and the World Bank Group (WBG). As of 29 April, the IMF’s total emergency financing was US$13,893.33m and total debt relief was at US$215.01m.[2] The IMF also has a further US$500m available in grants to help countries that cannot make repayments on existing loans.[3] The WBG had provided 78 countries with approximately US$9bn in funding through its Covid-19 Fast Track Facility[4] and says it has capacity to provide US$150-160bn in total financial support over the next 15 months.[5] The EU has also announced €500m to assist those most affected in the European Union.

Not only are we seeing debt relief from the IMF and WGB, we are witnessing humanitarian aid raised by charities and the United Nations. On 25 March 2020, the UN launched its humanitarian response and requested US$2bn to boost the global response. Existing international aid money will also be directed towards coronavirus aid. Funds managed by the UN’s emergency aid coordination body, OCHA, have allocated a total of $68m. The Global Fund to Fight AIDS, Tuberculosis and Malaria has also redirected some funds toward Covid-19. Charities are also directing aid towards coronavirus-related causes.

These are unprecedented times around the world and have called for a collective and extraordinary response: European Union finance ministers have settled on a coronavirus financial support package worth €500bn including €200bn which the European Investment Bank is expected to lend to companies. It also intends to provide €240bn in cheap credit, made available by access to the European Stability Mechanism bailout fund. The package will bring the EU’s total fiscal response to the epidemic to €3.2trn (US$3.5trn), the highest in the world.

Lessons learnt from past healthcare emergencies

Ebola in West Africa

The 2014 Ebola crisis saw mismanagement of money and a total lack of accountability of spending. Millions were provided to West African countries to help respond to the health crisis. The International Federation of Red Cross (IFRC) lost US$6m of its aid to corruption.[6] A 2017 internal investigation found that, as well as internally assisted corruption, it is likely that substantive sums were lost because of collusion between former IFRC officials and a bank in Sierra Leone. Research by Transparency International showed that 48 per cent of patients surveyed in Sierra Leone and 40 per cent in Liberia paid bribes to access health services. The emergency response to Ebola also saw funds lost to officials who ‘created’ employees to receive salaries. The entrenched mistrust of governments in these countries was a public health risk itself, with medical advice being ignored by locals. Such is the government mistrust in Eastern Congo that a 2019 survey found one in four people did not believe that Ebola was real.[7] Despite the aid, hospitals became hubs for the spread of Ebola due to a lack of equipment.

During the Ebola crisis, corruption also occurred when officials were paid by thosesubject to quarantine who bribed their way out: as has already occurred recently with Covid-19 infected people who bribed officials to cross the border from Iran into Pakistan.[8]

Malaria and tuberculosis in Burkina Faso

In 2009, the Global Fund purchased 6.6 million insecticide-treated nets to aid in its fight against malaria and tuberculosis in Burkina Faso. Approximately two million of the nets supplied by one company, valued at almost €9m, turned out to be counterfeit.[9] The head of the company was indicted in the United States (the lost funds included some provided by the United States ‘Agency for International Development’). The Global Fund then had to bear the cost of minimising the impact of the substandard nets. An investigation found that the Fund’s secretariat did not exercise sufficient oversight in its approval of the tender. Other failures included the lack of a mechanism for enhanced oversight, non-compliance with procurement practices in the setting of tender specifications, which also lacked bidders having to prove they had experience.

Hurricane Katrina in Louisiana

It is not just the developing countries which have seen corruption arise from emergency situations. Louisiana also saw a storm of fraud and corruption follow Hurricane Katrina. Mismanaged projects caused the loss of millions of dollars, including to politicians and business owners who skimmed off the top of the government’s relief aid. The then New Orleans Mayor received a ten-year prison sentence for various bribery and corruption charges, including some that occurred during the hurricane response. In response to such mismanagement, the US created the National Center for Disaster Fraud.

Hurricane Maria in Puerto Rico

The 2017 Hurricane Maria in Puerto Rico saw further bribery and corruption take place. In September 2019, the Deputy Administrator of the US Federal Emergency Management Agency was arrested for taking bribes to secure US$1.8bn in federal contracts to repair Puerto Rico’s electricity grid following the disaster.

We may consider that these responses were taking place when an independent investigation (ie, by an non-governmental organisation (NGO)) has been possible or where law enforcement has taken an active interest. Many countries, worldwide, may not be quite so incentivised to root out corruption.

What can we expect next?

Several factors will continue to converge to increase the risk of corruption and bribery coming out of the Covid-19 pandemic. The coronavirus outbreak has caused uncertainty about both the global economy and global health, which has generated a greater need for money and supplies, particularly, medical supplies, worldwide. The economic downturn has left developing countries particularly hard-hit and in need of fast-tracked aid. As such, we are already seeing a significant flow of immense amounts of money across borders, as well as consignments of supplies being shipped globally. Aid will pass through numerous bodies to get to its destination. The rushed response to the virus will cause major issues for compliance and create opportunities for fraud and bribery due to the shortage of medical equipment, expedited aid, together with reduced compliance and safeguards, as people and companies become desperate for cash.

The pandemic will also create incentives for corruption. These will include government, company or other organisational officials taking bribes, resources being diverted, officials skimming off the top of aid, counterfeit medical supplies being sold and procurement processes becoming subject to bribes – and those for medical supplies will be particularly vulnerable. Items in high demand will be particularly vulnerable to fraud and corruption. This will be medical equipment that we have seen to be in short supply, including ventilators, personal protective equipment and testing kits; for example, the UK government spent £16m on faulty testing kits although it is not yet apparent whether a fraud occurred. What is apparent is that desperation is high and government oversight is lacking. We are already seeing price gauging and counterfeiting relating to coronavirus supplies and this will continue, spurred on by corrupt conduct.

And with the vast amounts of money being dispersed worldwide from the IMF, WBG, the UN and various charities, we will see similar situations arise as in Liberia and Sierra Leone during the Ebola crisis, with millions of dollars lost to corruption and bribery. Governments, non-profit organisations and corporations all need to act with vigilance and awareness particularly where medical supplies are concerned. While cutting corners and sacrificing safeguards might arguably result in funds or supplies reaching their target destination more quickly, past events have taught us that more accountability and transparency can go further than more funding.

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