VZCZCXRO6836
RR RUEHCHI RUEHDT RUEHFK RUEHHM RUEHKSO RUEHPB
DE RUEHHI #1090/01 1281046
ZNR UUUUU ZZH
R 081046Z MAY 06
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC 1780
INFO RUEHHM/AMCONSUL HO CHI MINH CITY 1082
RUEHZS/ASEAN REGIONAL FORUM COLLECTIVE
RUEHZU/APEC COLLECTIVE

UNCLAS SECTION 01 OF 03 HANOI 001090 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON PGOV KCOR VM
SUBJECT:  PMU-18 Corruption Scandal: Donor Response 
 
HANOI 00001090  001.2 OF 003 
 
 
SENSITIVE BUT UNCLASSIFIED. DO NOT POST ON THE INTERNET. 
 
REF: Hanoi 771 and previous 
 
¶1. (SBU) Summary: Following the break of the Project 
Management Unit 18 (PMU-18) corruption scandal involving a 
substantial amount of Overseas Development Assistance (ODA), 
bilateral and multilateral donors met to share reactions and 
discuss a coordinated response.  Donors agreed:  that 
corruption should be an agenda topic at the mid-year 
Consultative Group (CG) meeting; to devise strategies to 
protect better their ODA investments; and, to develop a 
common approach to the "small envelope culture." 
Significant momentum exists in Vietnamese society to address 
corruption, and donors expect stronger statements from the 
GVN after the conclusion of the 10th Party Congress. 
Corruption remains a complex issue; donors exchanged ideas 
on controlling it, and shared examples of recent incidents. 
Post will continue working with other donors to ensure 
proper oversight of ODA and to encourage the development of 
a transparent and accountable system in Vietnam.  End 
Summary. 
 
Donor Reaction and A Way Forward 
-------------------------------- 
 
¶2. (SBU) The Danes convened an informal group of 
multilateral and bilateral donors to follow upon the April 3 
Ambassadors' Donor Coordination Group meeting with a more 
detailed discussion of how to seek to assist the GVN in 
combating corruption.  Present were a mixture of 
Ambassadors, development and economic sections staff from 
the British, Canadian, Danish, European Commission, French, 
Netherlands, New Zealand, Norwegian, Swedish and Swiss 
Missions, as well as the United Nations Development 
Programme (UNDP), Asian Development Bank (ADB) and 
International Monetary Fund (IMF).  ECON/C and EconOff 
attended.  (Note:  The World Bank was not present, but 
supports the group's agenda.  End Note.)  Donors agreed that 
corruption should be on the agenda at the Consultative Group 
(CG) meeting in June, and explored how to incorporate 
corruption into the agenda and prepare the GVN for a 
productive discussion.  The UK Department for International 
Development (DFID) and the World Bank agreed to take the 
lead on this issue.  Donors also recognized a need to devise 
strategies to protect better their ODA projects, nominated 
Sweden to head the effort, and agreed that the GVN should be 
alerted to the potential impact of corruption on ODA.  Swiss 
Ambassador Benedict de Cerjat noted that the Office of the 
Government has requested assistance in establishing a 
national anti-corruption steering committee to be chaired by 
the Deputy Prime Minister, which will present an opportunity 
to press the issue.  Finally, Denmark and the EC agreed to 
lead an effort to develop a common approach to Vietnam's 
"small envelope culture." 
 
The Media and Vietnamese Reactions 
---------------------------------- 
 
¶3. (SBU) Donors noted that there is significant momentum in 
Vietnamese society to address corruption, and anticipate 
that stronger anti-corruption statements will come from the 
GVN after the Party Congress concludes around April 26. 
Recently arrived Asia Development Bank (ADB) Country 
Director Ayumi Konishi expressed concern that in covering 
the PMU-18 scandal, the media has portrayed this sort of 
project as the problem, rather than focusing on the more 
general lack of checks and balances.  EC Ambassador Markus 
Cornaro commented that several local contacts have told him 
that the World Bank's positive statements regarding the 
Government's response to the scandal are naive, and that 
donors should push for concrete action.  (Note:  The World 
Bank missed the meeting because of a scheduling error.  End 
Note.)  Association pour le Developpement des Echanges en 
Technologie Economique et Financiere (ADETEF) Director 
Emmanuel Ly-Batallan repeated that he has learned that 
Transportation Minister Dao Dinh Binh, who resigned under 
pressure following the scandal, was generally disliked, and 
questioned whether the GVN is prepared to hold other 
ministers similarly accountable. 
 
Anti-Corruption Policies 
------------------------ 
 
¶4. (SBU) All donors said they were signatories to the OECD 
Anti-Bribery Convention, which makes a bribe paid by one of 
their multinationals to a public official in a developing 
country for a public works contract a punishable offense. 
Many have also devised codes of conduct for their grant aid 
recipients based on OECD principles.  Common practices 
 
HANOI 00001090  002.2 OF 003 
 
 
include:  anti-corruption clauses in grant contracts; 
requirements to report any suspected corruption cases to 
appropriate oversight agencies; mandatory investigations 
into any suspected corruption case; freezing of funding; 
and, fund recovery in corruption cases.  The Danish 
International Development Agency (DANIDA) requires all aid 
recipients to go through anti-corruption training, and 
solicits confidential reporting of suspected corruption. 
The EC has tight auditing procedures of both budget support 
and grants, and reviews all projects under Euro 5,000 
(approximately USD 6,175); France manages the funds for all 
small projects, while Norway hires independent auditors. 
Cornaro expressed concern that this tight oversight 
undermines Vietnamese ownership and hampers the development 
of more robust control systems. 
 
A Problem with Many Facets 
-------------------------- 
 
¶5. (SBU) Donors recognize the need to take different 
approaches to corruption in budget support and grants.  In 
the case of budget support, donor funds are co-mingled with 
those of the Government, and the focus is on strengthening 
the Government's systems and creating transparency rather 
than on fund recovery.  Donors seek to recover misused 
grants.  De Cerjat noted that it is also useful to 
differentiate between "big" corruption and "little" 
corruption.  He recounted that when he arrived to post, 
Vietnamese journalists expected to receive "small envelopes" 
to attend press conferences.  These Vietnamese "traditions" 
may be harder to eradicate than larger fraud cases.  Donors 
agreed that they should have the same approach on this 
issue, that is, refuse to pay.  (Comment:  We have heard 
similar stories of other bilateral and multilateral for 
getting GVN officials to attend seminars.  It is surprising 
that this is still an issue for some of our donor community 
colleagues.  End Comment.) 
 
¶6. (SBU) Netherlands Deputy Head of Mission Bengt van 
Loosdrecht noted that while anti-corruption is high on the 
political agenda, there are only limited tools to address 
it.  In his opinion, there is more focus on the management 
of the perception of corruption than on tackling the issue 
itself.  De Cerjat commented that building monitoring 
systems takes many years and will not have an impact in the 
short term.  It is therefore important to look for tools 
that will be effective in the immediate future.  The ADB's 
Konishi noted that in order to truly address corruption, the 
civil service needs to be reformed, including the pay 
structure.  He added that the lack of proper accounting 
procedures is a major obstacle to transparency, and that 
enterprises need to be given incentives to keep clean books. 
Currently it is cheaper to pay off government officials than 
to pay taxes.  British and French representatives commented 
that the fact that corruption is a capital punishment 
offense acts as a deterrent to their pursuit of some serious 
cases.  This is not unique to Vietnam. 
 
Donor Experiences with Corruption 
--------------------------------- 
 
¶7. (SBU) Given endemic corruption in Vietnam, there have 
been relatively few cases of corruption involving donor 
projects until now.  The PMU-18 and PMU-5 cases, however, 
involve a significant amount of donor money.  A Danish 
investigation found that 60 percent of funds in which 
projects on a general principle have not been properly 
documented.  Konishi said he is reasonably comfortable about 
the integrity of ADB projects, and that out of 18 cases 
referred to the internal investigation unit since 1993, only 
one was found to be serious, while the others involved minor 
instances of misreporting. 
 
¶8. (SBU) Cornaro said that recently corruption has been 
found in two EC projects.  A case of double-invoicing and a 
potential conflict of interest of family ties in a printing 
contract at the Ministry of Health (MOH) resulted in an 
investigation by the European Anti-Fraud Office (OLAF). 
While the GVN initially convinced OLAF that there had been 
no fraud, the EC Mission in Vietnam persisted, and the case 
concluded with MOH covering the disputed amount.  The GVN 
has acknowledged "fishy intent" in a case at the Ministry of 
Agriculture and Rural Development (MARD), and has agreed to 
restore Euro 100,000 (approximately USD 123,600) of misspent 
funds.  Cornaro said that the former MARD Project Director 
has offered to pay back the money to the EC in cash, but the 
EC has refused, maintaining the recovery should go through 
proper MARD channels and procedures. 
 
¶9. (SBU) Sweden has been working with four other countries 
 
HANOI 00001090  003.2 OF 003 
 
 
to support the Government Inspectorate.  They recently fired 
two GVN inspectors whose official final report contradicted 
their preliminary report of apparent corruption by 
exonerating the parties under investigation.  Sweden has 
heard unofficially that the Inspector General and several 
Vice-Inspectors will likely be replaced after the Party 
Congress as a result. 
 
MARINE