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RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHVN #0139/01 0511034
ZNY CCCCC ZZH
R 201034Z FEB 07
FM AMEMBASSY VIENTIANE
TO RUEHC/SECSTATE WASHDC 0905
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEAWJA/DEPT OF JUSTICE WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

C O N F I D E N T I A L SECTION 01 OF 06 VIENTIANE 000139 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR MLS (EDWARD BESTIC) 
INL FOR INL/AAE (CHARLES BOULDIN) 
JUSTICE FOR OPDAT (CAROLINE AIELLO) 
COMMERCE FOR MAC/ITA (HONG-PHONG PHO) 
 
E.O. 12958: DECL: 02/19/2017 
TAGS: KCRM PGOV KFRD CASC SNAR LA
SUBJECT: CORRUPTION IN LAOS:  THE CLOSER YOU LOOK, THE 
WORSE IT APPEARS 
 
REF: A. 05 VIENTIANE 1232 
 
     ¶B. 05 VIENTIANE 1298 
     ¶C. 06 VIENTIANE 275 
     ¶D. 06 VIENTIANE 596 
     ¶E. 06 VIENTIANE 632 
     ¶F. 06 VIENTIANE 646 
     ¶G. 06 VIENTIANE 674 
     ¶H. 06 VIENTIANE 804 
     ¶I. 06 VIENTIANE 1046 
     ¶J. VIENTIANE 121 
 
Classified By: Ambassador Patricia M. Haslach for Reason 1.4 (d) 
 
¶1.  (C) Summary.  Corruption in Laos is endemic.  At a recent 
governance and anti-corruption workshop in Vientiane, 
sponsored by the World Bank, donor and non-governmental 
organization (NGO) representatives met to discuss the current 
situation.  While there are some positive trends, such as the 
willingness of senior leaders to discuss the problem 
publicly, and the recent (2005) passage of Laos' 
anti-corruption law, the overall situation is negative. Low 
civil-service pay, a culture of official corruption, the 
Communist Party's resistance to transparency, the central 
government's weakness vis--vis the provinces, and the 
absence of effective institutions to counter abuse (such as a 
strong civil society) means corruption remains a daunting 
problem.  The representatives at the World Bank meeting 
reached consensus that with regard to corruption in Laos, the 
closer one looks, the worse it appears.  End Summary. 
 
 
Positive Indicators in the Battle against Corruption 
--------------------------------------------- ------- 
 
¶2.  (SBU) Although corruption is a severe problem in Laos, 
the situation is not entirely bleak.  The Government of Laos 
(GOL) has highlighted the problem of corruption since 1999, 
when it issued its first decree directed at this problem, 
something it had previously ignored.  GOL leaders now fear 
that corruption is impeding development; Laos has signed the 
UN Convention against Corruption and passed an 
anti-corruption law, demonstrating some commitment on this 
issue.  Unfortunately, insofar as we can tell, they have yet 
to publish implementing regulations or publicly prosecute 
anyone under the law.  The GOL is also taking steps to 
restructure its decentralized revenue system, which 
facilitates corruption and gives provincial governments 
enough independence to ignore the central government's reform 
initiatives. 
 
¶3.  (C) The GOL is now willing to confront the reality of 
corruption in Laos, something it was totally unprepared to do 
in the past.  A number of observers have noted that several 
years ago government officials would not discuss corruption, 
but this attitude has changed markedly.  Senior Politburo 
members have now begun to address the problem in an open and 
public forum.  The GOL keynote speaker for the December 2006 
commemoration of the International Day against Corruption was 
Deputy Prime Minister Ansang Laoly, an ironic choice given 
his well-established reputation for corrupt activities. 
Throughout the Lao bureaucracy, only revenue and customs 
officials still seem reticent to acknowledge that corruption 
remains a problem, perhaps because doing so would directly 
threaten their own pocketbook. 
 
¶4.  (C)  As previously reported (ref C), the GOL is now 
taking action against senior officials implicated in 
corruption.  At the 8th Party Congress in March, 2006, the 
Communist Party Central Committee forced out several 
governors and former governors accused of corruption.  Both 
the Minister of Agriculture and the Minister of Industry and 
Handicrafts were sacked for the same reason.  The Foreign 
Minister stated at a press conference following the Congress 
that some former Central Committee members had been involved 
in corruption and narcotics trafficking, but that this would 
no longer be tolerated.  The Congress also increased the 
power of the Party Inspection Authority, headed by Deputy PM 
Ansang Laoly, to act proactively to preclude corruption 
within the party's senior ranks.  Those removed from the 
Party's Central Committee, however, were not subsequently 
prosecuted for their offenses; the GOL prefers to transfer 
errant officials to less prestigious (and lucrative) 
positions rather than send them to jail. 
 
¶5.  (SBU) At the policy level, the GOL perceives corruption 
 
VIENTIANE 00000139  002 OF 006 
 
 
as a major impediment to development that could help to 
derail its stated goal of graduating from least-developed 
country (LDC) status by 2020.  Fortunately the GOL has a good 
implementing vehicle to help bring about the type of 
fundamental changes it needs in its National Socio-Economic 
Development Plan for 2006-2010.  The plan calls for the GOL 
to make fighting corruption a priority, establish the 
organizations and legal framework it needs to control 
corruption, and enforce anti-corruption statutes vigorously. 
International pressure, from the United Nations Development 
Program (UNDP), the World Bank, and possibly Vietnam, has 
given added impetus to Lao anti-corruption efforts. 
 
¶6.  (U) In May of 2005, the Lao National Assembly adopted an 
anti-corruption statute.  The new law moves Laos toward full 
compliance with the 2003 United Nations Convention against 
Corruption, which the GOL signed in December of 2003. Under 
the new law, acts that constitute corruption are: 
 
-Embezzlement of state property or collective property 
-Swindling of state property or collective property 
-Taking bribes 
-Abuse of position, power, and duty to take state property, 
collective property or individual property 
-Abuse of state property or collective property 
-Excessive use of position to take state property, collective 
property or individual property 
-Cheating or falsification relating to technical construction 
standards, designs, and calculations 
-Deception in bidding or concessions 
-Forging documents or using forged documents 
-Disclosure of state secrets for personal benefit 
-Holding back or delaying documents 
 
¶7.  (U) Among other things, the law specifically calls for an 
end to nepotism, senior official asset declarations, and the 
establishment of a national anti-corruption organization with 
similar bodies at the provincial level.  However, the law 
itself is sparse and clearly in need of detailed implementing 
regulations, a common problem for the GOL, which lacks the 
resources and expertise required to produce the comprehensive 
legal structures it needs to support its policies.  The law 
also establishes severe penalties, ranging up to 25 years 
imprisonment, for serious violations.  These enforcement 
provisions are in addition to existing laws that cover some 
but not all of the violations listed in the new statute. 
 
¶8.  (SBU) One reason that the GOL has been ineffective in 
curbing corruption is its inability to exert influence over 
the actions of provincial governments.  Following passage of 
the anti-corruption law, there were major efforts to educate 
provincial officials.  Although in theory the Lao state is 
highly centralized, in fact the central government has 
traditionally been weak in comparison to the provinces.  The 
majority of revenues are collected by the provincial 
governments, which provide only a portion of what they take 
in to support the national government in Vientiane. 
Obviously, this does not give the GOL much leverage over the 
provincial governors.  The revenue structure made the 
implementation of national policies difficult and allowed the 
provinces to impede national initiatives promoting 
transparency and discouraging corruption. 
 
¶9. (SBU) Fortunately, the new budget law, passed in December 
2006, is designed to correct some of this imbalance by 
centralizing revenue management through consolidated tax 
operations.  In addition, Laos will introduce a national 
value added tax (VAT) designed to replace customs revenues 
being phased out as part of bilateral and regional free-trade 
initiatives.  The VAT is also intended to reduce the 
opportunities for corruption within the customs collection 
system.  In theory, all revenues will now come to the central 
government before they are reallocated to the provinces; 
however, provincial governments will remain responsible for 
implementing the new tax codes, and significant challenges 
will have to be overcome if the system is to function as 
intended.  In practice, provincial governments are likely to 
continue holding substantial non-declared assets, and the 
national government will likely remain unable to rein in 
corruption in the provinces.  Both the new budget law and the 
VAT are awaiting implementing regulations yet to be 
completed. 
 
Negative Indicators in the Battle Against Corruption 
--------------------------------------------- ------- 
 
VIENTIANE 00000139  003 OF 006 
 
 
 
¶10.  (C) Laos' larger and more visible neighbors have 
generally garnered more attention with regard to corruption, 
but, on closer examination, the depth of corruption in Laos 
may be just as bad.  Transparency International, in its 2006 
report, rated Laos notably worse than the year before.  The 
World Bank Institute's Kaufmann-Kraay corruption measurement 
identified Laos as more corrupt than Thailand, China, and 
Vietnam, and only slightly better than Cambodia.  Of the 
multiple reasons for this, the woefully insufficient pay of 
civil servants tops the list.  The absence of transparency or 
any effective check on authority, intrinsic to a one-party 
Communist state, presents a serious challenge even to 
estimating the extent of corruption.  The GOL relies on donor 
support for much of its budget, and, as most of this 
assistance is not tied to good governance, there is little 
incentive for reform.  Finally, a large and increasing 
portion of GDP is derived from resource extraction 
industries, which are especially vulnerable to corruption 
because the national government lacks adequate means to 
effectively regulate them and their products are difficult to 
trace. 
 
¶11.  (SBU) Low pay for civil servants is a critical problem, 
and Laos is near the low end globally.  Salaries for 
physicians remain in the range of $120-$150 per month.  To 
receive care in government health care facilities, which 
include most of the major hospitals in Laos, patients must 
give supplemental cash to the doctors and nurses who care for 
them.  Police officers are paid even less; junior officer's 
monthly salary is approximately $20.  Laos, however, does not 
have the lowest cost of living in the region, and private 
labor costs are non-competitive with China and Vietnam.  To 
even approach the remuneration available in the private 
sector, civil servant pay would have to be increased by a 
factor of ten to twenty.  As civil servants cannot possibly 
survive on their salaries, many government officials see no 
problem with receiving commissions, which they perceive as 
nothing more than gratuities similar to what waiters might 
receive in the U.S.; they do not see themselves as engaging 
in a corrupt practice. 
 
¶12. (C) The Lao People's Democratic Republic, as a 
single-party communist state, is by its very nature resistant 
to transparency and accountability.  Decision-making 
authority is centralized, and, absent an opposition party or 
any effective check on the Communist Party's power, senior 
leaders generally do as they please.  Nepotism is rampant. 
Ironically, a number of rich and powerful families in the 
pre-1975 monarchy have continued to thrive under communism. 
There is strong resistance to audit systems, and many local 
governments have financial controls on expenditures but not 
on revenues, creating ample opportunity for the diversion of 
public funds.   In general, there is no sense among Party 
officials that there is anything significantly wrong with 
corruption, though a few stalwarts still hold to the 
socialist ideals of their youth. 
 
¶13.  (C) While Laos now has a legal basis to prosecute 
corruption, and state-sanctioned organizations to root it 
out, few government officials would be foolhardy enough to 
take on the senior Party members who benefit the most from 
the current system.  There has been no recent high-profile 
anti-corruption case against a Communist Party figure in 
Laos, unlike those which have occurred in China and Vietnam. 
Enforcement of the Anti-Corruption Law for anything other 
than relatively minor offenses by the most junior officials 
is next to impossible.  The lack of judicial independence 
would make the prosecution of a major case even more 
problematic.  The September 2005 arrest of a major Chinese 
drug trafficker in Houaphan illustrates how daunting 
corruption can be (ref A).  Han Yongwan was arrested only 
after the GOL came under intense pressure from China, Burma 
and Thailand.  Provincial officials were very slow to move on 
this case, and even the Governor may have had a hand in 
protecting this prominent organized crime figure.  Lao 
military officials were also implicated.  The drug lord was 
extradited to China via Burma, as Laos would have been an 
uncertain venue at best for the trial. 
 
¶14.  (C) The ongoing construction of the new National Stadium 
in Vientiane is an example of how the Anti-Corruption Law 
exists on paper only.  The law specifically forbids the use 
of authority to take individual property.  However, Vientiane 
Municipality used its power of eminent domain to seize small 
 
VIENTIANE 00000139  004 OF 006 
 
 
parcels of privately-held land fronting Route 13, the major 
north-south highway in Laos, for the construction of a 
stadium and auxiliary facilities it will need to host the 
Southeast Asia Games in 2009.  These tracts, optimally sited 
for commercial development, commanded premium values when 
their former owners purchased them. 
 
¶15.  (C) When the landowners requested compensation from the 
Municipality, officials responded that, while they 
sympathized with the owners, no budget had been set aside for 
the purchase of the stadium land and, consequently, no 
compensation could be offered other than comparably-sized 
plots in the rural countryside.  Valuable private land seized 
for public use following the Communist takeover in 1975 was 
sometimes used by senior officials for their own estates, and 
the memory of the past abuses makes the recently-displaced 
landowners skeptical about who will really benefit from the 
land they surrendered to the Vientiane authorities. 
 
¶16.  (C) Even the Embassy has not been immune to the effects 
of corruption in Laos.  Several years ago, when the NAS Field 
Advisor in Phongsaly Province halted a construction project 
because of the kickbacks being paid to senior provincial 
officials, the corrupt officials used their Communist Party 
connections at the Ministry of Foreign Affairs (MFA) to have 
his visa revoked.  The Embassy's Consular Section routinely 
returns  Lao passports to the MFA that the Ministry's own 
officials have issued to persons who have obtained duplicate 
identifies (new name, surname and date of birth) after 
failing a visa interview. To our knowledge, no action has 
ever been taken against any individual.   The NAS has on 
several occasions endured delays in processing law 
enforcement program documents and equipment when the Director 
refused to fund office furnishings for the concerned 
officials.  Fortunately, these experiences have generally 
been the exception rather than the rule, but the rage and 
shame on the faces of the Embassy's locally-engaged staff 
when this occurs speaks to a long and simmering frustration 
by some at the misuse of official authority. 
 
¶17.  (SBU) A direct consequence of decades of abuse of power 
is that there is no public trust; government officials are 
presumed to be corrupt unless proven otherwise.  There is 
also no mitigating indigenous civil society or strong private 
sector to serve as an independent but unthreatening impetus 
for reform.  The government is drafting legislation to 
regulate civil society and NGOs, providing some official 
sanction; the few civil society institutions and NGOs that 
exist in Laos continue to rely on a core of expatriate 
experts rather than civic-minded Lao.  There is ongoing 
dialogue between the Lao Bar Association and some donors, 
but, with fewer than 100 practicing attorneys in Laos, the 
influence of this organization is limited. 
 
¶18.  (SBU) In many cases, donor activities do as much to 
facilitate corruption as they do to promote good governance. 
A substantial portion of the GOL's budget comes directly from 
aid programs provided by foreign governments, international 
organizations, and NGOs.  Overseas development assistance 
(ODA) flows in Laos are not transparent; much of the 
assistance provided is expended on high-end SUVs and study 
tours for senior officials rather than reaching the masses of 
rural poor who need it most.  Our discussions with Lao 
counterparts on upcoming training programs often center 
around one topic--the per diem rate for participants. 
Management by objective is sorely lacking, and there is 
strong resistance to procurement reforms.  Corruption is not 
the consequence of ODA; that problem runs much deeper in Lao 
society.  But many donors are not doing what they could to 
promote transparency. 
 
¶19.  (C) A major donor's roundtable meeting held in Vientiane 
in November 2006 was a lost opportunity to tie ODA to greater 
transparency and better governance.  One major reason for 
this is that some of the largest donors to Laos, such as 
Japan, China, and Vietnam, are focused more on their 
bilateral relationships with the GOL than on the efficacy of 
their programs.  As the Japanese representative at the World 
Bank discussions stated, "Japan is not in a position to link 
ODA to governance . . . but expects the World Bank to assume 
responsibility for pursuing this objective in Laos." 
(Comment:  Unspoken but clearly communicated at the World 
Bank meeting was the message that, as long as Japan feels it 
necessary to continue a bidding war with China for the good 
will of the communist leadership, governance reform in Laos 
 
VIENTIANE 00000139  005 OF 006 
 
 
will not be a priority.  The Japanese representative read 
from a prepared statement with little enthusiasm. When the 
NAS spoke with her about the size of Japanese ODA in Laos, 
she stated that Japan contributed $80 million to Laos in 
2006, seven to eight times the U.S. contribution.  She then 
remarked, "but you have results to show for what the U.S. has 
put in," implying that Japan got little in return for its 
generosity.  End Comment). 
 
¶20.  (C) Corruption in Laos is not confined to the public 
sector.  Depositors must still pay banks to make withdrawals 
larger than a few hundred dollars.  According to figures 
presented at the World Bank meeting, construction kickbacks 
normally run about 10%.  Corruption in the mining sector is 
rife; and China in particular has been able to exploit the 
weakness of the GOL's regulatory system (ref F).  In one 
recent example, a Russian firm that had done all of the 
survey and preparatory work on an iron ore claim was refused 
permission to dig, only to find out later that a Chinese firm 
had been granted the concession (ref I).  Corruption in the 
logging industry is also rampant, Vietnamese concerns 
operating near the Lao-Vietnamese border being effectively 
exempt from even the minimal attempts at enforcement found 
elsewhere (ref G).  Siene Saphanthong, the former Minister of 
Agriculture, was transferred because he failed to control 
corruption in the timber industry, but not prosecuted (ref 
C).  Corruption in resource extraction industries is likely 
to get worse as the importance of this sector to the Lao 
economy grows.  Mining and hydropower, which currently 
account for approximately 50% of GDP, will grow to 70% by the 
end of the decade, and potentially 90% of GDP when these 
industries are fully developed.  Further complicating this 
problem is the very close relationship between the private 
sector and the GOL. 
 
The Path Forward 
---------------- 
 
¶21.  (SBU) If Laos is ever to bring its corruption problems 
under control, it must change the acquiescent attitude that 
allows abusive practices to thrive.  To that end, it must 
take several key steps: 
 
-Civil service pay must be increased to market levels, ending 
the economic motivation that drives much of the more common, 
albeit small-scale, corruption. 
 
-The GOL and the Party, under the direction of senior 
leaders, must rid themselves of their culture of corruption. 
The prosecution of a corrupt senior official or officials 
would send a strong message in this regard.  As China's 
influence in Laos grows, adopting some of China's strategies 
for prosecuting corrupt officials might raise awareness among 
Party officials and the government that corruption, even 
among the elite, will not be tolerated. 
 
-Prosecutors, the judiciary, and anti-corruption 
organizations must receive the support they need from senior 
leaders to act independently against corruption. 
 
-The central government must regain its authority over the 
provinces so that it can force implementation of reform 
initiatives.  Full implementation of a new 
centrally-controlled tax structure would be critical to 
effecting this change. 
 
-The banking sector must be reformed and fiduciary controls 
instituted. 
 
-Whistle blowers must be protected and their efforts 
recognized.  Some exist, but they find safety only in donor 
organizations outside of government. 
 
- A mutual accountability framework has to be established for 
donor support which links ODA to good governance. USG 
programs have this, and it works.  Procurement reform is a 
must. 
 
-Public institutions must be strengthened, and civil society 
afforded a chance to develop. 
 
-The GOL should prosecute several high-profile corruption 
cases, as China has done, to send a clear signal that it is 
no longer acceptable. 
 
 
VIENTIANE 00000139  006 OF 006 
 
 
¶22. (SBU) Changes such as these will not happen quickly, 
particularly under the circumstances found in Laos.  At the 
January meeting, World Bank representatives suggested that 
anti-corruption efforts in Laos must be incremental, using a 
multi-sector approach.  Initially, civil society must emerge 
as a partner in development, then transition into being a 
source for oversight.  Positive developments need to be 
reinforced, particularly where key stakeholders perceive 
corruption as a threat to the nation's long-term goals and 
prosperity.  For its part, the World Bank does not plan to 
make any major changes to its current anti-corruption 
strategy in Laos, based on its five pillars: 
 
-Preventing Fraud and Corruption within World Bank Projects. 
-Helping countries that request World Bank support in their 
efforts to reduce corruption. 
-Taking corruption more explicitly into account in its 
country assistance strategy. 
-Adding voice and support to international efforts to reduce 
corruption. 
-Protecting the Bank from internal fraud and corruption. 
 
The World Bank will continue to move forward with its 
anti-corruption programs in Laos when, where, and with whom 
it believes there is a reasonable chance for success, which 
the Bank terms its "points of entry."  In doing so, it 
parallels other donors concerned with governance, working 
with institutions and individuals that are relatively free of 
corruption, and avoiding the rest. 
 
¶23.  (C) Comment:  The corruption problem in Laos is not 
hopeless.  the World Bank contends that there are officials, 
some very senior, who wish to fight corruption, but they have 
been blocked by interference from the Communist Party.  The 
NAS has found that the GOL officials it works with often come 
to favor the transparency and tight controls we profess after 
they have worked with the Embassy for several years and have 
seen how much more effective and beneficial our system can 
be.  Surprisingly the most vocal critics of government 
corruption at the World Bank meeting were the Lao nationals 
representing foreign NGOs; in our experience, the few Lao 
citizens willing to discuss the subject with us rail against 
the abuses they face every day whenever out of earshot of 
Party officials.  Laos has shown a willingness to take on 
corruption, but in order to do so effectively, it will have 
to make profound changes in its government, society, and 
political culture.  End Comment. 
HASLACH