Corrupt and Illegal Activities in the Forestry Sector: Current understandings, and implications for World Bank Forest Policy Draft for Discussion Debra J. Callister May 1999



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Corrupt and Illegal Activities in the Forestry Sector:
Current understandings, and implications for World Bank Forest Policy

Draft for Discussion
Debra J. Callister

May 1999

For The World Bank Group

Forest Policy Implementation Review and Strategy Development: Analytical Studies

TABLE OF CONTENTS
INTRODUCTION
CHAPTER 1
1. DESCRIBING THE PROBLEM: ITS NATURE, CAUSES, SCALE AND IMPACT
1.1 Types of corrupt and illegal activities

1.1.1 What is corruption?

1.1.2 Corrupt and illegal activities in the forestry sector
1.2 Facilitating factors

1.2.1 Causes of corruption — general

1.2.2 Causes of corrupt and illegal activities — forestry sector
1.3 Scale and impacts

1.3.1 Scale of corrupt and illegal activities in the forestry sector

1.3.2 Impacts of corrupt and illegal activities in the forestry sector
CHAPTER 2
2. STRATEGIES FOR IDENTIFYING AND IMPLEMENTING SOLUTIONS
2.1 National efforts

2.1.1 Tackling corruption

2.1.2 Applying these approaches to the forestry sector
2.2 International treaties and related initiatives

2.2.1 Forestry, conservation and sustainable development agreements

2.2.2 Anti-corruption treaties

2.2.3 Other relevant initiatives

2.2.4 Conclusion — adequacy of existing multi-lateral agreements for addressing forest corruption
2.3 World Bank anti-corruption efforts
CHAPTER 3
3. IMPLICATIONS FOR THE WORLD BANK
3.1 Key considerations and findings

3.1.1 General considerations

3.1.2 Areas where data are lacking

3.1.3 Areas where action may be required
3.2 Strategy for World Bank future activities


REFERENCES
APPENDICES

LIST OF BOXES
1. Illegal practices in the forestry sector

2. Examples of corruption in the forestry sector

3. Categories of bribery, with examples from forestry

4. Factors contributing to corruption

5. Factors contributing to forest corruption and illegal logging in Cambodia and Papua New Guinea

6. Social, economic and environmental costs of illegal and corrupt forestry activities in Cambodia

7. Examples of actions to combat corruption in the forest sector

8. Step suggested to tackle forestry corruption in India and Cambodia

9. ITTO Libreville Action Plan 1998–2001 — elements relating to illegal forestry activities

10. The CITES Appendices

11. Issues underpinning the World Bank’s anti-corruption strategy

12. Possible illegal forestry assessment and action framework



LIST OF TABLES
1. Legal, social and administrative factors that impact on corruption: characteristics and effects

2. Program/project planning and implementation factors that impact on corruption: characteristics and effects

3. Scale of illegal forestry activities: some recent data (Still incomplete)

LIST OF APPENDICES
A. Terms of reference (Not attached)

B. Data on scale of illegal forestry activities (Not attached)

C. General framework for tackling corruption (Not attached)

D. Steps that have been suggested for tackling corruption in Cambodia and India (Not attached)



E. Inter-American Convention Against Corruption: key elements

F. Outline of structure of problem/cause/solution matrix that could be applied to corrupt and illegal forestry activities (Not attached)INTRODUCTION
In 1998, the World Bank commenced a review of its forest policy and its own role in the forest sector. This review, the Forest Policy Implementation Review and Strategy Development (FPIRSD) aims to better direct the Bank’s assistance in forest management and consultation in collaboration with other major stakeholders. The FPIRSD will be underpinned by selected analytical studies that document current knowledge and views on the crucial issues and questions surrounding forest conservation and management.
This report is one such study. It examines corrupt and illegal activities in the commercial forestry sector and suggests strategies for the Bank to assess and address this problem. So why should the World Bank be interested in combating illegal and corrupt acts in the forestry sector? The short answer is that such actions can have a range of negative economic, ecological and social impacts and act as a direct impediment to achieving sustainable forest management (see Section 1.3.2). Therefore, illegal forestry activities serve to directly undermine the Bank’s objectives of poverty reduction and sustainable development through improved forest management and forest protection.
Detailed documentation of illegal activities in the forest sector is a relatively recent phenomenon. Determination of strategies to combat it have received less attention, a practice which has extended to its lack of consideration in forestry planning exercises (Contreras-Hermosilla 1997). This failure to analyse what can be an important influence on forestry operations, has been suggested as a significant factor in explaining some forest sector planning failures.
The emphasis in the terms of reference for this analysis is on corruption and identification of strategies to deal with it (Appendix A). Nevertheless, this report also looks at illegal forestry actions more broadly1, in recognition of the fact that addressing corruption may only be part of the solution for achieving a legally operating forest sector. However, given their close interlinkages, for the purpose of this report unless otherwise clarified, the terms ‘corrupt’ and ‘illegal’ forestry activities should be read as referring to the same generic issue.
Examples of corruption documented in this report come from developing countries and economies in transition2. While generally speaking these countries are more susceptible to corruption, this is not meant to infer that such countries are the only ones where illegal activities occur in the forest sector. Rather, this emphasis reflects the Bank’s principal area of interest for its forestry assistance efforts. Indeed, it would seem reasonable to assume that the forest sector of any country, no matter how ‘developed’ the country and ‘well-managed’ its forests, suffers from some illegal activity at some time.
The first two sections describe the issue and potential solutions, with the last outlining a role for the World Bank in addressing this challenging problem. The report describes the nature and extent of the problem, resulting impacts, and the underlying conditions that promote and facilitate corruption. This is followed by discussion of strategies that can be employed to combat illegal and corrupt activities. Both these sections commence with a short analysis of the issue as it applies to corruption generally3, followed by a more detailed description specific to the forestry sector. The final section uses the preceding analysis to draw conclusions on the implications of illegal forestry activities for the World Bank’s forest policy. It suggests strategies for the Bank to address the issue in the short and medium and term, including suggestions for case studies to investigate the issue further and test suggested remedial actions.

CHAPTER 1
1. DESCRIBING THE PROBLEM: ITS NATURE, CAUSES, SCALE AND IMPACT
Simply to list examples of corruption,... gives little sense of the amount of corruption, or its weight. ...It may be embedded in a wider, but non-corrupt, framework of inept governance (mismanagement, lack of accountability, arbitrary decision-making and so on) that provides the opportunity for specifically corrupt acts... (Lamour 1997, p.10)
The above comments were made in relation to governance issues in the South Pacific, an area that has had its problems with illegal and corrupt forestry practices. They are as relevant to the forestry sector as any other.
Forest management embraces the legal, economic, administrative, social and technical measures related to the conservation and utilisation of forests (FAO 1997). Given this, it is clear that illegal and corrupt actions in the forestry sector must be seen as a problem of forest management. Likewise, they cannot be divorced from the broader context of law enforcement or integrity of public officials. A simple analogy is the illegal drug trade, which has numerous components, including law enforcement, public health, rural development and so on.
This chapter therefore looks at forest corruption from both angles. Greater attention is given to providing general descriptions of issues relating to corruption and illegality in general, rather than to generic principles of ‘good’ or ‘bad’ forest policy and management. The latter issues are widely dealt with in forestry literature and are being examined in great detail in other parts of the FPIRSD process. There is, however, far less information on how broad issues to do with corruption translate into the forest sector.
The description of the nature, causes and impacts of illegal forestry activities provided in this chapter serves a number of purposes, that are explored in later chapters. Firstly, identification of the types of illegal and corrupt activities that can and do occur in the forestry sector is a fundamental pre-condition to identification of any solutions. If you don’t know what the problem is, how can you know how to fix it, or even that it requires attention in the first place? Directly linked to this is substantiation of what can cause these actions to occur. Again, this is a necessary step in addressing the problem. Thirdly, the discussion of scale serves to indicate the serious extent of this issue and the negative impacts that result from it at the economic, ecological and social level. The determination of the size of the challenge is also important in deciding on a course of action to tackle it — one that involves neither too much nor too little effort.

1.1 Types of corrupt and illegal activities
1.1.1 What is corruption?
Corruption can and has been defined in many ways, however the definition that has been adopted by the World Bank is the abuse of public office for private gain (World Bank 1997). It can occur in both public and private sectors and may also involve actions that are designed to provide benefit for others close to the perpetrator, such as family, political allies and so on. Key elements is that the action is intentional, involves an improper or non-compliant action and is aimed at deriving a benefit for oneself or others close to them.
Corruption can be further divided into ‘grand’ and ‘petty’. Transparency International describes grand corruption as being characterised by a the involvement of a large bribe, paid to a top government official or politician; petty corruption involves a small bribe given to a junior public official (Pope 1996). Tanzi (1998) has a slightly different interpretation, defining petty corruption as that involving the bureaucracy and grand that which involves politicians. The application of this definition to activities in the forestry sector is discussed below.

1.1.2 Corrupt and illegal activities in the forestry sector
Examples of the types of illegal practices that have been detected in the forest industry are shown in Box 14. They largely fall into three categories: illegal logging of various forms; movement of wood products, which may or may not have been harvested legally, without proper authorisation or in contravention of controls; and activities directly aimed at avoidance of payment of taxes or forestry charges. It should be noted, however, that both illegal logging and timber smuggling will also result in the loss of government revenue in many instances, particularly where the two activities are operating together.


BOX 1: ILLEGAL PRACTICES IN THE FORESTRY SECTOR
Illegal Logging

. Logging timber species protected by national law 5

. Buying logs from local entrepreneurs that have been harvested outside the concession.

. Logging outside concession boundaries.

. Contract with local forest owners to harvest in their land but then cutting trees from neighbouring public lands instead.

. Logging in protected areas such as forest reserves.

. Logging in prohibited areas such as steep slopes, river banks and catchment areas.

. Removing under/over-sized trees.

. Extracting more timber than authorized.

. Logging without authorization.

. Logging when in breach of contractual obligations (e.g. pre-logging environmental

impact statement).

. Obtaining concessions illegally.
Timber Smuggling

. Export/import of tree species banned under national or international law, such as the Convention on International Trade in Endangered Species of Fauna and Flora (CITES)..

. Export/import of tree species listed under CITES without the appropriate permits6.

. Export/import of log, lumber or other timber product in contravention of national bans.

. Unauthorized movement of timber across district or national borders.

. Movement of illegally logged timber from forest to market.

. Exporting volumes of forest product in excess of the documented export quantity.
Practices Specifically Aimed at Reducing Payment of Taxes and Other Fees

. Declaring selling forest products at prices below market prices to reduce declared profits and corporate and income taxes.

. Declaring buying inputs at prices above market prices to reduce declared profits and corporate or income taxes.

. Manipulation of debt cash flows (transferring money to subsidiaries or a parent company where debt repayment is freer than the export of projets; inflating repayments allowing untaxed larger repatriation of profits, reducing the level of declared profits and, therefore, of taxes).

. Overvaluing services received from related companies to reduce declared profits and corporate and income taxes.

. Avoiding royalties and duties by under-grading, under-measuring, under-reporting and under-valuing of timber and mis-classification of species.

. Non-payment of licence fees, royalties, taxes, fines and other government charges.
Illegal Timber Processing

. Processing timber without documentation (if required) verifying its legal origin.

. Operating without a processing licence.

. Operating without other necessary licences and approvals (e.g. effluent disposal permits).

. Failing to meet licence provisions, including pollution control standards.
Source: Adapted from Callister 1992; Contreras-Hermosilla 1997; de Bohan, et al. 1996; Krishnaswamy & Hanson 1999

Corruption — paying of bribes, political patronage and so on — operates either to allow many of these activities to occur in the first place, or to allow them to proceed unchecked or unpunished. Examples of corrupt activities which have been observed in the forest sector are given in Box 2. These are divided into ‘grand’ and ‘petty’ corruption, with the distinction largely based on who is acting corruptly and their rank and status in the community, rather than the size of the bribe or the scale of the impact of the resulting activity. Note that I have diverged from the definition of Tanzi (1998), by including corruption involving bureaucrats under the category of ‘grand’ corruption. Some corrupt activities can span either category, such as payment to avoid prosecution for transgressions.




BOX 2: EXAMPLES OF CORRUPTION IN THE FORESTRY SECTOR
Grand’ Corruption

. Companies providing support to political parties, bribing politicians, bribing senior government officials or military officers, to:

- obtain a timber concession;

- obtain extensions to existing concessions;

- obtain approval for a timber processing venture;

- avoid prosecution for transgressions;

- avoid payment of fines or other fees; and

- negotiate favourable concession/investment agreements, including tax holidays and other investment incentives.

. Politicians and high-ranking military and government officers using their status to effect the same outcomes as listed above, for their own companies or those of relatives or political allies.

. Companies bribing local communities to influence them to agree to the granting of timber harvesting rights.


Petty’ Corruption

. Companies bribing junior government officials, military personnel and local government officials to:

- falsify declarations of volume or species harvested;

- avoid reporting harvesting of prohibited species or diameters;

- falsify export documentation or ignore document irregularities;

- avoid reporting and prosecution for non-compliance with forest management regulations established in the concession contract;

- permit illegal movement of timber;

- ignore logging in protected areas and outside concession boundaries;

- allow timber processing without the necessary approvals; and

- ignore infringements of timber processing regulations, including pollution controls.


Source: Some ‘petty’ corruption actions adapted from Contreras-Hermosilla 1997.

The distinction between grand and petty corruption is not always clear and the division in Box 2 should be used as a general guide only. Situations involving provision of inducements to local communities is particularly problematic. For timber companies, the dollar value of the bribe may be low, but given that in some countries (e.g. Papua New Guinea) approval of local communities is key for obtaining timber concessions, I have elected to include these as grand corruption. In some contradiction to what is stated above, this reflects the ultimate goal of the bribe (obtaining a timber concession), rather than the scale of the bribe and who it is paid to.


The distinction becomes further blurred in situations where, for example, there may be distribution of the income received from bribes through the system, from lower to higher-level officials or vice versa. Is this grand or petty corruption? Likewise, how do you classify situations such as systematic and on-going illegal logging, or illegal cross-border trade, where local officials or military personnel are accepting the bribes, but senior officials, military officers and/or politicians are aware of the situation and take no steps to stop it? If the latter are accepting bribes also, then they are clearly corrupt; if not, does condoning corruption make them also corrupt, or just apathetic? As for the grand versus petty corruption question, it is entirely feasible that both types of corruption may be involved in facilitating a particular illegal activity.
These examples illustrate that the distinction between the two types of corruption is less important than the need to recognise and find solutions, based on the individual circumstances of each activity. This is addressed in more detail in subsequent chapters.
Another way of categorising corruption is based on the incentives of the briber (Pope 1996). Transparency International gives four broad categories of bribery according to the type of gain to be achieved (Box 3). Categories 1 and 2 seem most pertinent to the forestry sector, but scenarios can be developed for all four.


BOX 3: CATEGORIES OF BRIBERY, WITH EXAMPLES FROM FORESTRY
Category 1: Bribes may be paid for (a) access to a scarce benefit, or (b) avoidance of a cost.
. Obtaining a timber concession.

. Purchase of newly privatized forest sector-related firm (particularly relevant to economies in transition).


Category 2: Bribes can be paid for receipt of a benefit (or avoidance of a cost) that is not scarce, but where discretion must be exercised by state officials.
. Avoiding payment of royalties, duties or other taxes.

. Ignoring illegal logging and/or breaches of concession terms and conditions.

. Allowing timber smuggling to occur.
Category 3: Bribes can be paid, not for a specific public benefit itself, but for services connected with obtaining a benefit (or avoiding a cost), such as speedy service or inside information.
. ‘Fast-tracking’ processing of logging approval applications.
Category 4: Bribes can be paid (a) to prevent others from sharing in a benefit or (b) to impose a cost on someone else.
. Paying law enforcement officials to raid competitors’ timber processing facility.
Source: Categories from Pope 1996.

An issue which has drawn particular attention over recent years, and is therefore worthy of highlighting, is concern over corrupt and illegal practices by trans-national logging companies. Allegations of corrupt actions by such companies are being increasingly widely documented7, with particular concerns raised regarding companies originating from South East and East Asia. While the range of alleged and proven improprietries is diverse, a significant recurring theme is the alleged bribery or patronage of political figures in order to obtain concessions. In the case of some companies, similar allegations of favourable treatment through political allegiances are leveled at their operations in their country of origin.


One area of corruption which has not been mentioned, are corrupt activities purely within private companies. This has been documented, for example, in a case in Australia, where a timber importer testified in court that he routinely paid bribes to Malaysian timber merchants, in order to guarantee a cheap supply of product (Davey 1991). While such activities do not clearly fit within the definition of corruption given in Section 1.1.1 (‘abuse... of public power...’), this example illustrates that bribery is also taking place within the private forestry sector.
Finally, it is important to note that while corrupt activities will almost certainly be illegal, not all illegal activities in the forest sector require corruption in order for them to occur. (As already noted, however, corruption can facilitate illegal activity, or stop the perpetrator being held accountable). This means that tackling corruption alone may be insufficient to deal with all aspects of illegal activities in the forestry sector of a particular country. This point will be elaborated on in Section 2.1.


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