Loopholes and resolutions that facilitate political corruption

Attention is now turned to the ways people extract money from others. Most of the time, embezzlement is possible because of the lax regulations governing financial practices.

In the US, the sub-prime crisis has led to a credit crunch that has engulfed the world, particularly other developed markets. Apart from previous policy mistakes and lax market supervision in the financial sector in the US, financial fraud is an interesting aspect of the current lingering crisis.

The FBI arrested about 400 people, including brokers and housing developers, as part of a crackdown on alleged mortgage fraud worth US$1 billion. Several giant banks including Citigroup, UBS and Merrill Lynch were forced by US regulators to pay fines and settle debt claims.

For example, Morgan Stanley and JP Morgan Chase agreed last week to buy back more than US$7 billion in auction-rate securities and pay fines totalling US$60 million, according to Bloomberg news agency. Auction-rate securities were marketed before the US$330 billion collapse in February.

Regulators in the US said investors purchased long-term debt on the advice of brokers who pitched it as a cash equivalent, only to find that they could not sell the bonds as demand dried up.

Observers say corruption has evolved to another stage in developed markets. It has long shifted from corruption in the public sector to the private sector, as the market economy becomes mature. Bankers have used sophisticated financial products to take advantage of investors.

In developing countries where market economies are emerging - such as Thailand - corruption is rampant in the public sector. Here, politicians use state tools to channel public funds into their own pockets.

One of the prime facilitators of corruption is the Cabinet resolution, since this is more or less a law that can stop any project or initiative being restricted by existing regulations or laws. The Cabinet resolution can bypass standard regulations such as transparency in government procurement that must go through a competitive bidding process.

The latest case is a controversial fair trade deal implemented by Finance Minister Surapong Suebwonglee, who is said to be under investigation for graft, according to news reports. Last month the Cabinet approved Surapong's request to choose the organiser of the fair trade deal by a special method which bypassed the competitive bidding procedure.

Another case involves the two- and three-digit lotteries, set up by the former Thaksin Cabinet. The Assets Examination Committee filed a lawsuit against 47 politicians and officials allegedly involved in the illegal approval of the lottery, and the case is currently pending in the Supreme Court's Criminal Tribunal for Political Office Holders.

 The positive side of the Cabinet stamp is that it allows ministers to bypass standard procedures which take a long time to complete, thus ensuring that urgent projects or measures can be implemented timely. Moreover, some existing laws or regulations may be out of date. Or they can be reinterpreted to favour new projects, such as the new type of lottery that the former Thaksin Cabinet believed could be established under the existing law. A Cabinet resolution in this way provides a flexible administrative tool for the government. By the same token, innovative financial products can enhance economic growth, and Cabinet resolutions can be used to make policies work efficiently.

Yet, on the flip side, the authority of a Cabinet resolution to bypass regulations leaves a big loophole for politicians to exploit. In the analogy of innovative, unchecked financial instruments - the abuse of which has caused the financial crisis in the US - a flawed Cabinet resolution could waste public funds or be used as a reason for the Thai military to stage a coup against an allegedly corrupt government. This is what we witnessed in the coup against the Thaksin government and the beginning of a crackdown on corruption the likes of which we have never seen.

The other tool being used by politicians is state-owned banks, or specialised financial institutions. Thaksin allegedly forced the Export-Import Bank of Thailand to lend money to the Burmese junta so that it could buy equipment from his family-owned telecom business. Sky-rocketing bad debts and allegations of fraud in the Small and Medium Enterprises Development Bank of Thailand and the Secondary Mortgage Corp, are the result of abuse by Thaksin's politicians and conies in the former government.

Many politicians and senior officials have complained that they are victims of the coup. They say they have worked within the scope of the laws so they should not be investigated by anti-graft agencies. They may be found guilty or not guilty later, but loopholes in the Cabinet procedure and the system of state-owned banks will remain and be exploited by a new crop of corrupt politicians.

As financial regulators in the West crack down on white-collar criminals, what will they do when a fugitive from Bangkok - indicted on corruption charges - seeks political asylum in their backyard.