US embassy cable - 05ISTANBUL526

UNCLAS SECTION 01 OF 03 ISTANBUL 000526 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR INTERNATIONAL AFFAIRS - MMILLS AND CPLANTIER 
NSC FOR BRYZA AND MCKIBBEN 
 
E.O. 12958: N/A 
TAGS: KCOR, ECON, EFIN, TU, Istanbul 
SUBJECT: CORRUPTION: TURKEY'S 800-POUND GORILLA? 
 
REF: ANKARA 1728 
 
 Sensitive but unclassified.  Not for internet distribution. 
This message was coordinated with Embassy Ankara. 
 
1. (SBU) Summary: Public attention has returned to the 
subject of corruption in Turkey in recent weeks with 
publication of a country survey by the "Economist" magazine 
blaming the problem for Turkey's failure to attract more 
foreign investment.  The  survey coincided with the 
publication of Transparency International's Global Corruption 
2005 report, which focused on the construction sector. That 
organization's 2004 perceptions index confirmed Turkey's 
negative reputation with a 3.2 score, reflecting observers' 
belief that the country's environment verges on "rampant 
corruption."  Our contacts, however, are inclined to view 
this single-minded focus on corruption itself as a mistake, 
believing instead that the problem is broader, and that there 
are a number of other factors that contribute to the 
"opaqueness" of the Turkish economy.  These views find 
support in the World Bank's newly-released World Development 
Report 2005, which asserts that Turkish companies pay 6 
percent of their turnover for bribes, but nonetheless finds 
that most investors view high taxes, tax administration, and 
legal problems as bigger obstacles.  End Summary. 
 
2. (U) Public Indictment: In a series of Istanbul and Ankara 
seminars aimed at disseminating the "Economist's" recent 
survey on Turkey, author Tim Hindle repeatedly reiterated 
that he views corruption as perhaps the most pressing issue 
facing Turkey today.  Citing the example of corrupt 
politicians, he argued that Turkey is a "fish that has rotted 
from the head," and that "sleaze and authorized theft" have 
undermined Turkey's economic life.  In particular, he 
suggested, corruption is a key reason why foreigners have 
steered clear of the Turkish economy.  Given its present 
situation, he elaborated, Turkey may be able to attract 
investment from "equally or more corrupt nations" such as 
Russia and the Ukraine, but not from Western Europe or North 
America.  The "Economist's" indictment was given wide press 
play in Turkish media, and has sparked discussion about just 
how pervasive and important the issue is. 
 
3. (U) On the Edge: By chance, the "Economist" survey 
coincided with release by Turkey's local Transparency 
International chapter of the organization's report on Global 
Corruption 2005.  An accompanying index of "Corruption 
Perceptions, completed in 2004, also emphasized the 
perception problem Turkey faces.  The index is a poll of 
polls, drawing on 18 surveys conducted by 12 institutions 
between 2002 and 2004.  A score above 9 reflects a relatively 
clean environment; a score less than 3 reflects rampant 
corruption.  As in the past, Turkey found itself relatively 
lowly rated, with a score of 3.2.  While the score left 
Turkey in 77th place among 146 countries, only Romania among 
EU candidate or member countries ranked lower.  The 
accompanying report listed deficiencies in Turkey's 
legislative framework, including failure to fully reform 
public procurement practices, the absence of an independent 
corruption fighting agency in a new draft anti-corruption 
statute, and the absence of aims or guiding principles for a 
new public servants ethics commission.  The local chapter 
drew particular attention to the problem of corruption in the 
construction sector, where contractors rig bids and evade 
zoning requirements by bribing inspectors, often with 
potentially deadly results. 
 
4. (SBU) A problem, but: Our Istanbul contacts concede that 
corruption is an ever present facet of Turkish life, but 
argue that its scope and impact have been exaggerated, and 
that it is more a result of other deficiencies than a 
principle actor in its own right.  Price Waterhouse Cooper's 
(PWC) Senior Partner Adnan Nas, who has studied the issue for 
a number of clients, characterizes corruption as just one 
aspect of the larger problem of the "opacity" of the Turkish 
economy.  Corruption, he argued, is "easier for the media to 
talk about and more sensational," and hence attracts more 
attention, but leads observers to miss other underlying 
factors, which can be more important.  These include such 
other deeply rooted problems as the absence of an assured 
legal environment, with effective legislation and 
enforcement, macro-economic instability, and the lack of 
internationally accepted accounting standards.  Nas notes 
that PWC conducted its own study in 2001 of "opacity," and 
concluded that these problems were the equivalent of a 36 
percent increase in Turkey's already high corporate tax 
rates, and estimated the amount of foreign investment they 
kept away at 1.8 billion USD. 
5. (SBU) Bureaucratic Obstacles: Nas argued that corruption 
results from a nexus of shortcomings in the Turkish system, 
including bureaucratic inertia, an ineffective legal system, 
and a tendency of Turkish corporations to compensate for 
their lack of competitiveness by rent-seeking behavior.  Nas 
pointed to the attitude of civil servants in Turkey, noting 
that the vast majority find it preferable to do nothing 
rather than to take proactive action.  "Action leads to 
investigation" by inspecting authorities," he suggested, 
noting that while cases are frequently taken to court under 
Article 240 of the Civil Service Code for misuse of 
authority, cases are almost never brought under the article 
covering negligence (230).  The natural tendency for civil 
servants is thus to do nothing, which can lead companies 
seeking government action to utilize corrupt means.  Nas 
conceded that elements of Turkish tradition can lend 
themselves to this, though they are often not perceived that 
way by civil servants themselves.  Giving of presents is seen 
as normal in government offices, he argued, and often these 
can involve substantial amounts.  Little control is 
exercised, as was evident earlier this year when the 
controversy surrounding the gifts presented to the Prime 
Minister and his wife in Russia showed that no effective 
monitoring or tracking system existed within the government. 
 
6. (SBU) Little Disincentive: TUSIAD Board Member Pekin Baran 
noted that in and of itself Turkey's bureaucratic complexity 
lends itself to corruption, even if most civil servants are 
honest.  While company registration procedures have been 
streamlined, other procedures have not.  If one must deal 
with 23 desks in order to clear a particular action, Baran 
argued, the odds are that 2 or 3 may make illegal requests. 
Baran argued that the legal system provides little 
disincentive to committing such illegal acts, since few if 
any civil servants or politicians have been punished or tried 
for such actions.  Bank of New York Representative Neslihan 
Tombul echoed that view, suggesting that currently in Turkey 
there is "no fear or respect for the law."  Currently "greed" 
wins out over "fear" every time, she said, and corruption can 
only be effectively addressed when that equation is reversed. 
 
 
7. (SBU) Legal System/Rent-seeking: Additional incentives to 
corruption include Turkey's dated and inadequate legal 
system, which in itself is a key obstacle to foreign direct 
investment.  Indeed, Nas believes these legal problems are 
the number one contributor to corruption in Turkey.  An 
additional contributor is a lack of private ethics among some 
Turkish companies, which are "not ready to compete" and 
instead are opportunistic and seek to profit from government 
connections.  Nas (himself a former Chief Inspector at the 
Ministry of Finance) characterized that Ministry as highly 
ethical, but suggested that staff at the other "spending 
ministries" are less highly qualified and ethical, and 
instead are susceptible to the 
bureaucratic/political/business nexus through which 
government favors are distributed.  Nas suggested that the 
top-tier of Turkish companies no longer relies on this 
system, but argued that second tier companies are in big 
trouble, and will either lose their position or undergo a 
significant transformation.  Almost in passing, Nas conceded 
the existence of political corruption, which looms largest in 
the public consciousness, but argued that political parties, 
which are most often blamed for the problem, are not its 
drivers.  Instead, they are being used by a culture in which 
people contantly seek favors from their deputies.  Only the 
EU, he said, will be able to break these habits. 
 
8. (SBU) A Balanced View: TUSIAD's Baran concurred that 
corruption is an endemic reality in Turkish life, but echoed 
Nas's view that such other problems as taxation, the 
judiciary, and bureaucracy are bigger obstacles to foreign 
investment.  He noted that TUSIAD is undertaking a major 
study of the issue, however, focusing initially on the civil 
service.  Succeeding chapters will focus on parliament and 
the judiciary.  The key, he argued, is for such "legal 
exceptions to responsibility" as parliamentary immunity to be 
lifted.  Only when that is done, he believes, will the 
problem be effectively tackled.  Tombul added that another 
contributor to the problem is the inadequate pay scale for 
some civil servants, particularily in the law enforcement 
area.  "If you paid these guys properly," she suggested, 
there would be less incentive for such transgressions. 
 
9. (SBU) World Bank View: These more nuanced appraisals find 
support in the World Bank's newly released World Development 
Report, though it is the study's assertion that 6 percent of 
the turnover of Turkish companies is devoted to "bribes" and 
"gifts" aimed at greasing the wheels of Turkish bureaucracy 
that has garnered headlines.  Investors identified Turkey's 
extremely high taxes and complex tax administration, together 
with legal uncertainty, as even more important problems. 
Equally striking was the study's conclusion that in those 
cases where legal proceedings are opened, they last for an 
average of 2.9 years. 
 
10. (SBU) Comment: Discussions of corruption are a popular 
pastime in Turkey and this will undoubtedly remain true.  But 
Turkey's difficulties are more complex than blaming 
corruption alone would indicate, and the fixation on that one 
aspect of the problem conceals the more important systemic 
reforms that need to be undertaken to attract the foreign 
investment that will sustain Turkey's recent economic growth 
over the long term.  End Comment. 
 
 
 
 
ARNETT